There is a huge intellectual gap between the daily life of a customer and the daily operations of a bank. According to TIME magazine, over 70 percent of Millennials would rather visit the dentist than listen to bank’s message. So, predicting what future holds for banking is per definition impossible.
There are multiple unprecedented technological changes taking place currently, and the biggest change is the digital disruption coupled with the great unbundling that will have a huge effect on traditional banks (Bank 1.0). Brett King, an influential thought leader in banking, argues that the era of Bank 3.0 is actually already here (but unevenly distributed).
Digital business is not for everyone but especially banks and other financial services companies need to realign their thinking and face up the facts instead of avoiding discussion.
From Provider-Dominant Logics to Customer Logic
In the financial services industry, there are multiple interrelated issues and new concepts such as crowdfunding, P2P-lending, high-frequency trading, dark liquidity, block chain, service/customer logic, machine learning, and big data & analytics. These random buzzwords are also real phenomena that are very ill-defined and sometimes scary, which financial services industry has to cope with. Most financial services companies have already understood that to survive these paradigm-altering changes, they need to understand and manage their mindset and attitude towards these issues. However, they still pretend that these trends are somewhat predictable, stable enough and relatively well-defined.
The traditional incumbent financial sector is still relatively hierarchical, conservative and goods-oriented, as D.Sc. Pekka Puustinen stated in his book. D.Sc. Jukka Saksi, on the contrary, found out that the leadership culture in the Finnish financial industry has drastically changed since the 1980s but there is still a taint of conservatism that doesn’t allow radical spin-offs from the status quo thinking. The views of Mr. Puustinen and Mr. Saksi seem to collide but I think that they are both totally right. They both seem to grasp two interrelated problems underlying the financial services industry; Dr. Puustinen puts the blame on the goods-dominant logic while Dr. Saksi emphasizes the importance of new kind of leadership.
"…Millennials would choose a root canal over listening to a banker"
I was totally shocked by the fact that Millennials would choose a root canal over listening to a banker. As Dr. Puustinen has argued, the current goods-dominant logic of exchange in financial sector has its roots in the Industrial Revolution when customers didn’t know anything better, their experiences were limited and they weren’t linked and active human beings.
Bankers, insurers, wealth managers, and other financial services companies are mostly living amidst total denial of any change in the business logic. However, we should keep in mind that financial services industry is no longer a homogeneous blob of companies in closed system. There are positive exceptions to this mindset of denying everything.
How to Enable Disruptive Innovation in Banking?
New technologies, the opportunities, and risks – coupled with new business models and service logic – create many deep political and ethical questions that must be taken seriously. We tend to overestimate the scale, linearity and pace of incremental change in the short run, and underestimate the sequence, place, nonlinearity and evolution of radical change.
There are also some mixed feelings amongst the top financial executives about the scope and extent by which digitalization will change the core of financial services business. We talk a lot about customer-driven business models, data-driven analytics, experimentation and learning, and agile organizational structures. Unfortunately this is just some hot talk without any actual purpose of radical transformation to finally become a truly customer-centric business. As Professor Christian Grönroos has put it bluntly, we all are in the hamburger business. French economist and politician Frédéric Bastiat once wrote in his pamphlet that “services are exchanged for services”.
Dr. Saksi argues that financial industry is actually currently only looking at product innovations instead of co-production, co-design and co-creation because understanding daily life of real people is not as easy as it is to calculate sales margins in Excel.
"There are positive exceptions to this mindset of denying everything"
If and when financial services industry will be dominated by nitty-gritty tinkering managers, employees also seem to adore same kind of echo chamber and are actually frustrated by laggardness of their respectful organizations. However, even if your line manager supports new kind of thinking and implementing new ways of doing the daily business together with the customers, these ideas are knocked out either by some unsubstantiated risk that the idea might cause from compliance or risk perspective.
Financial services companies need a true wake-up call and to understand what John Schwartz wrote back in 1996 (reflecting William Gibson’s original idea), “The future is already here, it’s just in beta testing, the high-tech world’s final smoothing-out of kinks before products and services go public.”
Most of the current business initiatives in the financial sector revolve around an idea that technology will solve most of these problems in no time but that’s not realistic at the moment.
From a more theoretical perspective, we are still lacking true competition in the financial services industry that would force incumbents to change their mindset or underlying logic. We still seem to think that there is money to be made out from price and output competition but as Joseph A. Schumpeter pointed out already back in the 1940s in his book, this is not really the case. But yet this hasn’t been enough to convince us.
We still seem to think that every problem is solved by installing more strict and pressing internal guidelines, protecting the myth of superbness of our internal processes, relying on strict deadlines, investing resources mainly on low-hanging fruits, and pretending that our key stakeholders, the customers and their life, are just some fancy facts on the screen without even considering that every customer is unique. All these problems – as we unwillingly pretend – can be solved just by pouring in more money and other resources to generate fancy features and “random” stuff.
