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The Innovation QuestionWhat, How & Why Now?

1

Lee Wetherington, AAPDirector of Strategic Insight

Jack Henry & Associates, Inc.®

@leewetherington

© 2014 Jack Henry & Associates, Inc. All Rights Reserved

Lee WetheringtonDirector of Strategic Insight

• Develops actionable insight and strategy

for the financial services industry at large

• Delivers keynotes nationwide

• Technology Faculty Chair for graduate

banking schools

• Authors articles for industry trades

• Degrees in Economics and English

from Duke University

• Accredited ACH Professional (AAP)

Presenter

@leewetherington


Agenda

• The Innovation Question

• Why, What, How, Who?

• Here & Now

• Convergence & Big Change

• Innovating in Complex Ecosystems

• Lending; Mobile; Payments; Delivery Channels

• What Innovation Looks Like Today

• Gen Y; Impulse Control; Feedback Loops; Automation

• Best Practices; What to Do


Why is innovation a big deal?

• Aggressive competition

• Banks, CUs and shadow banking ecosystem

• Disruptors

• Mobile, lending and payments

• Fast-evolving customer expectations

• Driven by pace of new tech adoption/diffusion


Innovation Management Waves

Assembly-line Manufacturing

• 1920s

Information Systems

• 1950s

JIT inventories

TQM

• 1990s


Innovation Evolution

Massive, vertical integration

• GE

• BASF

• IBM

External supply chain management

• Toyota

• Dell

• Nestlé

Ecosystem Orchestration

• Amazon

• Hasbro

• Roche


Then and Now

Vertically Integrated Company

Collaborative Partnerships


Then and Now

InnovationInnovation

Ecosystems


Q1: What is “innovation”?

1. Improvements to product/service feature functions

2. New technology that fundamentally disrupts the existing

order and creates significant new value for the customer

3. Organizational changes that better align the bank’s

execution with its strategy

4. A buzz word that nobody understands but everybody likes

to talk about


What is “innovation” exactly?

• Confusing “big I” and “little I” innovation

• Big I: large scale, disruptive technology

• Little I: incremental feature/function improvements

• Ability to fail fast and cheap in the exploration of reasonable ideas and opportunities

• Only 25% of new product development efforts ever launch commercially

• Of those launched, 45% fail to meet profit goals


11

Who cares about innovation?

SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015


12

Consumers identify “None” as most innovative

SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015


13

Who cares? Digital Behaviors

SOURCE: Celent’s “MAKING INNOVATION MATTER AND IDENTIFYING

CUSTOMERS WHO CARE”; Mike Fitzgerald & Craig Weber; February 2015


14

One third of consumers are digital or active




15

Over HALF of consumers are digital or young




Innovation in Financial Services

• As regulated, risk-averse entities, banks aren’t

usually comfortable failing, much less failing fast

and often

• General public perceives financial institutions as

“laggards in innovation” (Celent)

• The bar is low; modest advances heavily rewarded

• Many banks dedicate their most skilled talent to

regulatory response/compliance

SOURCE: Celent’s “Innovation in Financial Services: The Leadership Gap”; December 2013


Q2: Why don’t banks “I”nnovate?

1. Not capable of innovating

2. Don’t know how to innovate

3. Too risk averse to innovate

4. There’s been no need to innovate


“Until recently, there has been no need

for the industry to change.”Ron Shevlin

Author, Smarter Bank

21

80% of online adults own a smartphone


Smartphones have changed shopping:

• 47% of smartphone owners comparison shopped

with their phones while at a retail store

• 69% changed where they purchased as a result!!!


23


Gen Y Income > Gen X Income by 2020

Personal income by demographic segment (2010-2025)

SOURCE: Javelin Strategy & Research; “The Three Costliest Myths About Gen Y”; May 2014

26

Marketshare of Total Assets: Banks & CUs


How is “innovation” usually done?

1. Identify customer needs

2. Deliver great products

3. Beat the competition to market

PROBLEM: You can do all three and still fail.


