Platformit — Part Three: Shaping View
A Quick recap.
Part one was about seeding an idea via the “Look” framework. Part two was about imagination; how to nurture the seeded idea via the thinking framework. In part III, the one that you are reading, we will explore the importance of having a shaping view that can germinate the nurtured idea.
The one-minute investment journey imagined in Part II requires the key players identified in Part I, to align their independent vision around a more comprehensive view. A view with a clear trajectory of how we envision the future of the Investment Banking Industry. All key players must pursue a far-reaching agenda. An agenda that is manifested around defining a whole new market by reconstructing the boundaries of the Industry from its grassroots. The first footsteps in having a shaping view, is to re-frame our mindsets at a granular level; How the investments process should look like?
In the coming paragraphs, we will see why banks, as well as the regulatory body, must embrace a new shaping view. I mentioned in Part I that I was fortunate to experience both sides of the coin (i.e., being a regulator and at a later stage a banker).
The coin’s value to appreciate in the eyes of its end users, i.e., investors. Both sides must work in harmonization. Please don’t be seduced by the fancy word “harmonization,” here. It does not stand for a light-touch regulatory approach.
So, allow me to open my heart a bit, you can consider the upcoming paragraphs a form of “Dear CEO” letter.
For the past decade, I witnessed how the industry got dragged into a brutal cycle of intensifying attention on short-term operational efficiency. Board of Directors, CEOs and CFOs are exhausted. At best they can show breakeven or modest quarterly results by squeezing a few percentages from operating expenses. They are competing on declining profit margins and spreading the remaining of their resources too thinly across the traditional competitive landscape. Their attention is fixated on introducing incremental structural changes (i.e., non-transformative changes). They are merely benchmarking performance and striving to beat competitors on quarterly or even annually time horizon. This industrial age’s mindsets blinded the industry to a wealth of uncharted potentials.
The dynamic forces behind investment opportunities are changing rapidly. Some of these forces are entirely beyond the control of the Investment Banks (e.g., wealth transfer) and others are within their control (e.g., innovative capital allocation). Let’s explore them.
Wealth Transfer
The demographics of wealth started to change, and it will keep changing drastically over the coming decade. Unfortunately, the Investment Banking Industry is not ready for such a change. Thinking that online banking will bridge the gap is dead wrong. Such incremental enhancement (i.e., speed, efficiency, etc.) are cosmetic in facing the challenges underlying beneath the shift in wealth demographics.
The Investment Banking Industry will be facing a new investors’ base. Unlike the older generation, who had respect and loyalty to the Industry, the new generation of investors who started inheriting the wealth from the older generation have a different set of demands and expectations.
This younger generation lacks any positive recollection toward the industry. They came at the age of horrific global financial crisis. They never experienced the essence of wealth maximization from investing with banks. No one can blame them for not viewing Investment Banks as their trusted financial ally.
This generation does not remember the pre-internet era; they depend entirely on the computing supremacy embedded in their smartphones. At best they might view banks as apps on their phones. This generation will not accept being left at the gate. They will not hand over their wealth to wealth managers as customarily were handed out by their parents. They crave for higher control and transparency.
The Investment Banking Industry is faced with a fundamental challenge of rethinking how they acquire, retain and develop investors. The Industry must embrace a unified view with a clear industry trajectory on investors acquisition process. A peace treaty must be signed within the Banking Industry regarding investors acquisition process. A non-competitive acquisition zone must be defined. In return, an innovative acquisition process must be re-envisioned. A Collaborative Acquisition Process. Instead of competing over investors, Investment Banks should collaboratively mobilize their capabilities towards this end. The industry must place investors at the center of the investment process.
Innovative Capital Allocation
This younger generation has a different aspiration for wealth maximization. They will not accept the industrial age’s rate of returns. Whereas in our region “ the GCC,” investment banks’ balance sheets tell a different story; Banks are still allocating capital based on an outdated mental model of risk & reward that is trapped with legacy investments. For example, if the leader of a bank (i.e., BOD & Executive Directors, etc.) repeats the famous old phrase “real estate may get sick, but it never dies.” You must look no further than the asset column on the balance sheet. Most probably the capital allocation will follow the mental model of the leaders of asset builders, who mainly believe that value resides in developing, owning & leasing hard assets. Is there any chance that Crypto Assets might be on the agenda of the next board meeting of such bank?
