The banking business has been undergoing disruption for over a decade. How well is your institution handling this sea change? How far along the disruption path have you come? And will you make it to the end? Or have you been misreading the signs all along?
A good yardstick lies in four stages of industry disruption. Steven Sinofsky, a former Microsoft executive and currently a board partner at Andreessen Horowitz, came up with these back in 2014. How banks and credit unions react to each phase in some ways mirrors the classic stages of grieving:
- Moment of disruption – A state of “denial” where incumbent financial institutions refuse to accept that a specific event is disruptive. They may also push back in anger whenever the coming disruption comes near them.
- Rapid linear evolution – “Bargaining” begins as the disruptors begin to fill in their offering while the incumbent players compare their functionality to the newcomers. Their intent is to show how the disrupting change is deficient.
- Appealing convergence – As the disruptors begin to acquire a broader consumer base, incumbents begin to adopt features of the disruption, in order to “compete.” (Note: this stage quite full blown “acceptance”, as the reaction continues to be driven by denial, anger and even depression.)
- Complete re-imagination – The entire business model changes. The disruptors and incumbents that arrive at and push through this stage successfully become the new incumbents — while all others retreat into acceptance of their fate.
“Banks and credit unions have been fortunate that the speed of disruption hasn’t been similar to that experienced by Kodak, Blockbuster and Borders. “
With the hindsight of the last decade or so, we can apply this model to the current digital disruption in banking. Banks and credit unions have been fortunate that the speed of disruption hasn’t been similar to that experienced by Kodak, Blockbuster and Borders, as I’ve discussed in an earlier article.
Understanding where any financial institution is within these phases, and, more importantly, how they are reacting, could help produce a plan to address it appropriately.
Phase 1) Moment of Disruption: How is Your Environment Changing?
2007’s introduction of the iPhone opened the flood gates for financial disruption and innovation. I recall attending Finovate in New York City in 2008 or 2009 and feeling both exhilarated and scared about what seemed imminent for financial institutions. It took financial institutions and bank tech firms a few years to respond by introducing mobile banking apps, as a companion to online banking.
“Unfortunately, many bankers and credit union executives felt smart phones were just a fad. As a friend said, ‘Who will ever spend any time looking at such little letters?'”
Some financial institution executives felt satisfied that they had dealt with the possible impact. Their financial institutions introduced apps, and they felt theirs were on par with the disruptors’ offering.
Unfortunately, many more bankers and credit union executives felt that smart phones were just a fad. As a friend said to me then, “Who will ever spend any time looking at such little letters on such small screens?”
So denial set in. But that wasn’t the worst development. Bankers and credit union executives focused on the technology and not the true revolutionary idea behind mobile devices and the emerging fintech apps running on them. What they missed: design thinking focused on customer experience.
- Best Customer Experience in Banking Blends Digital with Human Touch
- The Future of Retail Banking Through a Digital Challenger’s Eyes
- Apple Card Rollout Threatens Traditional Financial Institutions
- New Fintech Bank Reinvents Itself With Bold Brand Position
Phase 2) Rapid Linear Evolution: How is Your Institution Trying to Evolve?
In this phase, fintech disruptors went beyond the capabilities of mobile and began to add capabilities from other technologies not being used in banking. These included such capabilities as data analytics, character recognition, algorithms and many others.
“The central idea of digital transformation — customer-centered design — has escaped a large swath of banks and credit unions.”
For financial institutions and bank tech companies, the response in this phase was to copy capabilities and combine mobile with online banking into a single digital banking platform.
Unfortunately, for a good number of organizations this is how far they have gotten — only to phase two. In their way of thinking, digital banking is a channel like branches, ATMs, call centers, and even the website. The aim of the vast majority of financial institutions and bank tech companies is to optimize the functioning of the digital channel and copy functionality from the incumbents.
Once again, the central idea of digital transformation — customer-centered design — has escaped a large swath of banks and credit unions.
