Recently, the former CEO of Barclays said publicly that banking could be facing its own ‘Kodak moment’. For the past 10 years, similar comments have come from bankers, technologists, consultants, and financial journalists evoking not only Kodak, but also Blockbuster, Borders, Amazon, and Über as ‘moments’ for the banking industry. Many of us have used these catchy lines to justify investments in technology that to many traditional bankers have not been proven.
These phrases confuse the issue of how these organizations stumbled, and the analogy to the future of the financial services sector. Often, the focus of these stories is on technology changes, and not on tragic errors in changing strategy. The mistake is further exacerbated when naysayers can easily discount otherwise cogent rationale for investing in digital technology by pointing at the vast differences between each of these examples and the banking industry.
The Kodak Moment
The popular belief says that Kodak was brought down by the public’s acceptance of digital photography. The real Kodak story has them inventing digital photography but failing to adjust strategy to leverage their own innovation.
Kodak dominated the photography industry with Fujifilm as it’s only true competitor. Kodak developed digital photography but failed to adjust when digital technology overtook and replaced film photography. Kodak doubled-down on marketing hoping to win business by mere advertising. Meanwhile, Fujifilm diversified, developing new kinds of film, focusing on their chemical expertise, and acquiring new businesses.
Kodak’s failure to adjust their strategy is a lesson that financial services firms need to heed. However, there are many differences between the Kodak situation and today’s banking reality, that allows traditional bankers to discount the lesson entirely. These differences come mainly in three areas, makeup of the industry, attention to industry trends, and the speed of the transformation.
The global banking industry has their giants, but none dominate like Kodak or Fujifilm did in their heyday. The financial service industry scale differs significantly with tens of thousands of strong organizations. While the financial services industry has many smaller companies that lag in investing in technology, or strictly give it PR-level attention, many others focus on transforming their businesses. Lagging organizations will face acquisition.
The Kodak Moment proposition says that banks act like Kodak. They may have developed online banking but have refused to continue to invest in digital technology instead focusing on what has worked before such as physical branches, more fees, and dying technologies. This proposition is mostly untrue.
Many banks – mostly the larger banks – invest large amounts of resources in digital technologies and have for the last decade. While smaller banks and credit unions lag in these investments, and attention on what is coming, their technology providers continue to focus on emerging technologies.
The crux of the Kodak situation was the speed of the customer behavior shift, and their failure to adjust strategy accordingly. Digital technology has and continues to impact banking customers’ behavior and expectations as well. Luckily, the banking customers’ behavior has changed much slower than in the case of Kodak, allowing financial institutions to move at their speed thus far.
Complacency, in this situation, should worry banking executives. The industry now lags in rethinking customer experiences compared to other industries. Technology innovators and early adopters move to fintech firms or the more tech-savvy banks. As the early majority begins this jump, banks will have to be ready to serve them.
The Blockbuster Moment
As noted by Jonathan Salem Baskin back in 2013, Blockbuster crafted their own demise. He notes that Blockbuster didn’t understand their core business, failed to look at the big picture, and allowed the “technology Greek Chorus take credit for changing the world.” Like Kodak, their failure was one of strategy adjustment as well.
The vast differences between financial services and movie rental industries makes the parallel hard to argue, and is used to discount this lesson as well. When Blockbuster failed, the movie rental business had existed for 10 years. Business models shifted continuously during that time. Varied and complex banking products have histories expanding centuries, frame parts of the economic infrastructure of a country, and people’s lives. The same cannot be said for the home movie rental industry.
Some parallels exist between Blockbuster’s situation and that of the banking industry, but stark differences remain. Many bank executives suffer from false confidence and myopic thinking, but most banks are led by thoughtful leaders that don’t tend to panic.
Like Kodak, Blockbuster ignored changes in the prevailing business model and customer’s behavior. Similar fate awaits many banks as well. Banks that rely on their core providers, or their online banking vendors as their “innovation” arm may also move too late. Financial service companies that don’t understand their core business or see the big picture will fail, whether faced by an army of fintech companies or not.
The Borders Moment
Like the previous examples, Borders also failed to change their strategy when faced with industry changes. While Amazon contributed to Borders going out of business, Borders’ fate was due to its own management errors. Amazon’s digital prowess has continued to impact all other booksellers, including Barnes & Noble and local bookstores. Amazon’s impact has gone well beyond its initial focus on bookstores and has impacted all manner of retailers. With its recent purchase of Whole Foods, it may be moving into the physical world in a much larger scale than it had been expected.
Like in the other examples, traditional bankers use the vast difference between Amazon and any single player in the financial industry to push their heads in the sand. There are many fintech unicorns but none offer the depth and breadth of a full-service bank.
A PayPal, for example, is an entrenched business in payments and has a fledgling lending business, but unlike Amazon it doesn’t offer a wide selection services in its industry. PayPal recently announced an effort to partner with a small number of banks to begin to offer traditional banking services, like checking accounts, and debit cards. However, how many banks have or are likely to go out of business simply because of PayPal?
