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Product Development In Financial Services: Innovation Or Mutuation?

When it comes to product development in the financial services and insurance world, I believe we need to stop the inbreeding—or at least slow it down.

Product Development

In the world of science and genetic research, inbreeding is loosely defined as creating offspring from genetically related parents. It is also a cause of genetic mutations. Genetic mutations can be positive, in some cases giving rise to a competitive advantage. But most often, genetic mutations are harmful, and they are caused when a faulty gene has no healthy, dominant gene to compensate for it.

In the world of finance, (often harmful) product “mutations” happen when people with the same education, background and experience are asked to find new opportunities and innovations. Some of this is negative. Some is seen as the natural evolution of things. Some will always be in debate.

What makes for a faulty “gene” in product development?

In the world of financial instruments, these faulty “genes” usually manifest as assumptions that are massaged or stretched from what actual experience might tell us is logical. The results can end up compromising the long-term experience. Assumptions can never be perfect, and error isn’t bad as long as assumptions can be understood and adjusted over time. But sometimes institutions find themselves trying to give their customers a piece of the cake and a fork too because that’s the way to keep bragging rights through holding the largest sales figures or “profits.” It may not even be the product itself that causes any harm but the way it is brought to market.

Too Much Of A Good Thing

The consequences of product mutation can range from squeezed margins to burst bubbles or (as we are all keenly aware) complete collapses. While nobody would argue that bonds, mortgages, life insurance and annuities are all great innovations and have done the world a lot of good, many would probably say that junk bonds, subprime mortgages, secondary guarantee universal life and guaranteed income annuities have caused a few headaches. While all of these products were developed with good intentions, their misuse and misunderstanding have caused negative consequences as a result of an assumption that was stretched, a corner that was cut, or an exception that was made somewhere along the line.

New Tracks To Run On

One way to slow down the inbreeding is to infuse outsiders into the process, just like in genetics—outsiders who are experts in a different but related (parallel) field. Another is to begin the product development process with deeper insights that might uncover brand new needs or desires that are untapped. That is not to say that evolution in your core product portfolio should stop. Quite the contrary. By seeding an innovation pipeline separately from a product maintenance pipeline, you build opportunities to grow healthier and stronger—for the long term.

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