We recently had a conversation with JP Nicols, president and COO of the innovation analytics and advisory firm Innosect, wherein we discussed the future of banking. Nicols offers useful mental models that will help banks and credit unions lead the digital banking revolution.
Trailblazers and Traditionalists
In the first mental model, Nicols defined two types of employees at financial institutions: trailblazers and traditionalists. Trailblazers are visionaries and idea generators. They see the big picture and know the latest news in all the various outlets in the industry. Traditionalists, on the other hand, are primarily concerned with staying the course and getting things done. They aren’t interested in carving new pathways; they just want to get an assignment, finish it, and move on to the next task.
Nicols says that while both types of employees are crucial to the success of an organization, banks and credit unions need to give more attention than they have been giving to the trailblazers. After all, since the 2008 financial crisis and the rise of mobile banking, banks desperately need fresh ways of thinking. “Financial institutions now have to innovate just to keep up,” Nicols said. “If you look at the way a bank makes money, every single line on their balance sheet and every single line on their income statement can now be done by a nonbank.” This enormous shift means that financial institutions must not only fend off traditional banking competitors but totally new fintech competitors as well.
“As a consumer, I no longer have to have a traditional name-brand financial institution interfacing directly with me,” Nicols says. To illustrate his point, he talks about companies like Kabbage or Moven or Prosper. Each of these companies team up with a banking entity, but the banking entity isn’t consumer facing — consumers don’t even care who the banking entity is. “Buyers of financial goods and services simply have jobs to get done,” Nicols says, “and they can get those jobs done without any direct interface with a bank.”
Nicols points out that if consumers engage directly with fintech companies instead of banks, then banks become a commodity behind the scenes. Nicols then poses two critical questions to banks: “How are you going to maintain profitability? And what are you going to do with all of those branches that you have?”
Trailblazers can help answer these questions. In order to best move forward, banks need to figure out exactly who the trailblazers are in their organization (a process Innosect helps with) and then link the ideas from trailblazers to the organization’s overall goals. In short, while it may have worked to stick with traditionalists in prior decades, the digital age calls for banks and credit unions to listen more closely to their trailblazers. Trailblazers can help banks revamp to a more effective business model — one that’s centered on advocacy.
The Shift to an Advocacy Model
Nicols says that banks have traditionally employed a gatekeeper model. “You had to pay the gatekeeper for the privilege of being able to do whatever it is you want to do with your money,” he says. There was no other option. But today there are increasingly a wide range of options, and as a result banks and credit unions are forced to really provide the consumer with what they want. That is, financial institutions are being forced to shift to an advocacy model or watch their business go elsewhere.
Luckily for them, banks and credit unions are in a position to make the advocacy model work. They can take all the data they’re sitting on and use it to improve the lives’ of their account holders. “You look at companies like Umpqua, and they’ve done a remarkable job of positioning themselves in that way.” It’s certainly possible to make it work, Nicols says, but banks need to more aware of what they need to do to pull it off. They need to understand where they stand in terms of innovative maturity.
Leaders, Learners, and Laggards
As he looks at innovative maturity in the banking industry, Nicols divides institutions into three groups: leaders, learners, and laggards.
“Leaders understand their innovation portfolio and their portfolio of talent, and they intentionally put the right people in the right positions,” Nicols says. “They also have deep and wide innovative efforts internally and externally — meaning that they’re not only innovating within their own company, but they’re also pushing the whole industry forward.”
“Learners have pockets of innovation inside their institution,” Nicols says, “but they haven’t figured out how to make innovation the core of the culture yet. Often, these institutions will appoint a chief innovation officer and think that they’ve done all they need to do to be innovative. That’s a learner move.”
Finally, laggards are institutions that don’t know why they should innovate. They often don’t even know what innovation would look like. “These institutions may not be doing poorly at all right now as far as return on equity is concerned,” Nicols says. “But that doesn’t mean they won’t face trouble in the long run.”
Currently, banks and credit unions are in need of real reform. “The vast majority of financial institutions are laggards. They’re very far behind, and they don’t even know what they should be doing.” Nicols says that he sometimes asks during presentations to have bankers text replies to questions he poses. “I show them companies like Moven, Wealthfront, Kabbage — well-funded, very successful companies that compete with them — and I ask bankers to text “1” if they’ve never heard of these companies, text “2” if they’ve heard the name but aren’t really sure what they do, on up to “5,” which means, ‘yes, I’m well acquainted. I’m their customer.’ And the answers are almost all 1’s and 2’s. They don’t even know about this competition.”
The Way Forward
Banks and credit unions can use the mental models outlined here to understand how to move forward. The first step is to know what’s going on inside your own financial institution — especially to know who your traditionalists are and who your trailblazers are. The second step is to make sure that you develop an environment where each group can play to their strengths. “It’s not about privileging one group over the other, and it’s not a matter of just turning the keys over to the trailblazers,” Nicols says. “The best companies figure out how to get the best out of both groups and create a healthy diversity. They intentionally put the right people with the right skills in the right jobs at the right time. That’s the difference.”