Banks are extinct … oh no, they’re not

Curating the daily news yesterday, I was surprised to see an article published by Wharton Business School that irritated me writes Chris Skinner in his finanser blog…

Wharton Business School is one of America’s Ivy League Universities up there with Yale and Harvard.  It should be publishing informed insights but this post was more of a headline grabber from Scott A. Snyder, chief innovation officer at venture capitalist firm Safeguard Scientifics and a senior fellow at Wharton’s Mack Institute for Innovation Management.

Scott’s thesis is as follows:

[Bank] executives believe digital disruption will drive 40% of companies out of the top 10 in the next five years. As Antony Jenkins, former CEO of Barclays, aptly put it in a 2015 speech: “Over the next 10 years, we will see a number of very significant disruptions in financial services, let’s call them Uber moments”  …

Some analysts believe Fintech disruption could take as much as 10% to 40% of bank revenue and eliminate 1.7 million banking jobs by 2025.  Couple this with increasing regulation, historically low interest rates, and the fact that most (73%) millennials would prefer to get their banking services from a non-financial services company, and banks seem to be headed the way of Blockbuster.

The article continues …

Despite being one of the top sectors for technology investment over the last two decades, including the creation of major products such as ATMs, debit cards, credit scoring and check scan and deposit, banks are lagging other industries on digital transformation such as those in retail, transportation and even healthcare.

The good news is that banks are still very well-positioned to win with the new wave of empowered digital customers given their rich historic data and balance of physical and digital touchpoints. But it will take a strong commitment to a customer-centric vision, a two-speed business model and agile infrastructure to enable “Big I” innovation, and a data-driven approach to delivering personalized, relevant banking experiences.

For bank executives, it’s time to decide if you want to be Netflix or Blockbuster.  Your customers won’t wait forever

Now there is some decent insight in the article, but the reason it irritated me is that it follows so many articles over the past few years that claim banks will die, just like Nokia, Kodak, Blockbuster and more.

They won’t.



One widespread premise in business is that companies compete by owning the assets that matter most to their strategy. Competitive advantage, according to this belief, comes from owning valuable assets and resources, which tend to be scarce and utilized over long time periods, as well as firm and location specific. Thus ownership (rather than, say, leasing) frequently appears to be the best way to ensure exclusive access.

But what if assets are used infrequently or inconsistently? In these cases, digital technology, by increasing transparency and reducing search and transaction costs, is enabling new and better value-creating models of collaborative consumption. As a result, ownership may become an inferior way to access key assets, increasingly replaced by flexible win-win commercial arrangements with partners. On the consumer side, the examples include Peerby, an app that allows neighbors to share tools and other household items that would otherwise sit idle in garages, and Uber, which allows any driver with a qualified vehicle to provide taxi service. House- and room-sharing programs apply the same thinking to underused real estate. In every case, consumers opt to access rather than own these assets.

Big companies are following suit—for example, by reducing sourcing costs through “cradle-to-cradle” approaches that collect and repurpose what they previously considered waste.44. See Hanh Nguyen, Martin Stuchtey, and Markus Zils, “Remaking the industrial economy,” McKinsey Quarterly, February 2014. Instead of buying (and thus owning) the raw materials needed for products, companies access these materials in previously sold products and repurpose them. Similarly, the global sourcing firm Li & Fung limits risk, increases efficiency, and enhances flexibility by using broad networks focused on access to (rather than majority ownership of) suppliers. The software maker Adobe Systems no longer licenses new versions of its products to customers through one-time sales; instead it provides access to them through monthly subscriptions. (For more on Adobe’s transition to its new business model, see “Reborn in the cloud.”)

The move from ownership to access mirrors a more broadly evolving societal mind-set toward open-source models. For example, in 2014 the electric-vehicle company Tesla made all of its intellectual-property patents freely available in an effort to encourage the manufacture of clean vehicles.

These possibilities penetrate deeply into traditional industries. Consider how a big European maritime port embarked on a large-scale land-management program. The industry belief reframed by the port was that large liquid-bulk-load ships valued private access to storage tanks. The underlying assumption was that shipping companies wanted the ability to deliver their bulk loads anytime and therefore required entry to their tanks at close range.

In response to this perceived need, most maritime ports have developed jetties to which they provide individual shipping companies private access—essentially the equivalent of “ownership.” As a result of each company’s varying schedules and traffic, many jetties ended up being mostly unused, but others weren’t sufficient for peak times. Seeing this problem, the port’s management reframed the industry belief by asking if customers cared more about access on demand than exclusivity. The port now intends to help all customers use any jetty to access any fuel tank, by developing a common-carrier pipe connecting them. Just as Peerby in effect shifts a neighborhood’s “business model” by increasing the utilization of underused assets, so the maritime port is making more of underutilized jetties and storage tanks by shifting the business model so that shipping companies pay for access to jetties and storage rather than the exclusive use of them. In the future, this model may evolve into a dynamic multiuser slot-booking system that matches the real-time availability of jetties with demand for liquid-bulk-carrier ships.

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Innovating in costs: From low cost to no cost

According to historian Peter Watson, humans have been trading goods and services for more than 150,000 years. During that time, we’ve always believed that to sell more of an offering you had to produce more of it. The underlying notion was that a single unit of a given product or service could be used only by one customer at a time. Any increase in production therefore required a commensurate increase in labor, resources, and equipment. While volume advantages did translate into lower average costs per unit, economies of scale could never get the average cost down to zero.

Digitization is reframing this ancient belief in powerfully disruptive ways. In fact, of all the reframes discussed here, this one has had the most devastating effect, since it can destroy entire industries. What’s driving prices to zero is the reframe that multiple customers can simultaneously use digital goods, which can be replicated at zero marginal cost. Massive open online courses, for example, provide a nearly zero-marginal-cost education.

Consider the implications for telecommunications, where the dominant belief has been that value is best captured through economies of scale—the more telephone minutes sold, the lower the unit cost. As a result, the larger the mobile-phone plan, the lower the cost per minute. One telecommunications company is upending this belief by making customers an “all you can eat” offer. It realized that unlimited use of voice and texting units comes at no additional cost to itself, so it can compete against emerging voice-over-IP competitors. As a result, the telco started to offer unlimited texting and voice plans by focusing its economic model on making money from data usage and from its investments in a huge data network and storage capacity. Such plans eliminate confusion among customers and increase their satisfaction. As soon as the network has reached its planned return on investment, incremental data service will also be free.


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