How banks will compete in the future with one another!

Back in 1995 Michael Treacy and Fred Wiersema wrote a book called The Discipline of Market Leaders, and in it, they broke down the three critical strategic domains of any business– Customer Intimacy, Product Leadership, and Operational Excellence.

They argued that companies couldn’t really dominate in more than one. None of these are exactly optional, but their research suggested that companies should focus on truly mastering just one of the domains and partnering or subcontracting with others in the areas where they couldn’t dominate.

A few years later, John Hagel and Marc Singer from McKinsey & Company came to a similar conclusion in their Harvard Business Review piece Unbundling the Corporation. They even used very similar wording (Customer Relationship Management, Product Innovation, and Infrastructure Management) to describe the domains.

The chart below combines the two concepts to show just how similar they are (Treacy and Wiersema are in black ink).

Customer intimacy

They both suggest kind of a Strengths-based Leadership approach for companies– improve your weaknesses enough to prevent failure, but the focus on your strengths to achieve greatness.

Implications for financial services

So, what kind of business is banking?

Last week I attended the NYPAY Transactions for Tomorrow Unconference at Google’s NYC headquarters; where Brett King led a breakout session on– what else?– The future of banking and we got into this very discussion.

We talked about what these three paths might look like. Some banks may indeed stay in the infrastructure management business, and even double down on the strategy. The basic machinery of banking actually works pretty well. Even in the fading hangover from the global financial crisis, trillions of financial transactions are made every year with astounding speed and accuracy.

During the conference I re-tweeted my recent post “From Transactions to Relationships: Innovation’s Next Horizon”, where I argued that banks are in the relationship management business; and I received a great response from Yann Ranchere, Finance Director ofAnthemis Group, and publisher of the Tekfin blog, which is on my regular reading list.

In response to my tweet, Ranchere asked why becoming a dumb pipe was such a bad outcome, and he sent me a link to a post he had written in 2011 “Banking as a platform – what retail banking can learn from investment banking”.

I replied that I didn’t disagree; I just didn’t think that a lot of banks were making that choice consciously.

banks can compete future

Ranchere added that banks have infrastructure management in their DNA, (which is, of course, correct), and I replied about the relative unattractiveness of utilities compared to consumer product/service companies, especially because the industry will only support so many utilities.

banks can compete future 2

Ranchere is absolutely correct. Banks do have this in their DNA, and some will be very successful at this. Think about State Street or The Bancorp, or even tiny CBW Bank in Weir, Kansas, the bank behind Moven. The problem is that the necessity to drive down costs and gain economies of scale mean that there will be only a few winners with this strategy.

Customer relationship management

I believe that more banks can win with a Customer Relationship Management strategy, but only if they actually run the business that way. Most bankers would probably agree that they’re in the customer relationship management business, but if we’re honest about the activities that get the most energy and attention in the industry, it really seems that most have taken an Infrastructure Management approach (I know, I know… the regulations rather reinforce that…).

Look at some of the descriptors of the Infrastructure Management strategy:

The battle for scale… Check.

A few big players dominate… Check.

Cost focused… Check.

Stresses standardization, predictability, and efficiency…Check.

A Customer Relationship Management approach is about economies of scope— expanding the share of wallet, in industry terms. Sure, we pay lip service to that, but it’s the customer-comes-first mentality where we usually drop the ball. And that’s where the industry is most vulnerable to nimble start-ups that design everything around the customer experience.

Customer relationship management

Product innovation

I would also argue that very few banks to date have taken a product innovation approach, and I doubt that more than a handful are truly capable of being true innovation leaders. At least not in the same vein as Mint, PayPal, Square, Moven and other poster children for financial innovation.

This is not to say that banks and other financial institutions shouldn’t innovate. I spend a significant part of my life advocating, encouraging, preaching and cajoling bank leaders to place a higher priority on innovation. It’s just that most cannot expect to create and commercialize the majority of new innovative products and services from within their own four walls. They absolutely should be innovating early and often, but with a much broader perspective that is more inclusive of outside partners.

To effectively innovate new products and solutions, banks need to partner with FinTech companies (and even with each other, which is why I recently co-founded the Bank Innovators Council, I was interviewed about that by Brett King on his Breaking Banks radio show and podcast live from Google. Click here to listen.)

Bankers are inherently risk-avoidant. At best they’re risk managers. Bankers have to be right 99% of the time in lending decisions, but innovation is about taking risks and failing and learning from those risks until you get it right.

The key is to fail fast and fail cheaply, and fail in an environment that is firewalled from impacting customers or shareholders.

This article originally appeared here. Republished with permission. Submit your copyright complaints here.

Author avatar
JP Nicols

Bank innovation consulting expert JP Nicols has been internationally recognized as a leading voice for innovation, strategy and leadership for the future of financial services.

JP is a trusted advisor to companies from startups to the Fortune 500, a popular writer, a top rated speaker, and is often quoted in the press on video and in print. He has been named to several lists as an influential thought leader in financial services.

A former senior bank executive, JP is the President and Chief Operating Officer of Innosect, a Silicon Valley based global innovation enablement and analytics company that has experience helping over 200,000 people contribute to projects and campaigns that have generated over $400 million in value.

He is also the co-founder of the Bank Innovators Council, an independent global membership organization with members in 65 countries that promotes and supports innovation in banking.

His work has been featured in some of the industry’s top publications, including American Banker, The Financial Brand, BAI Banking Strategies, Investment News, Bank Innovation and many others. Read more here.

Before his work in bank innovation consulting, JP served in various leadership and innovation roles at top financial institutions, including as the first Chief Private Banking Officer for a top five U.S. bank. He is an instructor at the Pacific Coast Banking School, and he serves on the advisory boards of NextBank USA and Advizr, and previously served on the advisory board of Balance Financial and as Vice Chair of the board of Forest Ridge School of the Sacred Heart.