Amazon and other lesser online retailers are hurting many retailers, resulting in large scale closing of retail locations, and the abandonment of many American malls. On the surface, this parallels the trend of branch closing and “consolidations” seen in banking.
The difference is that the reduction in branches is hardly a response to the rise of mega fintech banks, or even a large group of fintech startup banks. For my professed love for Simple and Moven’s customer experience, it would be foolish to attribute large scale branch closings to them, or their digital-banking brethren like BankMobile, CapOne 360, and Ally.
The real culprit for branch closings has been the traditional bank’s themselves, and customer behavior changes. Banks overbuilt branches, introduced new channels to reduce costs or in their search for increased revenue. Credit, debit, prepaid cards, ATMs, online, and mobile banking were adopted by customers in droves driving an increased reduction in branch visits. For the most part, this is the main culprit in the reduction of retail locations in banking.
Yes, retailers have jumped into the digital space lately but that has been entirely reactionary. Banks, for the most part, didn’t roll out online or mobile banking as a response to Moven. In fact, to this day, most executives in the top 20 banks in the US would be hard-pressed to explain Moven.
There is only one Amazon, and there isn’t a parallel to it in banking, at least not in the West. If Amazon moves to be the Alibaba of the West, then watch out financial services. The recent revelation that Amazon may be partnering with JP Morgan Chase may be worrisome to the industry in this regard, but that will depend on the nature of the relationship.
The Über Moment
Über (and Lyft) are growing juggernauts in the car ride sharing business. They are taking business away from taxi fleets, and in some cases, driving fleets out of business. In some ways taxi fleets are like community banks. There are many fleets throughout the country.
In many places, the businesses are highly regulated, a bit like banks. The largest difference between the taxi and banking industries is the number of customer experiences, the relationship model, and the scope of the industry. In the car ride business, the customer experience is a single process and transaction, hiring a car for a one-way trip. In comparison, banking encompasses many processes from opening accounts of various kinds, applying to loan products, doing transactions, receiving statements, etc.
While some people may have a relationship with a single taxi company, most people don’t. Traditionally, a taxi ride begins with hailing a passing or waiting cab, or calling a cab company to arrange for a ride. In banking, most people have one or a few banks that they engage with for their banking needs.
For better or for worse, banks have trained their customers to keep coming back to them for new products. Even when banks act inappropriately, as in the recent case of Wells Fargo, inertia keeps them banking with their regular bank.
Further, most people in the country don’t take taxis on a regular basis. If you live in large cities and you are of a certain socioeconomic class taxis are commonplace. Many people living in cities take taxis infrequently or never. If you are in suburbs or in rural areas, taxis are generally not something you use.
While there are swaths of Americans that aren’t part of the banking system, commonly known as the underbanked, most Americans do or have used banks. Often banking customers use their banks daily without much thought, say visit an ATM, or use a debit or credit card. It’s just part of life.
The Fintech Moment?
It is true these comparisons inform a general trend of digital transformation in each industry. The financial services industry is not immune to it, of course. The headlines of banking being the new Blockbuster, Kodak, or Borders are catchy, but aren’t truly descriptive of what we are seeing in the industry, particularly if the narrative focuses on technology.
These stories do point to a danger that the financial services industry is facing: lack of strategic thinking. Each of these companies failed to anticipate a change in customer behavior and adapt their strategy. Kodak, Blockbuster, and Borders had access to the technology that eventually was their undoing.
Instead of defining their multi-year strategy to adapt to existing and coming customer behavior, some banks task their CIO, or their new Chief Digital Officer, with the challenge to digitize the bank. Digitization of existing processes, and a focus on technology and process, misses the more complicated process of changing the business’ culture.
To address culture, some organizations go as far as announce that they are no longer financial service companies but tech companies. This is beyond absurd in the case of a small financial services firm that outsources 90% of their tech to large technology firms.
However, even if the organization develops large portions of their own technology, trying to become a Google misses the point that customers don’t come to financial services companies for tech but for banking, insurance, wealth management, investments, and other such services.
Both approaches points to leaders struggling with defining strategy that departs from the business-as-usual 20th century models.
The good news for American financial services companies is that customer behavior is not changing as fast compared to other industries. Yes, people adopted mobile banking quicker than they did ATMs, or online banking, but that doesn’t mean they stopped using those other channels.
The dot com days brought a slew of online banks and very few made it, despite being more efficient and cost-effective. This was because customers were not yet ready. Something similar is happening with some fintech firms. As VCs are asking for returns, some fintech firms are having a hard time scaling up and reaching critical mass. They are however starting to show banks that better customer experiences can be designed using new technology.
The fintech moment may be one of collaboration between organizations that don’t know how to change models, and those with new models that can’t attract enough customers to be viable long term. Those venerable financial services companies that fail to make the leap are not going to die off overnight.
Lingchi, or death by a thousand cuts, will eventually force them to sell to stronger competitors or go out of business. A single cut in a single vertical isn’t bringing down the industry. Winning organizations require a strategy that can deal with small cuts in all directions.