Banks and the Cost of Innovation Hesitation

When the smartphone launched in 2007, forward-thinking banks knew that they could offer a banking solution through iPhone apps. Yet the 2008 financial crisis put the brakes on any nascent innovation, and banks reverted to caution-mode. It’s one of the reasons that even today in 2025 we still have banks with their heads in the sand, content to offer loans and deposit services. After all, why waste time and resources on innovating if they don’t know their innovation will pay off. And everyone will always need banks, right?

Take a look at the current banking landscape for the answer. In the late 1980s there were over 3,000 banks operating in the U.S.; in 2025 there are fewer than 4,500. Bill Gates’ 1994 statement that ‘banking is necessary, banks are not’ is now less of a prediction, and an actual reality. There is today an existential reality for both community and larger banks, which should make the imperative to innovate stronger.

Yet banks are by nature risk averse, despite being very, very good at managing certain risks - the ones they have identified and have systems built up to tackle: credit risk, liquidity risk, compliance risk. But what about the risks they are overlooking right now? The ones they aren’t thinking about? Important, future-proofing risks that come from the attrition rate for their average customer. The risks that come with banks’ customers getting older and failing to build multi-generational relationships to secure their future. Then there’s the risk from the digital arms race fueled by the largest banks that is part of their decline. And the death by a thousand cuts from fintechs who are laser-focused on very specific products and sources of value for customers. The global traditional banking business model is fragile - with 90 - 95% of banks’ incomes coming from spread income: the difference between what comes in and what they pay out in loans.¹ By partnering and adding new opportunities and new sources of value, banks can reduce the impact of these pressures. This and all the risks above are a clear case for innovation.

Banks fail because they fail at the things they are supposed to be good at. They focus on managing areas of their expertise like liquidity risk and credit risk, with many banks not prepared to innovate to provide a service for customers they don’t have. A resistance to innovation isn’t the cause of a bank’s failure to thrive, but it is one of the reasons. If you’re not relevant to your customers, a bank will gradually ossify and die. This failure goes on to have a domino effect, impacting the consumers and SMEs who now have less choice. For customers using community banks, this is a tragedy as they still must use banks, but now have less choice, and have to use bigger banks which may cost more or not be embedded in the heart of a community.

But innovation has, of course, been happening in banking. In the early 1990s banks started to digitize transactions, using this as a cost-saving exercise (no paper envelopes and mailing of statements). It’s this technology that went on to be the trigger that enabled new capabilities. Personal finance management software such as Quicken and Mint.com discovered this consumer-facing innovation before the banks did. When we talk about the revolution of fintech and the revolution in money movement this was an important step, as it led to digitization of the customer experience where more context was added to transaction reporting, so banks now knew where money was being spent. This in turn lead to the rise in first neobanks who were built on prepaid payment rails. This was followed by one of the biggest innovations in recent years: open banking. Open banking means banks don’t have to reinvent the wheel anymore when they innovate. They can partner with fintechs and other experts to innovate for them. A huge theme going forward is for banks to be good at partnering with others, because you are not expected to build or think of everything on your own. Innovation will be easier: there’s no need to do it alone or achieve everything at once. However, banks innovate, one thing is certain, innovation hesitation doesn’t pay off.

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Sources:

¹ Wild Card in Global Money Movement: Digital wallets