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´s bank deposits. 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.
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. Colombia has adopted laws that seek to deregulate the industry. For example, Law 1735 (passed in 2014) enables the creation of nonbank deposit entities. Moreover, in April 2018, the Superintendencia Financiera de Colombia (a governmental 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.
In this context, Grupo Aval is changing its product development process by implementing open innovation. The company is betting on this megatrend to counter fintech disruption. The company’s 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.
To digitalize its products, Grupo Aval created in 2014 bootcamps named “fintech challenges”. 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.   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 to a company’s strategy, since external people are not precisely aware of the type of problems that a company needs to solve.
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 “fintech challenges”, 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). This type of open innovation is effective to foster a desire for change and progress at different levels of a company and can have a positive impact on employees´ levels of motivation and commitment.
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 company’s processes and culture. Hence, a mixed 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. Grupo Aval can create a platform to publish specific problems that need digital solutions so that entrepreneurs can submit their proposals.
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, 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. 
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?
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