Innovation Should Come in Measured Doses

CCG Catalyst Commentary

Innovation Should Come in Measured Doses

By: Tyler Brown

July 9, 2024

Amid the worsening crisis of confidence in Banking-as-a-Service (BaaS), it’s become clear how high the barrier to entry is for a compliant and competitive BaaS line of business. The basic narrative about BaaS, in which a bank enables nonbanks to provide banking products and services, glosses over the challenges of building and scaling a BaaS program. The basic framing doesn’t do justice to the technical, organizational, or legal complexities: The idea that banks can just turn high-cost infrastructure and a license into a low-cost, scalable source of revenue is too good to be true.

When bankers veer from tried-and-true banking products and services in the name of innovation, old frameworks may no longer apply. The cost base of a BaaS program, for example, isn’t the same as running a traditional bank because the two businesses are fundamentally different. A typical bank’s technology, people, and processes don’t graft evenly onto a line of business that depends on third parties to handle relationships with end customers. Even with the right technology, the incremental cost is high as banks require more staff and resources to meet obligations to partners, end customers, and regulators, particularly related to risk and compliance.

A fatal flaw in the evaluation and planning for an innovative new line of business like BaaS is thinking that it will be easy. That mistake holds for innovation strategies overall: It’s an illusion that anything new in banking will be cheap, quick, and comprehensive. In banking, missing that fact can lead to devastating failures. As the problems in BaaS have shown, cutting corners isn’t a viable solution to unexpectedly high costs, and taking a strategy halfway isn’t likely to be productive, either.

Innovating without tripping takes focus, deliberate thinking, and long-term planning. A key principle is to be rational about the business opportunity: Is it more substance than hype? Another is to be practical about how an opportunity might fit into the organization’s capabilities: Are current staff, culture, and technology enough? The thought process for any innovative product or service should start with a deep understanding of the issue, followed by a hardnosed assessment of the revenue opportunity, and finally, a sober look at the potential costs and unknowns.

The upshot for bankers is that they should innovate in measured steps, based on proper groundwork, and with accurate and complete identification and mitigation of risks. A bank that never modernizes or innovates — mistaking doing nothing for avoiding risk — will get stuck in the past. But by leaping ahead without preparation it may get burned.

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