When the predominant channel of delivering services transitioned from desktop/web to mobile/app, e-banking became ‘digital’ banking. Today, ‘digital’ is seen as a panacea in Financial Services, yet distinct from the core business. Digital is also an amorphous, undefined target for incumbents because it is defined with reference to (a) current technology paradigm and (b) UX/CX which are all encompassing terms and too broad in reality.
Further, while we use the term “Transformation” in the context of digital, in reality, incumbents’ face the innovators’ dilemma and approach “digital” incrementally and defensively. As a result, throughout the many cycles of technology, history has rather few examples of successful #DigitalTransformation in any industry.
We explore what digital could mean in the context of competitive strategy. We look at how Bob Iger, the CEO of Disney managed technology led disruption successfully with offense rather than defense. Based on Disney’s experience, we examine whether the path to “digital transformation” is not in incrementalism and tinkering from the periphery inwards, but in using the entire corporate strategy toolkit to decisively reinvent an incumbent from its core outwards.
Software Will Eat Banking, Guaranteed
As Mark Andressen predicted, Software has been eating the world for a decade, one industry after the other. Thanks to the utility nature of certain financial institutions, the consequent regulatory moat strengthened by post financial crisis regulation, and the relatively unattractive margins in banking, software has been very slow to “eat Banking”. While, Banking is only one of the industries that’s protected from software led disruption, it certainly is one of the most protected ones.
Being unattractive in terms of ROE and regulation can be a blessing for incumbents in that it provides a longer time window for incumbents to manage disruption. Time, however can also lull incumbents into a dangerous sense of false safety, exposing them to a jump off the cliff when the regulatory moat is suddenly taken off by social change. Further, it’s very brave for incumbent firms to assume that Silicon Valley firms won’t develop compliance, risk management, regulatory and policy engagement capabilities that are superior to what banks can deliver with legacy technology. So far signs are that big tech firms are learning fast, starting with the initial Libra debacle and Google’s sustained experience with the EU regulator.
Disruption and CEO Anxiety
Senior executives in Banking know that disruption has been coming at them from every direction for a decade now. Fintech startups, technology companies, e-commerce companies, all are targeting a share of the FS customer wallet. They are lean, unencumbered, have low costs of entry and exit and even the many that fail and abandon the attack still take a nibble or a bite before they disappear. This has led to Financial Institutions creating “innovation” and “digital” programs on the periphery of Banks, often as greenfield initiatives that are distinct and separate from the Banks’ core business operations.
Further, we are currently in a zone of uncertainty where neobanks as a category are being assigned very high valuations in private markets but are yet to definitively offer sticky offerings that generate significant profits. Many neobanks are arguably not full service banks in that their lending operations are rather limited if any. This has led to Banks responding to the threat slowly and in a somewhat half hearted manner. However, this landscape has shifted decisively towards the end of the decade as Silicon Valley firms and big tech are making increasingly incisive moves into the traditionally protected financial services territory. For banks, this is a far more worrying threat than the threat posed by neobanks and mobile wallets because big tech firms have an extraordinary level of political muscle, cash reserves, technology expertise and ability to acquire compliance, policy engagement and risk management capabilities while ensuring much more efficient and automated operations. Banks on the other hands are clogged with technical debt and legacy operational practices which lead to most of the IT budget being spent on serving internal users rather than external customers i.e. in “keeping the lights on”.
The Digital Panacea
This broad awareness of the threat of disruption coupled with a general sense of comfort with the speed of disruption has led to financial institutions exploring “digital strategies” that are a footnote or margin entry in their overall corporate strategy. Above all, few if any banks are willing to expose their core operations to digital approaches and digital remains an increasing but peripheral activity assigned to recently created functions such as Chief Digital Officers, Chief Innovation Officers, Innovation Lab and Corporate Venturing. Many new approaches such as “Bank as a Platform” and “Bank as a Marketplace” have been explored by different banks but in an overwhelming majority of cases, this activity is treated as distinct and separate from core operations. Further, Banks are still playing defense rather than offense in that the overall mindset is to defend against the slow and low threat of disruption from fast growth fintech startups like Monzo and Revolut.
Unfortunately, digital remains a rather woolly and undefined concept. In popular fintech literature, digital is defined with respect to (a) The most recent technology paradigm e.g. Mobile/SAAS and (b) Broad, sweeping punchlines such as “Delivering consistent and frictionless omni channel UX and CX”, which in reality encompass customer’s experience of an entire business, and not just the new mobile banking app. Digital, while vague, is seen as an all encompassing magic potion that contains all the ingredient of guaranteed success in the face of relentless disruption. Most banks tend to approach digital transformation by hiring a few “digital consultants”, creating an innovation lab and exploring the marketplace to replicated what the other banks appear to be doing, which in general means creating a mobile app backed by a greenfield private cloud based banking service.
