Talk to Chuck

Many would say that "innovation in financial services" is a contradiction in terms. The key elements of all financial products have been around for centuries. These are a play on time (as in a loan), a play on contingency (as in financial futures and options), and a play on liquidity (as in all standardised trading both on and off exchanges). However, there have been a number of large episodic, ground-breaking innovations. Often, these are linked to external events like changes in regulation, technology or customer preferences.

I will use the example of Charles Schwab to illustrate some of the points; starting with changes in the SEC regulations in the 70's, the changes in the Glass-Steagall Act in the 80s, together with waves of technology-led innovation in the 80s and 90s, with a return to customer in the mid 2000s.

1. The role of the regulators.

In 1974, the SEC (Securities Exchange Commission) allows deregulation of certain brokerage transactions. Charles Schwab takes this opportunity to launch a discounted brokerage with vastly reduced fees and commissions and high street branches.

The regulatory two-step is an intricate dance in financial services. At each turn the regulators, in trying to reduce the political fall out of the profit maximising strategies of clients and firms, provide a spring-board for even more opportunities to make money. This creates an ever changing environment to which firms have to adapt.

2. Technology's powerful fly-wheel.

In waves of technology driven innovations using, successively, basic computing, call centres, home based PCs, the Internet and social media, Schwab grows into a huge financial services operation, as some of the points below illustrate.

• 1979: Automated transaction and record keeping: Client accounts 84,000


• 1980: 24 hour quotation system: Client accounts 147,000


• 1982; 24 hour order entry system: Client accounts 374,000


• 1984: PC-based on-line investment system: Client accounts 903,000


• 1985: Over 1.2 million client accounts with $7.6 billion under management


• 1986: Using existing capabilities to have mutual funds quoting and trading 24/7: Client assets $11.3 bn


• 1989: Automated telephone brokerage: Client assets 25.3 bn


• 1991: First network TV advertising campaign launches: Client assets $47.5 bn


• 1995: schwab.com launched (see the WayBack Machine record for January 16, 1999): Client assets $181.7 bn


• 1996: Web trading introduced: Client assets $253 bn


• 1997: Registers 1 million online accounts: Client assets $437 bn


• 2002: Launches an advisor-branded website and hosting service for independent investment advisers: Client assets $657 bn

At this point the dot com boom is gone and the world is grappling with the after effects of 9/11, prompting Schwab to look at refocusing on customer needs at a more fundamental level.

3. Listen to the voice of the customer

Many of Schwab's biggest innovations arise through asking customers a few key questions:

• What can we do better?


• How can we make your life easier?


• What new service or product would you like to see us offering?

This is illustrated in some detail in the Ogilvy case study on Schwab's "Talk to Chuck" campaign.

In 2006, after extensive analysis that included ethnographic and qualitative research, Ogilvy identified "When it comes to my investment firm, I’m just a small fish.” as a real customer 'pain point'. The business response to this was to ensure that "... all clients have easy access to the best of [Schwab's] insights into financial markets & investments". Finally this was executed in the following range of commercials, where the innovation is in the manga-style execution of the television ads.

This article highlights many features of entrenched corporate innovation. To me these can be summed up in a sound bite. Schwab have become well skilled at responding to the shifting competitive landscape using whatever is at their disposal in order to remain relevant. Of course, it was still necessary to understand the extent of what is at their disposal and how to use it, and more importantly to understand that being relevant means being relevant to customers.

On a Razr Edge

Yesterday, Motorola announced a restructuring that would see its mobile handset business isolated from the rest of the group. Most commentators see this as the end of the road for the mobile division; doomed to be sold off.

This is very sad as Motorola is not only a pioneer in electronic innovation, but in effect created the mobile phone industry 25 years ago. It was the leading handset maker through the 1990s, loosing this position to Nokia in 1997.

This failure to recognize the handset as a fashion item and remain in tune with the fickle needs of the consumer could be the ultimate cause of Motorola leaving the business it started. The inability to understand and respond to customers plagued Nokia in 2004, when it was accused of arrogance and lack of design and innovation.

At the same time Nokia was struggling, Motorola had a huge success in the launch of the Razr handset, selling over 110m units and reclaiming a market share level of over 20%. However, since then Motorola has not had any significant handset launches or innovations. BusinessWeek has a great view of this failure, "The Razr was a fluke. Motorola was never an innovation-led company. It was a technology-driven company run by engineers who failed to understand the difference between technology and innovation." You can read the complete article here.

