Over the last 10 years we have seen the introduction of many new and innovative products. Unfortunately, not all of these have delivered positive outcomes to end customers and consequentially not delivered the anticipated benefits to the organizations who sold them. Some such as payment protection insurance, packaged bank accounts with product bundles, and interest rate swaps were often perceived as unethical products, leading to significant litigation. Clearly no financial institution wants to repeat this, yet avoiding the risk and not innovating and developing new products is not an option in such a competitive market.
Avoiding the pitfalls to financial innovation
There are many reasons a new product can cause problems for example:
- New technologies can give rise to risks never previously encountered.
- The volume of data generated require firms to reconsider what they collect and what they do with it.
- Complexity can build, making it difficult for both staff selling the product and end customers to understand the product, its features and risks.
What does good innovation look like?
I see a lot of great innovation going on in the industry. Attributes include:
- Increasing access to banking services; consider online banking customised for disabled customers.
- Helping end customers make the right choice
- Shortening chains and removing the middlemen—this can offer better value and utilise deeper customer insight.
What is the best approach?
Firms should have a business and innovation strategy which is truly customer-centric. To encourage and embed this customer-centric culture, they should put in place an ethical innovation framework to help strengthen the development of ethical products and services.
This framework should be based on the following:
1 Risk-Aware Culture: Encourage firms to take a risk-aware approach, and educate staff on where the ethical dilemmas may lie.
2 Performance Incentives: Employees should be incentivized to help solve real customer problems.
3 Governance: Senior managers need to understand the customers’ needs and take into consideration the characteristics and objectives of the target customers. Strong oversight is encouraged as is a rigorous challenge mindset, including the questioning of conflicts of interest.
- Know your customer: Firms should identify who is going to use the product and for what purpose—this includes understanding their objectives, financial needs, ability to take risk and financial understanding. Firms should use available data to increase their understanding of customer behavior.
- Know your distributor: Firms should consider how the product will be sold and promote the flow of information from the customer to the firm and back again to help quickly identify any possible changes and issues.
5 Risk Assessment: Firms should rigorously assess the risks they are exposed to and consider all aspects and features of the product they are looking to launch. Key questions to answer include:
- Is this product going to help the customer address a real problem?
- Is the product delivering customer value?
- What risks could the product pose to the customer?
6 Systems: Firms should stress test and model products using historic data, projected future data and dummy customer scenarios to improve their understanding of the product and how customers may respond to stress situations (job loss/change in interest rates, etc).