Scarlett Sieber is Managing Director, Chief Strategy and Innovation Officer at Catalyst Consulting Group (“CCG”), a management consulting firm that advises clients on the direction of banking and helps them develop strategies that deliver profitable growth and competitive advantage.
Scarlett is a well-known international speaker and as an informed advocate for financial services innovation. Before joining CCG, she was Vice President of USAA Labs; prior to this she was Chief Innovation Officer, Head of Strategic Transformation & Digital at Opus Bank; and earlier she was Senior Vice President at BBVA. At BBVA she was responsible for implementing the Spanish bank’s global strategy for innovation within the US and headed the North American region for BBVA’s global FinTech competition, Open Talent. She was also co-founder and COO of a data visualization technology startup.
Q. Scarlett, you’ve been a Chief Innovation Officer twice. First at Opus Bank and now again at CCG. What are the pros and cons of the CIO title?
A. It’s an ongoing conversation, whether or not the CIO title makes sense. If you look at the technology sector generally, it’s rare to see a CIO title.
Some people will go so far as to say that when you see that CIO title, it’s a sign that company or industry is behind. I believe it holds a tremendous amount of value and opportunity, and especially within our industry — financial services. It is indicative of an organization saying it wants to do something different and is empowering people to make a change. The CIO is there to represent that vision of where the organization is going.
The Chief Innovation Officer is there to remind everyone they’re on a mission. That mission will be different for every company. The CIO needs to bring together the right team and give them appropriate goals that are achievable and meaningful. It’s a huge responsibility, but I like the challenge.
Q. Should every bank should have a Chief Innovation Officer? Or should innovation just be part of everyone’s job?
A. I don’t think every bank should have one. Not all banks are the same and not all banks are equipped from a resource and from a strategy perspective to have a CIO.
Banks that are dedicated to thinking about things differently and overhauling what they’ve done in the past — and that could be a super small community bank or credit union or a giant institution — those should certainly have someone in a CIO-type role. But the executive team has to have the right strategy and mindset in place before bringing in a CIO.
In 2020, innovation is not a job that every person in the organization should be responsible for. Employees should have an innovative mindset and that can be part of your values set, and you can evaluate team members on their openness to innovation. But that’s very different from saying innovation is everyone’s job.
A lot of startup founders start in big corporations where they are inspired to build companies because they had a problem and saw it as an opportunity. Inside the bank we should think the same way — if something is a problem, why is it that way?
It goes to the question of what we mean by innovation. People can be thinking about ways of doing what they do on a day-to-day basis better. But that’s quite different from a true innovation function. The more transformative innovation — the big ideas — that should be handled by a dedicated group as their entire job.
Q. How should banks organize for innovation success? How do you go about building an innovation capability that can affect change in the larger organization?
A. Start with how you will define success. Typically, you’ll be looking at the P&L and direct impact on ROI. Those things are extremely important, but if you are just beginning your innovation journey and starting to think about your external ecosystem, you have to be pretty open and flexible in how you define success.
If you’re looking for transformative innovation, building and incubating takes a long time to show true traction. So start small, do micro-tests and then think of scaling.
When you say organizing, I think logistics. Make sure you’re putting processes and procedures in place that actually enable innovation activities, including partnerships with the outside world. Even if you have the right strategy and the right definitions of success, if you don’t have the right processes and procedures in place, you’ll have a hard time being successful.
Let’s say you find a really good, two-year-old FinTech startup with an offering that fits a gap in your systems. If you put it through a typical procurement process that requires five years of financial data, you’re going to have a huge bottleneck and a big, big challenge. The larger you are, the harder these things can be to do. In cases like this, the smaller organizations can have an advantage.
There are plenty of examples of banks that have created a streamlined process that makes it easier to work with FinTech startups. It means getting the right people on board and having risk, compliance, and legal active in the conversations early on.
Q. Where should the innovation team sit within the organization? Should it be a separate unit, or should you try to disperse your innovation team so members sit within your various business units?
A. I’ve seen both. Again, it really depends on the organization. You can have success both ways.
In my ideal structure, I would start out with a small but hyper-focused innovation team that is separate from the larger organization and not bogged down by day-to-day responsibilities within the bank, so you can really go test, iterate, and do cool things. But you’ll want to interact with compliance and legal, and ideally those departments have resources they can dedicate to you. It’s hard to do well, but I think this is the most effective approach.
