Bankers have used a number of strategies to gain competitive advantage the chief weapons being localization and scale of operations. Do you know that in the US of the 7,000 odd banks only 1.5 percent of the players command control over 75 percent of the deposits and 81 percent of the loans? GDPR and PSD2 are all set to transform the banking industry by empowering the customer with multi-dimensional power over their personal data in 2018.
The future of banks and their success is to reply to the regulatory and technological disruptions through a strategy aimed at value-added relationships with fintech enterprises, e-commerce platforms, and companies like Amazon, Google, Facebook and more. This will ensure they still get multivariate data for their systems to carry out their functions while they offer their clientele a more holistic improved experience since the regulations will check the growth of banks. The capital market course shows that the well-run and capitalized new-age midsize and small banks are among the survivors in the race for survival and staying competitive.
Will the mere strategies of being local and scale of operation in cashing in on local markets be sufficient for banks to survive? Let’s explore why it’s different now.
The Commodity trap:
The same basic model of banking has survived for centuries now. Banking had become an essential service that had no real threat of substitution, till it was at disrupt just 5 to 10 years ago when tablets, smartphones, broadband connectivity and other concepts of AI, data analytics and ML slowly and surreptitiously crept into our lives. The banking disruption in banking is only just beginning and it appears to have fallen into a commodity trap.
The essential features of a commodity trap as defined in the book by Beating the Commodity Trap authored by Richard D’Aveni and applicable to the capital market course states that the concept applies where,
- Business insights and process knowledge are distributed widely as in a bank with many branches.
- The moving of products from the manufacturer to producers occurs with very low costs as in the banking services and charging of high fees for sub-par customer service.
- The lifecycle of product s is short before a newer version replaces it.
The Collaborative Advantage:
The banking industry is burdened by regulations and compliance measures that focus on mitigating and avoiding risks. Established enterprises prefer to protect their territories of customer’s rather than collaborate and better the customer’s journey. And the time has come for the risk-averse banking sector to open its doors to collaborations with vendors, customers, and even other banks to stay afloat and make a bid to increase their customer bases. Managing the past results and protecting their revenues will lead nowhere if the focus on future outcomes is overlooked.
The regulators have a point in reinforcing compliance and this is especially good in the areas of credit underwriting and capital management. But, risks will have to be taken in small doses of improving customer experiences, innovating with new products customized on needs of clients, and bringing in new on par services like the leading ASIPs and PSIPs to counter the falling into the commodity trap.
It’s Better Together
Innovation in the banking sector should move towards more collaboration, beyond a single business line, and should include a more brainstorming capital market course for new ideas inside the bank. Events from the likes of Finovate, Bank Innovation, Innotribe, and NextBank prove the smaller firms globally have no legacy systems or models to protect and are hence more innovatively involved in newer products and services. The National Science Foundation’s Business Research and Development Survey show that large firms (with more than 25,000 employees) spent less than 40 percent in R and D which is down by 30 percent for the period 2001-2008.
The Bank Innovators Council is akin to the “FinTech” incubators and even when they do not have the same forums its good to go with an old African proverb that states when you want to go quickly you walk alone and fast. But if you need to go far buttressing the point that innovation badly needs the banks to introduce idea connectors, network enablers and such measures on a war footing.
While innovation may be frightful to risk-averse banks it has the potential to lead to effective collaborations, generate revenues and better customer service and interactions. If you would like to learn all about the remedial measures being taken up by banks it is time to do a capital market course at Imarticus Learning where the future of emerging technologies is well-taught and packaged with career-ready skills.