The concept of “financial innovation” can be defined as making and promoting new financial products and services, developing new processes to facilitate financial activities, to interact with customers and to design new structures for financial institutions. This article takes a look at the needs for innovation in the financial sector and some basic requirements.

Today the contribution of services to the economy is ever growing. Services are characterized by their intangible nature as well as the joint involvement of the producer and the consumer for the service to be enacted. This further stresses the need for an in-depth understanding of the customer’s preferences. These elements can clearly be illustrated by the various financial services that can be offered to consumers and professional investors. Often legislation will even prescribe certain elements of information that need to be specified in order to collect the customer’s preferences (e.g. the MiFID Directive at European level).

There are various ways to foster innovation in a company, it all requires the allocation of people and funds to collect or create new ideas for the company’s service provision. This service provision is not limited to the external environment but also involves the company’s internal environment. In other words, the concept of “financial innovation” can be defined as making and promoting new financial products and services, developing new processes to facilitate financial activities, to interact with customers and to design new structures for financial institutions.

Complex in character and inherently relevant to economic growth

Innovation in financial services is very different than innovation in a physical product environment.

Financial innovation is both complex in character and inherently relevant to economic growth, and full understanding of it requires the collaboration of experts and scholars in many fields of research, including economics, finance, marketing, law and technology. Nevertheless, innovation in financial services remains under investigated and it deserves careful attention, especially since the world is currently going through a period of economic slowdown.

For example, the economic crisis has led to reforming the regulation of the financial sector, and this may have some impact on financial innovation. Second, the advancements in the information and telecommunication sector have led to new financial innovations, the protection and the management of which are challenging and require closer examination. For example, while’s ® famous one‑click online payment system received patent protection in the United States in 1999, this payment system was considered patentable subject matter in Canada only recently.

Another key challenge of the financial sector is the current mutation affecting it. More precisely, a noticeable trend is the shift from financial intermediation to other business models, with the introduction of non financial intermediaries between lenders and borrowers and other market players (e.g. retailers, telecom providers) providing assimilated banking services.

Requires an interdisciplinary approach

Innovation in financial services requires an interdisciplinary approach. Experts in innovation, management, marketing, economics, business, finance, technology and law need to share their insights to fully foster an open innovation approach in financial services. Bringing together external and internal actors is a key element in fostering an open innovation approach. This can also be applied in financial services innovation.

The role of social networks in innovation for financial services

For example the role of social networks in innovation for financial services is a particularly interesting evolution. Twitter, Myspace, Facebook and You Tube are all being used to offer new financial services, increase the interaction with the customer and collect new ideas from outside the financial institution. These media allow collecting, in real time, feedback and ideas that can be used to start a company’s innovation processes. This massive outreach of these social media can pose a challenge to handle. Clearly there are also security and privacy challenges associated with them. This means that often there will be a need to create new organizational structures to effectively coordinate the various inflows of information and the tracking of the “external idea” towards absorption or rejection.

Often the financial institution’s innovation processes are managed by a few people and no specific company structure takes ownership of it. A dedicated “Innovation Department” or “R&D Department” is not yet a common practice in financial institutions. The closest corporate function in many financial institutions is the “Marketing Department”, which role may be essential in implementing open innovation, as a form of enhanced collaboration in order to create growth for the company and distinguish itself from its competitors.

Another important aspect is the cultural element of innovation. Is innovation a state of mind of the company and its employees? Often innovative initiatives are isolated, meaning that they hardly ever reach maturity (due to a lack of support or understanding) and that the company does not only miss growth opportunities but also long term spill-over benefits. These are the missed organizational learning to handle its innovation processes, a missed opportunity to demonstrate symbolic projects to create more awareness and inspire employees to consider new ideas stemming from their operational necessities.

Designing and implementing innovation strategies is the next element for disposing of a more successful ability to innovate in financial services. For example the lifecycle of innovation and the elements needed to facilitate a successful lifecycle are very important. The innovation lifecycle is strongly influenced by organizational concerns because the established structures and processes that drive success in mature service lines (i.e. efficient and highly standardized) are often too rigid and eventually lead to an innovation failure. It is critical to align the right structures, processes and provide leadership.

In other words, financial service innovation needs a reward culture.

This is a crucial element for the implementation of any innovation strategy since management or employees can suffer from the “not invented here” syndrome and does prevent capturing the benefits of the evolutions and possibilities available in the external environment. In other words, financial service innovation needs a reward culture, coupled with an innovation pool of excellence, which is multidisciplinary and transversal. Knowledge capitalization, knowledge sharing, coupled with a skills pool that provides people from various company functions is a key characteristic for the “Innovation Team” within financial service companies.

Innovation in financial services is very different than innovation in a physical product environment. Most innovations can and will be copied by competitors so the search for the “chicken with the golden eggs” is not the best tactic. It is a structural approach that is needed, with a continuous attention to skills development and a multidisciplinary team.

From September 21 to September 23, 2011, the Public Research Centre Henri Tudor (CRP Henri Tudor) is hosting the first “Innovation for Financial Services Summit” in Luxembourg. This event will bring together experts from the financial sector and academics specialized in the field, to share their insights and expertise on financial innovation. The CRP Henri Tudor believes that this event will raise awareness with regard to the role of innovation in the financial sector, the benefits that the economy, at both local and international level, may generate from this form of innovation, the challenges facing financial innovation and the measures needed to overcome these challenges. More information regarding the proposed programme and conference registration, can be found on

By Anne-Laure Mention

About the author

Anne-Laure Mention is the Head of “Innovation Economics & Service Valuation” Research Unit within the Service Science and Innovation department at the Public Research Centre Henri Tudor (Luxembourg). She is also leading the INNOFinance program, which is specifically dedicated to research and innovation for the financial sector and surrounding market players. She has a mixed background in engineering, finance and management. Her research interests mainly focus on innovation and technology management, intellectual capital evaluation, management and reporting, and finally, on open and collaborative innovation. She has more than 40 communications and publications to her name in these fields. She is a founding member of WICI (World Intellectual Capital Initiative) and the country representative for Luxembourg. She is also an active member of ISPIM (The International Society for Professional Innovation Management) scientific panel.