This post will take a bit of a different tack and it’s inspired by two things really, one, a talk by one of Society One’s cofounders Jason Yetton and the other this delightful little question from a friend:
If you were given an unlimited budget to innovate in Banking, what would you do?
It’s useful to start with some takeaways from that presentation. The vision Jason presented of the digital economy and banking in that future is where
- Trust is front and centre. It’s a fickle currency hard to regain once lost but it is everything in a digital economy.
- Global actors will be a force that the industry will have to confront (think Alipay or even the success ING Direct has enjoyed here) and
- New government reforms to free up data and empower customers announced by the Treasurer offer far more scope to empower customers in their financial lives. Think back if you would to the days where you could not transfer your phone number when you were changing your carrier and just how brutally effective that lock-in was for your average telecom company.
That being said when I put the question to him as to what incumbents would do if faced with a fintech threat I was reassured the going strategy is “buy it or kill it” and we can probably expect to see this play out in Australia and elsewhere (you could say Westpac’s acquisition of Society One is a case in point).
The problem we want to solve?
So, on this question of innovation I might start with the following:
What problem(s) do you wish to solve?
By this I mean we’re all bright, brilliant and capable of coming up with ideas on the fly but really what is the end issue we’re resolving for customers?
So many successful businesses are born with this at front and centre where they exist to minimise some kind of friction in customers’ everyday lives. Think of what Google does for you, almost the entire font of human knowledge is some text and a mouse click away as opposed to the alternative that many of us grew up with pre-Internet. Not just Google though, just take a moment to lie back and think how much of what we interact with was even a thing five years ago?
But to take a financial example, in the case of life insurance for many decades it existed as one of the few savings vehicles you could access outside of cash and property. You would pay a princely sum for it (more expensive trading costs, paper-based etc) but at the same time it filled a need for consumers at the time to provide for their families in a moment of need.
I think in the case of banking a good starting point would be to look at where these frictions continue to exist and ask whether we wish to solve them. Some areas might include
- Delays in moving money from one bank to another
- A lack of transparency in loan rates (aggregators are helping with this)
- Genuine, honest advice on our finances (rather than starting from us looking like a $$$ pile).
We can now consider the business you wrap around this core purpose. It might sound corny to say “Our job is to make customer lives easier at dealing with X” but that should be what defines you and your actions going forward. If it’s only a sideline to the broader goal of making money, you can still succeed but eventually the skewed priorities will bite you, and bite hard. If you don’t give a damn about clients why ought you expect any better treatment from them?
What path do we want to take?
Some available paths could be:
- “We’re going to be the lowest cost option”,
- “We’re going to differentiate our product and our services from everyone else”, or
- “We’re going to be a platform pairing suppliers and customers in a genuine marketplace for financial products and services”
Each of these items comes with its own pitfalls and benefits
The low cost play
- This effort is marked by a sacrifice of profits that you make up for with high volumes. You need a lot of sales essentially to shift the bottom line as a business.
- Low cost can be a virtue of sorts if you look at US asset manager Vanguard which prides itself for passing on savings to its clients and is the second-largest asset manager in the world, amassing trillions in part due to this ethos.
- Let’s use a toothpaste example – you probably buy the same brand every few weeks, right? Have you ever stopped to think what you’d look like in terms of dollars and cents? You, me, we are all effectively an annuity pumping out more and more cash over time with our regular purchases. The small amounts add up massively over time. As we can see in the success of a company like Unilever or Proctor & Gamble.
- Low cost doesn’t nor should it mean worthless, it fills a core need of customers but lacks certain features other providers try to differentiate themselves by.
- The flip side of a low-cost approach, you offer the brand, the premium features and more necessary to have customers pay more to you on average.
- Each new customer is especially precious in this dynamic because of the high margins you get to earn over their lifetime.
- Your luxury good brands, think Gucci or Prada, are cases in point. Brands have real power with some people going so far as to define themselves by their … well love for certain goods. Think about the fervour of Apple fans or to use a different example Jack Daniels tattoos.
- Get out of the product creation game entirely, open up your
- That pairing of buyers and sellers requires a real shift in mindset too. You don’t necessarily care about pushing your own products to customers but rather getting everyone’s products to them as you get to collect your commission as a market maker regardless.
- Low cost play
- Go all digital, minimise labour costs as much as possible with chatbots, AI etc. If you can you almost want to be at the point where like tech companies you almost have a zero-marginal cost, the additional impost for Facebook to service another advertiser for example is so tiny compared with traditional advertising that it might as well be 0.
- Pay to be the default provider in different ecosystems i.e. think how valuable it would be to the bank behind WhatsApp if Facebook let you use buy/sell through it? Remember you have minimal costs so volume, volume, volume is the name of the game.
- Product differentiation
- Go niche and go hard. What suits the mass market mightn’t work for particular customer segments e.g. High Net Wealth.
- Present yourself as the alternative able to fulfil every additional financial need or want that they might have.
- You see this already with the positioning of UBS to really corner this part of the market globally with other rival banks looking to grow in this space as well.
- On the funds management side as an example you see people espousing the values of active over passive in illiquid assets such as private equity which need more refined expertise → more fees charged.
- Harder to achieve but examples might include WeChat where banking is but one branch amongst many financial products and other being offered to customers. You can do almost anything for your life through the app essentially.
- Offer clean interfaces and friendly APIs to encourage developers to build new services/apps with your bank as a centrepiece. McKinsey has a great piece on this.
- Let your financial advisers offer anything and everything with the main goal to better their clients’ lot.
- That different mindset I mentioned above tempts me to say that most financial companies that attempt this will fail it because of the conflicting incentives between different branches of the business and the internal divisions that need to be overcome in any organisation to be willing to change (and cannibalise yourself in the bargain).
Lastly for this one let’s turn to some other notions that have been considered and employed.
Some of the available strategies
- “Gamify” the process – who says banking has to be boring? You’re playing a vital role in helping people save and invest, why can’t they have some fun with it as well?
- Some examples include Acorns, an app that “rounds up” your credit card purchases and invests this loose change in low-cost ETFs. Another might be Stash which simplifies the process and offers you the chance to invest in causes or managers you believe such as renewable energy.
- Simplify financial products and educate your customers
- A point of differentiation could be to have truly independent advisers by not creating financial products yourself. This enables the construction of financial relationships without conflict that deepen ties to the company while also helping clients with independent, sound advice.
- Find and kill causes of financial discomfort/friction as a point of differentiation and bettering customers’ lives
Finally, I’ll end where we began, this idea of trust and how you construct it. The internet frees up so much more information now but at the same time uncovers any misdeeds on the part of your company.
You can build trust though over time by being proactive and engaging. Many companies have started to do this with social media and the like but not enough have explored the opportunity. Blogs are another example where in an interesting way you create your own risk selection by building an audience of like-minded individuals as this blogger did with many of his firm’s leads sourced from the writings of himself and his colleagues and the inspiration they give to their clients.
There was a neat piece on Slate discussing the success of Apple’s Genius Bar with staff there motivated not by sales targets unlike other retailers but rather addressing customer needs first and foremost. That mindset is not an easy one to instil but the appreciation and loyalty it creates can prove invaluable not just as a way of “locking-in” a particular customer but also to help your people feel better. Helping people is a far more enjoyable and constructive cause than finding a new angle to screw them over with.
So to wrap up, we might visualise the approach I’ve discussed in the following way.
Note that I’ve cheated a bit in not giving a straight answer but I think there is no need to be prescriptive here. There will be more than one way to succeed and innovate in the future and what I hope I’ve articulated are some of the paths available to reach that state.
Any thoughts/sentiments are most welcome!