A key factor is very, very close alignment with technology. Technology is key to innovation, and without alignment you get bottlenecks. In some cases, innovation reports into the CTO. Whether or not it’s a direct report, I’m a bit indifferent. In a lot of cases, having it report to the CEO makes sense.
Having members of the innovation embedded within the individual lines of business is hard. It tends to work best when you’re focused more on incremental, rather than transformative, change. But if small improvements are really your focus, then integration with the business units can make a lot of sense.
Q. Does that imply that the innovation effort has to have dedicated funding?
A. Budget is crucial. Even if from the strategic standpoint the C-suite is singing Kumbaya, when the rubber hits the road, one of the bigger challenges is lack of time and lack of resources and that goes back to money.
If we (the innovation team) have a budget, and that budget can go toward funding you (the CTO’s team), that can work. We pay five salaries. They’re still part of your team, your org, but these resources are dedicated to innovation team priorities. It can make a lot of sense.
Q. One of the hardest parts of driving innovation into an organization is managing cultural change. How do you make innovation part of the cultural fabric of a legacy company? Is it possible?
A. An innovation culture needs to come from the very top. A CEO that is hostile or indifferent to innovation can have a chilling effect all the way down. People across the organization need to know that innovation matters and their ideas matter and it’s okay to try and fail — this all goes back to culture. But culture is notoriously resistant to change. You will come across certain people who will fight innovation and fight change and fight new ideas – if you’re an innovator, then it’s time to find a new job. You have to think about what motivates people, what motivates your team. Alignment of incentives is crucial to get the right buy in. You have to show people the positive impact innovation will have on their business.
If there is not an organization-wide mandate to be different, to do better, then you are going to have isolated groups and lack a concerted effort. But if the C-suite and the board want change, then you need the right people with the right resources and the right strategy.
Q. What are best practices for running an internal innovation program at an incumbent firm? Can you engage your employees without taking their focus from their day jobs?
A. I’ve seen and been part of several models. Employee innovation is extremely hard to do in general and definitely hard to do well. Start small. Get to the “why” of employee innovation. Getting people to be intrapreneurs is not easy and allocation of effort becomes a real struggle. Often times, it is most effective for incremental change.
But it is helpful for people in the lines of business to work with the innovation team for a certain amount of time — this is inspiring for people, and it is amazing what good ideas can come from the people doing the actual work. What you don’t want is an innovation team out on an island, disconnected from the everyday needs of the bank. It’s also a matter of culture, as we discussed.
Q. There are many different ways banks try to engage with external innovation. Some invest in FinTech venture funds. Others run innovation labs, either on their own or in partnership with groups like Plug and Play. Some support independent accelerator programs. For the bank that’s hoping to keep its finger on the pulse of external FinTech innovation, is there a right model? A right collection of activities? What have you seen work?
A. Start with your goals and your reasons for getting involved with the innovation ecosystem to begin with. Investing in a fund is way different than creating your own innovation lab or accelerator.
There is no single model that applies to all banks. What resources do you have? Is it a team or one person? What is your budget? You need to have a strategy. The strategy will dictate the interactions. Larger banks typically operate multipronged strategies.
You may think only bigger banks or super-regionals have the resources to do these things, but we’ve seen smaller institutions doing things pretty creatively. Look at NBKC — sub $1 billion in assets. They invest in FinTech startups and they also have an accelerator. They’re definitely a strategic player.
My best advice if you’re just getting started is to not put any serious amount of money into it initially. When I was at BBVA, outside of the FinTech competition Open Talent, I limited investments into the ecosystem as much as possible. But I was very active in all the accelerators and incubators and events. There’s so much you can learn just by going to key industry events. The big ones, as you can imagine, but also the local ones, even in smaller markets. Just go and spend time with the startups and the other incumbents, as well.
Based on this minimal investment in terms of time out of office and travel, you can gain a sense of where you as an individual and you as an organization want to go. Being involved in an accelerator can be helpful, but it’s easy for banks to sit back, so it becomes “innovation theater.” That can hurt your reputation. It is better to get hands-on, with a proof of concept. Sandbox environments can provide a safe space to do that.
Q. What are some of the best practices you’ve observed when it comes to banks and startups working together? What needs to be done by each side to ensure a successful relationship?
A. The never-ending question! I’ve been on both sides of the table and as a mentor I’ve been to meetings between banks and startups and some of them have been very painful.
