Bank Innovation and The Fast-Follower Fallacy

In June, the Insight Vault published a post titled Guess Who Holds The Most Blockchain Patents? To save you the trouble of a click, the answer is Bank of America. The advice to mid-size banks and credit unions was not to go out and pursue their own blockchain-related patent applications but to understand what the BofA patents means to their IT strategies and plans.

A recent report from Cipher shows the depth and breadth of patent activity in the broader banking space. I'll review some of their findings and then talk about what it all means to mid-size banks and credit unions.

Patent Activity Among Banks and Tech Companies

BofA's patents aren't just blockchain-related. The bank holds patents in 11 different categories--and more than any other bank in each of the categories except one.

Not surprisingly, banks (in aggregate) lag the major tech companies in banking-related patents. As Cipher pointed out:

"The stark difference reflects fundamentally different business strategies. Tech companies understand the role of intellectual property to define and protect markets."

That may be true, but the patent activity by BofA and even Chase suggest a new focus among the megabanks.

Some points to keep in mind here:

  1. Some of these categories (e.g., e-commerce and OCR) aren't necessarily banking-specific.
  2. More might not mean better. In other words, one OCR-related patent might have greater market impact than 100 banking IT infrastructure patents.

These numbers should scare the pants off mid-size banks and credit unions, but as best as I can tell, they don't faze them in the least.

It's not that mid-size institutions aren't concerned about innovation and being more innovative--they are. It's the seeming lack of awareness that since their technology innovation efforts may have already been accomplished by a BofA or Chase, or that their process innovation efforts may ultimately have to be supported with technologies they have to license from the megabanks.

The Fast-Follower Fallacy

I can't even begin to count the number of times I've heard a mid-size bank or credit union explain their technology strategy as follows:

"We don't want to be on the bleeding edge of technology. We're fast followers."

Total nonsense. As I wrote two years ago in a post on The Financial Brand:

"Even if there was a reason to be a fast-follower, the reality is most mid-sized banks and credit unions would be hard-pressed to execute on it. To do it, they would need: 1) A team of people evaluating technological developments in the market, [accurately] assessing the rates of adoptions, and the potential economic impact; 2) A team of people to rapidly deploy the technological innovations after a “go” decision was made; and 3) An agile, rapid planning process that took in the inputs from the team in point #1 and made the quick the decision to fund the team from point #2."

Maybe they're out there, but I haven't seen many mid-size institutions executing on these things.

The Vendor Problem

Mid-size institutions are certainly concerned about innovation and being more innovative. But many seemingly lack awareness of the megabanks' patent efforts and the reality that they may have to license technology from the megabanks some day--either directly or indirectly (see the recent USAA/remote deposit capture controversy for analogy).

In other words, the megabanks could become "vendors" to the smaller institutions (this, by the way, is what I think will happen with Amazon--see the Insight Vault post on this here). And as a "vendor," a megabank will have insights into the competitive directions and plans of the smaller institutions who are leveraging those technology patents.

Bottom line: Mid-size financial institutions are between a rock and a hard place in today technology's environment. While they don't have the resources of the megabanks to create new patented IP, many are deceiving themselves into thinking they can be fast-followers.

Maybe now you can see why I keep saying that product reinvention--not user experience or process innovation--is the key approach for smaller institutions to better compete with the behemoths.

Ron Shevlin
Director of Research
Cornerstone Advisors