Organic Growth Through Innovation

By Steve Wunker

Shareholders are speaking in unison: acquisition is no longer the path for banks to achieve profitable growth. With many superior targets already purchased, and others having an acquisition premium baked into their share prices, banks can no longer count on consolidation to create the growth their earnings multiples demand. Organic growth is the new imperative.

Given these prospects, banks may look jealously toward other rapidly growing and profitable industries. From search engine Google to regional jet maker Embraer, companies are creating new sub-industries and quickly dominating. Indeed, the biggest stock-market success stories of the past 100 years have followed a similar path—creating a sub-industry or segment, rather than slogging through entrenched competition. Through "disruptive innovation," a term coined a decade ago by Harvard Business School's Clayton Christensen, these firms have redefined what customers buy and how firms compete to serve them. Banks can do the same, using innovation to create organic growth.

Some in financial services claim the industry hasn't seen fundamental innovation in 400 years, but this is untrue. Innovation has, in fact, been remaking several aspects of the industry, but the forces of change are most powerful in business models, rather than technology innovations. Perhaps the biggest success stories revolve around non-banks. Capital One is marketing credit cards to downmarket segments. H&R Block has developed a robust business in refund-anticipation loans. American Express and Diners Club created corporate spending cards. Charles Schwab pioneered a low-cost direct model of selling investments.

Banks want to get their new offerings 100 percent correct before launch, but many ideas are not tested in quick and inexpensive markets first. This lack of concept malleability limits the impact of senior management intervention, and, therefore, executives will often review finished product concepts late in the pipeline. Strangely, they will ask ad agencies to present three variants of potential commercials they can vet at an early stage, but will not ask product developers to do the same thing. The dysfunctional products are numerous. What are banks to do?

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