Middle Market Embraces Change & Innovation


Bob McCarrick
Senior Vice President and Head of Middle Market Banking

This article first appeared in ABF Journal on January 19, 2019.


Capital One’s Innovation in the Middle Market survey results showed that middle market companies no longer fear disruption. Instead, they are embracing emerging technology and using it to drive innovation. Banks must follow suit and deliver products to streamline customer financial processes.

The advent of companies like Uber and Airbnb sent shock waves through the middle market when they emerged a decade ago. The attention they generated—reinforced by attention-getting valuations—created the impression that no sector of the economy was exempt from the sweeping effects of disruption. Middle-market executives scrambled to put in place defensive measures to protect their companies.

The results of Capital One’s latest survey of disruption, Innovation in the Middle Market, show that this sense of alarm has subsided. Middle-market executives no longer see disruption as an unmanageable threat to their businesses, instead viewing the advent of new technologies and strategies as an opportunity to improve their competitive positions. In short, the middle market has learned to live with disruption and value the pursuit of innovation.

A more nuanced understanding of disruption

One reason for the initial hesitancy in embracing disruption was the widespread tendency to equate disruptive business models with the underlying technologies that fueled them. As it turned out, industry disruptors were successful because of a confluence of factors: there were advances in artificial intelligence and analytics, both underutilized resources that could be monetized. If the events of the last 10 years are indicative, the potential to apply these breakthrough technologies to unexploited assets is quite rare.

Furthermore, the disruptive effects of these companies have been overstated. In the hospitality industry for instance, hotels generated more room revenue than ever, according to STR, a hospitality market research firm. In other words, with the passage of time, middle-market executives have taken a more measured view of the disruptive effects of emerging technologies, focusing instead on the power of innovation.

There is no single route to innovation

In fact, our survey revealed that rather than fearing emerging technologies, middle-market executives are now embracing them. All the executives surveyed said that their companies are taking one or more steps to encourage innovation. Overall, middle-market executives are combining homegrown development of new and improved products, services and processes with those acquired from external sources. The survey also revealed that a company’s approach to innovation was critically dependent on its size.

Most leaders surveyed said they are fostering a culture of innovation by creating opportunities to brainstorm new ideas and streamlining approvals for new initiatives. The larger companies—those with revenues from $2 billion to $3 billion— stand out from their smaller peers for their focus on implementing new collaborative technologies to act on these ideas. In addition, the vast majority (87%) of surveyed companies grew their R&D budgets for the second year in a row. Almost 20% of the larger companies increased their R&D expenditures between 11% and 25%.

Middle-market companies are also looking externally for innovation. Larger companies stood out for using acquisitions to gain innovative capabilities. By contrast, smaller companies—with revenues from $500 to $999 million—are most likely to turn to outside help for guidance on innovation by hiring either external implementation vendors (36%) or external strategy consultants (25%).

A new role for banks: providers of technology

In sum, the survey showed that middle-market executives are increasingly comfortable managing disruption, focusing on opportunities to invest in new, innovative ideas and emerging technologies that increase their competitiveness. They see the biggest potential in data analytics and mobile capabilities, applying the first to discover success factors that have gone unnoticed and the second to improve internal and customerfacing processes.

Their ability to harness these innovative technologies, however, depends critically on having strong relationships with banks capable of funding innovation. Almost 60% said that they had sufficient banking relationships to meet their innovation goals, while 45% said they would also use their existing financial resources, a figure that is highest among the larger companies.

Our survey also demonstrated that middle-market companies are looking to banks themselves to provide technologies that offer new, more effective ways to manage their finances. The survey showed that nearly 70% of middle-market companies are already using new digital technologies for billing, transfers and accounting, and they are especially enthusiastic about digital and mobile payment technologies that add an additional level of convenience, control and insight to their payment systems.

More than ever, middle-market firms want a financial partner that can deliver advanced tools that put timely, relevant information at leaders’ fingertips so they can make decisions quickly. To address this need, banks should have the human-centered design capability required to understand customers’ needs and the sophistication to address them with solutions including artificial intelligence, application programming interfaces, blockchain and more.

In other words, our survey revealed that middle-market companies want their banks to do more than fund innovation in products or services. They are insisting that their banks be innovators themselves, actively harnessing emerging technologies to create products that companies can use to streamline their financial processes.

Capital One engaged Beresford Research, a market research firm, to conduct a phone survey of senior middle-market executives consisting of 26 questions covering such issues as disruption, innovation, financial technology and recruitment and retention. For purposes of the study, middle-market companies were defined as firms with operations in the U.S. with annual revenues between $100 million and $3 billion. The 300 responses represent the U.S. middle-market population with a margin of error of 5.65 points (at 95% confidence).