If you were to ask any banking executive today whether innovation is a priority, the answer would be a resounding "yes". Yet, if you were to look into the internal processes of that same organisation, you would likely find an engine designed to do the exact opposite.

This is the "Innovation Paradox" in banking: institutions that know they must evolve to survive, yet they operate within structures explicitly engineered to prevent that evolution.

I explored this concept with Wasim Mushtaq, the founder of 1CG and a veteran of the financial services industry, after reading his paper that was published in The Journal of Digital Banking (which Wasim has kindly allowed us to make available for our readers to download for free here). With over two decades of experience, ranging from the coalface of business banking at Abbey National (now Santander) and credit operations at Barclays, to leading global transformation at Standard Chartered and serving as the interim COO of the Centre for Finance, Innovation and Technology (CFIT), Wasim offers a rare, holistic perspective. He has seen the industry from the lender’s desk, the operations floor, and the regulator’s office.

Our conversation went beyond the usual platitudes about "digital transformation" and "agile working". Instead, we dug into the structural, cultural, and leadership mechanisms that stifle innovation, change and transformation and, more importantly, how to dismantle them.

The Cost of Inaction

The fundamental premise Wasim puts forward is provocative but undeniable: "Banks know they need to innovate, but operate in structures that are engineered to prevent it."

For centuries, the banking model has remained largely static: taking deposits, lending money, and facilitating transactions. What has changed is the delivery mechanism: from branch to internet, to mobile, and now to smart data ecosystems. The paradox arises because banks are largely risk-management entities. Their governance models, quite rightly, are designed to protect stability.

However, when stability becomes synonymous with stasis, the organisation becomes vulnerable not to risk, but to irrelevance (sorry, I couldn’t resist the link to our 2026 event theme: “Rethinking Relevance”).

As Wasim noted, the cost of inaction is no longer just a loss of market share; it is a generational shift. Younger demographics (the future wealth holders) are already bypassing traditional incumbents in favour of neobanks like Monzo and Revolut. These challengers are now maturing, moving from simple FX and spending apps into the core lending and mortgage territories of legacy banks.

If incumbents do not invest in their own evolution now, the ripple effect of procrastination will eventually become a gap too wide to bridge.

The Governance Trap: Prediction vs. Validation

One of the most significant barriers we discussed was the traditional governance model. In most banks, innovation is stifled by the "New Product Approval" (NPA) process and the reliance on the traditional business case.

We are all familiar with the ritual: a project manager presents a five-year ROI forecast for a new innovation. The approval board scrutinises the numbers, debates the margins, and approves or rejects the budget based on the "prediction". The reality, as Wasim candidly admitted, is that "every business case I’ve seen... the actual prediction was wrong."

It is a planning fallacy, a theatre of certainty performed in a domain that is inherently uncertain.

Wasim argues that banks do not need lighter governance; they need smarter governance. The shift must be from prediction to validation. Instead of demanding a fictional three-year P&L for a nascent idea, governance boards should be demanding evidence from controlled experiments. Replace gated business cases with funding tranches based on validated learning.

This shift requires confronting a formidable adversary in the boardroom: ego. Ego manifests when leaders defend their turf rather than debating outcomes. It appears when stakeholders shut down ideas with vague objections about "risk" rather than asking inquisitive questions. As Wasim put it, "You reward the protectors rather than the builders."

To break the paradox, leadership must stop demanding certainty in an uncertain world and start speaking the language of evolution.

Operational Excellence: The Revenue Driver

A refreshing part of our dialogue was Wasim’s reframing of Operational Excellence (OPEX). In many boardrooms, OPEX is viewed strictly as a cost-cutting exercise: a way to shave 5% off the budget while demanding 5% more output.

Wasim flips this narrative. He views OPEX not as cutting costs, but as building capability. When you streamline a process to allow eight people to do the work of ten, you haven't just saved two salaries; you have created capacity. Those two individuals can now be redeployed to high-value tasks eg: white-glove services for top-tier clients, or innovation projects that the bank "didn't have time for" previously.

By creating this internal capacity, operations teams transition from being cost centres to becoming centres of excellence. They become the "go-to" teams for new pilots and products because they have the bandwidth and the agility to execute.

In a market where products are increasingly commoditised, the ability to execute flawlessly and faster than the competition is, in itself, a new revenue stream.

Unfreezing the "Frozen Middle"

We touched upon the often-maligned "middle management" layer, which I have often referred to as the "frozen middle" or the "corporate antibodies." Wasim, however, came to their defence.

He argues that middle managers are not inherently blockers; they are simply overloaded. They are stretched vertically, managing the demands of senior executives, and horizontally, managing the operational realities of their teams. When they resist innovation, it is rarely due to incompetence or malice. It is because they are drowning in "workload spikes" and see yet another change initiative as a threat to their already fragile stability.

