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Today’s banks fight for success and future prosperity is strictly tied to a bank ability to innovate; as seen above, banks are called to innovate their services and to be competitive with those offered by new-comers in the industry.

Innovation of financial services, by the way, is not an easy process and, in particular, financial services are characterized by a high level of “intangibility” and by “simultaneity of production and consumption”: the first characteristic implies that innovation for these services should be implemented via high levels of communication within the financial institution, as we are not talking about tangible products whose inner characteristics and also eventually added/changed features are easily visible and touchable; while the second characteristic of financial services has an impact in terms of “user involvement” in the innovation process, this indeed should be high in order to develop effective innovations (Vermeulen, 2004).

Taking into consideration the above characteristics of financial services and studying the processes that Financial Services firms usually adopt to manage innovation, Vermeulen (2004) concluded that there usually are four very well-known barriers to innovation in these firms, namely:

 “Functionally departmentalized structures”, an organizationally feature which causes many time scarce or weak interactions among different departments, or even tensions among them, as they can feel to have “conflicting priorities” and often enter “battles for resources”;

 “Limited use of New Product Development (NPD) tools”, as many times financial institutions are not used to those methods, such as inter-functionality, thus, for example, they fail in creating dedicated and very close teams to work on projects, opting instead for dedicating to innovation process some human resources belonging to other departments, and, by doing this, discouraging

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innovation which becomes just an extra-task than ordinary ones and which is not well perceived among these people who fail to communicate effectively;

 “Conservative organizational culture”, this is a very common barrier, even if many banks and insurance companies started eroding it and understanding the need for change, but, especially for some more technical department, there still is a shared avoidance towards the inherent risks of innovation;

 “Constraining information technology”, an impediment which mainly refers to the lack of IT people within banks and even to the existence of legacy structures which could render very difficult a shift towards more innovative products. These general innovation barriers in banks can render the reliance on internal resources and initiatives not enough to deliver innovation and to face disruption; but, despite the above, and with reference to the recently required change, many players within Financial Services industry opted to “build” innovation internally, with their own capabilities, and, for example, they are trying to build up internal team dedicated to innovation; but, such teams can be truly efficient if their function is just the one to deal with innovation on a daily basis, not to run into the above described difficulties for innovation.

For this reason, many times the innovation dedicated teams, created in face of Fintech revolution, are equipped with talented people from the outside of the bank’s organization (for example, with young talents coming from most well-known technology Universities and from backgrounds different from the banking and finance ones only) just to avoid the risk of not having in the team the right attitude towards innovation.

Another popular strategy that banks have been adopting in order to launch their own Fintech businesses and to implement change within their organizations, is the creation of dedicated divisions via the model of innovation labs or hubs: initiatives run by and within banks to gain ideas from disruptive “makers” and to foster innovation, often fueled by competitive contests.

A popular characteristic of such labs/hubs is, again, the reliance on external talents, especially the youngest and tech-savviest ones that banks try to be able to attract; indeed, the underlying idea is that existing workforce alone could not be able to propose innovative and cutting-edge technological ideas, while talents from the outside of the bank could. Diversity is seen, with this reference, as a competitive advantage for innovation to flourish; many backgrounds and industries of pertinence characterize people hired within innovation labs, as long as, according to Sonea’s (2016) considerations on innovation labs, such diversity is

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actually respected thus searching either for the “nerds” young talents but also for people strictly rooted into banking business, in other words those able to bring “hard”, namely technical, skills too.

This strategy, while opening the bank’s space to an inflow of innovation, can still allow the traditional organization to maintain the control on the development of the new products and services and also lets banks to retain the produced knowledge and capabilities within the firm’s boundaries.

Furthermore, this choice lets banks develop talented people groups able to foster further innovation. Just the centrality of people involved with reference to the pursuit of an effective internal innovation strategy for banks also explains the location choices for such hubs: within their global presence and network, banks often place their innovation labs in the most prominent geographies in terms of talented people concentration (New York, Singapore, etc.).

According to Sonea (2016), “an innovation lab is a Noah’s ark of professions and specialisms”, a definition which highlights how such labs should be endowed with very different species of professionals, just to lever on this “combination” for an efficient innovation to come out; by the way, such heterogeneity, which characterizes a successful innovation lab, requires adequate management and organization: first of all, in terms of “common language” creation, thus a very hard work must be done to lead all of the diverse profiles towards aligned goals and to create a method via which they can be able to collaborate with each other, since, as said, such figures can and actually should come from very different fields.

As far as dedicated resources to innovation labs are concerned, there can be cases in which these initiatives are run within “normal business (rooms, technology and processes)” available resources, but still the majority of traditional financial services’ players use to dedicate a new “remote location” to them (Sonea, 2016). In the latter case, these places, which many times appear to be much more colored and modern in style with respect to the traditional banks’ spaces, have the potential to facilitate the generation of new and creative ideas, but, according to Sonea (2016), given the separation from the rest of the organization, a gap among the innovation division and the others could be created as a result and the necessary interactions among innovation-dedicated employees and those who will be mostly influenced by their innovations could become more complicated.

Failing to grant adequate relationship with the inner organization and legacy of a bank can go at innovation delivery expenses, as people supposed to reinvent the bank processes

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could not be able to understand the exact functioning of the bank they wish to innovate; also, collaboration with other key employees and functions of the bank serves the purpose of granting innovation team access to data, the huge source of insights within the banking organizations (Sonea, 2016).

In short, innovation within the bank organization does not come by simply encouraging creative and disruptive thinking, as, in the view of Sonea (2016) a good innovation execution should be precisely governed: the author claims it is just by a “clear definition of what the innovation function needs to do in order to have access to resources and what experts and governing bodies it needs to consult in order to make sure the data is not compromised and large risks are not created through experimentation” that innovation can be successfully achieved. As a matter of fact, an innovation which really has an impact for the bank should be tied to core issues of its functioning, otherwise remaining focused on the “tip of the iceberg”, that is on more visible yet less radical processes or tasks (Sonea, 2016).

Also, an effective internal pursuit of innovation implies a strong commitment of the top management of the company; as highlighted by Lopez Moctezuma (2018) too, if the Head of the bank is not able to catalyze innovation and change, these won’t never spread throughout the organization and cannot be implemented by all the employees.

In summary, against this backdrop, the main challenges for banks to be able to launch their own tech-edge products and services organically are: the lack of adequate digital expertise, with the subsequent need to rely on external talents, and the difficulty to effectively manage simultaneously innovative projects on such a diversified and large scope as the one of Fintech universe; these limits to in-house innovation, and further conditions that we will better explain in a few, led many banks to opt for partnering strategies to acquire innovation from Fintech universe.

3.2.2. Discussing the M&A alternative for banks: what does it mean for banks to rely