By Tom Alford, Deputy Editor, TMI

Innovation comes with no guarantees of success. Is there a way to increase the odds? We ask Annerie Vreugdenhil, Chief Innovation Officer, ING , to describe the processes she employs with her team.

In the treasury world, ‘innovation’ may be interpretated as simply offering new products or services; it’s certainly an approach favoured by marketing teams when describing their latest efforts. But true innovation has far more depth, says Vreugdenhil who spoke recently at the Singapore FinTech Festival on sustainable digital transformation. Instead, she defines it as “enabling progress to the next level and beyond”.

It’s a fair definition, but progress itself is a debatable point, especially when ‘if it isn’t broken, don’t fix it’ is often quoted as a counterpoint to innovation. But hold on, says Vreugdenhil, “at some stage, even though things may not be broken now, there may be better ways of achieving the same goal”. It is the expectation that something better may be round the corner that drives humans to keep innovating.

It’s also the case that if you hold on to only tried and tested methods, opportunities to discover new and better ways will remain a closed door to you. With innovation by its very nature an endless pursuit, Vreugdenhil believes it entirely possible for those who resist to become stuck in time.

This may suit some, but in treasury it’s an approach that could eventually prove risk laden. As the world becomes increasingly complex and competitive, and data sources keep piling up, there is a strong probability of risk issues escalating, and a certainty that suboptimal performance is being delivered. That will not sit well with key stakeholders such as the board and the investors.

New beginning

The now legendary Moore’s Law expresses how computing power and speed rises exponentially over a certain period. It seems likely, given that the physical constraints of chip manufacturing have been more or less reached, that classical computing has gone as far as it can. But true innovation is needed to take it to the next level.

The likely contender to do just this is quantum computing. Microchips are replaced by the manipulation of the smallest particles, such as electrons, on a conductive material to make a qubit. It is a nascent discipline, but with massively superior processing speeds proven, once it gains prominence it will have an enormous impact on treasury, especially as it is exceptionally good at crunching vast pools of data.

Getting it out there

As an idea, quantum computing is extremely complex. It certainly tramples all over another cliché pertinent to innovation, that ‘the best ideas are always the simplest’. But for Vreugdenhil, what counts is not necessarily the simplicity of an idea, but the way it is made usable. “The simpler it is, the more it will be used, even though what is in the background might be very complex,” she says. Quantum computing’s complexity will make many of its applications much simpler and considerably faster.

Of course, treasurers neither have the time nor inclination to spend too long going through a thick user manual; that’s not their job. But in most cases there is no real need for users to understand how something works for it to make their life easier. It is part of the challenge of true innovation teams working in the treasury space to imbue their technology, no matter how complex, with ready usability.

Innovation teams need to be creative; they need to understand how to place their ideas in the hands of willing users, and they also need to find a structured way of enabling innovation to solve the right problems. Says Vreugdenhil: “We are not necessarily looking for ideas; that way, people often have a solution in mind and then go looking for a problem. Our approach is to find a customer problem to solve, and then work out the best way to solve it.”

However, she adds, in most contexts, a problem has to present a notable level of inconvenience, “otherwise people will not change the way they work”. When that level is reached, adoption of new ways is far more likely. This is especially the case when a task is mundane but necessary, like payments.

Who these days would rather write a cheque, put it in an envelope, go out and post it, and wonder when or if the beneficiary will receive and process it, than send an immediate electronic payment? Payments innovators saw a problem and fixed it with a solution so convenient that few could resist the benefits of adoption. It’s an example of why a solution should be as simple as possible. “When you can change a process so dramatically that it really helps people, they will change their behaviours,” says Vreugdenhil.

Formula for success

Formalising the capture of sufficiently challenging problems, and finding user-friendly solutions that will be readily adopted, is something most innovation teams know they have to do, but understand it is a challenge in itself; there is no magic formula for success. Nevertheless, development of an innovation methodology at least helps smooth the development process.

For Vreugdenhil, this means dividing it into a number of stages with ‘stage gates’ applied to quickly weed out likely failures. This is the classic ‘fail fast’ philosophy, where the aim is to try to determine if something isn’t working as soon as possible so a different path can be explored, a process known as pivoting.

“At the earliest stage we try to validate everything we do with clients,” she says. In physical product design, it is possible to intensively observe existing solutions in action – such as how people hold and use a kitchen knife – before making improvements. As an intangible, banking requires a different process.

“We try to figure out what the real issues are, and at what point the user will change behaviour,” explains Vreugdenhil. One process her team employs is referred to as “the five whys”. As it suggests, the question ‘why’ has to be asked up to five times to the users before arriving at the real issue. “This is a controversial topic in the innovation world,” she notes. “There are people who say that if Steve Jobs were to ever to have asked consumers their view, the iPhone would never have been created.”

Indeed, asking customers what they want can lead down the wrong path. Henry Ford famously noted that, when asked, people could think no further than a faster horse as their ideal transport; futuristic notions of motorised transport were not in their minds at all.

This is not a valid argument against the ‘five whys’ says Vreugdenhil. “If people had been subjected to this process and asked why they wanted faster horses, the car would have been the eventual logical outcome. It’s essential to dig deeper to unearth the core of the issue that is to be solved.”

Out with the old

There is no doubt in Vreugdenhil’s mind that the question and design process is one that needs to be applied to treasury as it stands today. “There is still so much change needed because the work is so manual and paper based,” she notes. The treatment of loan documentation is a case in point.

Around two years ago, her team started looking at easily tradeable banking assets. It noted that products such as leveraged finance were neatly standardised, so secondary market investors had no problem assessing relative risk. However, the majority of other loan types, although potentially attractive to investors, exhibited very little of the standardisation necessary to enable secondary markets to flourish. This was missing a huge investment revenue potential. But there was more.

Even loan documentation issued under Loan Market Association guidelines was still being heavily customised per deal, removing any possibility of standardisation. “We tried to extract relevant data fields using natural language-processing software to make these documents more transparent to investors,” comments Vreugdenhil. “But we concluded that we couldn’t get sufficiently granular just by extracting it from loan documentation.”

A truly innovative approach was adopted that would see the team exploring the idea of digital native loans. By starting from all the necessary data points, if a loan contract needed to be inspected by a prospective investor, the documentation could be created from these points, rather than the other way round.

With other banks now on board, when this goes live (possibly Q2 2021) it has the potential to open up a new market in traded assets. At its heart it will make life easier for corporate borrowers as they will need just one format for all their loan negotiations with their banking counterparties.

“The starting point was so old-fashioned, and the leap towards where we wanted to be so radical, that we didn’t even think about it at the first instance,” admits Vreugdenhil. The technology may be simpler, but the breakthrough in thinking here is akin to shifting from the ‘faster horse’ approach, to that of ‘build a car’, or moving from microchip to qubit chip. It dumps the old and starts again. It is this preparedness to make a leap into the unknown that marks the difference between innovation and development, and with it comes a greater chance of success.