FROM CLOSED INNOVATION TO OPEN SERVICES INNOVATION
It has become clear in this chapter that banks may need to re-examine their definition of innovation. At the same time, FinTech startups may believe they know all about innovation, but they, too, need to keep an open mind and should look at all possible options to becoming excellent companies.
A useful framework for this process is Open Innovation. It describes an approach for firms to advance their technologies by using external ideas, and internal and external paths to markets. Open business models transcend the narrow confines of existing structures and incorporate inputs, processes, and outputs from outside firms.12 Open innovation gives companies a chance to transcend the “not invented here” syndrome and keep an open mind about those innovations that might help them become stronger. Some banks are moving from a closed innovation model to an open innovation model. They might have taken first steps towards profiting from emerging technology in the lending space, but this trend is still in the early stages. At the same time, most products in finance are commodities: capital is fungible, and borrowers hardly care where the money in a loan comes from. To understand how to compete in a world of commoditized products, author Henry Chesbrough recommends that companies turn their products into services on a platform.13 In Open Services Innovation, companies should adopt a customer-centric business model where they can co-create with customers to build those experiences that customers really want. By practicing open services innovation, companies accelerate and deepen innovation and growth, and they provide more choice for customers. It is easy to see that banks and marketplace lenders could apply this model with success.For open services innovation to be effective, new business models are necessary. It requires business models that take advantage of external innovation that adds value to existing services. This sounds similar to some of the FinTech innovation labs banks already run.
However, because such labs often have rigid guidelines, banks set the frame for innovation too narrow. As a result, they mainly attract sustaining innovation and pass up the more promising ideas with the potential to shape the future. If banks opened up their innovation funnel for more radical ideas, these ideas might help them escape the financial services commodity trap. They might shift the focus away from product-focused innovation towards services that incorporate useful ideas, no matter where they originate.Granted, banks mostly offer services to their customers already. However, their innovation model would profit from more openness. While they may be in touch with new companies in the marketplace lending and FinTech space, they prefer to keep them at arm's length instead of incorporating those services into their own business. This is not all the banks fault. Regulatory hurdles are also to blame. However, the way banks underwrite credit still rests on conservative principles that have changed little in decades. Banks could benefit from experimenting with ideas that originated in marketplace lending.
Open innovation comes with several requirements: banks need to be able to source ideas that might help them in the future; they will need processes to assimilate those ideas and co-develop them with the innovators; and they need to have enough fertile ground on which new ideas can flourish. It is easy to forget that FinTech companies need to do exactly the same. Without a thorough understanding of what banks actually do, they will be guilty of closed innovation, even though they may be a hip startup. This is why we have gone to great lengths to describe the inner workings of banks when it comes to underwriting and managing credit. Open innovation works when companies understand the business models of their competitors in detail.
15.7