Banking is necessary, banks are not – how to deal with disruptive technologies and uberification of everything

Disruption means a fundamentally better alternative for solving a customer problem, in a cheaper, quicker and more convenient way with technology playing an essential, enabling role. It does not mean evolutionary change, but it is radical in the way it influences businesses and societies (Girn, 2014). It creates a new market and value network to eventually disrupt existing ones and displace established leaders (Bower, Christensen, 1995).

Disruption in few words is what Uber did to taxi drivers, how Spotify has changed the music business and how Airbnb diminishes the incomes of hotels all over the world.

Bill Gates on banking

Source: https://www.slideshare.net/patrickpijl/how-square-is-disrupting-banks/6-Bill_GatesBANKING_ISNECESSARYBANKS_ARENOT

Business leaders all over the world believe that an average of four of today’s top 10 companies (in terms of market share) in each industry will be displaced by digital disruption within the next five years (Cisco, 2015, Digital Vortex. How Digital Disruption Is Redefining Industries). Despite that, over 40% of companies do not acknowledge that risk or have not addressed it sufficiently and another 33% take “wait and see” approach. It’s quite a dangerous approach, isn’t it?

Disruption has its foundation in psychology of convenience:

  • decision convenience – product fast and easy to choose,
  • access convenience – fast and easy to acquire,
  • transaction convenience – fast and easy to pay,
  • benefit convenience – fast and easy to use,
  • post-benefit convenience – fast and easy to re-purchase

When it comes to banking sector, according to forecasts, 17% of banking revenues in US will be impacted by digital disruption till 2023 (compared to 1,1% in 2015), while in China fintech companies already have similar number of clients as the major banks (Citigroup, 2016). In Poland, where financial sector is very well developed, there is already a fintech movement ongoing with a variety of social lending services as well as crowdsourcing and e-money solutions.

Disruptive forces – what banks should fear the most

From the customer’s point of view, as Bill Gates said – “banking is necessary; banks are not”. Customers expect smart and simple solutions to manage their money, invest and borrow – with transactional costs (money, time, effort) as low as possible. Key disruptive forces addressing the needs of customers for Polish banking industry at the moment are as following:

  • Social lending – banks have had monopoly for lending money for centuries. Simplifying, using this monopoly banks could borrow money (through deposits) from customers and lend it (through cash loans) to others with higher interest rate. Social lending skips banks as brokers and lets customers deposit money for better interest and borrow cheaper. Clients’ need is to borrow money as cheap and as convenient as possible and social lending gives an answer to this need. By now this is a very small competition, but it the future companies like kokos.pl, lendico.pl and similar can become a serious threat in terms of bank’s cash loans offer as their pricing is much under bank’s pricing. There are also quick loans providers that beat banks in terms of time and amount of formalities such as Provident, Wonga and Vivus. They are already a serious threat to banks and can be even higher in the future, as according to researches, young customers tend to prefer faster and easier solutions (psychology of convenience), even if the price is relevantly higher.
  • Crowdfunding – as social lending works for individuals, crowdfunding lets start-up companies raise money without using banks and investment funds. This is a key in terms of answering the needs of small businesses that find it difficult to search for financing as their business plans are not verified enough on the market to gain trust of big financial institutions.
  • E-wallets – digital wallets come in many shapes, some of which exclude banks (ex. Billon, Bitcoin) from the transaction. Customers can avoid fees and store their money in a safe digital form on their smartphones and computers. For banks, which take high profits from interchange, every new company in this field means diminishing number of transactions with bank’s credit and debit cards and as a result – lower incomes.
  • New “banks”- as PSD2 directive is coming to live soon, there might appear new players on the market who will use the API of banks to deliver their own services. For some of the banks it may mean, that their role will be diminished to backend – their customers will use another interface, where their competitor will be able to serve them other offers and convince them to change their provider.

From the industry point of view it is important to consider as well:

  • New players on the market – banking industry, being very attractive in terms of margins, entices big players from other sectors. In China the company called WeChat offering text and voice messaging works for customers like a bank – they settle their bills through it, pay for shopping etc. In Europe, Facebook has already registered a banking license in Ireland. Google is taking similar actions as well, not to mention Apple.
  • Industries going horizontal – with companies outside banking coming to the sector and shifts in customer needs, boundaries between sectors such as banking, e-commerce, insurances, telecoms etc. start to disappear which leads to the birth of entirely new industry segments, much more complex than current ones. On the Polish market, Alior Bank has already started a partnership with T-Mobile and created a bank (to be) deeply connected to a telecom – T-Mobile Usługi Bankowe.

How to deal with such a change?

Digital disruption becomes a serious topic all over the world, including Poland. To avoid losing market share, banks ought to be a part of the trend. The most effective response to reduce fintech threat, as seen by nearly two thirds of banks, are partnerships with fintech companies (Capgemini and Efna, World Retail Banking Report, 2016).

Some of banks in Poland have already started doing their homework. Alior Bank has created an accelerator Huge Thing, where start-ups have worked for 18 weeks on IOT, augmented reality, cyber security, blockchain, biometrics and artificial intelligence. Alior has also partnered in Startup Path with MasterCard, a similar project for fintechs. Those two companies are also partners in The Heart, which is as they calle themselves “European center for corporate-startup collaboration”. Alior Bank has its own Innovation Lab, they cooperate with Hub:Raum and Business Mixer as well. This is probably the most active bank in Poland when it comes to fintechs, what is understandable, as it is perfectly coherent with their strategy.

