Chapter 80 Identifying Different Forms of Innovation in Retail Banking

Veronique Favre-Bonte

Laboratory Institut de REcherche en Economie et en GEstion (IREGE), University of Savoie, France

Gardet Elodie

Laboratory Institut de REcherche en Economie et en GEstion (IREGE), University of Savoie, France

Catherine Thevenard-Puthod

Laboratory Institut de REcherche en Economie et en GEstion (IREGE), University of Savoie, France

ABSTRACT

To be competitive and capture new customers, banks must develop continuous innovations that can reduce costs, enhance existing service quality, expand current service offerings, and increase market share.

1. INTRODUCTION

Despite growing service-related and innovation management research, researchers continue to call for further studies that can improve understanding of service innovation (Ordanini & Parasuraman, 2010). The service sector remains the “poor rela­tive” in innovation management literature (Gallouj 2002), which concentrates instead on technical

DOI: 10.4018/978-1-4666-6268-1.ch080 innovations (Damanpour, Walker & Avellaneda, 2009), especially in biotechnology, semiconduc­tor, and other such industries (Baum, Calabrese & Silverman, 2000; Gilsing & Nooteboom, 2005; Roij akkers, Hagedoorn & Van Kranenburg, 2005).

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informal, customer-affiliated innovation process (Lusch & Nambisan, 2012). Common criteria for measuring technological innovations, such as the number of patents or R&D budgets, are not valid for services. Innovation in the service sector also is less tangible, reliant on human and relational fac­tors rather than technology (De Jong & Vermeulen, 2003; Ettlie & Rosenthal, 2011). Furthermore, specific forms of innovation generally pertain to particular service sectors, which encourages researchers to concentrate on single-sector studies: five-star luxury hotels (Ordanini & Parasuraman, 2011), hospitals (Djellal & Gallouj, 2005), or retail networks (Cadwallader et al., 2010).

In this study, we focus on the banking sector, which represents approximately 8% of the gross domestic product (GDP) and 4% of employment in member countries of the Organization for Eco­nomic Cooperation and Development (OECD, 2008). It also has undergone significant regulatory and technological changes and faced increasing competition in recent years with the arrival of online competitors (Athanassopoulou & Johne, 2004). In this difficult context, banks have had to innovate to remain competitive, whether to lower their costs or differentiate themselves from com­petitors (Drew, 1994; Han et al., 1998; Reidenbach & Moak, 1986; Storey & Easingwood, 1993). Despite increasing numbers of innovations in the banking sector (OECD, 2005), our knowledge in this area remains uncertain (Athanassopoulou & Johne, 2004; De Jong & Vermeulen, 2003; Menor & Roth, 2006; Oliveira & von Hippel, 2011; Re- idenbach & Moak, 1986). Authors investigating banking innovation often consider the develop­ment of new offers (De Jong & Vermeulen, 2003) or implicitly assume that banks cannot innovate beyond new technologies (Ding, Verma & Iqbal, 2007; Karmarkar, 2000; Oliveira & Von Hippel, 2011).

Innovation, in the literature, mainly refers to the creation of value directed toward the customer, though it also might involve other areas, such as a bank’s organization (Oliveira & von Hippel, 2011). It also might feature several dimensions (Avlonitis, Papastathopoulou & Gounaris, 2001), including service concepts, processes (information systems or work methods), organizations (hierar­chical level, structures), and external relationships (interfaces, intermediaries). We define innovation as occurring when the bank takes deliberate ac­tions to increase its profits (De Jong & Vermeulen, 2003). With this definition, we aim to clarify the scope of innovation in banking, show how several categories of innovation apply in retail banking, and propose a typology of categories.

We begin by reviewing prior research into in­novation in both banking and the general services sectors. With this information, we develop a ty­pology for identifying innovations in the banking sector. Then we apply the proposed typology to France’s main retail bank, the Credit Agricole, to check its relevance. It leads into our discussion of the effects of an innovation on the innovation portfolio and the innovation process. Finally, we note some implications and limitations of our research.

