Where's the Innovation?

Cash Point - Andy Culpin

Innovation is an overused word. Like the weather, everybody talks about it, but nobody does anything about it.

I am always on the lookout for the best ideas and approaches that can give my clients a leap forward in terms of competitiveness and profitability. I look in areas as diverse as anthropology, psychology, marketing, history, sociology, medicine, sport, biology, the arts, and popular science (networking effects, the power of many, emergence, use of intuition), but I can not remember the time I found something I could take from a banking client into the non-banking world as an example of leading edge thinking. There seems to be a dearth of innovation in investment banking - and at exactly the wrong time.

I watched the Davos conference to see if this was where the smart, constructive suggestions for the future direction of investment banking would be made. If there was such a moment it never caught the attention of the banking customers. I began to wonder: when did investment banks last really innovate rather than play back a variation on a theme?

The things that I consider to have been game-changers in my working lifetime are the introduction of ATMs, credit cards and microfinance (the latter idea being now taken up by the large banks). Although derivatives have had a lot of attention over the past 20 years (due to profitability), behind their complexity, most of them can be modelled (if they can be modelled) as a series of the cash flow-like swaps. Taking it further, a swap is similar to a shipping agreement: I agree to deliver x to y and receive z. These shipping agreements have been around for thousands of years in one form or another, so the derivatives concept has a lot of history but is not new - the new part has been in creating complex asset values. This additional complexity should not be confused with innovation. Furthermore, the complex calculations to value derivatives, as we now know, is an estimate based on a set of assumptions supported by an averaged out-market price. It has created a market for computers to crunch the calculations, but as we witnessed in the credit bubble, it seems more like a return to a religious faith in the numbers, and ignoring the evidence of your senses.

If we compare changes over a similar period in other areas, we find that from technology, we have the rise of super computers, personal computers (laptops, netbooks, iPods), the Internet and super computers. From the motor industry we have adopted total quality, kaizen and lean thinking. From medicine we see laser eye surgery, keyhole surgery and transplant operations that were unthinkable a generation ago. However, I'm disappointed when I look to see the breakthrough thinking that bankers have invented during this period.

Do we think these people can come up with some clever ideas to remedy the financial problems they have created? They seem to lack the curiosity and motivation to do it, or maybe it can't be done. As explained in the book, Fooled by Randomness, people didn't understand how they were making money in the first place, so when the conditions changed, they did not have an alternative strategy.

I meet a lot of hard working and genuine people who are involved in investment banking, and who would not like to think of their work as 'socially useless'. But I really want to see these innovators that I heard about, now that we really need them.