The term “financial innovation” often gets a bad rap, and it’s understandable. It tends to be associated with investor-focused innovations like mortgage-backed securities and collateralized debt obligations – two of the primary culprits behind the 2008 financial crisis. But in recent years, many big banks have turned their focus towards innovations that help consumers.
In the past year alone, financial powerhouses like American Express, Capital One, MasterCard, Deutsche Bank, and JPMorgan Chase have launched or expanded innovation labs. They join similar initiatives at Citi Bank, Visa, Fidelity Investments, and other organizations. In fact, the trend has been going on for quite some time: between 2008 and 2013, venture investment in global fintech tripled to $2.97 billion, and it’s expected to grow to $8 billion by 2018.
These recent efforts aren’t aimed at finding new ways to package investments but rather at delivering services more effectively to customers, often by leveraging digital technology and mobile access. The banks are driven, at least in part, by a growing sense of urgency to respond to incursions from tech giants like Google, Facebook, Amazon, PayPal, and Apple – not to mention Safaricom and other disruptive technologies like bitcoin.
Interestingly, many of the developments coming out of these labs have focused on improving services for people living paycheck to paycheck. For instance:
- JPMorgan Chase’s Financial Solutions Lab will be a $30 million, five-year collaboration with the Center for Financial Services Innovation (CFSI), which specializes in improving financial services for the underserved. Its goal is to bring together “social entrepreneurs and leading experts in technology, behavioral economics, and design to improve financial capability.” The best ideas generated by the lab will have access to capital, technical assistance, and third-party evaluation. Behavioral economics and human-centered design consultants ideas42and org will serve as strategic advisors to the initiative.
- Both ideas42 and IDEO.org, the consultants mentioned above, are also involved in the Financial Innovation Lab, a new partnership with American Express aimed at generating ideas that promote financial inclusion at scale through the software platform for American Express Servereloadable prepaid cards. The lab brings together researchers, practitioners, and business developers to develop and test technological innovations that improve users’ financial behaviors and attitudes. The best ideas will be refined by experts at ideas42 and IDEO.org and implemented as experiments on the Serve platform, with an opt-in group of actual account holders.
- Capital One Labs is focusing on innovations ranging from new mobile apps and payment options to better in-branch experiences. Recent projects include Spark Pay, which helps small business owners accept more payments, track sales, and manage inventory. Capital One also engaged in a 2013 collaboration with the microfinance crowd-sourcing platform Kiva, where employees could lend money to entrepreneurs using their credit card reward points.
- A number of financial services companies have set up their innovation labs directly in developing countries. For instance, the MasterCard Labs for Financial Inclusion, based in Kenya, aims to generate innovative strategies for serving the underbanked poor worldwide. It will tackle challenges like identifying the ways by which financial providers can service this group profitably, designing features and functionality that will drive usage, and creating products with the potential to scale globally.
Both the missions of these labs and the innovations they’re generating reflect a new awareness in the financial industry: with tech companies targeting their customers in countries around the world, financial services providers can’t afford to overlook the underserved market and the potential of digital technologies in serving the market at scale. If these labs are successful, the coming years may show a new wave of products that serve these customers effectively, affordably, and profitably.