If you didn’t notice my sarcastic tone, no, I don’t really believe that money can solve all our problems. As Dr. Puustinen and Dr. Saksi, among many other brilliant thinkers have forcefully argued, our problems are much wicked than we are willing to acknowledge. They are fundamentally related to wrong kind of theoretical reasoning that doesn’t acknowledge the importance of self-sovereignty instead of late William Hutt’s consumer sovereignty.
As Ludwig von Mises, an Austrian economist, suggested in his magnum opus, the amount of capital doesn’t generate profit, but the success of adjusting production to the demands of the consumers.
Financial services industry will need a lot of time for self-reflection but time is running out if we don’t embrace the fact that there is a need for radical transformation through dynamic capabilities and agile mindset (and development). If this won’t happen, new #FinTech will eventually overwhelm incumbent financial sector as we aren’t willing to admit that there are still many things wrong in the sector. In the end, as Curtis M. Grimm, Hun Lee and Ken G. Smith have emphasized, a true competitive advantage is achieved through entrepreneurial discovery and unpredictable strategic action taken by an organization.
We Need a Long-term Plan with Some Short-term Incentives to Transform the Industry
The reality is that financial services companies aren’t going to face dinosaur-like sudden extinction but instead the biggest fear is that the industry might face long, slow and painful death if it’s not going to embrace new technologies, customer logic and form a true understanding of ongoing changes in the world where the customer is the epicenter of the business.
Traditional financial services companies don’t really like change (as nobody really wants change to affect them anyways) and they still see the world as a closed system protected by strict regulatory structure, high barriers of entry, and very high customer inertia. The digital disruption, lowering entry barriers, and changing consumer habits are challenging our so beloved static linear paradigm.
“…we are still lacking true competition in the financial services industry”
Regulation is getting tougher all the time, risk control and liquidity requirements are now pushed up due to new requirements, while everyone are also demanding higher transparency, so the competitive landscape will change a lot in the future.
Financial services industry needs to have a long-term plan that is based on seven basic questions put forward by Peter Thiel and Blake Masters in their co-authored book Zero to One: Notes on Startups, or How to Build the Future. Banks, mutual funds companies, and brokers have to address every single one of these in order to be successful.
As Thiel and Masters write, “If you don’t have good answers to these [fundamental] questions, you’ll run into lots of ‘bad luck’ and your business will fail.” Financial services companies need to change the mindset by making sure that easy victories are not be confused with larger and much needed changes in the culture.
In the short term, traditional financial services companies have to make sure that they have enough distinctive strategic capabilities, competences and resources to take the first steps towards the era of living services. The steady state model of the business landscape is long gone, and the financial services of the future have to be based on a kaleidoscopic vision of the markets, customers, competitors and stakeholders.
Basically this means that data analytics is one of the key drivers in this transformation. Everything related to customer analytics and data-driven customer insights, marketing optimization, and improving day-to-day customer service (with the help of real-time data) are low hanging fruits. They will improve the chances of answering the seven crucial questions now more precisely than ever before.
In the long term, everything depends on our concept of the future. Thiel and Masters argue that “- - the future is simply the set of all moments yet to come - - No one can predict the future exactly, but we know two things: It’s going to be different, and it must be rooted in today’s world”. In the long term, only the most evolvable companies will survive and there are some tricks and tips that companies can use to increase their chances of survival.
Takeaways for the Digital Transformation
Here is a list of some takeaways to tackle the challenges the financial services industry is facing as digital transformation moves forward:
Admit that the outside world has actually changed – whether you’re an idealist or empiricist – and not to blazon a reality that just isn’t real.
Change the leadership/management style, as Dr. Puustinen and Dr. Saksi tacitly seem to suggest, to allow rapid co-development laboratory experiments and prototypes together with the staff and the customers.
Inject a welcomed dose of creativity viruses that can bypass regular corporate antibodies.
Encourage culture and team building that will allow free generation and flow of ideas. Then validate them (jobs-to-be-done), realize the (unseen) constraints of your assembly line, and execute your ideas superbly (secret).
Move rapidly from goods-dominant logic to service logic, and move decisively forward towards customer logic.
Rediscover the true meaning of “at your service”.
In addition to those of the above, here is my personal advice for the industry:
Establish multiple build-measure-analyze cycles
Don’t be afraid of failure as long as you fail fast, often, and learn at least something from these experiences.
Last but not least, think about what this insight from Asymco’s Horace Dediu might mean for financial services industry:
Disruptions are fueled not by dreams but by profits.— Horace Dediu (@asymco) June 6, 2015
Disclaimer: The opinions and views expressed in this post are solely mine and don’t necessarily reflect the official views held by Nordnet Bank, nor do they carry Nordnet’s endorsement.