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Nowhere is innovation more essential to survival than in the banking industry. However, innovation is challenging for banks. Many products, like payments, are a commodity. A vast number of products and a complex infrastructure require continual upgrades to keep apace with technology advancements and comply with evolving regulations and security requirements. This article describes how bank of America fosters a culture of innovation. Pivotal to an innovative culture is the direct engagement of clients in the innovation process. Incubation and the cross-fertilization of ideas are important to the creative process. Bank of America is integrating online networking into its innovation process. For example, they are connecting participants in the Treasury Exchange program to an online forum. Successful innovation continuously improves aspects of the customer's experience. Perhaps, ultimately, clients will want to take their bank accounts with them, storing virtual money inside their mobile phones. Banks have an opportunity to reassert their unique role as the trusted brand in storing and moving money. Innovation will be critical to their success.

Nowhere is innovation more essential to survival than in the banking industry. In the payments domain, for example, nonbank competitors less constrained by bank regulations and therefore more agile are changing the banking industry's grip on the public perception of banks as the only trusted brand for holding and moving money.

However, innovation is challenging for banks. Many products, like payments, are a commodity. A vast number of products and a complex infrastructure require continual upgrades to keep apace with technology advancements and comply with evolving regulations and security requirements.

This article describes how Bank of America fosters a culture of innovation. Pivotal to an innovative culture is the direct engagement of clients in the innovation process. We highlight some of the ways that Bank of America achieves this. But first we'll look at the role of innovation process in building brand loyalty.

Build Brand Equity Through Progressive Transformation

Change can occur by redefining a problem or redefining a solution. According to Robert Sternberg, a leading creativity expert,1 creativity is the ability to redefine a problem. Innovation can be viewed as the ability to redefine a solution. Successful innovation is a process over time - one that typically happens in increments rather than leaps. Rarely is a single innovation a game changer.

In banking, 90 percent of innovation focuses on core competencies (that is, business-as-usual innovation), seven percent on game-changing innovation within core competencies and only three percent on leaps that significantly shift the client experience. Outside of banking, an evolutionary approach to innovation is also the rule, not the exception. Continual improvements throughout a product's life cycle build brand equity.

Take the case of Nabisco's Oreo cookie, the bestselling cookie in the United States. In 1912, Nabisco came up with the idea of two chocolate disks with cream filling in between. Since then it has released Double Stuff cookies with more filling; fudge-covered Oreos; holiday cookies, including Halloween and Christmas cookies; bite-sized Oreos for children; and reduced-fat Oreos.

Oreos illustrate two important aspects of product innovation. First, Nabisco stayed close to its customers. It understood how needs varied among consumers and changed over time. The company developed its product to meet the needs of a continually broader set of consumers. Second, the example illustrates an incremental approach to innovation that focuses on advancing core products.

The iPod was at once the next step in an evolutionary process and also a creative leap. This product integrated a number of capabilities in a portable device, but it was not the first MP3 player. However, the concept of iTunes was a new business model that changed the way consumers could store and listen to music. The iPod was transformative, too, because it aligned with changing consumer behavior reflected in trends of mobility and customization.

Technology enabled a tipping point. Consumers were ready to embrace a leap.

Engage Clients in the Evolutionary Path

Innovation is a process over time - an evolutionary path. An incremental approach to innovation mirrors the gradual way in which people change. Consumer behavior tends to change gradually.

Successful innovation is customer driven. It gets as close as possible to the customer's current process. A deep understanding of how customers operate today - and why they do what they do - gives insight into how to improve the process; how to create a step forward for the customer.

Further, by directly engaging customers in the innovation process, they become deeply committed to, and invested in, a solu- tion's evolutionary path. This makes innovation a primary differentiator, an- other way of creating value for customers by enriching their experience and rein- forcing loyalty over time. Staying close to the customer is one of the most important attributes of a successful innovation process.

Get Close to the Customer

At Bank of America, customers play a key role at every stage of the product innovation process. There are a number of ways in which we directly engage our customers throughout product development.

We use a range of formal techniques for idea generation. Formal techniques focus on gaining deepened client insight and are important when we have limited information about an opportunity and the related customer need. Formal idea mining typically requires expertise through our internal innovation group or external specialized vendors.

Ethnographic research is an important tool for generating innovation ideas. Observation provides insight into customer behavior and needs. Returning to the Oreo example, the idea for a bite-sized cookie began to germinate when Nabisco researchers watched young children grapple with dunking the full-sized cookie in smaller cups.

Ethnographic research helps Bank of America understand how to advance our core products in a way that stays close to customers' evolving needs. For example, through ethnographic research, we discovered a common practice among consumers of rounding up when writing checks. We took the idea of rounding up and turned it on its head - redefining the problem by associating payments with savings. How can we foster increased saving? With Keep the Change, each time a customer pays using a Bank of America check card, the bank rounds the payment to the nearest dollar and transfers the extra change to the customer's savings account.

