Before you start stripping down, this is an article about regulation. Starting with the CFPB dusting off the dormant rule that it can pursue even non-regulated entities, more stringent guidance keeps rolling out with a matching uptick in regulation through enforcement. The Blue Ridge Bank enforcement action is likely the tip of the iceberg. Swirling rumors indicate it isn’t just the BaaS programs under scrutiny, but third party relationships broadly are getting a second look. It seems the regulatory party is just getting started.
Regulation and innovation being at odds is standard fare for articles and conferences. It is, however, the wrong question to be asking. We can’t do away with innovation, nor can we do away with regulation. Both serve critical purposes. We artificially set them at odds by asking IF they can interact rather than HOW they should interact.
The Case for Innovation
Opponents to change in financial services are using recent regulatory actions as vindication that change is bad or even dangerous. The recent cryptocurrency carnage is further validation of the innovation boogie man. We need to draw a hard line between reckless, fraudulent or irresponsible behavior and innovation. Innovation gets a bad rap as spending on shiny objects without an underlying business case. True innovation is quite the opposite and why we can’t do away with innovation.
Innovation should be renamed ‘growth initiatives’. It is impossible to accelerate growth by doing more of the same. Growth comes from building products that better serve customers that they can’t get elsewhere. Growth comes from opening new segments or finding ways to serve those segments historically left out. Innovation and growth are inextricably tied. To be anti-innovation is to be anti-growth and anti-improvement.
The Case for Regulation
Doing new things creates opportunities for new things to go wrong. This isn’t cause to cry “the sky is falling” and avoid anything new, but to have a clear eyed view that things will (and should) take some unexpected turns. Regulation, when applied correctly, creates guard rails rather than roadblocks. Regulation ensures customers and the system are protected. Ensuring innovators have thought through potential threats to consumer and systemic safety is essential for responsible innovation to occur.
Jim Marous, publisher of the Digital Banking Report and co-publisher of The Financial Brand once told me “regulation is just the excuse institutions that don't want to change use when confronted by the reality they are living in the past.” Regulation itself is often not as problematic as the perception or legacy beliefs of how regulators might respond.
The Case for Cooperation
The question isn’t whether regulation and innovation can coexist, but how they need to interact. Our stances towards innovation and regulation both need to change.
Responsible innovation is not dangerous. Avoiding innovation, however, is dangerous. The absence of innovation is the absence of growth, customer intimacy and ultimately relevance. To avoid innovation is to embrace obsolescence. Giving risk too much or too little weight is an equally treacherous path. The purpose of regulation is not to mitigate but to manage risk.
We teach bank leaders individually and at several graduate schools of banking a process called FIRE™. FIRE™ (Fast Iterative Responsive Experiments) is about moving more quickly and breaking large innovations into smaller risks. Included is a tool we call the FIRE Break™. There are for essential components that help teams manage risk rather than letting risk manage them:
What is the biggest risk?
How do we minimize it?
How do we monitor it?
How do we repair it?
This links the innovation experiment and the risk management from the outset, rather than treating them as separate processes. It also helps quantify what can seem like millions of risks down to a few concrete things scaled down for each phase of the experiments.
Innovation and risk management are an interactive process that need to work cooperatively rather than competitively.
Now let’s get this innovation party started…
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Our corporate and executive growth programs help bank leadership teams unleash exponential growth potential, build internal innovation capacity to "unbreak the bank", and quickly forge ideas into results. You can also apply some of our industry-leading tools and frameworks and learn best practices from peers on operationalizing innovation in our open (co)Lab sessions. Both are open to non-Alloy Labs member financial institutions.
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