Stuck in the Middle

Are Banks and Insurance Companies Really Damned If They Do and Damned If They Don’t? Co-Written by Mick Emmett

“Nothing will ever be attempted, if all possible objections must be first overcome.” — Samuel Johnson

When most of us think of risk taking, images of men and women climbing Mt. Everest or jumping out of airplanes are pretty standard visuals. If you switch the focus to business, it won’t be long until Apple or Amazon pops up. And bringing up the bottom? Banks and insurance companies, especially the big ones. Because once you get down to the community bank and credit union level things get dicey for the future. In fact, a recent FIS survey showed that community banks and credit unions are basically dying along with their aging clientele while, simultaneously, Millennials opt for big banks and digital financial service providers.

The same goes for customer focus. Every bank and insurance company says they’re focused on customers (OK, that’s pretty much every company in every industry) but as a customer of one or more of these institutions, can you honestly say that has been your experience? Some of the time — sure. But most or all of the time? Especially with digital applications? OK, that’s enough with the questions. You get the drift.

Two recent personal experiences basically generated this article. These thoughts have been simmering for a while just looking for a little kindling to fire them up. And for those of you who have experience using a bank for business purposes and/or working for a large financial institution, these examples will resonate pretty vibrantly, we’re willing to venture.

Real-Life Scene 1: Business banking customer walks into the local Bank of America. The purpose? Wire some money to Europe. Seems like no big deal. BofA must process thousands of these every day. Probably same day or next day processing, one would think.

The result: $50 to send the wire, a bunch of paperwork to complete, and 2–3 business days worth of waiting. In 2017. Something about SWIFT codes (aka a 40+ year-old process), legacy systems and other things.

Real-Life Scene 2: Running an innovation lab for a global insurance company. In the spirit of innovating, the project was related to blockchain and solved a “real” problem that company employees dealt with every day while utilizing an antiquated process on a legacy system. The deliverable also would have saved approximately half a million dollars annually.

The result: Was told by the company’s board that if the project didn’t sell insurance in the next six months then, “We don’t know what to do with this.”

So, there’s that.

DNA and Quarterly Returns

OK, it’s easy to beat up on banks and insurance companies. And kind of fun, too. But we’re aiming higher than that here. We want you — the reader — to understand why most of them are so risk averse and customer sort-of-maybe-not-always-focused. And we want to give you a look at where Realm Labs sees things going.

For starters, we’re certainly not saying that ALL banks and insurance companies are risk-avoiding, customer-shirking organizations. In fact, we’ve written previously about JP Morgan Chase and others delving into blockchain because of the platform’s immense potential. Then there’s BBVA, where they’re using blockchain to significantly speed up international money transfers. And one of us even worked for global banking behemoth Credit Suisse — who recently announced news about a blockchain-based, syndicated loan product that could be ready as early as next year. Those are just a couple examples.

However (you knew there was a “However” coming)…risk-taking and truly customer-focused banks and insurers are the exception, not the the rule. At least in our experience.

Think about a company that works backward from the customer, as some smart people like to say. That is, they start with the customer’s point of view, and execute from there. As in: Every. Little. Step. When you think of this approach do you think of your bank? Or your insurance company? Right. More likely, you’re thinking about Amazon or another customer-savvy company. Though if you are thinking in the financial space, there’s a good chance it’s a FinTech company; they tend to be smaller, more agile, and built on ideas that financial institutions are slow to embrace. Oh — and these companies are usually not protected by regulations that make it purposefully difficult to do financial business if you’re not a chartered bank or insurance company.

Then there’s risk. We’re not talking here about investment risk. There are many television networks and seemingly millions of websites devoted to this topic. Rather, we mean business risk: like placing bets on new technologies and platforms to grow a business years down the road. Being OK with some failure because that’s just part of the process. That kind of risk.

Well, if you’re reading this article then you know that Risk with a capital “R” just isn’t in the DNA of the vast majority of banks and insurance companies. It’s not part of their culture. That’s not surprising given that they’ve had a near-monopoly on financial stewardship since…a really long time ago. And then there are quarterly returns.

Again, it’s not surprising that organizations beholden to quarterly returns — like banks and insurance companies — aren’t pushing their innovation chips to the center of the table. A big reason for this is that investors and shareholders don’t like things that are new, difficult to understand (not that blockchain, to use one example, is actually that hard to understand) and take a long time to manifest in returns.

