Banks are busily setting up innovation labs - but how successful have these ventures been so far and how should their success be measured?

Setting up an innovation laboratory has become the new norm for big banks around the world - a means of embracing “disruptive” digital innovation and staying competitive. To some, these digital playgrounds may seem something out of a science fiction novel – whizz kids, mad hair and white lab coats. Looking beyond the surface and past the hype, where is the actual innovation coming out of these labs?

First, it's important to understand why banks are setting them up in the first place. Ian Woodhouse, a director within PwC's UK asset and wealth management practice, tells this news service that there is a significant push from regulators for both consumer protection and innovation. For example, the Financial Conduct Authority's Project Innovate encourages innovation in the interests of consumers, with a regulatory sandbox that allows businesses to test innovative products, services, business models and delivery mechanisms.

Then there is the pull from new technologies in areas such as blockchain (the distributed virtual ledger network associated to some extent with Bitcoin), cybersecurity, big data analytics, behavioural recognition, artificial intelligence and robo-advice. Client demand for increased connectivity is another factor, Woodhouse said.

Last year alone, the UK's fintech sector employed over 60,000 people and generated ÂŁ6.6 billion ($8.7 billion) in revenue, according to a statement from the UK's Treasury department. Banks that have recently joined the fintech revolution in setting up such innovation “labs” or “hubs” include Deutsche Bank, HSBC, Standard Chartered, Citi and ABN AMRO. In London, the FinTech Innovation Lab, an organisation exploring new tech ideas, has raised over $35 million to date. Its partners including Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Lloyds Banking Group, Morgan Stanley, RBS, UBS, Santander, Societe Generale and Intesa Sanpaolo.

This is a global trend. In Asia, for example, there has been a push in centres such as Singapore to stay at the cutting edge of fintech in all its forms. PwC has launched an "innovation hub" in Singapore; DBS and Bank of Singapore, among others, have launched various initiatives. IBM has opened digital studios in South Korea and Singapore; in May, the Monetary Authority of Singapore and the UK's Financial Conduct Authority signed a cooperation agreement to allow financial technology firms in the two countries better access to each other's markets.

The financial sums involved in fintech spending are rising fast, despite, or possibly even because, of market volatility in recent months. Investment channelled into the global fintech sector shot up 75 per cent to $22.3 billion last year, according to figures from Accenture (see here). In Asia-Pacific, investments more than quadrupled to $4.3 billion, with the lion’s share occurring in China ($1.97 billion) and India ($1.65 billion). In Europe, it more than doubled (120 per cent), while the number of deals rose by 51 per cent and investments in German ventures alone swelled 843 per cent. Investments in the North American fintech sector (the world's largest) grew more modestly, by 44 per cent to $14.8 billion; the US continued to dominate the sector with 667 fintech deals - a 16 per cent increase.
 
"Name any bank and there’s a big chance they’re either involved in or are setting up a fintech innovation lab. And for good reason; whether it’s in-house or outsourced, these labs are giving them invaluable exposure to innovative technologies which they’re unlikely to encounter in their existing IT infrastructures," Dr Richard Theo, chief executive and co-founder at online investment service Wealthify, told this publication.

Saxo Bank’s CEO, Kim Fournais, says: “The industry is on the cusp of change. The main challenge big banks face is making the right decision when it comes to upgrading or replacing their technology - many legacy systems are too expensive to run and upgrade, so unsurprisingly they are looking to outsourcing as a way of reducing costs and growing their assets under management and profitability. The notion that everyone should develop their own systems is dead.”

Just for show?
Looking at the facts, there’s no doubt that technology has moved past being just window dressing to becoming a fundamental part of a bank’s strategy. Critics that say innovation labs are plain marketing spend, just to make banks look good, need only look for the fruits of such centres.  

The FinTech Innovation Lab Asia-Pacific, for example, is a collaboration between Accenture and financial institutions, including BNP Paribas, Commonwealth Bank of Australia and Macquarie. The start-ups participating in this year’s Lab have developed a range of innovations, from wealth management solutions that are precisely oriented to customers’ investment goals to know your customer (KYC) services that leverage blockchain technology and a fraud prevention programme using algorithms based in Chinese characters to help financial institutions flag risk.

Citi’s innovation lab in Singapore even has a Client Experience Center and a Client Collaboration Center, where clients can "test drive" latest banking solutions through live demonstrations with situation analysis and discussions with product experts.

Some innovations’ net contribution to the bottom line in terms of income, however, remains unclear because they are too embedded in the relationship management offering, according to Sebastian Dovey, managing partner of wealth management research firm Scorpio Partnership.  

How then can banks justify the capital expenditure of such labs and the plethora of projects that they foster? Capital spend is typically not large or one-off but can be controlled through partial stakes. Investment can be phased from first-stage to second-stage funding before moving to full ownership once a concept is proven, Woodhouse advises.

Measurement of how effective innovations are, he explains, is around how well the fintech investment can be integrated with existing assets – such as brand, product platforms or technology capabilities – to scale and create game-changing advantage.

James Aylen has been in tech for 20 years and is now head of UBS Evolve, the bank’s centre for design thinking and innovation in Singapore. He tells WealthBriefing the innovation lab trend is not a technology race, rather a matter of usability.

“Here, the client is at the centre of what you’re building, as opposed to starting with the solution and then doing user testing. Human-centred design gives you a shortcut to success because you’re ensuring what is being delivered is exactly what people want,” he says.

The early stage is a funnel process, where you start with lots of ideas and take some through to test. Each has its own success criteria. Think of it like a chemist in the beginnings of an engineering project, saying "Yes, this works. Now let’s build it on scale", explains Aylen.

Germany’s biggest lender, Deutsche Bank, works with tech start-ups and academic institutions through its labs in Berlin, Silicon Valley and London.

“The Deutsche Bank Labs accelerate the bank’s adoption of new innovative technologies - to enhance products and services and to compete more effectively in the digital age. The Labs strengthen the bank’s internal innovation capabilities by broadening relationships with external technology start-ups, by deepening partnerships within the innovation ecosystems, and providing the ability to conduct rapid experimentation,” the bank told this news service.

The ability to apply innovative technologies to the benefit of clients is not just a nice-to-have, but a must-have for banks to better serve the next generation. And innovation labs are increasingly recognised as the way to achieve this, not to mention the more cost-effective option versus in-house investments. The alternative is losing talent, and ultimately clients, to the players that got there first.