The financial services industry has witnessed a surge in innovation due to the global COVID-19 pandemic. Financial providers around the globe have been forced to fundamentally rethink their business models to continue to serve their customers, many of whom could not leave their homes due to national lockdowns and physical distancing measures. Even some traditional microfinance institutions – many of which had never offered a self-service digital channel to their customers – quickly ideated and launched digital credit products delivered through SMS. Others have looked at new ways to provide customer support, such as designing solutions through popular chat channels like WhatsApp. Some financial service providers (FSPs) with existing digital channels witnessed transaction volumes increase by upwards of 200 percent compared to pre-pandemic rates. Nearly everyone dealt with reduced staff headcounts and disruptions to business continuity as the pandemic shuttered the doors of their small business customers at a frightening pace. small business customers at a frightening pace.
As vaccine rates gradually tick upward and the world shifts again, will more traditional microfinance organizations be able to sustain the pace of innovation that occurred during the beginning of the crisis, or will things return to business as usual? Our experience supporting our partners has shown us that relative stability – i.e., the sentiment that things are running well – can be an impediment to ongoing innovation. How can we ensure that the spirit of innovation that persisted throughout the COVID-19 crisis remains a strategic priority?
To hub or not to hub? That is the question.
For FSPs looking to carve out a dedicated space for innovation, a particularly successful model is an innovation hub (or lab). Given that one of the biggest barriers FSPs face in innovating is a separation between core ‘business as usual (BAU)’ activities and more future-focused initiatives, innovation hubs effectively create a test tube environment of sorts; a space for institutions to experiment with products and services that they feel may take more time to find that elusive product-market-fit.
That said, there is a significant amount of variation in structure, focus, and resource intensity between types of hubs. Within emerging markets, innovation hubs tend to take on one of the following forms (and some may even take on aspects of each):
- Incubators and accelerators: Scaling new and innovative business solutions through investment capital and advisory support. One notable example is J.P Morgan Chase and Co’s Financial Solutions Lab, an accelerator that aims to identify, test, and scale innovations focused on improving the financial health of low-income and underserved individuals.
- M&A-focused innovation: Rather than build research and development and innovation capabilities in-house, some firms opt to outsource innovation through mergers and acquisitions (M&A) of startups. Technology acquisition is one of the top drivers of M&A strategy globally. This innovation strategy is widespread in the financial sector, where banks often find it faster or cheaper to purchase a fintech instead of building the tech stack in-house. Common examples include Stripe’s acquisition of Nigerian startup Paystack and Ant Financial’s acquisition of WorldFirst, a UK-based currency exchange.
- Open innovation labs: As a catch-all for many types of innovation labs, open innovation can have varied meanings. At its heart, open innovation is a strategy that promotes innovation across varied organizations, disciplines, and people and recognizes that the most innovative ideas often come from looking outside of the company’s immediate domain and resources. Successful emerging market models include the BRAC Social Innovation Lab in Bangladesh and the Mastercard Lab for Financial Inclusion in Kenya.
Innovation can be pursued in different ways, and it’s important to recognize that a hub may not be the right model for all institutions. Launching an innovation hub sends a clear message that innovation is a priority within the firm, but also requires substantial resource investment. Therefore, FSPs considering this approach should take time to reflect on the following questions:
- Are you aiming to invest in new systems, capabilities, and processes?
- Are you seeking breakthrough innovation that can achieve real impact at scale?
- Are you looking for a dedicated space to solve client needs in different ways and implement a test-and-learn approach?
- Are you willing to try out new models that haven’t been widely tested before?
If you’ve answered “yes” to the above questions, an innovation hub may be a good model to achieve your strategic objectives.
A blueprint for innovation: Introducing the Innovation Hub toolkit
To support providers on their innovation journeys so they can serve their customers better, we have collated lessons learned from supporting our FSP partners globally into a comprehensive toolkit. Our experience has shown us that successful innovation hinges on three core components: 1) an appropriate organizational design; 2) a well-designed product development process; and 3) a culture of experimentation that supports continuous innovation. The toolkit contains practical guidance and resources that innovation leaders can leverage to structure their own innovation hub:
- Organizing for innovation covers some of the key strategic and operational decisions that FSPs should consider prior to setting up an innovation hub. It also includes Accion’s recommended capabilities and outlines different governance models that organizations might consider.
- The innovation process showcases Accion’s product development methodology and the importance of balancing desirability, feasibility, and viability throughout the design process. This section also outlines different research methods commonly used in product development that can lead to truly disruptive ideas that challenge current thinking.
- Sustaining a culture of innovation draws on Accion’s deep expertise in change management, highlighting the role of experimentation, data, and partnerships in nurturing and sustaining innovation within an organization. An overview of different ways of working and how they fit into the product development process is also included to help organizations think about how they might structure innovation teams.
We believe that only through innovation and reinvention will the financial services sector deliver meaningful financial solutions at scale and close the access usage gap. We hope this toolkit provides a useful blueprint for FSPs looking to create their own safe space for experimentation.
This toolkit was developed as part of an ambitious program with the Mastercard Center for Inclusive Growth to help millions of underserved microbusinesses successfully operate in — and benefit from — the digital economy.