Diversity and Organisational Health in Financial Services – Building the Foundation for Innovation

By Evelina Bondareva and Romeo Effs

Disruption in financial services is the new normal. However, the lessons for the traditional financial services institutions stretch beyond the immediate gains that employing technology and digital capabilities can bring. Instead, the focus should be on facilitating innovation and long-term, sustainable growth, and the key ingredient for that is good organisational health.

 

Once pioneers in the adoption of information technology systems, some financial services institutions are now facing a threat to their very existence. Digital transformation and disruption led by financial technology start-ups, commonly called Fintechs, have brought a significant shift to the financial services (FS) industry that has been resistant to change for a very long time. The inherited inflexible legacy systems, bureaucratic and risk-averse cultures facilitated by the regulatory environment, have made these former pioneers slow to change and innovate. It has also made it difficult for these established players to attract and retain top talent, particularly in the area of technology. This, in turn, has paved the way for those outside the industry to disrupt and reinvent financial services. New banking products, such as bill splitting and dividing money into pots, as well as highly personalised insurance products that can be controlled from mobile applications, have been attracting younger customers, who often see the traditional FS sector as outdated. By using new technologies to enhance customer experience and building products that have a customer focus at their core, Fintechs have revolutionised the market, pushing the incumbents to consider how they can begin embedding change. 

With the pandemic accelerating disruption and further strengthening the position of Fintechs, many traditional banks and insurers are seeking new ways to keep up with the competition. Most commonly, this has involved replicating Fintech capabilities, forming new partnerships, and investing in Fintech Start-ups. Although these approaches may be successful and are likely to yield good results, there are lingering questions about their long-term impact and sustainability. To answer these questions, it is first important to understand what facilitated the rapid growth and success of FinTechs. 

Fintech business models – looking beyond digital capabilities

There are fundamental differences in the business models of traditional FS institutions and Fintechs. At the core of Fintech business models is flexibility, agility and adaptability, as well as customer focus, which enables them to innovate, quickly respond to changing customer demands and adapt in times of crisis. These Fintech capabilities have been especially important during the Covid-19 pandemic when customers increasingly accessed online services, and it became critical to have fast and secure access to funds, protection, assurance, and financial information. It is not surprising that the highly personalised, easily accessible products that offer greater transparency, particularly when it comes to fees, have been the key to Fintech success. The responsiveness of Fintechs is evidenced by the fact that during the pandemic, 30% of bank customers and equally, 30% of insurance customers said they would switch to a FinTech bank or an InsurTech respectively if their existing provider failed to deliver the customer experience they expect1. As customers have also increasingly prioritised organisational values and transparency since the start of the pandemic, Fintechs were able to tick all boxes and gain customer trust in this challenging time. 

There are fundamental differences in the business models of traditional FS institutions and Fintechs. 

The continued success of Fintechs throughout the Covid-19 pandemic, highlights why it is important for organisations to be agile, flexible, and adaptable, as these qualities go hand in hand with innovation. This, in turn, shows the need for companies to look beyond employing digital capabilities. Whilst it might help incumbents to win the race in the short term, organisations must be ready to learn and adapt other key elements, if they are to create the kind of company culture where innovation can thrive. 

 

Diversity and inclusion foster innovation and help a company’s bottom line

An agile, flexible and innovative environment is directly linked to an organisation’s leadership and culture, which are the essence of overall organisational health. It plays a central role in enabling any organisation to successfully thrive, particularly when faced with unprecedented challenges and changes2. Diversity is at the core of this. Innovation does not thrive in an environment where everyone agrees, so divergent voices are indispensable3. However, if companies do not foster a culture that values diverse ideas and takes on board these contributions, they limit their ability to gain a competitive advantage.

Here, the evidence is compelling. Companies that champion diversity and foster an inclusive culture and an environment of belonging, are in a much stronger position to unlock innovation. Almost 80% of the companies that have a formal Diversity and Inclusion strategy in place, said that this has helped them to innovate, and further 85% said that it has improved their business performance4. This shows that diversity, inclusive organisational culture and innovation go hand in hand. Each element is indispensable for the success of the other. 

 

Diverse and inclusive company cultures are a commercial necessity

Despite overwhelming evidence in favour of diversity, inclusion and good organisational health, traditional financial services companies have been extremely slow to invest in improving their cultures. Such companies are often criticised for box-ticking when it comes to D&I, and encouraging monocultures and groupthink, whereby everyone is leaning toward a particular idea because of an environment that makes it difficult to have divergent opinions. This is also evidenced by the attitudes of leaders in financial services – fewer than half believe that better D&I outcomes lead to overall better business performance. Furthermore, only 48% of leaders implement diversity and inclusion initiatives to create a more open and accepting environment, and only 34% do so to aid decision making with a wider range of views and perspectives5. Given the lack of innovation in the sector, this data is unsurprising. It indicates an urgent need for companies to transform the cultures before they can unlock innovation and create an environment that will help them thrive. Additionally, as FS firms with monocultures face 24% more governance-related issues5, this gives a strong indication that transforming company cultures can go a long way to restoring the reputational position of the sector, which is particularly crucial in these unprecedented times. 