- Crafting Amazon-Like Banking Experiences Easier Said Than Done
- T-Mobile Money Rocks Banking Model Using Fintech Engine
- How to Build Banking Products Consumers Will Love
- Taking Mobile Banking to the Next Level with Innovation & Design
Phase 3) Appealing Convergence Arrives (But for Some, It’s Appalling)
For most of financial services, this is the current phase. Disruptors have begun to extend their customer base beyond early adopters. Expansion brings limitations that they hadn’t had to deal with. For example, fast-growing fintech firms have had to deal with regulatory scrutiny that had been absent when they were flying under the radar.
On the part of the incumbents, they have started to copy the capabilities that disruptors implemented in the previous phase. The result is digitization of functions beyond digital banking, particularly support and operational areas.
Once more the missing ingredient continues to be the lack of design thinking. Incumbents implement digitization that fails to address customer and employee needs.
Phase 4) Complete Re-imagination
Re-imagination represents the development of entirely new models. In this phase, disruptors that have innovated along the edges of a process have entirely defined new models. For example, PayPal innovated the person-to-person and person-to-business payments experience. However, PayPal continued to move to other payments and financial services experiences, building a different model for small business banking. Other disruptors enter during this phase with entirely new models threatening to disrupt early disruptors and incumbents alike — such as the new wave of neo-banks entering the U.S. market.
“Think back to Blockbuster, which began offering streaming services in 2011. By then it was too late. “
For those incumbents in this phase who have not begun to learn from disruptors to transform, it could be too late. Think back to Blockbuster, which began offering streaming services in 2011.
By then it was too late. Financial service companies that survive and thrive are those that have adopted a strategy to implement design thinking, focus on customer journeys, and commit to redesigning their business models. A great example in banking is Radius Bank, formerly First Trade Union Bank. Their strategy focuses on re-inventing their model from a two-branch community bank to a digital-only fintech-enabled bank.
- Do Banking Execs Have It All Wrong With Innovation Labs?
- How PNC’s Fintech Innovation Lab is Accelerating Digital Transformation
- Tech-First Startup Bank Aims to Wipe Out Customer Pain Points
- This Virtual Bank Wants to Be The Engine Behind Fintech Brands
Traveling the Path to Transformation
Incumbent financial service firms have the opportunity to intelligently respond to the disruption afoot. As noted, financial institutions should update their strategy to focus on customer, design and reinvention.
“Financial institutions must develop the ability to distinguish between valid new approaches and distracting buzz.”
In a previous article I wrote for The Financial Brand, I identified the steps that bank or credit unions should take to address digital transformation. In six brief steps:
- Obtain full support for a transformation agenda from the executive team.
- Assign transformation to a high-level team member or team.
- Adopt “Jobs to be done” design principles within product management functions.
- Engage existing technology partners and industry disruptors.
- Develop transformation goals for all areas, including risk management.
- Build innovation into the culture of the organization.
There are a few caveats to consider:
Technology doesn’t equal appropriate re-invention. “Shiny New Object” syndrome challenges true innovation. For example, many companies have been implementing blockchain approaches when simple databases could have been the appropriate tools.
Not everybody that is out to disrupt your business really has a model or product that will disrupt it. Financial institutions must develop the ability to distinguish between valid new approaches and distracting buzz. In the late 00s, several mobile payments fintech firms, like Obopay, amounted to more buzz than disruption. While their technology and business models made sense, they offered experiences no better than existing payment models.
Financial institutions should adjust their standard metrics for success. ROI, for example, doesn’t capture whether a new experience for a customer is impactful and will disrupt a business model. Amazon’s disruptive model lost billions before it saw a positive net income in the late 00s.
Digital transformation in banking has gone through a few phases. Initially, financial institutions stood up mobile apps as a companion to their online banking. Soon after, online and mobile banking were combined into a single platform only differing by the capability of each device. Digital transformation moved from behind the login to other experiences such as new account opening, mobile payments, and website experiences. Digitization of back office processes followed.
As the industry moves to the next phase, we see application of digital technologies to all areas of banking and to all customer interactions even in-person experiences. Financial institutions should switch to a different way of thinking to participate and thrive in the disruption. Digital transformation is not a matter of technology but a redefinition of overall strategy with a focus on customer, design and new models.