DEVELOPING CORE COMPETENCE IN FINANCIAL TECHNOLOGY INNOVATION
To develop core competencies that allow banks to play in the emerging FinTech space, banks should do some fundamental soul searching. Corporations should ask themselves the following three questions to stay competitive:
■ How long could we preserve our competitiveness in this business if we did not control this particular core competence?
■ How central is this core competence to perceived customer benefits?
■ What future opportunities will we miss if we lost this particular competence?
Without answering these questions and pointing out the obvious, banks are in desperate need to bolster their competencies in financial technology innovation.
In the medium and long term, this will be the only way for them to establish leadership in newly emerging areas such as online lending. Staying on the sidelines and watching the sector emerge is dangerous, as new entrants amass experience and know-how in this sector that will further increase the knowledge gap to the incumbents. To stay in the race, banks should integrate innovation skills into their operations as soon as possible. This may mandate a rethink of their established practices, but it will be instrumental in the future. Unless they do this, they may suffer the fate of film manufacturers, who went under when digital cameras took over; or the music industry, which has ceded a large market share to new online vendors. In hindsight, it is always clear what companies that went from market leader to bankruptcy should have done to avoid their fate. Most likely, banks look at the existing examples of industries that technology disrupted, believing their situation will be different. Why is this so? Because it is easy to fall into the trap of marginal thinking.4.4.1 The trap of marginal thinking
When a company has the option of making an investment in new technology or innovation, it will assess the innovation from the viewpoint of its existing business model.
Based on the results of its number crunching, it will often decide against the investment if the marginal revenue is not worth the marginal cost of the investment. This is what author Clayton Christensen calls the “trap of marginal thinking.”29Companies can see the immediate costs of making an investment, but they struggle to understand the costs of not investing. When they deem the profit from a new product as insignificant while they still have an existing product with acceptable returns, they are blind to the future and the possibility of somebody disrupting the market under their nose. Assuming that the revenues from their legacy products keep rolling in forever, the consequences of the decision to wait are far from obvious. Companies remain on the sidelines and watch their competitors struggle with perfecting new innovative products. However, eventually, those companies that remained on the sidelines will have to pay a price, and that price can be very high. It may cost them not only the marginal cost of catching up, but the loss of an existing business line that the new innovation has disrupted. Henry Ford summed this up nicely: “If you need a machine and don't buy it, then you will ultimately find that you have paid for it and don't have it.”
Throughout history, large incumbents have lost their shirts against new entrants. Just look at the battle between the video rental companies Blockbuster and Netflix. At its peak in 2004, Blockbuster had up to 60,000 employees and more than 9,000 stores. When it looked into the business model of a small startup called Netflix that pioneered DVD rentals by mail, Blockbuster management decided not to bother. Netflix profit margins were below those of Blockbuster and engaging in rentals by mail would only cannibalize their profitable stores. They concluded that Netflix's business model was not financially viable in the long term, and that they served a niche market. Was their assessment correct? By 2011, Netflix had almost 24 million customers.
Blockbuster had declared bankruptcy the year before.30Could this happen to banks? Author Brett King points out most banks linger in silo thinking, legacy organization structure, and traditional business models that frustrate change. Their use of digital communication as a one-way marketing channel, where customers are routinely told not to respond to emails they receive from banks, are hardly in sync with the demands of today's hyperconnected customer.31 The attitude of marginal thinking shows itself in the statement of a senior U.S. banker at Barclays, who stated that “A widget company makes widgets, and a bank makes loans. If banks could make money on it, you bet you'd see more lending to small firms.”32
4.4.2 The way forward
We realize it is easy to point out faults without offering encouragement for the initiatives that banks undertake. It is true that banks have come a long way in recent years, and that their digital and online operations have improved remarkably. The existing infrastructure becomes more and more efficient and automated, which will eventually lead to less interaction between the majority of customers and banking staff, with subsequently fewer branches. As we have examined in this chapter, sustaining innovation is what banks are masters of. However, disruption of the financial sector will happen sooner or later—it is only a question of time. There is no reason for banks to suffer the fate of other industries, which underwent massive reshuffling because of digital disruption. If they keep an open mind and build their digital strategy with innovation—not technology adaptation—at the core, they have a good chance of surviving the storm, even coming out on top.
4.5