In my previous article I discussed how traditional banks are acquiring deep intelligence and insight of disruptive technologies and new business models through strategic investment in innovative systems. In this article I will discuss how unconventional collaboration with competitors, customers and suppliers can create new value for banks in the quest to sustain competitive advantage.
Going it alone in the new era of change is not an option. With the perennial need to cut costs whilst focusing on building more intimate client relationships and winning the new strategic battlegrounds of digital interfaces and beneficial intelligence, traditional banks need to find friends to help them.
Collaboration per se is not new but the why, whom and how has changed judging by the sheer number of examples with:
Utilities and Co-opetition – Working with competitors
Connected creation and Hackathons – Working with suppliers and other third parties
Crowdsourcing – Working with customers and future customers
Utilities - but done better!
The benefits of pooling resources, otherwise known as commercial cooperatives or shared models, are well understood so why not look more closely? In fact, more than 40 market utilities have been founded in the financial-services industry over recent years and not surprisingly recent research shows that the interest and appetite is increasing.
The ideal elements to co-opt are things that all banks have to do, and do themselves but that have little competitive value. Sure, there are obstacles and building a culture of trust is fundamental, particularly when sharing data. But as these are not new concepts these are well understood too.
The key to drive additional value is for the utility to act more like a venture capitalist. Governance and ownership, yes, but not micromanagement. A successful utility will also invent and innovate and be rewarded for success.
And as food for thought, in the new era of change, how soon could utilities extend fully within jurisdictions under a single regulator? Equiniti’s white paper discusses the real possibility of this for KYC utilities.
Co-opetition – allies for a greater cause!
The shift from competition to co-opetition is becoming more important.
For example, the much heralded transformational potential of Blockchain has seen the emergence of the Blockchain Consortium R3. The 75 strong financial institution consortium is collectively evaluating this technology with intellectual property shared by all participants. Seven banks have recently agreed to work together on a Blockchain project to develop a new product called Digital Trade Chain (DTC) aimed at global trade for SMEs.
Barclays and FinTech start-up Wave are reported to have become the first organisations to complete a global trade transaction using Blockchain technology.
In addition, the rise of FinTechs makes for an interesting marriage, bringing innovation at speed and with the opportunity to help target the new customer segments including millennials and the digitally savvy. The partnership works because FinTech lack the scale distribution and infrastructure to go it alone.
RBS recently announced a partnership with FinTech Cloud accounting firm FreeAgent, making available their accounting software to small business customers and linking with the business’ bank accounts for integrated services.
Connected creation – plugging and playing!
Connected collaboration is a well-established premise in many tech companies today. The key enablers are Application Programming Interfaces (APIs), universal adaptors that allow third party applications to link and work seamlessly.
Apple, for example, provides the platform, companies and individuals provide the applications.
Uber actively encouraged developers to adopt its open APIs and as a result now offers much more than a taxi ride. Customers can order a cab from the Google Maps app, listen to their own music via Spotify and automatically sync up their receipts to Expensify.
Mobile-centric banks like Monzo are built on a similar model. The strategy is to become a FinTech hub and deliver an extended product set by connecting with other companies allowing them to compete with the established banks.
This model also chimes to what seems an inevitable drive to open banking by the arrival of the new banking regulation PSD2 in 2018. Banks will have to make data available through APIs to any third party with the necessary regulatory approval. This is an extraordinarily hot topic with much still to be clarified that could tip the balance in favour of FinTechs or established banks. The creation in the UK of an open banking framework will go some way towards this.
What is clear is that a key challenge for the established banks is moving into a collaborative model where banks connect parts of their ecosystem with the preferred services that customers are already using.
According to Accenture, those banks embracing open banking could see an increase of 20% in profit.
Hackathons – innovation sprinting!
These short intense events designed to accelerate change and uncover new ideas are a well-respected tool within many tech organisations. Literally hacking away at new ideas typically over 24-48 hours, Apple and Facebook have both benefitted from ground breaking innovations.
It’s also increasingly a tool of choice for the established banks. Barclays recently run what it claims to be the largest ever hackathon in financial services.
A global network of developers, start-ups and FinTechs took part along with technology partners including Google, Twitter, Amazon and Microsoft.
Barclays also made available APIs for the first time, a step in the direction of ‘open banking’ by sharing data and technology to drive innovation.
It’s not clear yet whether the established banks have achieved any real successes like the tech companies have seen but it will no doubt be bringing new talent and fresh approaches and new blood to software development.
Crowdsourcing – power to the crowd!
Crowdsourcing is seen as a really useful and relatively low cost way for gathering ideas, innovations, and information, typically using the internet, giving access to a wide number of contributors.
Examples include giving the vote on content, ideas, links, etc. so the best rises to the top. One of the best known examples are the Wiki sites, where everyone has editing power and the ‘large crowd’ can verify, update and filter out inaccuracies.
According to the Harvard Business Review companies that make their customers partners and share in the value created are more profitable. Apple, Lending Club, and AirBnB have customer sourced collaboration central to their business models and it’s no coincidence that they are also among the most innovative firms.
This trend is unlikely to disappear soon as the next billion people become more aware and get digitally connected over the next five years. So learning about the crowd economy is key for Banks.
You will see that embracing collaboration is a key and successful strategy for retail and technology based companies. Banks too are adapting and, with the landscape set to shift further, will increase the need and scope of collaboration.
In my next and final article in this series I will bring the discussion to a fitting close by focusing on people. Customer and employee advocacy and trust are cornerstones in the digital age. Married with the right organisational culture, will drive successful long term profitable customer relationships for the established banks - something any challenger would long for.