Part of it is each side being clear on expectations. In some cases, all the bank wants is to understand the business model or understand the technology without any real intention of working with that startup. That doesn’t mean the startup shouldn’t engage in that conversation because, depending on where they are in their lifecycle, feedback regarding things they’re not thinking about or where resistance within the bank is coming from can be instrumental in helping them understand what they need to do.
Both sides need to learn as much as possible about the struggles the other faces. For banks, this means understanding the struggle startups have with funding, how it sucks away the founder’s time just keeping the lights on. Startups need to understand banks have different, sometimes competing lines of business, as well as tight budgets. Startups sometimes think banks are made of money — they are, but it’s not necessarily there to spend on technology. A lot depends on people and on relationships, that is, on having a champion — this is important — and a lot depends on culture. The cultural piece is essential for innovation, and essential for working with startups.
Whether you are banking executive or a startup executive, time is your most valuable resource, but the real challenge there is on the startup side. A startup may have just 6 to 18 months of runway at its current burn rate. Even if the bank has said yes, we’re interested in working with you, how long will that take? Will it take a year? Will it take 18 months? At banks, it can take a long time for things to happen.
Make sure you find that internal advocate, who might be in the CIO’s office. But tenure in these roles is not typically very long, so you need to have more than one ambassador. It seems like the innovation team usually turns over more quickly than the other parts of the bank. Get into a few different areas and make sure multiple people are aware of the conversations that you’ve had. It happens a lot — this person left so you’re starting again from ground zero. So ask your ambassador to make sure there are enough people in the room from different parts of the bank so that if some people change, you can still continue the conversation. Be very deliberate about documenting every conversation.
Q. In a world where people want digital banking solutions seamlessly embedded in their daily lives, is there a future for the bank branch beyond a role as an expensive billboard? Is there a future for bank branches in a digital world?
A. I think so, though banks are certainly looking at branch expenditures more carefully.
The branch means different things to different people. Some customers want the branch for advisory services, human contact, though I think the need for that, particularly for young people, is exaggerated. Wells Fargo used to refer to its branches as “stores” – this changed because their sales culture has changed, but also because retail stores are facing extinction-level challenges. Branch numbers will continue to decline, but there are many reasons they will never entirely go away — regulators sometimes discourage banks from closing branches in underserved areas, as just one example. And regarding ATMs, cash use has been declining but has recently ticked up among young people, according to a report from the San Francisco Fed in late 2018.
I actually think branches are resources that are being undervalued and underutilized in some ways. People are getting creative with the cafes and the like, which I think is a nice beginning, but what data could we collect here that helps us iterate and create new products in a more efficient and customer-centric way?
I get asked a lot about reducing turnover in branches. Not surprisingly, branch staff tend to have higher turnover because career paths aren’t obvious. Well, what motivates people? Money is part of it but it’s not the only thing. It’s about exposure, it’s about how you’re equipping and empowering them to be experts in different things. They actually have direct relationships with your customers, so maybe you should talk to them more.
Q. A number of European digital-only challenger banks — Monzo, N26, and Revolut — are entering or preparing to enter the U.S. market. Some will enter with banking licenses, others will partner. Which model do you think makes more sense and do you think any of them will be successful at achieving scale? Home-grown digital-only banks have struggled.
A. The good news is regulators are warming up to challenger banks and they’re trying to make it easier to get licenses. There’s some politics around this, but I had the chance recently to sit with the heads of some of our banking regulators and they are certainly trying to do what they can to facilitate this.
Of course, the faster path is to partner with an existing bank. And, there’s an opportunity for banks to get inexpensive deposits. But when you think of Grasshopper and you talk to Judith, the reason why she went after a license is all around economics. She just didn’t see how the numbers made sense partnering with a bank. Obviously, that was a much longer path and it takes more funding to even start that process.
Challengers have certainly caught on more in Europe and in the UK than they have here in the U.S. By 2023, challenger banks could have 85 million customers in Europe, which is 20% of the population. But, it’s hard to see how European challengers will find an audience for themselves in the U.S., where awareness of their brands is limited, and domestic challengers have struggled.
Q. While legacy banks aren’t loved or even trusted by consumers, very few Americans switch banks each year. So what can these new entrants offer to get people to move their primary accounts?
