Introduction:
Innovating Through Scarcity

“More money is rarely the answer to innovation. The best innovations actually come from a world of scarce resources.”

—John Donahoe, CEO, eBay1

A few years ago, I had the privilege to be one of the early members of PayPal X, a division of PayPal owned by eBay Inc. PayPal X was a radical idea at the time—a complete shift in business and operating models, which put developers and partners at the center of everything PayPal did. It was an acknowledgment that despite the significant number of talented people working at PayPal, far more talent, business insight, and innovation existed outside PayPal’s walls than from within. That’s a tough realization for any company to grasp—the fact that the best ideas, business, product, marketing, and engineering talent will always live outside the walls of any particular company, regardless of how successful it is with its core business. It requires a lot of courage to invite outside talent to compete with your company’s ideas and products, and that was certainly true for PayPal. It meant that other companies might have a better idea of how to serve their customers with your company’s assets. It requires a very strong, forward-looking CEO to allow that creative destruction to take place—a company might disintermediate itself to some degree, but the trade-off is that it stays relevant and has its fingers on the pulse of where an industry may be headed.

Most financial services companies are not wrestling with this challenge. Hiring a “chief innovation officer” or forming an innovations group isn’t sufficient because significant industry innovation and disruption happens outside the walls of a company. Just consider the average mortality of large, multinational firms—roughly 40 years, versus the 75+ years that humans live.2 We live in a world of scarcity—there never seems to be enough talent, time, or resources for innovation beyond a core business. Ask any senior executive at a bank how many of their information technology (IT) and operations professionals are dedicated to risk and compliance initiatives, and chances are high that you’ll hear that anywhere from 70 to 90 percent of their resources are tied up to ensure they are meeting regulatory and risk requirements, despite the fact that U.S. banks will spend close to $42 billion on technology.3 They’ll spend another 25 percent of their compliance budgets on new overseas regulation.4

Even at places like PayPal, which has a reputation for industry innovation and disruption, it’s never easy to free up product and engineering resources to focus on new initiatives. In today’s world, the only way to harness a critical mass of talent and stay relevant to consumer preferences and expectations is to open up and partner.

In the case of PayPal, that meant encouraging developers of all sizes to build new products with a “PayPal Inside” approach. They could create frictionless experiences by integrating them within their own mobile applications. And through the new JavaScript PayPal buttons, developers could add PayPal by copying and pasting five lines of code into their web site, shopping cart, or a QR (quick response) code5—leading to massive improvements and cost reductions in development and integration. Developers could have access to new application programming interfaces (APIs)6 so that companies could accept credit cards while PayPal maintained the liability of handling the compliance aspects of the payment instrument. This was to include applications like peer-to-peer payments that could happen on multiple platforms besides PayPal.com. It allowed for split payments, enabling many recipients to receive funds at once, or payment preapprovals that allowed for automatic transfer of funds based on preset specifications, and even payment aggregation—allowing businesses to reduce the cost of transactions by aggregating payments to one lump sum.

Opening up a platform, however, is not trivial and not for the faint of heart. Key vetting processes, compliance, and risk capabilities need to be in place. It requires ceding some control of an institution’s customers and brand. It also requires an understanding of what micro trends will become mega trends, and how to evaluate and build trust with the right partners.

The exercise we went through with PayPal was transformative for us. Too often, the bigger a financial services company gets, the easier it is to resort to an insular “build it and they will come” mentality, leading to mediocre thinking and products. At PayPal, the platform approach led us to develop a strong business development culture—scouting for companies that could leverage PayPal assets. We partnered with many types of companies—other platform providers, technology companies, kiosk providers, and various commerce enablers. One of the biggest shifts was our approach in partnering closely with the banking world. We realized early on that these partnerships generated win-win outcomes due to the complementary nature of business models and core competencies involved.

Fast-forward to today, and the financial services industry at large now has an opportunity to take advantage of a plethora of new services built by innovative companies that are recognizing trends faster than any larger company could. It requires a large company mind shift—an understanding that consumers or small businesses may not want to access their bank for a lending product; they may prefer Kabbage, Lending Club, Braintree, or Square to their banks. The only way to stay relevant is to embrace the fact that if you are one of the 14,000+ financial institutions not in the “top 10,” faced with a scarcity of assets, you can embrace technology to create incredibly relevant and compelling experiences for your customers. This means making it incredibly easy for others to integrate to your channels through a common platform services approach (think Apple App store for banks), or make it incredibly easy to embed a bank’s capabilities within a nonbank application. If you are involved in a strategy, innovations, or business development role with your institution, that will be important if you want to stay ahead of the curve. Stessa Cohen, a banking analyst with research firm Gartner Group recently tweeted her prediction that a full 25 percent of banks will have consumer app stores by 2016.7

So how are some financial institutions not just surviving but thriving in this environment, even with little to no IT staff? They are taking advantage of a few key shifts in the marketplace—changing consumer behavior (social, mobile, and local trends discussed later in this book), the rise of platform services, and open APIs. These shifts, if combined with good, creative partnering, can go a long way to ensure that any institution can stay relevant and thrive. There are a few other trends and influencers discussed briefly in this introduction that we’ll weave throughout this book.

The Influence of Cloud on Innovation

Platform services, as we’ve just discussed, have been a tremendous enabler for anyone looking to innovate in the financial services arena. This has all come about as a result of “cloud services”: the ability for software to be remotely hosted on servers and delivered through the Internet. This allows for traditional financial institutions to more easily take advantage of others’ software and pair up offerings to create an almost unlimited number of software possibilities delivered through bank and nonbank channels. It has effectively lowered barriers and costs for anyone with a good idea to deliver their software. The cloud cuts across many areas of business but is tremendously valuable in the realm of financial services, where most people now bank online and money increasingly is managed in the form of digital information.

The Influence of Smartphones

Much has been written on the smartphone revolution, and we’ll explore some of ways the financial services industry can take advantage of new technologies, partnerships, and business models. To this day, 2.5 billion adults do not have access to the formal banking system, yet through smartphones, that is about to change very quickly.8 Around the world, companies such as PayPal, Square, and iZettle are enabling small businesses that would have otherwise transacted in cash to accept electronic payments. Simple credit card readers that can plug into a consumer’s existing smartphone make all this possible.

Big Data = Big Driver of Innovation

Big data is a big buzzword, but it’s a powerful trend and concept that we’ll discuss in more detail throughout the book. It refers to powerful analytics that can analyze massive amounts of information to detect patterns and correlations that most would not spot. It becomes particularly interesting these days given the information that can be unearthed in unconventional ways. Data are increasingly read from mobile phones (location, time, identity, mobile applications) combined with social data (e.g., LinkedIn, Facebook) and wearables (e.g., Nike’s Fuelband, Jawbone “Up”) that can give businesses and consumers the opportunity to better pair their financial and commercial needs with specific, tailored offerings.

Two notable areas worth watching relate to home automation and autos. Imagine getting an instant claim completed...