External Pressure, Internal Inertia: The Innovation Challenge in Financial Services

We often describe the financial services industry as being in the midst of a technological revolution, i.e. Open and Embedded Banking, AI, blockchain, stablecoins, CBDCs, you name it. But stepping back, one might wonder: has the sector truly transformed?

Despite the buzz, the fundamentals of financial services remain largely unchanged. Incumbent banks still dominate most markets (with exceptions like Nubank in Brazil or Revolut in select countries), and the mechanics of many financial products and transactions would look familiar to someone from 20 years ago.

Digitalization has undeniably changed the industry:

Branches gave way to online portals, then mobile apps.
Cash and chip cards were replaced by contactless and mobile wallets.
Customer onboarding and credit origination moved from paper-based to digital workflows, increasingly embedded in journeys led by other industries.

Yet, many of these shifts were reactionary, not proactive.

Take Covid-19: it accelerated digital banking adoption because physical branches closed. It pushed cash aside for hygiene reasons. Similarly, the rise of smartphones and biometric tech (developed outside the financial services sector) forced banks to adapt. These were external triggers, not internal innovations.

Which begs three uncomfortable questions:

Can financial services truly transform without an external shock?
Examples of homegrown innovation, i.e. blockchain, AI, robo-advisors, Open Banking, tend to be incremental and slow-moving. True internal reinvention remains rare.
Is the sector being reshaped more by outsiders than by incumbents?
Big Tech is certainly pushing boundaries: Apple Pay and Google Wallet now control consumer payment rails, TikTok and WeChat process billions in payments in China, and ChatGPT-like AI assistants are beginning to guide financial decisions and initiate financial transactions (like payments).
What new external triggers are on the horizon?
Several disruptive forces are gathering momentum:
- Agentic AI: Intelligent agents could shift financial decision-making from banks to software acting solely in customers’ interests. This may potentially eliminate customer inertia and force banks to adapt to a new type of "client".
- Digital ID & Open Finance: Regulatory initiatives are enabling seamless data portability and secure access across ecosystems.
- Quantum Computing: Threats to today’s encryption standards could require a complete rethink of transaction security.
- CBDCs: Central bank digital currencies might bypass commercial banks entirely.
- …

While any sector can be "accused" of lagging on innovation (e.g. consider the car industry’s delayed embrace of electric vehicles) most other sectors have seen serious disruption from new entrants. Traditional automakers have lost significant ground to companies like Tesla and BYD.

In other service-based sectors, like tourism, disruption has been even more radical. Players like Airbnb and Booking.com have completely reshaped the industry landscape.

And in Big Tech, companies often disrupt themselves, sometimes with mixed success, but always with ambition and leadership buy-in. Apple killed the iPod with the iPhone. Amazon continues to cannibalize itself, from 1-click ordering to AWS to drone delivery. Google is racing ahead with Gemini (seriously impacting its own search engine). OpenAI has launched a browser. Meta pivoted to the Metaverse and now to AI.

So why does financial services struggle to disrupt itself?

Several reasons stand out here:

Market structure: The industry is dominated by a small number of national giants, which are highly profitable and with loyal customer bases. Many behave like quasi-monopolies, which naturally stifles innovation.
Legacy infrastructure: Most banks operate on decades-old systems. These complex platforms are difficult to modernize. Nearly every bank has experienced a failed, multi-million-dollar transformation project in the past decade. Legacy tech severely limits agility.
Compliance-driven risk aversion: As a trust-based and heavily regulated industry, financial services tends to be cautious, often at the cost of innovation.
Short-term shareholder pressure: Most large banks are publicly listed, resulting in a heavy focus on quarterly results. In contrast, tech companies often have founders or major shareholders with long-term control, allowing bold, strategic bets.
Lack of tech expertise at the top: Though improving, many bank boards are still dominated by bankers, lawyers, and compliance experts. There’s often limited understanding of emerging technologies, leading to superficial innovation driven by fear of missing out, rather than clear vision.
Talent leakage to tech: Due to the above constraints, the culture of most incumbent banks is often quite hierarchical and bureaucratic. This makes that top tech talent is more likely to join startups or Big Tech firms. Banks invest heavily in innovation, but the most transformative ideas rarely originate from within.
Slow consumer adoption: Financial habits are conservative. Customers tend to stick with what they know and trust. They’re slow to embrace change, even when better alternatives exist. That said, younger generations are beginning to demand more, i.e. expecting banking experiences on par with those offered by Netflix, Spotify, or Amazon: "If Netflix can predict what I want to watch, why can’t my bank anticipate my financial needs?", "If a fintech can onboard me in minutes, why does my bank still take days?"…

Yet, financial services holds immense innovation potential.

Before the financial crisis, top engineers and mathematicians flocked to the industry to create complex financial products. With budgets, freedom, and alignment to the business, innovation flourished, even if outcomes weren’t always positive (products became so complex that senior decision takers were no longer able to assess the risks properly). The lesson? Given the right incentives, structures, and talent, financial innovation can thrive.

The sector is also uniquely positioned to innovate:

Massive IT and digital budgets
Access to unparalleled customer data, i.e. no other industry has such depth and breadth of data on its users. This is a key enabler for building personalized, intelligent services.
A vital, trusted role in people’s lives. Financial institutions have unmatched insight into customer behavior, life events, and financial patterns. This creates a unique opportunity to develop hyper-personalized, context-aware experiences. Banks could evolve from being service providers to becoming true life partners. See my previous blogs "The Next Frontier for Financial Services: Life-Cycle Event Platforms" (https://bankloch.blogspot.com/2025/05/the-next-frontier-for-financial.html), "Financial Institutions as Partners for Life-Altering Events Like Buying a Home" (https://bankloch.blogspot.com/2024/10/financial-institutions-as-partners-for.html) and "From app to super-app to personal assistant" (https://bankloch.blogspot.com/2020/08/from-app-to-super-app-to-personal.html)
Fully digital product offerings, which allow for rapid experimentation. Unlike industries that rely on physical infrastructure like factories or supply chains, financial services can iterate quickly using A/B testing, feature flags, or rapid prototyping. Sadly, even minor changes today can take months and cost millions due to legacy systems and bureaucratic processes. But if this bottleneck can be removed - especially with AI-powered development and automation, we could finally unlock meaningful, internal innovation.

Financial services tends to evolve only when pushed by regulation, competition, or crisis. Most changes today are incremental, aimed at preserving legacy systems. Until bold internal disruption becomes the norm, the industry will continue to be shaped - if not led - by outside forces.

That said, with emerging trends, shifting customer expectations, and powerful new tools like AI, there may finally be a turning point on the horizon.

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