Taking a closer look at financial services’ track record of innovation
Financial innovation: what is it and how do we get there? VP Operations, Tom Oscherwitz, begins to unpack the idea ahead of our next panel.
How is the financial services industry doing at innovation and must we do better? That is the central question of our next upcoming Aire Talks on September 14.
Financial innovation
Commonly defined as a ‘new idea or method’, innovation is at the root of most lender growth strategies. Peter Drucker, the management guru, has said simply, businesses must ‘innovate or die.’
We know that some industries, like High tech, have mastered the art of launching and absorbing new technologies. Tech’s archetypal example of innovation is Moore’s law. Gordon Moore’s prediction in 1965 that the number of transistors in an integrated circuit will double every two years, has held true for over half a century.
But for financial services, the story is much more uneven.
After the Great Recession, Paul Volcker, infamously said ‘the only things banks have invented in the past twenty years is the ATM machine.’
The pace of change
Perhaps Volcker had a point. Take credit scoring, for example.
Market leading decisioning products, such as the FICO score, arguably have not changed much in the past twenty years. And, though the problem of credit invisibles has been recognized for decades, there are still tens of millions of consumers who are left out of mainstream credit opportunities.
‘But an alternative view is that a vibrant culture of innovation is transforming some areas of financial services’.
But an alternative view is that a vibrant culture of innovation is transforming some areas of financial services. These include the gold rush stampede for Buy Now Pay Later offerings, the emergence of digital payments and open banking, and new offerings within the credit application journey, where my company, Aire, sits.
Alternate data lending solutions have a legacy of pushing boundaries.
In 1999, Riskwise International launched Business Transaction Express, a credit score that addressed the thin-file or no-hit population. In the early 2000s, companies like VantageScore, L2C, and ID Analytics launched alternative credit scoring models.
And the beat goes on.
On August 11 of this year, Fannie Mae announced it will accept positive rental payments into its desktop underwriting models.
The last eighteen months
Great societal shifts can also help to accelerate innovation.
Covid-19 has marked an important moment for every business, forcing many to make sweeping changes to their operational methods, and with little notice.
Change has accelerated. Established practices that lay unchanged for years, suddenly in just weeks, no longer made sense. Home working, for example, has caused huge change not just to what workers spend their time working on, but how they do it also.
All these are important shifts — forced upon us faster than planned perhaps, but innovative in their output nonetheless.
VC investment
The financial services sectors’ investment in innovation continues apace.
According to KPMG, VC investment in fintech more than doubled in the second half of 2020, making 2020 the third highest annual total despite the pandemic.
Our interest in (and desire to financially back) the new, the innovative, the exciting continues — despite the uncertain backdrop of the last eighteen months.
Unearthing the tools to innovate
Why do innovations occur more in some lending arenas than others? How can lenders convert their best ideas, their research dollars, and institutional commitment into tangible changes in the lending ecosystem? What does it take to really deliver meaningful innovation to consumers?
I don’t pretend to have all the answers.
But I am excited to be hosting our next Aire Talks on September 14 — where a panel of esteemed US innovation experts will help uncover the the tips, tricks and cheat codes to help your business innovate faster.
I’ll be joined by:
- David Rabkin, previous Head of Small Business at American Express
- David Ehrich, Executive Director, Alliance for Innovative Regulation
- Sarah Davies, Head of Credit Risk Analytics, Nova Credit
- Paul Watkins, Founder and former Director of the Office of Innovation, CFPB
From setting up innovation divisions to the embedding of brand new lending and analysis techniques across big business, what can we learn from their diverse experiences — particularly in relation to credit decisioning and the credit application process?
Is a vibrant culture of innovation set to sweep financial services? Join me to find out.
Fifty minutes of live debate, our digital event series, Aire Talks, returns this September. Register to save your spot here.
