Grupo Aval is the largest financial group of Colombia and one of the leading financial groups in Latin America. Its business units include banking and pension fund management. In 2017 it managed 27% of Colombia\u00b4s bank\u00a0deposits. Regardless of its leadership position, its main executives acknowledge that some changes are necessary to cope with the high level of disruption that the global banking industry is facing.[1]<\/p>\n
Banking is one of the sectors that are particularly affected by digital disruption. Fintech companies (using technologies that seek to enhance the delivery of financial products) are increasing competition and compressing margins. A key factor shaping the radical pace of digitalization is the increasing openness of regulators to accept digital players. According to McKinsey & Co, u$7 billion to u$13 billion of bank profits are at risk in Latin America due to digital disruptions.[2] Colombia has adopted laws that seek to deregulate the industry. For example, Law 1735 (passed in 2014) enables the creation of nonbank deposit entities.[3] Moreover, in April 2018, the Superintendencia Financiera de Colombia (a\u00a0governmental entity in charge of regulating the financial sector) announced the launch of a new department to encourage the development of fintech companies in the country.[4]<\/p>\n
In this context, Grupo Aval is changing its product development process by implementing open innovation. The company is betting on this megatrend to counter\u00a0fintech disruption.[5] The company\u2019s objective is to migrate from a physical bank to an online bank that is available 24 hours through the entire year. For that purpose, the firm is focusing on the development of digital solutions for its customers.[6]<\/p>\n
To digitalize its products, Grupo Aval created in 2014 bootcamps named \u201cfintech challenges\u201d. These events recruit external entrepreneurs who pitch innovative ideas to a committee composed of Grupo Aval executive managers. The committee selects the best ideas, and awarded entrepreneurs are coached to further develop them, either by creating new products for the bank or by creating a start-up funded by the company. [7] [8] Some products such as Occiauto, a webpage that processes bank loans to finance car purchases, arise from this open innovation initiative. Even though this type of innovation creates out-of-the-box ideas, its drawback is that it can generate a significant number of proposals that are out of scope in relation\u00a0to a company\u2019s strategy, since external people are not precisely aware of the type of problems that a company needs to solve.<\/p>\n
By introducing Aval Digital Labs (ADL), the company intends to focus on creating new products that are in line with the firm’s strategy. In contrast to the \u201cfintech challenges\u201d, ADL crowdsource ideas from inside the company, allowing employees to interact with co-workers from different functional areas and business units. Employees work on 16-weeks projects to develop a Minimum Viable Product (MVP) that is subsequently tested with customers. Successful MVPs are further developed and transformed into new products. An example of an initiative developed through ADL is AvalPay, a digital wallet app that enables customers to use their telephones to make payments (replacing credit cards).[9] This type of open innovation is effective to foster a desire for change and progress at different levels of a company\u00a0and can have a positive impact on employees\u00b4 levels of motivation and commitment.[10]<\/p>\n
To effectively balance the business know-how of employees with the creativity and disruption of external entrepreneurs, Grupo Aval should create mixed teams that include both employees and entrepreneurs. Employees generally tend to observe the business from the point of view of the company, sticking to the actual business model and focusing on creating add-ons to existing products. However, external entrepreneurs bring a different perspective, since they are not biased by the\u00a0company’s processes and culture. Hence, a\u00a0mixed team can create an ideal environment to work both on incremental and disruptive projects. In addition, Grupo Aval can incorporate some open innovation best practices from other industries. For example, manufacturing firms such as Ikea are creating platforms that enable entrepreneurs to constantly submit new product development ideas.[11] Grupo Aval can create a platform to publish specific problems that need digital solutions\u00a0so that entrepreneurs can submit their proposals.<\/p>\n
Long-term, Grupo Aval should work on solutions that reduce costs. In a context where global banking returns on equity are falling to single digit figures[12], Grupo Aval should create cost efficiencies by digitalizing manual tasks. Luis Carlos Sarmiento, CEO of the company, acknowledges that cutting costs through technology could generate long-lasting competitive advantages. [13]<\/p>\n
Finally, some pressing questions remain unanswered. Will Grupo Aval be able to innovate and sustain its leadership position? Or will fintech disruptions debilitate its business in the upcoming years?<\/p>\n
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Sources<\/strong><\/p>\n [1] Grupo Aval 20F Report 2016, p. 55. https:\/\/www.grupoaval.com\/wps\/wcm\/connect\/grupo-aval\/fee49377-395a-4112-a9c3-2a4687750bec\/20F-publicado.pdf?MOD=AJPERES<\/a>. Accessed November 2018.<\/p>\n [2] \u201cA Brave New World for Global Banking McKinsey\u201d, McKinsey Global Banking Annual Review, 2016, McKinsey & Company, via Factiva, accessed November 2018.<\/p>\n [3] \u201cTurning Digital. Financial inclusion and penetration are still big challenges to overcome for the Colombian banking sector\u201d The Business Year, 2016, via Factivia, accessed November 2018.<\/p>\n [4] \u201cColombia Banking & Financial Services Report\u201d, BMI Research (Fitch Group Company), February 2018, via Pro Quest, accessed November 2018.<\/p>\n [5] \u201cFintech threatens to eclipse banks that do not adapt digitally\u201d, Financial Times, June 11th<\/sup>, 2018, accessed November 2018, https:\/\/www.ft.com\/content\/731bcdc8-6810-11e8-aee1-39f3459514fd<\/a><\/p>\n [6] Rob Dwyer, \u201cLatin America: Four is company at Grupo Aval\u201d, May 3 2017, Euromoney, via Factivia, accessed November 2018, https:\/\/www.euromoney.com\/article\/b12xygfzjmrwzv\/latin-america-four-is-company-at-grupo-aval<\/a><\/p>\n [7] Grupo Aval, Highlights report for investors, accessed November 2018. https:\/\/www.grupoaval.com\/wps\/wcm\/connect\/grupo-aval\/c87134c7-de07-42cc-b6fa-2a6c1f8e2baa\/Hechos-destacados-Highlights.pdf?MOD=AJPERES<\/a><\/p>\n [8] Grupo Aval, \u201cFintech Challenge\u201d, https:\/\/vimeo.com\/145285400<\/a>, published November 2015, accessed November 2018.<\/p>\n [9]\u00a0 Grupo Aval webpage, https:\/\/bancosaval.com\/aval-pay\/, accessed November 2018.<\/p>\n [10] Developing Innovative Solutions Through Internal Crowdsourcing, Arvind Malhotra et al, MIT Sloan Management Review, May 31st 2017, accessed November 2018,\u00a0https:\/\/sloanreview.mit.edu\/article\/developing-innovative-solutions-through-internal-crowdsourcing\/<\/p>\n [11] \u201cIKEA plans full-range town-center showrooms, ‘open-source’ design\u201d, Reuters, October 9th<\/sup> 2017, accessed November 2018, https:\/\/www.reuters.com\/article\/us-ikea-sales\/ikea-plans-full-range-town-center-showrooms-open-source-design-idUSKBN1CE1HK<\/a><\/p>\n