Start-Ups vs Incumbents

If I look at how the fintech start-ups are tackling the incumbents in the retail banking industry, there are clear patterns emerging and it’s raising a specific question…

Will start-ups understand distribution before incumbents can Innovate?

This is not an exclusive distribution vs innovation debate, but it is a race between the two. The incumbents are faced with a more complex financial problem due to the start-ups approach to the retail banking industry, they’re identifying specific products or experiences which they can do better and cheaper than the incumbent (see fig 1). This is causing concern for the incumbent banks. They are continuing to try to be everything to everyone, still focusing on up and cross sell whilst trying to understand how to transform their culture.

Fig 1. How the retail banking industry is being broken up by start-ups focusing on specific products and services.

The incumbent banks are constantly talking about the need to adapt and innovate, not only through the creation of an agile culture with modern ways of working, but also the ability to foster innovation and experiment.

‘Some leaders understand it, but there are thousands & thousands of people under them that are either happy with the status quo, or they simply don’t get it’
-Lee Sankey, Former Group Design Director, Barclays

There are a variety of challenges ahead for the incumbents. The key ingredient of a start-up is the culture and innovation. The incumbents need to radically adapt their working cultures. This alone is a huge challenge, mainly caused by the people leading the corporate banks. Rather than exploring who is doing this well and hiring these people or native leaders to transform their culture, they follow the standard corporate approach and spend millions hiring large consultancy firms who create the same stereotypical organisational designs and frameworks at a premium, to maximise their profits, and worst still, doing it in an agile way and selling these consultancy services at waterfall costs.

Innovation should be at the core of the cultural changes, but you must get the culture right before innovation can follow otherwise there will always be friction.

That said, the number of challenges the start-up faces are similarly tough, though radically different. How will they scale distribution in a competitive landscape? More meaningfully, how will they maintain their strong culture as they grow? There always seems to pressure on start-ups to scale. Will this translate into them trying to become the ‘everything to everyone’ bank that the current incumbents are? Most start-ups will say they don’t harbour these ambitions, but there are no safeguards, especially when it comes to human nature. To quote the film limitless, “We’re wired to overreach, look at history, all the countries that have ever ruled the world — Portugal, with its massive navy… All they’ve got now is tourism. And the British? Now they’re just sitting in their little island, fussing over their suits. No one’s stopping and thinking, ‘Hey, we’re doing pretty well. We got France, we got Poland, we got a big Swiss bank account… You know what? Let’s not invade Russia in the winter, let’s go home, let’s pop a beer and let’s live off the interest.”

There are interesting times ahead as the start-ups and incumbents try to solve these different problems. These are not exclusive to the banking sector, they transcend most industries. The question is who will win in the race of distribution vs innovation?

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