2. INNOVATIONS IN BANKS: PRIOR LITERATURE

Prior literature on the banking sector suffers two main limitations: It focuses on new offers (visible innovations for customers) and assumes techno­logical progress is the only source of innovation. We offer a typology that might better explain variety in banking innovations.

2.1. Limits to Extant Current Research

According to the first research on innovation in the banking sector, banks do not always rely on innovation as a means for development. However, those that establish and formalise development programs for new products perform better than others, whatever their size (Reidenbach & Moach, 1986; Reidenbach & Grubs, 1987).

Such research appears interested mainly in new service developments (NSD, Sundbo, 1997), largely ignoring other types of innovation, such as service delivery (e.g., Athanassopoulou & Johne, 2004; De Jong & Vermeulen, 2003; Menor & Roth, 2006). Yet the widespread exposure of banking to technological progress has changed many op­erational aspects of banking, especially in back offices (Cooper & De Brentani, 1991; Lusch & Nambisan, 2012). For example, the automation of administrative tasks allows staff to spend more time with customers in sales and advisory roles. Considering the influence of technological and IT progress, Barras (1986, 1990) offers a theory about the spread of technological innovation in services, such that a bank’s adoption of a new computer system initiates a series of three phases of innovation:

1. The learning curve for the new software causes incremental process innovations, designed to improve service efficiency (e.g., automation of back office functions through a centralised mainframe computer system);

2. Improvements to the service quality stem from more radical process innovation (e.g., ATMs that cut costs and improve quality);

3. Product innovation may appear (home banking).

This theory predicts no innovations beyond technological possibilities; several other authors similarly focus on the role of technology-based innovative banking practices (Ding et al., 2007; Karmarkar, 2000; Oliveira & von Hippel, 2011). For example, Ding et al. (2007) focus on the development of self-service activities (e.g., auto­matic cheque deposits, account balances, printing of bank statements), for which technology is an essential resource.

Neither the approach that concentrates on NSD nor those based on technology impact take into account the variety of innovation in banking. Therefore, we need a typology that better addresses variety in banking innovation.

2.2. Proposed Typology of the Entire Scope of Banking Innovation

Few authors have tried to compile a typology of innovation in banking. Karmarkar (2000) con­centrates on services related to new technologies (Internet, telephone, interactive terminals) and proposes a typology along two axes: means of access (i.e., centralized, such that the client must go to the service, or decentralized, such that the

client can access the service without moving) and the cost of access (from low to high).

With a broader review of innovation in services in general, we find several typologies (Table 1), though most of them rely on a single dimension, such as:

• The element affected by the innova­tion (product, process, or organization; Belleflamme, Houard & Michaux, 1986; Damanpour et al., 2009; Hamdouch & Samuelides, 2001);

• The degree of novelty of the innovation, which can be combined with its risk level (i.e., new to the organization or new to the world; Birkinshaw et al., 2008);

• Means of production (with or without cus­tomer participation; Sundbo & Gallouj, 1998).

These criteria, though relevant, tend to be iso­lated and cannot quite encompass the total variety of innovations in banking. Some classifications appear to build on several criteria, but they are not always explicit (de Vries, 2006). In this sense, no existing typologies are sufficiently operational to identify different types of innovation that may exist in the banking sector, which leads us to suggest a two-dimensional matrix (Table 2).

The first dimension relates to what exactly is being innovated, that is, the element that will be affected by the novelty. The second dimension relates to the degree of novelty of an innovation (how new?). Regarding the subject of innovation, we adopt Langeard et al.’s (1981) model of five components of a servuction system (neologism used by the authors to describe the production of a service: service + production = servuction). The back-office (i.e internal organization, or backstage) includes all traditional functions of a company that are invisible to the customer (marketing services, human resources, purchasing...) and their opera­tions (working methods, equipment, information systems...). The front office consists of tellers (advisers), the physical medium (equipment used by the staff or customers in service delivery, such as branches, though also more generally the prem­ises on which the service is delivered), and the customer, who is more or less involved in service production (define the problem and/or engage in operational tasks). Finally, the system delivers, as an output, the service or offer to the customer. This model thereby differentiates more service components than a product-process-organiza­tion approach, such that it can distinguish what is visible to the customer from that which is not. In addition, we can consider an essential constitu­ent of a banking system, namely, the back office, where fundamental contributions often appear, such as management innovation (Hamel, 2006).

