Big tech companies continue to reinvent the rules of business and their success worries many financial institution executives as the new players go beyond merely nibbling at the edges of banking. But instead of fearing big tech boogeymen, Alyson Clarke, Principal Analyst at Forrester, suggests that banks and credit unions learn from what the likes of Amazon, Google, Facebook and Apple do, adapting what they can and taking the opportunity to try some fresh thinking in their own sphere.
Clarke says financial institution leaders must understand that as big and successful as these companies are, they aren’t invincible and make plenty of mistakes.
“Each of the titans brings strengths and opportunities to the table but also have weaknesses and threats,” Clarke writes in a report. For example, she continues, “Amazon has a strong ecosystem, high levels of consumer trust, and the potential for even more partnerships, but has a mixed record on consumer data privacy.”
Despite pointing out that the big techs are not invincible, Clarke injects a sense of urgency into her report. She believes 2021 will be a year of major activity in big tech and fintech.
In response financial institutions should be thinking about gearing up for “moonshot” projects — major efforts that redefine their business models and reasons for being. Ignorance, complacency and inaction are luxuries no institution can afford anymore.
“You can’t take your eyes off these guys,” says Clarke of the big techs. “And if your institution has made the conscious decision to not be innovative, then you can’t complain when the tech titans come out with amazingly wild things that you never thought of.” While the much-rumored Google Pay/Google Plex project appears poised, at last, to turn into something solid in 2021, Clarke believes Amazon and the other big techs will also launch major financial services initiatives. Although not technically a “big tech,” Walmart also bears watching, especially its announced intention to partner in launching a fintech. The retail giant has increasingly built its ecommerce presence.
Thinking Like a Big Tech May Demand New Leaders
Clarke thinks some institutions have already broken out of their mold — she likes what Goldman Sachs has done with the Apple Card and with Amazon business lending — but she thinks the only way many others will change is with an infusion of fresh management blood at the top. Too many of today’s leaders, curiously, still don’t feel uncomfortable enough to change, she suggests.
“The biggest challenge is that many institutions think they understand their customers — they don’t.”
— Alyson Clarke, Forrester
She also believes that many have spent so many years worrying about what regulators will say if they try new things that they sometimes lag the regulators themselves. And for those who think the regulators will somehow help them maintain some exclusivity, she points to FDIC’s 2020 adoption of rules enabling nonbanking companies to own FDIC-insurance industrial loan companies.
Clarke also believes that leaders have to give up cherished beliefs about their institutions that just aren’t true.
“The biggest challenge is that many institutions think they understand their customers — they don’t,” says Clarke. “They might have data that tells them about a consumer’s propensity to want a mortgage or a car loan, but they don’t know much else about them.”
But what also holds them back are old-fashioned definitions of success, she believes. Traditional institutions tend to think in terms of sales, and typical key performance indicators skew towards profiting from every activity. Big techs like Amazon and Google don’t think that way and that frees them up to think bigger, broader and longer-term. The companies routinely try new things, which, if they miss, they shut down and try something else.
By contrast, banking institutions bend over backwards to avoid anything that smacks of “failure,” because of entrenched regulatory influence, and thus hold onto lots of deadwood products and services.
In an interview with The Financial Brand, Clarke discussed ways financial institutions can adopt additional concepts from big techs.
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1. Great Execution May Be More Important Than Great Ideas
Clarke says that American financial institutions commonly take the attitude that any new activity must be treated like a great poker hand, kept close to the chest. As a result, many times they miss the benefit of collaboration with outside experts. She’s seen banks in other countries benefit via consultation and cooperation. She even thinks U.S. institutions could actually benefit by “bringing regulators into the tent” more often. Only a handful of institutions have used such processes as the Consumer Financial Protection Bureau’s Project Catalyst.
“If you look at some of the innovative ideas in any industry, they came about because of ideas that organizations talked about with others.”
