Solving the innovation puzzle. A framework for consistent innovation in banking and insurance

Overview

For the past 500 years, the banking and insurance industries have struggled to balance innovation with stability and conventionality – with innovation suffering as a result. The incremental innovation of the past is not sufficient in today’s rapidly chang

In December 2009, Paul Volcker, former chairman of the U.S. Federal Reserve, shocked the financial world by telling an audience of senior finance executives that the banking industry's single most important innovation in the past 25 years was the automated teller machine, which, he added, had at least proved "useful."1 Proponents of the Optional Federal Charter - a proposal to allow U.S. insurance companies to choose between a current state-based regulatory system and a single federal regulatory agency - contend that "the [insurance] industry has not introduced a single entirely new property and casualty insurance product for individual customers" since 1959.2 Both statements seem to support the popular verdict on innovation in the financial services industries: There is little innovation and, when innovation occurs, it is typically of little real value.

But is this verdict true? And even if it is, does it matter? Arguably, modern economies could not function without the stabilizing services of banks and insurers, which include transforming uncertainty into economically manageable risk and pooling and transferring funds from market participants with excess capital to those that have a business proposition but no means to realize it. Would innovation enhance these basic services? What benefits might be gained by solving the innovation puzzle?

Before addressing these questions, it's important to determine what exactly is meant by the term innovation. Does innovation have to be radically new? Most would agree that the introduction of a Web-based book-selling model like that of Amazon.com is innovative