Now, instead of check writers rounding up, the bank does it for them - but in a way that builds their savings. The solution also facilitates increased use of debit cards, thereby supporting retailers' efforts to discourage check payments. It was also a timely solution, which took advantage of evolving consumer behavior toward increased card usage.

Ethnographic research has also been key to improving our electronic banking platform, CashPro, over time. For example, we designed an enhancement based on a typical client work flow for handling exceptions. By closely watching how 15 companies were posting their receivables, we identified a common practice of placing a sticky note on invoices when they did not match payment. Staff would then fax an invoice to the salesperson to inquire about the discrepancy. We incorporated an electronic sticky note with email capability in CashPro, so that clients could maintain their work-flow process in the online environment.

Amplify the Voice of the Customer

CashPro is a great example both of innovating in increments to improve a product over time and of engaging clients in an evolutionary innovation process. With CashPro, we established a customer advisory board, which has been closely involved in the product's development. With CashPro, the innovation process becomes part of the client experience, thereby increasing customer satisfaction. For example, with CashPro, clients prefer self-service for upgrades. They are fully vested in the change process.

Our strategic client program, Treasury Exchange, serves to amplify our voice of the customer research. Clients are long-term program members in senior treasury and/ or finance roles within their organizations. They meet regularly - at frequencies varying from once per quarter to yearly. The program enables participants to share insights on best practices and learn from each other, while helping us to better understand their challenges and needs. A detailed executive summary that identifies key discussion themes helps pinpoint areas for deepening discussion and exploration. Conference calls exploring priority topics serve as touch points between in-person meetings.

We also look to Treasury Exchange members to validate and flesh out new product ideas and to provide validation at points in the product development cycle. Treasury Exchange members have submitted innovation ideas under the auspices of the program. Customer advisory boards and special client programs like Treasury Exchange augment our extensive voice of the customer research.

Cultivate a Culture of Innovation

It's important to be open to ideas from all sources. That's part of cultivating a culture of innovation. At Bank of America, all associates are invited to collaborate in the innovation process. For example, associates can submit their ideas online via IdeasZone, an internal intranet site. These ideas are furmeled into the idea stream and receive equal attention within our innovation process.

Foster Employees

There are different options for organizational structure to foster an innovative environment. At Google, it's part of everyone's job to innovate. There is a decentralized approach to innovation in which all employees are engaged and given incentives. It's built into their objectives and reflected in their salary increases and bonuses.

At the other end of the spectrum, responsibility for innovation can be centralized in a shared service center. At Bank of America, we have dedicated staff focused on game-changing innovations. At the same time, our entire organization recognizes the importance of ongoing process improvement and enhancements.

Work with Peers

To maintain a competitive edge, banks increasingly will look for ways to work with clients, technology companies and other financial institutions to combine strengths. For example, in May 2008, Bank of America announced a partnership with Wells Fargo called Pariter Solutions LLC. The 50-50 joint venture will operate the commercial- ized ACH platform that will be leveraged by the two banks. The goal is to gain economies of scale and better position both banks to develop future products with a single investment in the underlying processing engine instead of duplicative investments. It's a platform for growth and innovation.

Collaborate with Technology Innovators

In banking, technology is an enabler of innovation. Therefore, it's important that banks collaborate with their technology providers. Bank of America's collaboration with Microsoft is a great example of how we work with technology companies to develop innovative applications. Cash positioning and forecasting continue to be key client challenges. We spoke with clients to determine how they perform cash positioning and forecasting. Treasurers might use a treasury workstation, an Excel spreadsheet or a combination of tools. However, treasurers who rely on treasury workstations typically supplement their process with an Excel spreadsheet. Our research also confirmed that many clients have difficulty building a historical database of information for trend analysis to support forecasting.

Bank of America worked with Microsoft to develop CashPro Accelerate. This tool accepts information feeds across all of a client's bank accounts and automates the cash-positioning process. It also builds a historical database that clients can use for forecasting.

Build a Brain Trust

In a September 2008 issue of Harvard Business Review, Ed Catmull, cofounder of Pixar and the president of Pixar and Disney Animation Studios, talked about how Pixar fosters collective creativity. One of Pixar's core operating principles is that, "We must stay close to innovations happening in the academic community"2 It's part of the company's effort to eliminate boundaries between different disciplines.

Earlier this year, Bank of America and MIT's Media Laboratory announced the creation of the Center for Future Banking. Over the next five years, Bank of America will contribute $3 million to $5 million annually. The center is a prototype for how business and academia can work together to invent the future of an entire industry. It will bring together researchers with radically different perspectives, including behavioral economists, social scientists, computer scientists, psychologists, designers and others. The goal is to trigger unexpected new ideas that lead to innovation leaps in banking.