“The really good stuff that’s come along hasn’t necessarily been about the idea,” says Clarke. “It can also be about excellent execution. And if you look at some of the innovative ideas in any industry, they came about because of ideas that organizations talked about with others.”
The Google Pay/Google Plex project, involving at last report 11 institutions, is a good example of this. So far, what the collaboration between the big tech and the banking institutions consists of is savings and checking deposit accounts. That’s about as vanilla an idea as you can have. But the excitement comes from the combination of features the institutions will provide and the user experience that Google has been developing.
“The big techs don’t do things alone, they collaborate all the time with many firms and people involved,” says Clarke. “They don’t try to innovate in their own world the way many banking institutions do.”
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2. Innovation Labs Are Done. Innovation Must Permeate Your Organization
Testimony to the pace of change in banking, fintech and big tech is the role of innovation labs. A few years back, establishing a separate lab to foster a different culture and focused research made some sense, according to Clarke. But now, taking a page from the big techs, innovative thinking and questioning of the status quo must reach all corners of a banking institution. She believes that labs, once a potential catalyst and accelerant for innovation in banking, may now actually hold things up.
The catch is that when a lab devises a fresh process or new product today, it comes to the parent organization as a semi-outsider that has to sell the new idea to the actual practitioners of this or that activity in the organization.
“That is when they get stuck,” says Clarke. “The reason is that you are still dealing with the original culture, complete with its existing risk and compliance viewpoints and the old mindset. And often the mainstream staff, because they weren’t on the innovation journey from Day Zero of that new idea, don’t really understand it.”
Labs still have a role as incubators for ideas and inspiration, says Clarke, but the whole organization must be drenched in fresh thinking, like the big techs are. “Otherwise,” she says, “you’re not going to get any different results. I’ve seen firms kill some great ideas because the organization measures them on one factor: What kind of sales are we going to get out of it?”
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3. Rethink Your Business Model Before It Completely Winds Down
In multiple ways, Clarke makes it clear that that sales fixation stymies the traditional players. They seek to monetize everything right away.
By contrast, “Apple doesn’t need to make money on that credit card,” says Clarke. “For them it’s all about having more people embedded in their ecosystem and buying more Apple devices.”
This comes up time and again when Clarke compares banking thinking to big tech thinking. Even though the activity involved may be the same, the mindset differs and so the two industries aren’t playing on the same field.
Clarke thinks it’s time the banking business began reassessing traditional thoughts on how to make money. With low interest rates likely to stay in place for years, with the spreads razor thin on many credit forms, the longstanding banking profit model is creaking.
To survive, banking institutions must start coming up with ideas that build freshly on expertise. One that she sees promise for is banking-as-a-service. Consider this from the report: “The tech titans don’t worry about making money on banking services because they make their money elsewhere. For them, it’s about creating new value by integrating and leveraging banking services into their other products.” An example of how financial institutions can apply this follows.
4. Think Like a Curator, Not Like an Originator
Increasingly the traditional goal and concept of primacy — being someone’s primary financial institution — is going away. With that trend, Clarke thinks financial institutions should adopt the concept of curation — packaging and presenting products from multiple sources — rather than being the originator of everything.
This is related to an issue Clarke and colleagues have raised in earlier research on the future of the banking business — some institutions will specialize in “manufacturing” services for delivery straight to customers, while others will provide services via someone else’s platform.
Curating services, in a sense a banking equivalent of Amazon’s Prime Account, recognizes that customers have related needs that may not all be met by financial services. Clarke points to buying car. The consumer needs to find the right vehicle, have registration and other requirements taken care of, must insure it and, of course, finance it. USAA and DBS, in Asia, are among institutions that are providing such packages, with the institution only providing the financing part but serving as an umbrella over the whole process.
People welcome the convenience. Clarke says this approach deepens the relationship with the consumer and creates a “stickier” relationship. Anyone with a Prime account knows how that goes.