Commercial Banks Can't Innovate - Ever Wonder Why?

Commercial banks lack the ability to truly innovate because of the way they are structured and their culture.

BANK STRUCTURE

Commercial Banks core function is to lend money and that whole business model is predicated on loans being repaid. Failure to have loans repaid is not an option. 

Consider this lesson taught on day one in every bank credit class taught to new loan officers. If a bank loans 100 companies each $1 million with a standard 1% ROA the bank earns $1 million on the entire loan portfolio. So, if only one loan goes belly up and the bank losses $1 million on that one loan ALL of the profit from the other 99 loans is wiped out! The bank would have to lend another $100 million just to recuperate the $1 million loss (and that assumes no losses on the second round of loans). Given this economic dynamic, no individual at a bank is empowered to approve a loan. The "Credit Committee" approves loans and, of course, there are multiple people on the committee. And, by definition, a committee is slow moving and ponderous; not exactly the traits you need to innovate. Add on top of that the siloed and hierarchical structure of banks and you end up with no innovation. Innovation relies on speed, initiative, and applying learnings from failures - things that banks not only abhor but actively avoid.

BANK CULTURE

Banks don't encourage staff to try new things and fail. Failure is simply not an option. Innovation, however, relies on experimentation and the learnings that come with failure. There is no spirit of risk taking in commercial bank culture and as a result there is no innovation. Since no one is empowered with the ability to make a decision a comfortable sort of "group think" sets in and staff are simply happy to "do their job" in which decisions are made by other groups. The driving cultural factor that permeates down to the lowest levels in the organization is to "not make any mistakes." Unfortunately, that ethos is the antithesis of innovation.