The second dimension, focused on the degree of novelty of the innovation, makes it possible to identify whether banks can develop innovations that are more than minor (Gallouj, 2002). An incremental innovation refers to items already available that the bank improves or recombines (Gallouj & Weinstein, 1997); radical innovations entail elements that are new to the company but already may exist elsewhere; and a banking sector innovation introduces an element that is entirely new, both to the company and the sector at large. We check this proposed typology by applying it to a French retail bank: Credit Agricole.

3. METHODOLOGY AND RESULTS

We use a single case study to understand innova­tions in the banking sector, such that we detail each innovation developed by the studied firm and situate it in our proposed typology. In addi­tion, we describe two examples of innovation in greater detail to highlight a recurrent phenomenon, namely, the cascade effect of innovation.

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Table 1. Service innovation typologies in prior literature

Identifying DifferentForms of Innovation in Retail Banking

Table 2. Proposed retail banking typology

* Invisible to the customer, ** Visible to the customer

3.1. Single Case Study Methodology

To assess the relevance of our typology, we study a retail bank in depth to identify various innova­tions in the past decade and classify them. We selected the Credit Agricole for several reasons. It represents the leading French credit institution, in terms of its equity capital (70.7 billion euros in February 2012), number of employees (more than 80,000), and its market share in retail banking (28% in 2012). Its net banking income also placed the Credit Agricole in a leader position in 2008 (28.5 billion euros for Credit Agricole in 2008; 27,4 for BNP Paribas). In 2012, however, Credit Agricole is at the second place of the market on this criterion basis (35.13 billion euros), behind BNP Paribas (42.4 billion euros)¹. As a leader in the retail market, it offers many innovations and has a reputation as one of the most dynamic banks in the marketplace. Furthermore, Credit Agricole is highly decentralized, with 41 autonomous re­gional entities. We focus on the operations of one such entity, which adopts innovations developed by headquarters while also enjoys independence, being authorised to develop its own innovations.

To identify innovative practices, we conducted ten semi-structured interviews (Table 3), each of about one and a half hours, during 2007 and 2008. The interviews aimed to understand key innovations developed over the past decade, in­cluding their nature, origins, degree of novelty, and strategic impact on the entity.

To supplement the interviews, we collected data from internal secondary sources (memo­randa written by headquarters, presentations of innovations to employees) and external sources (newspaper articles). The codification process fol­lowed recommendations by Huberman and Miles (2003). Each interview was coded and gradually refined, as soon as possible after each interview, providing a basis for subsequent discussions. We also compared the information, when possible, and undertook triangulation across the primary and secondary data.

Table 3. Overview of interviews within the regional bank

Table 4. The Credit Agricole’s innovations

Table 4. Continued

Table 5. The typology applied to the Credit Agricole case

3.2. Credit Agricole’s Innovations

The regional entity we study regularly innovated or adopted innovations from the headquarters in the past decade. We particularly focused on the 12 innovations most frequently cited by the interviewees as real successes (see Table 4 for the description of the 12 innovations). All these innovations thus can be positioned in the matrix (Table 5). Our typology not only can encompass various innovations (despite their differences) but also distinguish among them.

Several observations pertain to the relevance of this matrix. First, no examples of innovations focused only on customers’ degree of participa­tion. It thus appears relatively rare in retail bank­ing for customer participation to change, without prompting from the introduction of a new physic al medium or front office employees. Although the marketing director of the regional entity admits that the focal bank has not developed any such innovation, the competition has done so². Among the improvements made by innovating front office components (employees or physical medium), the most radical innovations entail the launch of a new distribution channel, which influences three front-office components.

