Digital Disruption in Financial Services takes place as we speak, but the threat is more imminent these days than (ever) before due to eroding barriers of entry. What are the strategic choices open to the incumbent banks in this situation?
The threat of being (digitally) disrupted is relevant for most, if not all businesses. Obviously, the threat is most “clear and present” for industries selling products and services that can be digitized and automated. Consequently, Financial Services overall is clearly exposed for disruption.
(Major) innovations has occurred throughout human history, and is such not something new! Disruptive innovations as phenomenon described in the book “Innovator’s dilemma” gives this definition: “…an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leaders and alliances”
In terms of how disruptive innovation initially attack a market, two angles are presented:
- “New market”: New products compete with “no consumption”: Meaning: the product/service aims at customer segments who currently won’t afford or don’t find it justified to acquire the knowledge and skills to operate the product or/service. Example: Canon desktop photocopiers.
- “Low-end”: companies with low-cost business models are targeting the least attractive customers in an existing market. Example: Initial market entrance by Korean smartphone producers (Samsung, LG), followed by Chinese smartphone producers (Huawei).
Norway has seen branchless banks since apr-2000, when will we see the “peopleless” bank targeting certain customer segments with “sufficient” (automated and digitized) financial services?
Main drivers behind disruptions Financial Services
Increased rivalry in the market place of Financial Services indicate that the barriers of entry to the market place have been lowered. What has caused reduced barriers?
Political: National initiatives, encouraging the establishment and growth of FinTech newcomers: Singapore FinTech Initiative, UK Financial Conduct Authority innovation initiative, etc.
Economical: Rapid growth in startup capital facilitates funding in the critical early stages for the emerging FinTech companies. The commercial hyper platforms have reduced the once-high fixed costs and substantial operational expenditures to a predictable “pay-as-you sell” variable cost model. A global market place thus truly exists, enabling the most marginal vendors selling their products to anyone 24/7.
Social: “ecosystems” emerge that encourage FinTech growth: InnovateFinance UK. Millennials display less loyalty to banks than older customers. I.e. young(er) people live by Bill Gates’: “Banking is necessary, banks are not”. SnapChat perhaps fastest growing social media among future bank customers (teens), messaging apps are on a positive trend, and may well be the future choice as channels for interacting with providers of (B2C) banking services.
Technological: Customer centric solutions (via smartphone) empowers the customer, diminishing the incumbent banks’ competitive advantage of size, its marketing channels and (physical) branches. Artificial intelligence and Bots even enables FinTech newcomers to enter the Financial Service areas of advisory: wealth management, credit worthiness, and to top it all: Lawyering services.
Legal: The Payment Services Directive (PSD2) will legally open the payment process to third parties, and enforce transparency for outsiders for incumbent banks’ customer data and purchase patterns.
Strategic responses when facing disruptive innovations
MIT Sloan professors Charitou and Markides present the following generic responses when a company/industry is facing disruptive strategic innovations:
- Focus on and invest in the traditional business
As long as the disruption is not purely technological in nature, we can make the assumption that the entire industry will not be disrupted, the old ways will not be considered obsolete due to the new way(s) of service deliveries. Various (demographic) segments of the consumers will a) stick to the old delivery model of banking services, b) adopt the new model, c) choose either old or new dependent on time, place, and whether the financial service is strongly prone for (full) digitization or not.
- Ignore the innovation – It is not your business
One typical description of Financial Services are Insurance, Deposits and Lending, Capital Raising, Investment Management, Market Provisioning and Payments. These subservices are potentially disrupted in different ways, and on a different scale: Payment services as an example more easily could be disrupted than more complex services as Market Provisioning. As mentioned above, some customer segments within each subservice may prefer the old way the service is delivered, and not the new way. It is still an open question of which of your services are hit by the disruption, and how hard…..
- Attack Back — Disrupt the Disruption
The (exponential growth in) number and variety of initiatives/startups in the Financial Services make it a challenge (mildly put) to identify the future technology and/or new players that will be the future winners. Meaning, what horse(s) to bet on, or bet on something different than horses altogether?
This is one reason why some incumbent banks embrace the similar venture capitalist strategy applied by high-tech companies like Intel and Microsoft: Increasing the odds for being on the inside of a potential disruptive future technology/company, or selling the startup at a future stage with a positive yield on the initial investment.
- Adopt the Innovation by Playing Both Games at Once
For incumbent players applying this “hedging strategy” both betting on the existing service model as well as disruptive innovation, the players need to overcome the intrinsic challenge of “BI-Modal IT”. One practical approach is to NOT assimilate an acquired FinTech company into the incumbent’s (stable in nature) organization, process and culture. Instead the FinTech company (agile in nature) co-exists with the incumbent company. (See also Peter Diamandis’ article related to same)
- Embrace the Innovation Completely and Scale It Up
The traditional adoption cycle for new products may not apply to the digital era, instead a “Big Bang” adoption could occur. Overnight the incumbent player could find its existing (“old”) service model disrupted by someone and something “new”. The speed of the disruption adoption among the customers as well as the (unknown) impact, means it could make sense for the incumbent bank to embrace the innovation to the fullest extent.
Summoning up: The barriers of entry to the financial services market place have been lowered, resulting in increased competition as new players enter the market with (new) business and service models. Not only is the rivalry of the market place intensified, but the impact of the possible disruption is bigger and more sudden in the digital era due to “Big Bang” adoption cycle among customers.
The existing players in the Financial Services can respond in a passive manner by improving its current services, or consider the innovation not (so) relevant in the way its targeted customers acquire the offered services. (A senior citizen may prefer a personal advisor for its wealth management over a (cheaper and digitized) robo-advisor.).
The existing players can also respond in an active manner by embrace the disruption AND keep the old service model (hedging), or go “all in” and embrace the innovation to the full extent, meaning the old service model will not have the future strategic attention within the company.
