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International Banks Innovating -- Now in the Right Way

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While innovation in banking acquired a bad name in the years before the financial crisis, it doesn't mean international banking groups should now dispense with new ways of operating.

The major challenges that face the international banking sector include cost, lack of capital and reputational issues. To rise to this challenge, banks must concentrate on becoming more customer-focused and serving real business.

The problem is also one of tension -- banks serve shareholders ultimately, but they also embrace a role of serving the broader economic community.

What happens when these two impulses collide?

Ireland prides itself as a leader in innovation, but it also knows -- to its cost -- what happens when the banking system lurches off the correct path.

Ireland's reputation did suffer as a result of the collapse of the domestic banking sector, but we are gradually turning this around. There were myriad reasons for this: an overdependence on the property market, loose regulation, insufficient capital and too much balance sheet leverage.

Ireland has been trying to fix its domestic retail banks over recent years through a combination of re-capitalization, cost reductions and de-leveraging. This process is ongoing and has caused the balance sheet of Ireland to become heavily indebted.

Throughout the crisis, however, overseas banks in Ireland have continued to operate successfully. Dublin's IFSC (equivalent to London's Canary Wharf) currently employs approximately 33,000 people, generating taxes of more than $1.3 billion annually.

Despite this, it is becoming increasingly apparent that international banks also need to focus on innovation in order to regenerate customer confidence. Banks now need to innovate in the right ways -- not by designing products too opaque to financial markets and investors, but products that promise to deliver real sustainable returns.

Some have already responded to the innovation challenge.

Citibank, for example, is leading the field in innovation at its Dublin base. Citi's Innovation Lab is where the principals of innovation are applied within a service context. The focus of the Innovation Lab is to identify the next big financial innovation that will help Citi customers with new products, services, efficiencies and productivity. Fundamental to this work is the involvement by Citi clients, and the Innovation Lab is proving to be a key differentiator in the bank's business offering.

Another example of innovation in banking is set by BNY Mellon, the largest asset servicing company and largest fund administrator in Ireland, employing about 1,800 people. BNY's capacity to innovate has led to the company maintaining its pre-recession staff numbers in Dublin. BNY has moved into more sophisticated debt servicing products and has also begun to service the depository receipts market -- BNY now boasts a 65 percent market share in this U.S. -- based trade.

Other international banks need to follow the examples set by Citi and BNY in order to improve their own offering and stay ahead of the competition.

One area of innovation that is of significant importance is the growth in the financial technology and operations market. Technology continues to play an increasingly important role in financial services globally. Research and development into technology is going to be essential. As a result, some banks across the world are carrying out rationalizations into operations hubs; often technology and operations are co-located, which could create excellent opportunities for Ireland to benefit from this and offer a base for newly rationalized operations.