Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Risk Management

03:13 PM
Mick Simonelli
Mick Simonelli

Risk Aversion: The Biggest Innovation Obstacle

Fear of risk is the biggest factor holding financial services organizations back from innovating.

There are numerous obstacles that banks face when trying to innovate. There are things such as funding, people resources, the right ideas, customer needs, and the list goes on … All of these are important, but there is one underlying obstacle that must be overcome while taking on the other issues, and that obstacle is risk aversion.

Risk, by its nature, is something that large companies avoid. Risk is especially critical in banking. Most of my clients have some sort of major initiative launched around risk mitigation. Yet, contrarily, they also usually have some sort of innovation program that introduces risk. Risk and innovation go hand in hand, so banks need to be aware of how they manage and react to innovation risk.

[For more on innovation strategy from Mick Simonelli, check out: To Patent or Not to Patent.]

Generally speaking, risk is even harder to overcome if certain factors are present. I’ve found that there are five major determinants of risk aversion that I can use before I even work with a company in order to know how strongly the company will resist risk (and hence resist change and innovation). Those factors are:

  1. Size of the company
  2. Age of the company
  3. Organizational structure
  4. Customers
  5. Market

The size and age of the company are usually good indicators of risk aversion. The larger and older the organization, the more risk averse it usually is. Large and old companies develop formal ways to identify and avoid risk so that risk aversion actually becomes embedded in the culture. 

The organizational structure of a company also influences its ability to assume risk. The more hierarchical and formal the organizational structure is, the more likely it is to reduce risk at each level of the hierarchy. There were numerous innovations that I led for a major bank that started off as potential game-changers. However, these innovations became filtered and watered down by various levels of bureaucratic risk reduction into very mediocre, incremental innovations.

Comparatively speaking, I sometimes work with smaller organizations with flatter organizational structures that are more agile and less risk averse due to their structure. Hierarchy and formality in an organizational structure tends to increase risk aversion.

Continue reading on Bank System & Tech...

Mick is an independent consultant and thought leader on innovation in financial services. Previously, Mick served as the senior innovation executive for USAA, where he built and led the innovation program to world class status. During his tenure, USAA received numerous awards ... View Full Bio
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.