 

Laying the foundation for innovation – understanding the key elements of good organisational health

Creating a diverse and inclusive culture that facilitates innovation does not happen overnight. However, with serious commitment, organisations can begin reaping the benefits even with minor changes6. Successful implementation of D&I initiatives first and foremost requires a strong commitment from leadership, particularly those in C-suite and upper and middle management. Participative leadership that encourages and values different views, frequent communication, openness to new ideas, along with a strategic emphasis on diversity and inclusion led by the CEO are indispensable for an inclusive environment. Diversity also needs to be present across the company board and leadership team, as it will enable the space for divergent opinions in leadership, whilst also ensuring the presence of positive role models, which is equally crucial. 

Creating a diverse and inclusive culture that facilitates innovation does not happen overnight. However, with serious commitment, organisations can begin reaping the benefits even with minor changes.

Attracting top talent from diverse backgrounds and with diverse characteristics, will go a long way towards creating an innovative environment. With the right inclusive foundation, companies can take full advantage of the unique viewpoints and perspectives of employees and leaders alike, as well as gain an understanding into the needs of under-leveraged markets. It can also foster an environment that enhances individual qualities, such as flexibility and problem-solving – skills which are indispensable in the context of innovation7. However, if a company does not have an inclusive culture, it will be difficult to retain diverse talent and the advantages they bring. In addition, as 80% of millennials report inclusion as an important factor when choosing an employer, companies risk losing out if they are unable to attract and retain the top performers. Given that millennials will make up 75% of the workforce by 2025, this is critical8.

And finally, taking a tailored approach based on the needs of the organisation and establishing and tracking clear metrics, can go a long way towards meeting strategic organisational health goals. Organisations need to be proactive in understanding and meeting the needs of their employees and ensuring their feedback is considered. Without fully understanding how employees feel and what their expectations are, organisations risk-taking generic approaches to increasing diversity and inclusion can prove ineffective. Any approaches to improving organisational health must therefore always place employees’ views at the core, to avoid top-down approaches that risk causing more harm. In turn, thought-through and tailored approaches will help build a strong base for an environment where innovation can thrive.

 

Conclusion

In a race between more established financial services companies and the disruptors, the question is no longer simply who will win, but who will create an environment that facilitates sustainable long-term success. Both, the disruptors and incumbents have their strengths and downsides. Whilst disruptors may lack industry knowledge and experience, the traditional financial institutions are being held back by legacy systems and cultures. They can learn from each other, and successful partnerships can certainly facilitate this. However, for traditional FS firms, the most successful will be those, who not only take new products and technologies, but those who also take on new lessons and use them to adapt their business models and organisational culture in a way that fits the current landscape and meets key stakeholder expectations. They need to be proactive in identifying customer demands now and in the future, and innovative in finding solutions, rather than being reactive to incoming trends. That, however, will require looking beyond the immediate gains the technology can bring. 

About the Authors

Evelina Bondareva is Head of Research at Lumorus, where she creates content on the social and economic impacts of corporate governance, leadership and inclusion. She has previously worked on several research projects relating to social justice. She also holds MSc in International Social and Public Policy from the London School of Economics and Political Science.

Romeo Effs is the Founder and CEO of Lumorus, a global consultancy that works with business leaders to redefine governance and leadership to bring about positive, structural change and impact. He is the Founder of IBRIE Foundation and Chair and Trustee of several other global Charities. He is an Advisor to several Boards and an adjunct lecturer at London South Bank University.

References

1. Capgemini, 2020. Everything will change, starting with consumer behaviour and expectations toward FS providers.

2. Lumorus, 2021. Navigating Disruption & Digital Transformation in Finance: The Role of Leadership & Company Cultures.

3. PwC, 2015. 18th Annual Global CEO Survey.

4. McKinsey & Company, 2018. Delivering through Diversity.

5. BrightPool, 2019. Diversity & Inclusion: The New Cultural Barometer.

6. BCG, 2018. How Diverse Leadership Teams Boost Innovation.

7. World Economic Forum, 2020. The Future of Jobs Report 2020.

8. Deloitte, 2017. Unleashing the power of inclusion

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.