Once upon a time, not so very long ago, banks were among the most innovative of industries when it came to using IT to create competitive advantage. Observers of the financial services scene have begun to notice and comment on banking's boring period (1996-?). The question is, is this period of non innovation an anomaly or the new normal?
Before we answer that question, it probably makes sense to ask, "Why did [banking] innovation stop?" Among the various analysts, experts, pundits and gurus who populate the consultancies and subscription-research houses that devote attention to the banking industry, there is general consensus about root causes. And the primary cause is massive industry consolidation.
Consider the numbers. Bank of America is the product of more than 3000 acquisitions in its long history. Going back to 2004, there were 271 deals totalling $US131.5 billion in value, led by JP Morgan's eye-popping $58.8 billion takeover of Bank One. And in 2003, there were 264 bank deals, totalling $72.4 billion in value.
And consolidation won't slow yet.
Consolidation isn't alone in hampering technology innovation in the banking industry. There is also regulatory compliance. This is where you really start to hear the experts make noise. One researcher revealed that one of her bank clients was spending 8 percent of total bank revenue on compliance.
Richard Kovacevich, CEO of Wells Fargo, describes the situation as follows: "The products are commodities. The way you distribute them is not." Are the days of innovative banking products truly behind us?
This is where banks should be concerned. While they focus on extracting postmerger efficiencies and keeping various regulatory bodies appeased, competitors like Wal-Mart and Google are entering the playing field.
The role of a bank in the financial services value chain is changing, and it's being threatened. Google Checkout allows users to make purchases from online stores using payment and shipping information they keep on file with Google. The company's goal, said CEO Eric Schmidt, is to make it easier and faster for people to buy products advertised on Google -- and thereby attract more advertisers. It's a very different model to that of a traditional bank's, but a threat nonetheless.
But competition is a catalyst to innovation. It could be that a new day of bank innovation will soon be upon us.