In general for most financial institutions, core operations, composition of the board, talent mix and culture remain unaffected by a defensive and peripheral approach to Digital Transformation.
The Pace of Disruption
Banks are remarkably robust organisations in that banks have survived cycles upon cycles of technology led disruption. In fintech parlance, digital is essentially seven letters for nirvana. Its when incumbents are done catching up with winning consumer applications built by silicon valley. Unfortunately for incumbents, the pace of technology change has accelerated so much that existing “periphery first” approaches to transformation are now too risky (see the hype cycles). Further, forced by consumer pressure and the post crisis discontent with Banking oligopolies, regulators are much more willing to consider new business models and are actively promoting competition in many jurisdictions such as in the UK. Moreover, unlike in the e-banking era and previous eras, payments, the entry point of most banking are now increasingly getting captured by “technology first” silicon valley firms and fintech firms.
In 2019, this has led to Andreessen Horowitz forecasting that financial services will become increasingly “embedded” in consumer experience of day to day e-commerce and other consumer services, and financial services will be provided by “financial services as infrastructure” business models such as Square and WeBank that will provide compliance, risk management, merchant endpoints, APIs, automated operations and other core capabilities that banks currently depend on to defend against fintech firms. This is a ripe field for Big Tech with global scale and sophisticated data science capabilities to enter and essentially undercut the core thesis of why a defensive or “follower” strategy might be adequate.
Consulting firms differ in their preferred approach to digital transformation. More recently newer firms have recommended taking a “greenfield approach” in that such an approach reduces the innovators dilemma. Unfortunately, such an approach only trades the challenge of data migration and internal resistance for the challenges of customer migration and brand alignment. When such digital initiatives from incumbents fail to deliver expected outcomes, the tendency among the new breed of “digital consulting firms” has tended to be to find a flaw in one of the myriad elements of digital strategy or execution by the incumbent. Such reasons can include technology, “the all encompassing UX”, people, leadership, culture… just about everything except karma, astrology and so on.
My argument is that it’s impossible to drive any kind of transformation without transforming the core business of an incumbent. This is because it’s the core business of a firm that sets the culture, pace and mindset of the rest of the organisation. This is exemplified by in the case of Disney by Robert Iger who notes “As Animation Goes, So Goes Disney”. Further, the task in front of a CEO and the board is not ‘Digital Add Ons’ but managing disruption and beating the competition in the battle for the customer. That shift in emphasis expands an incumbent’s toolkit from UX and CX to the entire strategy toolkit, and shifts emphasis from half hearted, poorly funded defense to decisive offense and focus. What incumbents have to do to survive is not a peripheral activity called digital but reinvention of an entire business to compete with the best technology first businesses that are going after their share of the customer wallet. This is particularly important in the fintech battlefield which looks more like the chaotic Zombie apocalypse than the well behaved American civil war.
Understanding the nature of the threat
Silicon Valley is like Jurassic Park. It’s a beautiful but violent place for business. Businesses are born in hundreds every week and die in hundreds the next week at different stages of their life. In this violent, darwinistic, evolutionary space, innovators try literally millions of mutations to current business and technology practices, tools and ideas. Just like Jurassic Park, it prefers giants. Facebook, Google, Amazon, Netflix, Microsoft — rising to the very top of the food chain through acquisition and integration is disproportionately rewarded in survival credits and margin expansion. On the other hand, if a firm can’t continuously scale, private capital markets find someone else who can, often by acquiring the firm — or their customers.
Looking from afar, protected industries, such as banking find it difficult to appreciate this relentless creative destruction, ignore the nature of relentless innovation, acquisition and integration, ignore survivorship bias and classify all of the business models that are working in Silicon Valley under one single word headline called DIGITAL. Digital becomes the catch all phrase for a bundle of technology, culture, practices, patterns… from the winning technology first businesses, except they are not all the same along these dimensions. Chasing “Digital” as a woolly all encompassing notion is a losing proposition because that means never being competitive with respect to fiercely inventive survivors of the Jurassic Park.
Then there is one little issue:
Silicon Valley Doesn’t Do Digital
There is no digital business. Google is not Amazon which is not Microsoft, which is not Airbnb which is not Apple… which is not Qualcomm! Let’s look at some examples at how apparently digital businesses were created.
- Amazon wasn’t creating a digital retailer. Amazon has simply been using whatever is the most current consumer useful technology to deliver a great retail experience and inventing technology along the way as needed. Amazon was digital when websites were digital and is digital when mobile apps are digital. It will be digital when voice or even thought is the primary channel of consumer interaction. Thats because of great engineering.