Alior Bank Strategy

Source: “Digital Disruptor”: Alior Bank’s Strategy 2017-2020

The second bank that can be perceived as very active in the fintech field is ING. They have organised European Startup Days, have their own ING Innovation Lab as well and do some coding nights focusing on PSD2 changes coming.

PKO BP, a very traditional bank and one of the first banks in Poland, is also aware of the threats as well as it not only participates in acceleration programmes (such as Let’s Fintech, which was organised by MIT Enterprise Forum Poland, and PKO is one of partners) but also invests in fintechs using its own CVC – they have acquired Zencard.

With the purchase of ZenCard, PKO Bank Polski is an example of use of the potential of financial start-ups and it is not the first time, when it sets a path for the remaining Polish banks. We not only generate advantages of the Capital Group, but also send a clear signal that Polish start-ups are worth supporting. By means of the acquired technology, PKO Bank Polski will strengthen its relations with customer and also provide entrepreneurs with a state of the art tool to benefit from opportunities given to them by developing digitalisation” –said Mr Zbigniew Jagiełło, the President of the Management Board of PKO Bank Polski.

(See the whole press release here – http://media.pkobp.pl/press-office/press-releases/about-bank/pko-bank-polski-invested-in-a-fintech-start-up-and-will-support-polish-smes-in-creation-of-loyalty-programmes/)

Other banks are not as active, but there are some activities they take, as for example Start Up Me program or Bank It Up hackathon by BZ WBK.

To cooperate successfully with fintechs, banks will need to adapt more entrepreneurial approach and evolve their digital banking ecosystem. Meanwhile, banks need to ensure they remain integral in terms of customer relationships and responding to customer needs. Those needs are by now usually better addressed by more agile fintech competition that is capable of preparing a service convenient for a client for a smaller price as operating costs of a start-up are drastically lower.

While the vast majority of corporate employees and business decision-makers agree that entrepreneurial attitude is important and has the potential to create new ideas that promote growth (Reilly, Silverstone, 2014), very few companies are perceived as offering enough support to employees in this field according to Accenture research.

Accenture

Source: https://www.accenture.com/t20150523T052044__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Strategy_2/Accenture-Survey-Enabling-Culture-Innovation-Entrepreneurialism.pdf

What most companies are missing is the environment supporting innovative and entrepreneurial approach – general support from management, tolerance for failure, bonuses for successful implementation of ideas and dedicated time for employees to work on their solutions.

How can employee be innovative, when there is no tolerance to failure and his bonuses depend on the project outcomes? For all those managers who try to mitigate any risks and avoid failure of any kind – there should be a requirement to read about any top innovator and his path to success – Elon Musk, Steve Jobs… It has been failure after failure for a long time…

Innovativeness of employees and entrepreneurship can be stimulated when the organisation is ready for it in terms of culture, processes and systems. As described by Relly and Silverstone (2014), to encourage entrepreneurialism, the organisation should look for ideas at all levels, provide incentives, reward also good ideas that failed in “instructive” way, develop the tolerance for failure and educate employees how to be relevant in idea generation. The readiness for innovation and entrepreneurship can be defined by the creative climate dimension model shown below (Isaksen, Ekvall, 2010).
This model can be easily used to identify where your organisation has gaps and what can be done to catch up.

Dimension | Definition
——–|——
Challenge / Involvement | the degree of involvement in daily operations, long-term goals and vision
Freedom | the degree of independence of people in the organisation
Trust / Openness | the emotional safety – comfort of sharing opinions and honesty
Idea-Time | the amount of time used for creating new ideas and developing them
Playfulness / Humour | the spontaneity in the workplace, atmosphere
Conflict | the presence of tensions, gossips, interpersonal warfares
Idea-Support | the way of treating new ideas, suggestions
Debate | the presence of open disagreements between viewpoints, knowledge, experiences
Risk-Taking | the tolerance of ambiguity

However, failure does not have to mean millions of wasted capital on a project. There is a saying “if you fail, fail fast” that sums up how the entrepreneurial approach in companies should look like. Companies that are start-up like in terms of process of developing new ideas and products can maximize opportunities coming with digital disruption and use them to gain competitive advantage.

There is a model that totally changes the process of new product development, that lets companies experiment quicker and much cheaper. It is called lean startup model where other employees as well as clients are present on every stage of product development (Ries, 2011).
Lean startup model can strengthen a test and learn approach and will let any organisation verify ideas faster and adapt to the changing environment much less costly. This methodology can help banks unleash innovative ideas. At the moment, the process of developing new services happening inside the banking sector is often very linear. The banks usually use benchmarking and base only on verified tools and mechanisms. Customers participate at the end of the process through marketing research. This limits banks to solutions that are not innovative and result in a very reactive attitude.

Disruption is unquestionable. The only question is how to deal with it effectively. Every major player on the market will need to find its own way – either using its internal assets and shifting processes to be able not only to follow agile competitors but also to set trends, or by cooperating with (and buying them when they are not mature yet) emerging fintechs and disruptors. For both paths, banks will need to be more agile than ever.

PS A lot has been written about the disruption and innovation. Feel free to dig deeper into literature (click the image to see the book on Amazon):


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