The “Innovation Blindspot”

SOURCE: Ron Adner’s “The Wide Lens: A New Strategy for Innovation”


Sony eBook


Michelin Run-Flat Tires


Nokia 6650 (First 3G Phone in 2002)


The “Wide Lens”



Co-Innovation & Probability of Success

Partner A

Partner B

Partner C

Partner D

85% 85% 85% 85%

52%



Co-Innovation & One Weak Link

Partner A

Partner B

Partner C

Partner D

85% 85% 85% 2%

1.2%



35

Weigh Probabilities: Disruption vs. Innovation

Probability of Your Success at Innovation

Pro

bab

ility

of

Dis

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tio

n f

rom

Ou

tsid

e

HIGH

HIGH

LOW

BlockchainAlt Lending

Mobile Payments

Faster Payments

Fintech Startups


Innovation Strategy: The Wide Lens



How to Co-Innovate in 2015

1. Use the “Wide Lens”

2. Check the value proposition

• Great for customers? Or does it just make management happy?

3. Identify dependencies

• Does your innovation depend on other innovations/companies?

4. Map the ecosystem

• Suppliers; intermediaries; customers; competitors

5. Assess risks

• Dependencies; ecosystem; timing; blindspots and bugs

• Candid calculation of co-innovation probability of success

6. Timing, timing, timing (you have to get it right)


• The Bad News

• Innovation is more urgent due to scale and pace of change

• Big “I” innovation is more complex in tech ecosystems

• Complexity brings difficulty and diminishes probability of

success

• The Good News

• Little ”i” innovation is easy and cheap

• You don’t have to risk the whole bank to see what works

Innovation: Bad News, Good News

38


Complex

Ecosystems


40

Complexity: The Unicorn Stampede

SOURCE: https://www.cbinsights.com/blog/increasingly-crowded-unicorn-club/


41 SOURCE: https://www.cbinsights.com/blog/increasingly-crowded-unicorn-club/

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@leewetheringtonSOURCE: http://www.americanbanker.com/bankthink/the-great-rebundling-of-financial-services-1077172-1.html


Lending

Ecosystem


Alternative Funding Providers


Harness the Alternative Lender Marketplace?

FI


• Alternative lending improved distribution & delivery

• It did NOT (and will not) disenfranchise FI lending

• “Alternate lending disruptors will be disrupted in 2016”

• Investor scrutiny of returns on their Alt-Lending investments

• FIs aggressively re-entering consumer lending as interest

rates rise

• What began as true friends-and-family P2P lending in the

2000s has evolved into B2C lending.

• U.S. Treasury Department will continue investigating

marketplace lenders, especially on heals of San Bernandino

terrorist attack

48

2016 Forecast: Alternative Lending Marketplace

SOURCE: Aite Group’s “Top 10 Trends in Retail Banking & Payments, 2016: The Quest to Reduce Friction”; January 2016


Mobile

Ecosystem


50


51

Mobile Wallet Wars: Complexity & Fragmentation


52


53

“Chase Pay will allow Chase’s 94M credit, debit and

pre-paid card customers to make in-store, in-app

and online purchases, beginning in 2016.”

Sarah Perez

TechCrunch

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54

“Banks can’t add

tap-to-pay features

to their iPhone

apps because

Apple doesn’t let

third parties use

the NFC tech in its

phones.”

Jason Del Rey

Senior Editor

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• Though there is an Android Pay app, issuers can add

Android Pay to their own apps via the API.

55 Celent; “Tokenization Evolution: Rapid Developments”; Zilvinas Bareisis; October 2015


…Android Pay will

allow issuers to

integrate mobile

payments into their

mobile banking apps.


• Launched September 10, 2015

• Tokenized NFC mobile payments (like Apple Pay)

• Issuers must sign up and enable cards, but can leverage existing tokenization with MC and Visa

• Host Card Emulation (HCE) approach to NFC means tokens generated in the cloud (and limited number stored on phone)

• Works with all NFC-enabled Android devices (running KitKat or later) on any mobile carrier

• Pre-installed on new Android phones (Verizon, AT&T, T-Mobile)

• Google collects no fees from issuers and issuers pay no tokenization fees to Visa/MC