A. If I knew the answer to that, I’d be running my own bank! Banks like Chime are offering fee-free overdraft and paycheck advances, but while this pleases existing customers, awareness of this in the general market is limited.
I think these banks need to get their foot in the door as an occasional account — one you use for rideshare, for example, because you offer better deals, and gradually win over the customer. In the UK and Europe, a lot of challenger bank usage is as a secondary account. It is just too difficult to disentangle direct deposit and recurring payments — the system contains friction that discourages switching.
Q. The ability of many small-to-midsize banks and credit unions to innovate is constrained by the limited capabilities of their core providers. These banks don’t have the budgets, nor do they have the large tech teams of the money centers or even the super-regionals, and they don’t have the agility and flexibility of a FinTech startup. What’s a community bank or CU to do?
A. I’ve been there. I’ve been frustrated and felt that pain. It’s a big challenge.
On the one hand, while the small institutions can’t compete with the larger banks in terms of technology because their budgets aren’t comparable, I still think there are really ripe opportunities for partnerships with FinTech providers. Sometimes it’s just for shiny bells and whistles type stuff, but that too can help.
Let’s go back to NBKC, which we discussed earlier. They went out and plugged in and engaged with FinTech startups directly. They acted as an enabler on the back end and brought in a new revenue stream because of it.
You also have new cores entering the market and competing by enabling better, more personalized experiences like the NeoCovas of the world. I feel optimistic because one of the big impediments to real movement in our industry is the reliance on the traditional cores.
Q. So you think switching cores is a viable option?
A. You don’t need to fully switch your core. Cores in general are going to become dummy systems, if that makes sense. You can partner with one of the newer ones with APIs that allow you to do certain things but still use your existing core as the foundation. The basics are handled by the existing core and the interesting, cool, innovative testing is happening at a higher level.
In conversations with some of the alt cores, they’re willing to start with a small piece. So try it out, see if you like it. Depending on your ambitions and goals, it may eventually make sense to move over, but I don’t see a lot of institutions fully replacing their cores. That’s a really, really big undertaking.
Q. Banks have been worried for a while about big tech and social media companies becoming banks. They’re edging ever closer, offering banking products without fully taking the plunge. How should banks be thinking about this?
A. They’ve been worried about this for a while. You see the big tech companies getting closer than they have before but if you look at the products — like Google Checkout, Facebook Pay, Apple Pay — banks still remain an integral part of the system. The movement of money has gotten easier, but that in itself is not a business model.
It is true the front end may be taken over by another company, but so then are the customer acquisition costs. Every technology company that offers bank-like services ends up partnering with a bank — even Libra from Facebook is said to be in conversation with banks. Banks should welcome these partnerships. In any case, the lifeblood of many banks is businesses, and businesses are not getting checking accounts with Google.
Q. Which new technologies are you most excited about? By which I mean, which emerging technologies do you think will have the biggest impact on banking?
A. I’m pretty excited about 5G.
We’re going to see a lot more 5G devices this year, and 5G is going to solve a lot of network connectivity problems that have been around for years. It’s much more powerful than 4G and is supposed to be comparable in strength to an average WiFi setup. This has big implications for mobile banking, things we’ve heard about for years, like augmented reality offers, proximity awareness, and more powerful computing for AI at our fingertips.
It is also likely to encourage the migration of technology to the cloud, which has already started. I’d argue that the biggest asset most banks have is data. Moving to the cloud and leveraging AI will allow banks to derive actionable insights from that data in real time. If we actually harness the power of our data, and truly offer personalized experienced for our customers, it could be game-changing.
I think another side to it is technology for privacy — as a society, we have to confront the question of whether having a mobile device and being always connected means we have to surrender our privacy. The large technology companies don’t seem interested in addressing this — is there a role for banks here? Automobile use was widespread by the 1920s, but it was almost 50 years before the law required seatbelts. Are we using mobile devices now without seatbelts?
Q. What does the support system for FinTech startups in the U.S. need? Is there a piece that’s still missing?
A. The one area I would mention is the regulators. Having had the opportunity to talk to some of these folks, I can say that they’re warming up to FinTech. But if they can find a way to take a more active role, I think it would be very interesting.
A few states are creating sandboxes where they are providing relaxed regulation on a state level allowing FinTechs to learn and grow. Arizona was the first, and Utah and a few others are also doing something similar. They have a long way to go — there needs to be more structure and strategy — but I definitely like where that’s heading.
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