Even having an innovation lab (like our example from earlier) is no guarantee that actual, you know, “innovation,” is being greenlighted. When shareholders are looking over your company’s shoulder every single quarter and expecting returns, then it’s hard to say, “Hey, we’re investing time and resource into a project that employs a cutting-edge technology and could pay huge returns in five years! Or maybe ten!” Then again, no one ever said being a multi-billion dollar global financial institution is easy.

No One Wants to Plant an Olive Tree

Back in the late 90s at a small investment management and venture capital firm in Boston, one of us was told by a Senior Vice President that the sales process was too short-sighted: “You want to plant the seeds in the Spring, and then haaaahvest them in the Fall,” he was fond of saying. We were all trying to beat the next person’s sales numbers for the week — never mind next quarter. That led to pushing way too hard for the likes of most clients, and ultimately backfired over the long term. If only his thick Boston-accented advice had been followed…

All kidding aside, the point resonates because it’s true. Plant some blockchain or other digital innovation seeds now (like the examples above), and harvest the profits years from now when your competitors are doing their late-to-the-game-again act.

Yeah, we know. It sure SOUNDS easy. But let’s be real here: banks and insurers are sort of damned if they do / damned if they don’t. Bet big on blockchain and then have it not pay off for years (if at all), and you’re out of business before there’s even a chance to do any reward-reaping. Keep on doing what you’re doing for the foreseeable future and watch while more forward-thinking competitors and innovative FinTech companies eat your lunch right in front of you. We get it. It’s hard. Who wouldn’t want some tasty olives next month, or next quarter, as opposed to 5+ years from now. It’s so much easier to just crank out some corn or wheat every few months, just like always.

Where Is This All Leading?

The thinking here at Realm Labs is:

1. Despite all evidence and trends to the contrary, the internal changes necessary for most banks and insurers to decrease their risk aversion while simultaneously increasing their customer focus is still a long ways off. Executives who “get” the importance of ramping up speed and agility with regard to innovation will be thwarted by their stay-the-course colleagues. There will be exceptions like BBVA, but they won’t be in the majority any time soon. To go back to our farming analogy, instead of rotating their crops to replenish the soil and grow new and different crops — as any farmer would tell you is necessary — the big banks and insurers are just going to keep working their same old infrastructure and legacy systems as long as they can. Sure, there will be some new stuff, but not at the pace or level needed to stay ahead of the game. What they’re missing is the fact that one of these years the usually reliable corn and wheat crops won’t grow because the soil is depleted. You’ve got to plan ahead to keep on growing!
2. The large financial institutions will try to rig future innovations in their favor. No, we’re not predicting mass illegal activity and fraud. Rather, the legal means that these organizations use to rig…um, we mean…get their way — lobbying, regulatory favor, acquisitions and industry consolidation, etc. — will ramp up.
3. The big players who put out actual working digital products will have the prototypical first mover advantage, but on steroids compared to most tech first movers given the amount of money at stake. Think about it: if Credit Suisse has a good experience with their blockchain-based syndicated loans product, they are in a great position. And maybe JP Morgan Chase will as well if their private blockchain experiment scales among consumers and businesses. Whatever the product is, it’s got to be in the hands — or, more accurately, the smartphones — of paying customers.
4. FinTech innovators have a window of opportunity right now to get out ahead of the big institutions. Hell, many of them already are. With blockchain in particular, the chances are a lot more favorable in Europe and Asia (as we covered here) because the regulatory environments are much more open than in the US, but opportunity only knocks once, as they say.
5. Just like a corn and wheat farmer who realizes late in the game that the soil needs replenishing, your personal bank(s) and insurer(s) will be dragged along the innovation trail because they will be forced to by competitors and innovators. Not kicking and screaming, but not far from that. There will be major upgrades in digital services and even the way you are treated. New platforms and services will be instituted that you won’t believe are coming from your bank and insurer. And this is all within the next five years. Ten years from now…oh boy. That’s a whole other, quantum computing-and-other-borderline-science-fiction-filled article.
6. So to answer the question we posed at the top, “Are Banks and Insurance Companies Really Damned If They Do and Damned If They Don’t?” Yes. Yes they are. But it’s a hell of a lot better to be in the “Do” camp than the “Don’t” camp.

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DISCLOSURE: We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for it. Views shared here are our own and cannot, under any circumstances, be interpreted as an official account of any companies we are associated with — currently or in the past.