These examples of banking innovation sug­gest several implications. Although technological progress opens many paths to innovation (online banking, cheque processing), in both the front and back office, many others are unrelated to new technology, such as the new offerings (products for cross-border workers, Pacifica, Square Habi­tat), some distribution channels (green points), or formal innovations regarding staff contacts with customers (new diagnosis methods). The easing of regulations, new customer needs (Payne et al., 2008), and imitation of competitors (Abrahamson & Fairchild, 1999) are potential sources of innova­tion, which are at least as important as (if not more important than) information and communication technology progress. These results are consistent with Han et al. (1998) who emphasize the link between market orientation and innovativeness. They also point out, in the case of the French banking market, the value of having a competitor orientation (Day & Wensley, 1988).

These cases of innovation also show that retail banks can produce innovations with a high degree of novelty, though some of them are invisible to customers (e.g., cheque processing). In this case, the question is whether the bank creates value for customers and enhances its competitive advantage. Because back-office innovations lower costs, the

bank can lower its prices or improve its service quality to attain a competitive advantage that may be easier to maintain over time, because its components also are less visible to competitors (Birkinshaw et al., 2008). Those innovations occur less frequently but are more significant in deliver­ing superior value to customers (Parsons, 1991).

3.3. Cascade Effect

Several innovations also led to other innovations in different areas of the servuction system (Table 6), regardless of whether their initial goal was to propose a new offer to the customer or improve the back office. That is, innovation spreads pro­gressively to reach other elements or even the entire system, a phenomenon already mentioned in prior research (Barras, 1986, 1990; Daman­pour & Evan, 1984; Fritsch & Meschede, 2001). However, our analysis shows further that these snowball or cascade effects may not relate to the use of a new technology. A new trend seems to be emerging: the higher the innovation’s degree of novelty, the greater the impact on all the bank organization. A radical innovation or an innova­tion that the bank is the first (in the market) to implement exerts a greater impact on other parts of the servuction system than an incremental one. Finally, we propose that the starting point for a series of innovations may be the back office, the front office, or even the offering itself.

To illustrate the cascade effect, we examine in detail two innovations with different purposes (new offer and back office innovation) but the same degree of innovation (banking sector in­novations): products for cross-boder workers and cheque processing (Table 7).

The raison d’etre of the cheque processing in­novation was to cut costs, because it was difficult to bill customers for this service. The new orga­nization created by the Credit Agricole allowed customers to deposit cheques 24 hours per day,

Table 6. Cascade effect of studied innovations

Notes: - No innovation in this part; + Incremental innovation; ++ Radical innovation for the firm; +++ Banking sector innovation for the competitive environment. Grey cells correspond to the starting point of an innovation. See Appendix for the description of the 12 innovations.

Table 7. Impacts of cheque processing and products for cross-border workers

Notes: Black points indicate the starting point of the innovation; white points show the impact of the innovation on the other elements of Servuction and therefore the cascade of changes that the innovation has triggered.

using a scanner. The images of the cheques are sent to a central platform that manages the flow from the different branches and credits customer accounts. Two video-coding workshops correct any errors (e.g., misread cheques) and the central cheque processing services compares the image file from the platform with the real cheques. The subsidiary then distributes cheques to the various regional entities and competing banks (checks of less than 5000 euros are archived for 60 days and images are returned to the branches every day). This back-office innovation (starting point) caused other innovations at various levels of the servuction system. In the front office, it prompted:

• Greater degree of customer involvement through cheque scanning;³

• Introduction of new physical media (suc­cessive generations of scanners);

• Reduced staff associated with cheque deposits.

In addition, service improved because the customer account is now credited within one, instead of three, days.

Regarding products for cross-border workers, this offer of new services (e.g., transfer of wages, fixed rate foreign currency loans) was accom­panied by changes in physical media (specific areas on the website, new machines to change currency) and the back office. Changes in the back office included the development of new computer programs to monitor the stock markets and offer customers a competitive exchange rate, as well as partnerships with foreign banks that aggregated wages deposited by cross-border workers before making the transfer to Credit Agricole in France.

