There is a strong and growing conversation around the pace and speed of innovation in today’s banking model and how banks can pivot to take advantage of the latest advance in FinTech innovation and big data.
Many feel that if banks are to achieve success in innovation, more than just technology acquisition must take place. They point out that banks must also consider how they can be prepared as an organizational culture to be ready and equipped to fully embrace the challenges and benefits of innovation and ultimately business transformation. To consider this question for banks, Frontiers in Finance reviewed the work of Alex ‘Sandy’ Pentland and his recent book Social Physics: How Social Networks Can Make Us Smarter.
To start off we looked at the question of what exactly is ‘social physics’ and why is the concept becoming increasingly important to business leaders today? The book highlights social physics as a new way of understanding human behavior by using Big Data – essentially the ‘digital breadcrumbs’ of society – to tell us more about all aspects of human life and how ideas move, evolve and spread. For businesses, this unlocks all sorts of amazing possibilities and offers a path towards building more cooperative, productive and creative organizations. And that means more resilient and more profitable organizations as a result.
Today, people tend to view management as an ‘art’. Social physics takes this art and turns it into a science by allowing decision-makers to qualify things, find the patterns, visualize them and then manage towards them. In other words, it’s adding discipline to the art by taking a ‘major’ in interaction and understanding the patterns of interaction that lead to innovation.
Banks feeling pressure to change in today’s environment can benefit from applying social physics principles. For example Pentland notes that everybody
thinks they know what it means to be a bank and are constrained by pre-conceived notions of how a bank traditionally works. The idea behind social physics is to understand how people interact not only with organizations (such as banks) but also with eachother and to use that information to find new ways to inspire innovation.
An example of how social physics can be applied in the banking sector relates to credit scoring. Pentland’s research team at the MIT Media Lab looked at a large body of bank data from developing countries and found that they could achieve almost 50 percent more accurate credit scoring than the bank could because we were looking at the social physics – the behavior of the people –rather than traditional bank data such as age, income or repayment history.