The failure lies in the incentive structures. We pay middle managers to maintain stability, ensure process compliance, and hit BAU targets. If a transformation project threatens those KPIs, of course they will resist it. To unlock this layer, banks must change the incentives. We need to stop rewarding pure BAU protection and start rewarding problem resolution, cross-functional delivery, and evidence of simplification.

You cannot expect a manager to champion a risk-taking initiative if their bonus depends entirely on risk avoidance.

Breaking Silos with Unified KPIs

This leads directly to the issue of silos. Banks are traditionally vertical organisations, yet customer journeys are horizontal.

Wasim used the example of onboarding. In a typical bank, onboarding involves Sales, Credit, Compliance, Operations, and Legal. Each department has its own KPIs. Sales wants speed; Compliance wants thoroughness; Operations wants standardisation. These conflicting metrics create friction, and the customer falls through the cracks.

The solution is to create Unified KPIs across the outcome. Instead of measuring the Credit team solely on risk reduction and the Sales team solely on volume, the bank should measure the entire onboarding function on a holistic set of metrics: time to revenue, customer satisfaction, and risk profile.

This forces the vertical silos to collaborate, as they are now jointly accountable for the end-to-end engine, not just their specific cog within it.

The Collaboration Flywheel: Commit and Repeat

To visualise the process of change, Wasim introduced the "Collaboration Flywheel": a cycle moving through Align, Focus, Commit, Accept, Apply, Assess, and Reflect.

When I asked him where banks most often stall, his answer was telling: Commit.

Alignment is easy; everyone can nod their heads in a meeting room. Commitment is hard. Commitment is when resources are actually allocated, when budgets are ring-fenced, and when "BAU is too busy" is no longer an acceptable excuse. This is the stage where the "naysayers" are exposed: the people who hide behind policy to avoid action.

However, Wasim threw in a curveball. The second hardest stage, he noted, is Repeat. Innovation is not a "one and done" event. It requires iteration. Yet, stakeholders often resist repetition because it isn't "sexy". They want the shiny new initiative, not the hard graft of refining a process for the third time to get it right. But repetition is where change is embedded.

Without the discipline to repeat the cycle, innovation remains a series of disconnected pilots that never scale.

The Innovation Radar: Knowing Your Blind Spots

We also discussed the "Innovation Radar," a framework Wasim adapted (originally from MIT) to benchmark banks across 12 dimensions, from Offerings and Platform to Supply Chain and Networking.

Unsurprisingly, banks tend to overrate themselves on Technology and Product. They see their new mobile app and assume they are innovative. However, Wasim points out that they consistently neglect Networking, Supply Chain, and Value Capture.

This reveals an insular culture. Banks often fail to understand their place in the wider ecosystem. They try to build everything in-house rather than leveraging the supply chain or partnering with fintechs effectively. The radar exercise is less about the score and more about the "acceptance of reality." It forces the bank to acknowledge that having a great app doesn't matter if your supply chain is archaic or if you are failing to capture value from your data.

Future-Proofing: Frontier Bets and the Crumbling Core

Finally, we looked to the future. What are the "Frontier Bets" that banks must be placing today? Wasim identified three critical areas:

1. Smart Data Ecosystems: Driven by regulations like the Data Use and Access Bill and the move towards Open Finance. Banks must prepare for a world where customers demand a 360-degree view of their financial lives.

1. Agentic AI: Moving beyond simple chatbots to AI agents that can autonomously execute tasks. However, Wasim warned that this relies entirely on clean, verified data sets. "Garbage in, garbage out" remains the rule.

1. Autonomous Risk Management: The ability for AI to handle decision-making at a speed and scale that humans cannot match, freeing up capacity for complex judgment calls.

But he ended with a profound warning that should be plastered on the wall of every boardroom:

"Frontier bets fail when the core is crumbling."

You can have the most advanced AI strategy in the world, but if your legacy systems are fragile, your data quality is poor, and your operational resilience is weak, you will fail. It doesn't matter how shiny the paint job is if the engine is broken and the tyres are flat.

Conclusion

The innovation paradox is solvable, but not by simply throwing money at technology. It requires a fundamental rewiring of how we govern, how we incentivise, and how we collaborate. It requires leaders who are willing to challenge their own egos, empower their middle management, and look beyond the walls of their own institution.

As Wasim rightly said, we are moving into an era of "Smart Data Ecosystems." The banks that survive will be those that can stabilise their core while bravely betting on the frontier.

The rest will simply be left watching the gap widen, wondering where the customers went.

The article above is a summary of an epic 56-minute interview with Wasim that went into far more depth than I could possibly capture in words. You can watch or listen to the full interview below, or follow on your favourite podcast platform here.