Choose Winning Concepts

Vetting ideas and building a business case are key steps in the innovation process. Bank of America uses a scoring technique as part of our process for vetting ideas. Scoring criteria include whether a concept matches to plan objectives, whether it has wide applicability, its level of innovativeness and complexity and the potential magnitude of its impact. At Bank of America, for example, out of 919 ideas received this year, 10 have been submitted for funding in 2009.

Building a business case is a key step. An effective business case must describe the opportunity and its alignment with strategy and also describes the target client and market within the context of the competitive landscape. Finally, it outlines the proposed approach, the risk and the financial opportunity.

Keep Moving Forward

"I am not discouraged, because every wrong attempt discarded is another step forward." - Thomas Edison

With an inventor's mind-set, the idea of failure is a fallacy. Some who know best have even looked at failures as a continual path forward. Besides being the still-unrivaled record holder of 1,093 U.S. patents, Thomas Edison broadened the concept of the invention to what's known today as "innovationinvention," R&D and commercialization.3

Innovative companies find ways to leverage new insights to keep moving forward. The creation of 3M Post-it notes is a classic story of turning failure on its head and using creativity to redefine a problem. Spencer Silver was working on developing a strong adhesive but invented a weak one instead. Silver's colleague Arthur Fry came up with a novel application for the weak adhesive, which became the basis for Post-it notes - a new vehicle for communication - which Bank of America used in its CashPro innovation. Sometimes the leap is in how we look at things.

Test, Learn, Evolve

This inventor mentality is at the heart of our testand-learn environment, in which we deploy an initial solution design to get firsthand feedback from clients on its usability and value. At this stage, the intent is to address any issues or opportunities in the next iteration of the design. The process enables us to evolve our product design before we get to the pilot stage. As an iterative process, the test-andlearn environment is a microcosm of the broader innovation process focused at a certain point in the development process.

The Intelligent Cash Manager, a new end-to-end Bank of America solution, gives a live example of the test-and-learn approach. The solution concept germinated in a series of Treasury Exchange meetings, where clients identified cash handling and deposit as a major pain point. It's an ATM-like machine that counts cash, accepts it for deposit and provides safekeeping. An issue related to jamming surfaced in the test-and-learn environment, which will inform a solution redesign.

Storyboarding is a creative technique used in the early stage of filmmaking. Storyboarding can help speed time-to-market. By not building the entire product - but rather using storyboards and prototypes in a test-and-learn environment - we retain flexibility even as we move further into the product-development process. Flexibility enables us to prioritize the most important features and integrate feedback and new insights from customers. It helps us to make smart choices with our investment dollars as products take more tangible form.

The Next Leap in the Innovation Process

The ability to synthesize information into insights will be an increasingly important part of creating a valuable client experience - not only banks connecting to customers - but of customers connecting to each other for insight.

Incubation and the cross-fertilization of ideas are important to the creative process. Bank of America is integrating online networking into its innovation process. For example, we are connecting participants in the Treasury Exchange program to an online forum. Our long-term vision is to link our various Treasury Exchange client groups - which are based on industry, function and geography - into a clientcentric global collaborative network. We also plan to introduce online ideation as a way to collaborate with Treasury Exchange participants on innovation.

More broadly, the idea of integrating social networking into the bank's innovation process holds tremendous promise. With our consumer base of 59 million households, social networking can be a powerful tool for engaging customers firsthand in product development.

What Might Be the Next Leap in Banking?

Successful innovation continuously improves aspects of the customer's experience. Leaps occur when the next step integrates multiple aspects to transform the end-to-end client experience. To cite an earlier example, the iPod integrates communication speed, mobility and storage capacity. All of these come together, along with consumer readiness for change and the introduction of the iTunes business model.

Within the banking realm, clients increasingly want banking solutions to integrate into their flow - whether flow constitutes, for example, a mobile consumer or the workflow related to a treasurer's broader financial processes. The need to integrate payments in the broader customer experience will involve mobile technology in some form and the analysis of information to provide insight.

For corporate customers, banks are already delivering time-sensitive information to personal digital assistants (PDAs) and cell phones. Information analysis and synthesis could help treasurers to improve broader financial processes (for example, accounts payable or receivable), help optimize working capital and minimize cost and use payment information to deepen insight into customer behavior. We are already seeing merchants, for example, use consumer payment information to tailor coupons to a customer's buying preferences. Banks can deliver robust information to consumers, for example, to help them weigh product features and engage in financial planning to evaluate a purchase within a desired spending budget.

Perhaps, ultimately, clients will want to take their bank accounts with them, storing virtual money inside their mobile phones. Banks have an opportunity to reassert their unique role as the trusted brand in storing and moving money Innovation will be critical to our success.