What's this all about?
In recent years, neobanks have demonstrated true innovation by deploying customer-centric features at breakneck speed. All the while, most traditional banks lumber along without as much as an app upgrade. So, why such a discrepancy in levels of innovation? In the following article, Head of Innovation at LEVERIS, Conor McAleavey, seeks out the answer in the most unlikely of places: SpaceX’s recent launch into orbit.
Read on if you:
- Have an interest in the future of banking
- Want to understand why there is such a widening gap in product innovation between neo and traditional banks
- Are considering modernising your bank
In May 2020, over 150,000 people gathered at various vantage points around NASA’s Kennedy Space Centre to watch SpaceX launch two astronauts to the International Space Station (ISS), while millions more watched online.
On the face of it, however, many others wondered why it was such a big deal and why SpaceX is considered such an innovative and transformational company. Rockets have been launched into space since the 1950s, so why such global media attention for this launch? Have we not seen all this before?
Well, the answer is, in a way, yes, we have, but those that understand spaceflight understand the one big difference this time around. Cost.
Spaceflight is eye-wateringly expensive. It costs approximately $10,000 for every pound of matter you send into orbit. The ISS itself has come with a total cost of approximately $150 billion and is the most expensive man-made structure in history. The laws of physics, it turns out, are expensive little constraints to try and engineer your way around.
One of the biggest determinants of a space mission’s overall cost is the reusability (or otherwise) of the various rocket parts. The enormity of Earth’s gravitational pull means that a huge amount of fuel is required to propel the rocket away from Earth and into space. With a huge amount of fuel comes a huge amount of rocket and a huge amount of rocket is extremely expensive (approximately 80 per cent of the overall launch cost), especially if you throw it away after each launch.
So the real innovation of the most recent launch is the fact that the massive Falcon 9 rocket returns and lands safely back on earth, to be used again in the next mission. This reusability is what makes the whole SpaceX mission viable. If they had to spend the estimated $350m that it cost NASA to refurbish the space shuttle after each mission, there would be no SpaceX, no quest to colonise Mars and no one would consider it the most innovative company in history.
what has this got to do with banking?
Revolut, Monzo, Starling, N26, Tinkoff and Nubank are quite rightly considered amongst the most innovative banks on the planet. They have the fastest onboarding, the slickest interfaces and deploy features at breakneck speed.
Many big banks on the other hand still require branch visits to open an account, have cumbersome interfaces and, despite them all having ‘innovation teams’, can go years without releasing a single new customer feature.
Why this discrepancy in levels of innovation? Can it really be that all the most creative and innovative thinkers work at the neobanks, while the traditional banks are packed full of unimaginative automatons?
The answer is of course, no! People at traditional banks are every bit as imaginative and innovative in their thinking. However, they are bound by the very same fundamental constraint that hampered space exploration before SpaceX came along. Cost.
The one true barrier to banking innovation
When you hear big banks complain about their substandard mobile offering, their difficulty with regulatory compliance or their scant feature set, what they are really complaining about are symptoms of an underlying condition called technological inflexibility. This inflexibility results in massive project costs that make real product innovation untenable from a cost perspective.
Every organisation in the world is constrained by budgets. Just as NASA had to operate within congressional budgets, private companies like SpaceX and the various neobanks have to operate within their own company budgets. Innovation has a cost and budgets are finite. Therefore, speed of innovation has a direct and inverse correlation with project costs.
Rocket reusability is SpaceX’s innovation enabler because it drives down their launch cost making their company-wide mission possible. Flexible technological infrastructure is the neobanks’ innovation enabler because it drives down the cost of technological change thus enabling their innovation teams to consistently launch new products and features.
Product innovation is never so much about the actual idea itself but whether it can be produced and distributed at an acceptable enough cost that makes it viable as a commercial proposition. It’s as much about efficiency and working within budgets as it is about inventiveness.
The SpaceX Quadrant
The neobanks operate in what I call the ‘SpaceX Quadrant’ of the Innovation Matrix. In this quadrant, the pace of innovation is extremely high because their technology platforms are sufficiently flexible enough to allow rapid new product deployment within realistic budgets.
A case in point is Revolut and its launch of Stock Trading, Commodities Trading, Account Aggregation, Revolut Junior, as well as app redesigns on both iOS and Android, all within the last nine months
In and of themselves, none of these new features are particularly innovative or original, we’ve seen variations of them all before. What makes Revolut such an innovative company is not the inventiveness of any particular feature, but rather the consistent pace at which it can deploy new features into the market. A pace at which big banks are not currently equipped to match.
The ever-widening product innovation gap
In attempting to shift their organisations towards the SpaceX quadrant, many big banks remain focused on lowering costs via headcount reduction. This, however, is a very short-term focused approach, which will only result in a temporary improvement in their ability to deliver innovation within budgetary constraints.
As the neobanks are built on modern, flexible technology, they have already found their innovation enabler. Their approach to cost reduction is about reducing the cost of technological change to improve and maintain their speed of innovation. Their cost of product innovation is so low that they will continue to innovate at pace well within their budgetary constraints.
For as long as the big banks continue to sit on their existing technological infrastructure, the product innovation gap between them and the neobanks will continue to widen. If it goes on for much longer, you have to wonder if one day the big banks will end up deploying their budgets via partnerships with the neobanks and the financial superapps. Just as NASA was forced to do with SpaceX.
Until then, and for the foreseeable future, their innovation will remain well and truly grounded.