Innovate or Die — Banking Industry Under Pressure
By Marko Vidrih on The Capital
The banking industry has been under pressure for years. Traditional “believes” prevent changes, and a look at the “Porter curve” gives a hint of the worst.
Michael E. Porter was able to demonstrate an empirical connection between strategy and market success in the 1970s. The “Porter curve” named after him says a lot about today’s problem areas that banks are currently dealing with:
- Companies with a very small market share and companies with a very large market share can have significantly high profitability.
- The competitors with mediocre market shares “sit between the chairs” (Stuck in the Middle). They are too small to compete with the market leaders and too large to take advantage of the specialists’ niche economies.
Applied to today’s banking landscape: Online banks where the scalability is theoretically infinite with simultaneous transaction costs that — the more market share the company has — tend to survive. As well as “boutiques” that are loved for their great quality of advice and individual investment services. The rest, the middle, dies.
Disruptive technologies
The downfall is always accompanied by disruptive technological innovations. In this case, it is the “online banking” technology that did not exist 20 years ago. A physical bank presence with expensive branches and expensive employees is simply no longer necessary for my daily banking business.
It repeats what other industries have already successfully demonstrated:
Think of the music industry, which preferred to deal with lawsuits against Napster and Co. for years instead of changing its business model.
Or to Kodak, an extremely successful company that invented digital photography but preferred to leave it in the drawer.
It was no different for Nokia, surprised by the very first iPhone presentation in Silicon Valley.
Reasons for the decline
There are essentially only two dominant paths to business success in Western Europe (the watchful eye of corporate management before market changes are always required):
- Cost reduction, for example, by moving to low-cost countries with low wages and streamlining overhead costs as well
- Innovation, in products/services, processes and business models.
And it doesn’t always have to be disruptive. Incremental innovation is much less risky, economically more assessable (net present value, ROI, etc.) and easier to sell to existing customers.
But even before you innovate, it should be the primary task of company leaders to recognize and question Orthodoxy and to counter market changes prematurely. Instead of burning large sums of advertising money in marketing and trying to maintain the status quo, to lose yourself in lawsuits against the emerging competition (example Uber / Taxi) or to glorify the past (analog photography).
It is important to anticipate and tackle upcoming changes instead of handing over the inevitable anyway to a refurbisher and unsuccessfully relinquishing it.
In today’s banking world, this train may have already left. The path of the industry seems to be mapped out, bank extinction is inevitable. The middle will be gone in 10 years at the latest, there will be niche specialists with high advisory quality, and virtual mass banks.
Author: Marko Vidrih
Featured image credit: Pixabay