This cascade of innovations gives rise to two key observations. First, a bank that wishes to innovate drastically needs to be able to change the various components of the service system in a coherent manner (Damanpour et al., 2009). It must anticipate the impact of a radical innovation, which can affect different areas of the servuction system. Ettlie and Rosenthal (2011) similarly note the importance of the combined roles of senior managers, middle managers, and professionals in ideation and innovation development processes.

Second, some doubts remain about the rel­evance of research that only concentrates on new service development, because it can only have a fragmented view of innovation mechanisms or outputs. The introduction of a new offer often produces other types of innovation. The perfor­mance of a NSD thus must be linked to another innovation, such as back office innovation.

4. CONCLUSION

Most literature is interested in NSD (Sundbo, 1997) or the role of technology in innovative activity (Oliveira & von Hippel, 2011). Yet innovation takes multiple forms. With this article, we aim for a better understanding of the multiple forms of innovation and propose a typology to classify them. Our case study of Credit Agricole produces four main contributions. First, banks can innovate more than incrementally. They can market and sell completely new offers or implement original servuction processes. Second, banks can develop multiple innovations without any technological advances; for example, changing regulations and the varied needs of customers are important causes of innovation. Managers and customers thus should be encouraged to consider innova­tive codevelopments of new offerings. Third, our proposed typology can overcome some limits of previous works, by broadening the discussion to all banking innovations, not just to those of new services. Various back office innovations in the banking sector are not visible to the customer but may be strategic, particularly as a means to reduce operating costs. The bank must then take up the challenge of showing how it creates value to customers. Fourth, an innovation is rarely isolated. Especially if it is radical or new to the banking sector, it leads to other innovations in other components of the servuction system. Our typology highlights the impact of each innovation on the entire company.

Our findings also have practical implications for banks seeking to innovate. In particular, it is useful to recognize the different types of innova­tion that can provide a more or less sustainable competitive advantage. Managers should classify these innovations, using our typology, to identify their firm’s degree of innovation-especially with regard to innovations with a high degree of novelty that are invisible to customers (e.g., cheque pro­cessing). In this case, customers cannot perceive the innovation directly, even though it provides a sustainable benefit compared with competitors’ offers. Moreover, technological progress is not the sole source of innovation. It is possible to develop innovations that have no connection to new technology. Retail bank managers can look to regulations, new customer needs, and competitors for potential sources of innovation.

Of course, our results and implications are limited by the methodology used: our case study focused on innovation in one part of the banking sector (retail banking), one company (Credit Agricole) and one country (France). It is difficult to generalize results from a single case study. However, the Credit Agricole is a relatively representative bank of retail banking in France and Europe, thanks to its leading position in the French market and Europe (n°1 in France, n°3 in Europe) and through its presence in over 70 countries. Nevertheless, the phenomena studied here could be different in case of other types of banks. Future work could then look at the relevance of our results, including our typology, in investment banking. Furthermore, as every industry has special traits, empirical research in other types of industries could help establish the generalizability of our typology. Moreover, ad­ditional research might determine the importance of the process of implementing innovations in the banking sector by looking beyond the core organization (i.e., collaborators such as business partners or customers). The cascade effect we highlighted also should encourage researchers to apply qualitative methods to investigate banking innovation. In line with De Jong and Vermeulen (2003), for the process of emerging innovation, we propose further study of these processes that depends on their type. Doing so may lead to a better assessment of the cascade effect; in turn, organizations may require a long-term view of customer relationships, that does not fit well with the short-term financial goals that tend to drive capital markets.

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ENDNOTES

¹ http://www.credit-agricole.com/Le-Groupe/ Presentation-du-groupe ; http://www. culturebanque.com/classement-banques- francaises-2012/

² Specifically, Laydernier Bank offers a spon­sorship system, whereby customers obtain benefits if they recommend that others open a bank account.

³ The customer deposits cheques without sup­port from staff, then a receipt is automatically produced.

This work was previously published in International Journal of Service Science, Management, Engineering, and Technology (IJSSMET), 4(4); edited by Ghazy Assassa and Ahmad Taher Azar, pages 43-57, copyright 2013 by IGI Publishing (an imprint of IGI Global).