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Regulation: The Mother of Invention?

D+H CEO Gerrard Schmid talked regulation and innovation at his company's Connections 2014 conference.

Despite a high regulatory burden, US banks still must invest in innovation. And indeed, regulation can often spur innovation.

That sentiment was expressed by D+H CEO Gerrard Schmid during the keynote of the company's Connections 2014 conference this week in Orlando, Fla. Schmid mentioned the regulatory environment banks face, noting that in July Dodd-Frank  celebrated its fourth anniversary. "I'm not sure how many people showed up for that birthday party," he joked.

However, he did also say that regulation can be the mother of invention: "Despite the burden, good things can come from regulation."

Schmid mentioned the auto industry as an example. Tasked by regulators with curbing emissions, the industry started manufacturing fuel-efficient and hybrid vehicles. In the same vein, the banking industry can use regulatory requirements to become more efficient and agile and to create innovative products.

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But the other side of that coin is that innovation often is difficult for the industry to achieve, regulatory burdens or not. He said that many studies that poll banking industry executives find that most consider innovation to be important, though a majority feel that banks are not good at it. And rapidly changing technology makes it hard to predict what exactly it is that banks should innovate in. For example, he asked, "How many of you several years ago would have thought gamification would impact your business?"

Still, one thing that is indisputable is that consumers' dealings with forward-thinking companies like Amazon, Google, Apple, and others affects what they expect from their financial institutions, he noted.

"Today’s customers are expecting more from their financial institution. New technologies are shifting consumer expectations like never before, and we are being held to new standards of convenience. We are competing against, not just other banks, but companies in totally different industries as well."

Schmid said banks are just starting to really look at cloud services, but they will be indispensable going forward in reducing costs as well as redefining the role of the branch. Banks also need to figure out how to effectively harness all the customer data they currently possess.

Ultimately, any investments banks make in innovation must have a practical business purpose in order to be successful, said Schmid.

"We often tend to think of innovation for innovation's sake, but rather we need to create forward-looking solutions that help solve problems in the current reality of the industry and the changing economy."

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio

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Becca L
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Becca L,
User Rank: Author
8/31/2014 | 8:16:59 PM
Re: Is regulation needed for invention?
Banks aren't great self motivators, it seems, but they know they must leverage tech, differentiate their business and stay closer to the cutting edge. That's probably why they are starting to get deeply invoved in a lot of incubator programs that foster innovation in fintech startups. Wells fargo just launched one, too http://www.forbes.com/sites/tomgroenfeldt/2014/08/27/wells-fargo-launches-fintech-innovation-lab/
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
8/29/2014 | 9:40:19 AM
Re: Is regulation needed for invention?
I wasn't just thinking in terms of product innovations, but also innovations in processes and business models. Think of all the new policies and procedures banks have had to put in place since Dodd-Frank. They're really learning a new business model that has to adapt to a changing regulatory environement. I think some of the new things banks are doing around that, and some of the back-end systems and processes being implemented in response to Dodd-Frank can be classified as innovations within the industry. And those aren't things that the market will necessarily decide if they're good or bad.
Byurcan
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Byurcan,
User Rank: Author
8/27/2014 | 9:03:48 PM
Re: Is regulation needed for invention?
I agree, no industry should rely on regulation to be the driver that spurs them to innovation. Apple didn't create the iphone because of regulatory pressures.

But perhaps more worrisome, is Schmid's larger point that banks aren't very good at "doing" innovation, regulatory burden or no. We have all heard many experts say that banks need to adopt a  more entreprenurial or startup mentaility to innovation, and be "willing to fail." Whether this kinf od mentaility can be translated to fianncial services, remains to be seen.
Byurcan
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Byurcan,
User Rank: Author
8/27/2014 | 9:00:33 PM
Re: Is regulation needed for invention?
Well really, the market will ultimately be the judge of whether innovation is "good or bad." Tablets: Good. Laser Disc: Bad.
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
8/27/2014 | 5:15:12 PM
Re: Is regulation needed for invention?
Effective regulation necessitates that companies learn how to do business differently, which usually leads to innovation. Whether or not that innovation is good or bad probably depends on whether your the regulator or the company.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/27/2014 | 12:17:24 PM
Is regulation needed for invention?
If banks need regulation to spur innovation, they might as well through in the towel.

I'm joking, of course. Innovation does spur innovation, sometimes. Granted, excessive regulation is costly, and often useless, but it can bring about improvements.

In the capital markets, Reg NMS set the groundwork for a fully electronic equities marketplace. In the years following Reg NMS, numerous innovations (trading algorithms, low latency trading, HFT) were developed. Granted, depending on your viewpoint, those innovations may not be a good thing, but regulation did bring about innovation.
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