Inside the Entrepreneur-Led Innovation Group at Eastern Bank

By Scott Kirsner |  March 23, 2015

Dan O’Malley had tried to disrupt the banking industry from outside. Now, he’s working within it, as the founder of Eastern Labs, an innovation group at Eastern Bank, the country’s biggest and oldest mutual bank.

O’Malley had launched a rewards-centric online bank called PerkStreet Financial with venture capital funding. But when that company couldn’t grow fast enough to keep investors happy, O’Malley, a veteran of Capital One, had to figure out his next move. A contact from the entrepreneurial scene introduced him to Bob Rivers, President of Boston-based Eastern Bank, which has nearly $10 billion in assets and branches throughout Massachusetts and New Hampshire.

The bank was eager to stay relevant with an increasingly digital customer base, and was planning to dial up its investment in innovation. “The percentage of transactions happening at a branch was dropping like crazy, and mobile banking was going through the roof,” O’Malley says. “There were questions about whether the retail branch had a future.”

Eastern hired O’Malley to launch Eastern Labs in April 2014, and O’Malley brought with him several key members of the PerkStreet team, like the former CFO (now EVP of Emerging Technologies at Eastern Labs) and former VP of Analytics (now Chief Data Scientist).

“The mandate,” O’Malley says, “is to build new technologies, buy new technologies, and change Eastern. We focus on that first thing, look opportunistically at the second, and the third is a by-product of #1 and #2.”

Highlights from our conversation with O’Malley are below, along with two slides.

  • “We build technology. We don’t do training on design thinking, or run innovation workshops. Four of us came here from PerkStreet, and we’ve brought on other team members who are credit experts and product developers. Both of those people came from Capital One.”
  • To be successful in innovation, “you need to be fairly outside the thrum of daily activity, but you also need to have some level of authority, or else you build stuff and nobody cares.” O’Malley says that in addition to his Eastern Labs crew, a 10-person product team reports to him (it had previously reported to the Chief Marketing Officer), as does the bank’s 75-person customer service center. “We’ve done at least four tests where we leveraged them. They can get on the phone and call customers. As a startup, your ability to test new things is really focused on digital — sending people e-mails, for example. Having a legion of people who can get on the phone makes you much faster.” His goal is to push out a new product every quarter.
  • In innovation groups, “there is a need to be focused and not take on too much. When we got started, there were like 25 ideas that people here wanted us to tackle. But we’re trying to be relentlessly focused on things that will drive revenue and be important for the bank, and not get pulled in a thousand different directions. Right now, we have the capacity to look at two things at once — not 25.”

O’Malley says he sees three transformations happening — or on the verge of happening — in the banking industry:

    1. “Too many people and too much paper — not enough automation and robots.”
    2. “Lots of insights in data that hasn’t been unlocked yet.”
    3. The rise of ‘shadow banking’ services offering low interest rates and new models, like Lending Club or Kabbage

  • O’Malley reports to Eastern Bank’s president, Bob Rivers. “I go to monthly board meetings, but I don’t necessarily do a download on Eastern Labs every time — maybe every three to six months.” He says he works with the bank’s CIO and IT team as “a very close first customer” on most projects.
  • “It took us about three months to get up and running, and since then, we’ve been running a test every month. My friends in the startup world say, ‘It sounds like you’re operating faster [inside Eastern] than any startup that is trying to work with a bank.’ And we are.””Any innovation team runs the risk of being seen as an indictment of how things are done currently. I saw it at Capital One, when we started the payments business there. One hundred percent [of your potential for success] comes down to the support you have from the board and other senior management.”
  • “The existing business has demands on it that never go away. If you don’t firewall resources for the innovation team, the existing business just eats them. You need your own resources.”
  • “We’re building a pipeline [of new product ideas], and we look at this like R&D for the bank. We expect to have a lot of duds and a lot of successes.”
  • “We’re still fairly loose on metrics. But we didn’t come here just to do cool stuff. You measure progress by asking, did you make a lot of money or not?” But quantifying whether you are on the path to making a lot of money — that can be hard to know. We are paying attention to things like how many customers we’ve touched, loans booked, insurance sold.”
  • “If you want to change an organization, people learn by doing. So far, we’ve worked with the retail team, the credit team, the small business team. We’ve been pushing and shipping stuff. People in the organization know what we’re doing because we’ve been working with them.”
  • Since Eastern is a mutually-owned bank that isn’t subject to Wall Street expectations, the mindset there is that innovation “is a longer lead-time investment than a public company could typically make. We have a longer runway — a few years to prove we’re generating results.” But a multi-million dollar investment in setting up Eastern Labs, O’Malley acknowledges, “is a big deal for Eastern.”
  • O’Malley says he has discussed with the bank’s board the possibility of eventually launching startups that would market Eastern Labs’ products to other institutions. “Eastern is the first major user of what we’re trying to build, but we have authority from the board to spin things out. The organization gets new products and the cultural change that it wants, but the end result is going to be something big.” The possibility of producing independent ventures has helped O’Malley attract the sort of workers he believes he needs. “Spin-outs are an expectation on our part. I don’t think you can attract the right talent if what you’re building can’t have a big impact. There’s also a bigger potential for financial returns [that would benefit Eastern.]”