- Google wasn’t launching a digital advertising business. Google was doing 100x better search and then 1000x better ads.
- Facebook wasn’t launching a digital social network. Facebook hit upon 100x better social networking and kept building great technology and amazing design.
- Airbnb weren’t creating digital hotels. They were building airbnb.
- Uber wasn’t creating digital taxis, uber was doing cabs in a whole new way.
- Netflix wasn’t trying to create a digital movie theatre. Netflix was doing dvds, then movies, then an app, 100x better, taking advantage of each successive generation of technology.
This leads to a question — what if the way to do digital in banking and #fintech is to stop “making a bank more digital” and start working to deliver financial services to consumers 10x, 100x or 1000x or more better than anyone else using the same technology first approach that created Silicon Valley powerhouses?
Financial institutions can’t beat SiliconValley but they can join it.
Digital transformation, often practiced incrementally, often does not work. If we add a website to Walmart, Walmart doesn’t become an e-commerce company. If we add a chatbot on a Bank’s website, it doesn’t become an AI company. If we throw a mobile app into a legacy bank, the bank doesn’t become a digital bank. Transformation has to come from the core, the parts we are most scared to mess with and that’s what Robert Iger did. From Bob’s autobiography, “The Ride of a Lifetime” we can extract the following key steps into a different “Digital Transformation” playbook that squarely places the responsibility for Digital Transformation in the hands of the CEO and the board, and not a separate “Digital” function.
- Bob recognized that disruption was inevitable and imminent. In Bob’s Autobiography, Page 197 he writes about how decided to reinvent Disney in the face of imminent Disruption — which meant changing almost EVERYTHING. With Big Tech going after FS dollars, I believe the threat has magnified 10x and an aggressive rather than defensive approach is the only path to safety for retail Banks.
- Bob started from the core — Bob started by changing Disney from its most core business i.e Disney Animation. Bob did not acquire Pixar to run it as a sideshow. Bob specifically configured Disney such that Pixar could lead, and teach Disney Animation, the core of the company, how animation can be done 10x, even 100x better.
- Bob hired a consultant on the board. His name was Steve Jobs — when Bob paid the premium for Pixar, he brought on someone on the board who knew what no one else at Disney did ie how to build a technology first business. In fact, Bob’s humility and approach towards Steve was a huge change from his predecessor and inspired by the recognition that Bob himself was unprepared to compete in a technology first environment.
4. Bob didn’t see reinvention of Disney as a separate digital or innovation function to be done by a Chief Digital Officer. Bob saw it as the number one priority for the CEO and used every single lever of corporate strategy at his disposal. Restructuring, market entry and exit, culture change, corporate finance, M&A, partnerships, corporate portfolio management, … literally, almost everything.
5. Bob built a coalition at the board level and used his proximity to Silicon Valley to drive urgency through the board and executive ranks.
14 years, 4 acquisitions, 1 Bob Iger: How Disney's CEO revitalized an iconic American brand
Disney's domination of the global box office in 2019 has been nearly 20 years in the making, under the direction of Bob…
6. Bob made bold, decisive bets.
Bob knew people aren’t inspired by pessimism or half hearted things. When Bob moved, Bob moved big, like an entrepreneur would. The idea was to inspire the whole company for the new era, to make everyone part of a cause, the cause of reinventing a great American institution.
7. Bob let the new kids work. The kids knew way better.
The usual incumbent playbook is to acquire a disruptor and smother it with a soft pillow inside the new mansion. Bob’s playbook was to let the disruptors teach the whole family how to do things in a world that had already changed!
What’s truly incredible about Bob Iger’s playbook is his courage to make big, bold bets on cutting edge technology businesses and let the acquisitions e.g. Pixar (a) Run their own show with absolute freedom (b) Take over the whole legacy business over time e.g. Disney Animation.
8. Bob worked every lever to drive alignment, including incentives to reinvent culture…
Bob Iger Did It, Jamie Dimon Will Do it Too
Is it time to replace the buzzwords of buzzwords, #digital by two words — technology first? My thesis is that since the task ahead for incumbents is not changing existing operations to be “more digital” but “surviving in the face of extreme competition and rapid technology led disruption from technology firms”, the path to being a digital company is being a technology first company. Goldman Sachs understands this. JP Morgan does too.
For senior executives in Financial Services, this means turning off the tap on half hearted, peripheral experiments and mobile apps and making a trip to Disneyland to fire up their imagination like Buzz Lightyear. If Bob (read Buzz) can reinvent the whole of Disney, surely you can reinvent the bank…