Android Pay: Fact Sheet


• NFC & MST mobile payments on…

• Galaxy S6, S6 Edge, S6 Edge+ and Note 5

• Does NOT support in-app purchases/payments

• Is NOT supported on Verizon at launch

• Tokenization

• Issuers must sign up and enable cards, but can leverage existing tokenization with MC and Visa

• Host Card Emulation (HCE) approach to NFC means tokens generated in the cloud (and 10 stored on phone)

• Leverages fingerprint identification

• Similar to Apple Pay

• Samsung collects no fees from issuers and issuers pay no tokenization fees to Visa/MC

Samsung Pay: Fact Sheet


59

1% of U.S. Shoppers Use Apple Pay

1% of U.S. shoppers use Apple Pay


New

Tokenization

Options

60


61

“Tokenization binds payments credentials

to any device connected to the Internet:

cars, wearables, appliances, clothing…”SOURCE: www.pymnts.com


• New token services enable issuers to deploy not only

to Apple Pay but to Android Pay and Samsung Pay.

Tokenization: Set Up Once, Deploy Everywhere

https://usa.visa.com/partner-with-us/payment-technology/visa-token-service.html62


VDEP is a framework—not a service or technology.

Participants commit to…

• Enable access to all issuers

• Refrain from charging issuers fees to participate

• Restrict transaction data usage

• Data can only be used to operate wallet

• Data cannot be used for marketing purposes!!!

63

Visa’s Digital Enablement Program (VDEP)

Celent; “Tokenization Evolution: Rapid Developments”; Zilvinas Bareisis; October 2015

NOTE: Issuers that sign VDEP agreement gain

access to Visa’s token services free of charge.


Criteria for Choosing a Mobile Payment Play

SOURCE: Mobey Forum; “The Host Card Emulation in Payments: Options for Financial Institutions”; HCE Workgroup; December 201464

65

Apple Pay Android Pay Samsung Pay Issuer HCE App

Issuer

Cost

Security

Cardholder

Usability

Issuer

Control

Ability to

Integrate into

Issuer App

POS

Acceptance

Data

Ownership

?

?

65


Payments

Ecosystem


Evolution of Payments

Mobile

Digital

Invisible

67

@leewetheringtonSOURCE: hatoriz / Shutterstock.com


What about

faster payments?


• Fragmented approaches will eventually converge

• Fed joins NACHA Same-Day ACH bandwagon rolling out September 2016

• Early Warning acquires clearXchange

• FIS PayNet partners with The Clearing House

• These approaches aren’t ubiquitous…yet

• NACHA’s ACH Same-Day Settlement; The Clearing House’s Real-Time Payments Initiative; MasterCard Send

• Immediate notification more important than immediate settlement.

• What about virtual currencies?

• Bitcoin, RippleLabs, etc.

71

Faster Payments?


Blockchain could

change everything

…but probably not.


73

• Internet of Information

• Internet of Things

• Internet of Value


Protocol Application

TCP/IP & SMTP Email

TCP/IP & HTTP Web browser

TCP/IP & VoIP Skype & FaceTime

Distributed Ledgers

(Blockchains)

Bitcoin, NASDAQ Pre-IPO

private stock exchange, etc.

74

Blockchain is a protocol, not an application


75

Blockchain


76

Blockchain is a distributed ledger


77

“…transfers facilitated by central authorities

such as FIs and clearinghouses has not

changed in the last 150 years. Distributed

ledger technology can eliminate the need

for that trusted middleman.”

SOURCE: World Economic Forum

via www.forbes.com


• “…faster, cheaper and more secure/transparent way to manipulate money electronically…”

• “…financial services face the most immediate threat.”

• But layers of infrastructure must be built first, and consumers and regulators must be persuaded to trust blockchain–two prerequisites that give incumbents an early edge.

• “…shortened settlement time also reduces the risk of fraud. Shared ledger technology could even curb the current epidemic of identity theft.”

• Applications: payments; title insurance; buying/selling a house; buying/selling stocks; corporate syndicated loans and trades; private stock and repurchase agreements

78

Blockchain: Why (and When) It Might Matter

SOURCE: “Bitcoin's Shared Ledger Technology: Money's New

Operating System”;Laura Shin, Sep 9, 2015; http://www.forbes.com


79

Blockchain as a Service

Private / hosted | Digital assets | Shared ledgers


80


Delivery Channel

Ecosystem

Tipping Point:The digital channel reached parity with the physical

branch in 2014, with 49% of applicants opening checking

accounts online, or on a smartphone or tablet.