To re-enforce the above let us see what took place during 2017. The entire world has witnessed the birth of a new concept in raising funds (i.e., Initial Coin Offering) with only a “White Paper.” Some, have blamed investors for being ignorant, while others flagged what happened as another “Tulip Mania” which are set to be burst. It is questionable whether these are the only possible characterization of this concept. What if this is the early symptoms of the wealth transfer and the innovative capital allocation?
Since the financial crisis, Investment Banks struggled in this domain (i.e., Fundraising). Despite conducting expensive and comprehensive due diligence process, appointing international law firms, audit firms, consultants, tax advisors, etc. and then undergoing a lengthy process of obtaining regulatory approvals, they rarely get the job done. The question that arises is, why investors are willing to give their funds to Startups, FinTech, etc. with just a “white paper” while they are very reluctant to handover their wealth to the banking system?
Now let’s turn the focus on the regulator; they to must embrace a new shaping view. A five-inch-thick rulebook which was built over decades must be subject to comprehensive review. Some of the long-held regulatory beliefs placed a greater magnitude on risk mitigation and discounted the reward potential; such beliefs might have been reflected into a regulation at a point in time as a reaction to a specific economic turmoil. This is perfectly understood and much-needed practice. However, to revive a fading industry, the regulator must take the lead. To take such a stance, the regulators must stress test some of their regulatory requirements by embracing a broader perspective. A perspective that aims at striking a balance between a preventive regulatory ideology that is designed for times of high uncertainty, and a thriving regulatory ideology that promotes growth.
Such rebalancing can be achieved by constantly monitoring a Return on Regulation (“ROR”) ratio. A ratio that takes into accounts both ideologies whenever any new regulation is issued. Return on Regulation should not narrowly be viewed from risk mitigation's point of view. Return on Regulation should factor-in, the possibility of unlocking growth opportunities.
A decade of data (e.g., audited accounts since 2008, till this date) is enough of evidence that the current business models of Investment Banks are not capable of delivering the desired value to the targeted audience. The Industry is highly fragmented; every Bank is venturing on its compass. They do not gravitate toward a higher objective. How can such industry be entrusted towards wealth maximization? If they are not taking an active part in solving this issue, maybe, and I am just saying maybe it is the right time for the regulator to push banks to embrace new models. Let it be via a stick or a carrot. I prefer a healthy snack.
The good news is that we only need to look around us. All industries in the past decade that got disrupted share one common characteristic. The force of Platform Business Model has disrupted them. Let us examine the below famous and publicly used example.
Three emerging themes can be extracted. First, all these companies applied the platform business model. Second, their ecosystem provided them with the needed resources. Third, the fact that value creation resides outside our conventional domains. Value creation resides in the set of rich experiences enabled by a vibrant and collaborative ecosystem.
The platform business model can effectively and efficiently harness the explosive potentials yielded from the technological innovation as well as aligning the interests of a wide range of fragmented individuals and businesses, at the same time it can collaboratively gravitate unlimited resources.
The platform business model will enable Investment Banks to change their model from merely taking “upfront” margin on initial investments, to a model that would allow banks to charge based on wide range of value creation along with enriching investors’ overall experiences.
Dear CEO, please ask your secretary to examine the Board of Directors minutes of meeting for the past three years. Let her search for keywords such as Amazon, Google, Apple, PayPal, etc. as well as “FinTech.” If you cannot find such keywords in your board’s discussions, then, I unhappily must confront you with the truth; either you are in the wrong place, or they are in the wrong place. Your competitors are not only the banks across the street, not anymore.
So, we need to embrace such a business model. But as discussed in part II of this story-telling white paper, we are aiming very high. Our idea is to “Platformize” this fragmented industry (i.e., Investment Banking Industry), by attacking one of its conventional building blocks, as we envisioned in part II; the Channel building block.
In simple terminology, the “Platformization” of the Channel building block means that the banking industry will use a unified channel to reach their investors to deliver their value propositions. At the same time, investors will be enjoying a unified window/interface to invest. The rest of this story-telling white paper will try to unpack this keyword “Platformize.”
Currently, I am working on part IV. I am feeling sleepy a bit. A few claps might make me awake to complete the below canvas. Starting from Part IV onward, the hard work will commence. No more theories.
See you very soon in Part IV…..
You are most welcome to connect via https://twitter.com/KhalidiAlmadani or https://www.linkedin.com/in/khalid-al-madani-2009a1160/