The stakes are high in this industry. The metronome of contractual upgrades beats out a rhythm demanding handset manufacturers respond to new product cycles of no more than two years. Then as part of the fashion industry, they need to understand the psychology of being 'cool'.

Here is an industry where innovation, has to be 'built in'.

Constraints

Recently, I was chatting to a product developer for a large retail bank. She had two very insightful observations about innovation in banks (and I guess many other firms).

First, she said, "Well, Tom [not his real name] the CEO, was very excited and fully behind the idea of innovation, but the middle managers were a real problem." She went on to detail how they had blocked, rejected and made implementation difficult.

This shows the importance of a culture that embraces change on a more fundamental level than mere 'lip service'. Contrast this with Toyota where change and innovation are somehow 'built-in'.
Second, she observed, "Then the IT is a real stumbling block. No matter how good the innovation is, we have to be scheduled into the next release cycle and that means our time to market is far too long."

This practical problem is as serious an impediment as the cultural issues. Perhaps it is even the cause of some of the negative experiences of the middle managers. In banks, the technology is the product. Poor technology architectures inhibit change and the introduction of innovations.

Most banks are in a similar position with a large investment in product specific packaged applications. These count against bringing in new products and services as they often need a new product-specific application that requires extensive integration into the existing environment. Alternatively, they cause a replacement of an existing monolithic application. In either event these result in multi-year roll-out plans.

Even those that build most of their applications, have built layers of complexity on top of layers of complexity. This makes each change incrementally longer. A large financial clearing house, recently quoted five days of testing for every day of coding!

There is a major opportunity when banks' product development can move at anything approaching Internet speed.

Local Search

I recently came across a list of interesting inventions and new products. Seeing all of these together from so many industries and applications really brought home a few points.

1. Humans are dangerously inventive
   
   Humans are unique in the world for their use of tools and language. This combination, without going into debates around which came first, allows us to dominate, control and mold the environment to our own needs.
   
   Unchecked this ability will lead to the extinction of everything that does not meet the needs of human development and survival. The reason that so many of the products and inventions are 'green' is the result of the human worry for survival of the planet.
   
   
2. Products carry knowledge
   
   Products that we have developed and evolved over the years carry important knowledge. Could we have a wind turbine without years of development of windmills and knowledge of electricity generation, or an electric vehicle without batteries, electric motors, electricity, vehicle body design, and lightweight materials.
   
   
3. There are discernible patterns in many of the product's evolution
   
   Many of the products are the result of people searching for knowledge or ideas a small distance from that which is already contained in their product. A PC keyboard with a storage compartment, a washing machine with sensors that control precisely the amount of water needed for a particular load, a bicycle with an attachment for crushing grain, are just a few examples.
   
   The further from the knowledge already contained in the product, the more radical the invention seems. Often new knowledge is introduced as a simple juxtaposition or combination from other products. For example, the laser guided robot brings together a robot with an ability to pick-up irregular objects and light detection, together with a simple laser pointer.
   
   There are many other patterns of this kind in the human creative process that moves from one product to another.

Micro-payments

There are some things in life that have emerged over eons and seem unlikely to change. My two favourites in this category are paper and cash.

In spite of all the hype of the digital age, paper still seems to win over a screen in most practical situations. Have you ever tried reading your laptop in the bath? The convenience of paper makes me think it will be around as a medium for a good few years to come.

With the worldwide take-up of mobile phones, we already have a complete digital platform in our pockets. What smart inventors do with it is only starting. My own prediction is that it is a good contender for a cash replacement. Pre-paid accounts already contain stored-value and those who have contracts have already been granted 'credit' by the celular operators.

There is one major stumbling block and that is to disconnect the cash or stored-value from the banking system. TipJoy is just one example of an onine business trying to do this.

While not related to the mobile industry, they are an example of the need. This service allows you to leave a tip on a website by simply entering your email account. It creates accounts that hold the proceeds of your tips, offset by tips you've left for others. Settlement is via PayPal accounts. When you want to cash out you can receive an Amazon voucher. Neatly, bypassing the monetary system.

Of course, Amazon does not provide, gasoline, schools, hospitals, and so-on. However, the point remains, break the banking link and the economy will change.