SOURCE: Javelin Strategy & Research; “Digital Account Opening Reaches Tipping Point”; February 2015

Branches are dying! Long live the branch!

Branches: The Long View (Looking Back)

SOURCE: FDIC: “Brick-and-Mortar Banking Remains Prevalent in an

Increasingly Virtual World”; FDIC Quarterly; 2015, Volume 9, No. 1



Recent Branch Cycles: 1989-2014

Branch transaction activity declined 45% since 1992.

Check use declined 68% since 2003.

Top 50 U.S. banks have reduced branch networks.

…but branch density hasn’t changed significantly.

Branch Density in Decline Since ‘89



CONCLUSION: Branch density hasn’t changed

significantly, so technology is not impacting branching.

‘The FDIC is looking at lagging rather than

leading indicators of branch health.’ –Brett King

‘The FDIC doesn’t measure the average number of

visits to a branch per customer per year.’ –Brett King


What Works………………….What Doesn’t

• “Divest to Invest”

• Channel-Centric

• Driving Revenue

• Knowing your market, your

strategy, and your

customers

• Choosing optimal channel

delivery

• Engagement

• Deliver everything to

everybody in all channels

• Absolute Cost Cutting

• Product-Centricity

• Migrating Transactions

• Generalizing from national

banks to local banks

Divest to invest.

94

“Delivery channels can’t just be

additive. Banks must make bold

and deliberate plans to redirect

their investments and capabilities.”

Terence Roche

Cornerstone Advisors

Let Strategy Drive Optimal Channel Mix P

hysic

al

Dig

ital

Digital Focus

Digital Mainstream

Balanced

Trust Advisor

Physical Focus

Assess Branches as Part of Delivery Strategy


97

Javelin Digital Banking Model: 10 Principles

SOURCE: Javelin Strategy & Research; “Turning Digital Banking

into a Financial Journey Starts with the First Paycheck”; May 2015


What innovation

looks like today.


99

“Adults under 35 had a savings rate

of negative 2% in 2014.”SOURCE: Moody Analytics


100

50-60% of Generation Y

confess they have

impulse purchase

problems… and huge

holes in their ears.


So what’s the

answer to the

impulse problem?


102

Real-time

feedback

loops?


…but there are

limitations

to real-time

feedback.


A third of US consumers

who have owned an

activity tracker stopped

using it within six months.Endeavour Partners, July 2014


So how to help

those immune to

feedback loops?

(because their brains aren’t fully mature yet)


Opt-outs and automation.


109

Automated savings?


112

Impulse Savings


113


114


115

Likely Choice of Next FI (Potential Switchers)

SOURCE: Javelin’s “Bank Switching: Combating ‘Silent Churn’ to Maximize Primary FI Status”; November 2015


116

Next FI: Moneyhawks (Potential Switchers)



117

Primary vs. Secondary Relationships (by FI Size)



118

Checking Accounts & Credit Products (by FI Size)



1. Target well-defined, sufficiently large, receptive

segments with your innovation efforts.

2. Segment by behavior.

• “Highly Digital” much different from “Analogs”

3. Use your own data (supplemented by 3rd party

data) to discover accurate, current understanding

of how your consumers are responding to

technology.

119

Innovation: Best Practices




• Define “innovation”

• Weigh probability of disruption against your

probability of success in innovation

• Align employee incentives with strategic innovation

• De-stigmatize failure and experimentation

• Develop communication plan around innovation

• Conspicuous senior-level commitment to innovation

• Clear link between strategy and innovation/transformation

• Beware killing innovation with project-management

overkill and/or CFO/Compliance Officer veto power

120

The Road Ahead: Transformation & Innovation

SOURCE: Celent’s “Innovation in Financial Services 2016:

Reaching the Next Level”; November 2015


Lee Wetherington, AAP

[email protected]

http://discover.profitstars.com/leewetherington

@leewetherington

http://www.linkedin.com/in/leewetherington

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