Disruption, Innovation or Process Model Change? Why Banks Are A Great Example of Every Firm’s Dilemma

The debate

What do companies really need to do to succeed over the next five to ten years – and give yourself some strategic latitude here. Is it more innovation, more social communications in the enterprise? The need to find more creative responses to disruption? Or is it the bogey most firm’s fear most – deep process reengineering?

In this update we’ll look at the case of banks and conclude that, sorry, the future is all about process model innovation, or some kind of BPR. Process model innovation requires companies once again to look deep into how they do business and redesign how their people execute on company objectives.

The new process model is the business platform and executives in finance are beginning to realize they need one too.

The E2.0 Era and Social Business

Over the past decade an abundance of literature told us the real answer to productivity issues and workplace performance was “social”. In a variety of guises “social” has been the modern day but gentler business process reengineering meme.

There are various definitions: “Enterprise 2.0 is the strategic integration of Web 2.0 technologies into an enterprise’s intranet, extranet and business processes.” Yes, it represented a change in process but a manageable one for the folks affected. Enterprise 2.0 is “the use of emergent social software platforms within companies, or between companies and their partners or customers.”

This was change without layoffs, an answer to silos without process redesign.

Gigaom was on top of it from the start (see The Future of Work Platforms and the discussion around Technology and The Future of Work ) and is one of the few places that maintained a critical viewpoint. The challenge for banks is that no amount of socialising the enterprise will provide the answer to  the current disruption they face. If that’s the case for banks, it’s also the case for many other sectors too. And the reasons go deep.

The Changing Economy

Banks, as we know, are more susceptible to global economic change that other companies. They had a bull run during the period 1995 – 2005, some would say on the back of collateralised derivatives but perhaps more pertinent, on the back of a long run of increased global trade that was closely tied to growth in gross domestic product in major economies like the USA. The 1980s and 1990s were the era of booming trade in goods. It’s over, according to a recent working paper from IMF staffers.

The key reason? The relationship between US growth and Chinese growth is broken. That conjoined growth is fixed in most people’s minds by the Apple-Foxconn relationship. Apple creates the IP and design values, Foxconn builds and ships. While nothing can derail Apple, a new reality is emerging – in many emerging markets local manufacturers and suppliers are beating out the multinationals.
The graph below shows the bald truth of China’s changing position as an importer of parts for onward manufacture and shipping.

Figure 1. China’s Share of Imports of Parts and Components in Exports of Merchandise and Manufacturing (percent)

china parts and goods

The evidence supports the idea that globally we will trade less. However there is a parallel development. Small companies are trading more – a whole lot more.

Evidence for the internationalization of small business trade comes from a variety of sources.

Figure 2. Small Business Internationalisation to end 2016

small business internationalization

The table above is supported by evidence from surveys by the World Trade Organisation and by companies like DHL that have a stake in any small package international trade. According to DHL:

81% of high performing SMEs trade internationally – high performing being measured as 3 years of 10% + growth in the OECD and 20% annual growth over three year in the BRICM (BRICS plus Mexico) countries, and much of that performance is attributable to a range of international activities – import, export, partnering, sub-contracting etc. and 60% of these companies expect to increase their international activities to a total of 20% of all turnover over the coming three years.

So here is the problem for banks. In fact it is a generic problem for companies looking a few years out.

Their large customers are being beaten out of emerging markets by local competitors because there are too few supportive financial functions for western companies in, say, the second cities of Vietnam, or the third cities of China. It is tough to get the credit checks, to provide the merchant credit, to find the data on consumption patterns, all the things that go into a western market entry campaign. So much so that Nestle is less able to sell its ice creams or P&G to sell its detergent.

Their small customers are meanwhile expanding into new markets. Traditionally these are precisely the customers that banks don’t want to loan to – sub-$1million dollar loans are not cost effective for relationship managers.

Leave aside the esoteric discussion banks are currently having about Bitcoin and distributed ledger technology, they are losing credibility with customers. This is not necessarily a fatal position but does call for substantial process change.

The case for banks as platforms

Banks will have to gravitate towards platforms if they are to serve small businesses and if they are to improve their relationships with larger ones. The importance of the first of these is that the rosy future (growth) lies with the small business that is internationalising. The second is their mainstay. It’s where the big money mandates come from.

In the case of small businesses, banks typically have too high a cost base for serving small business needs, depending on real-world relationship building, high margins and outdated credit scoring. New limited feature platforms like Cashflower can help with transparent cash management and platforms like PayPal are stepping in with working capital support.

Platforms like Alibaba fund the customer, the merchant and the manufacturer, as well as hiving off cash to fund managers, as well as providing escrow to secure trust. US and European innovators have a long way to go to be competitive in this area.

For larger customers banks need to adapt the integrated model that Alibaba has proven, and provide cash visibility, new foreign exchange management services, innovate in credit references, and devise other services that will make more trade happen in more localities.

The Process Model Innovation Challenge

Here’s the challenge. Most people who do not understand the world of platforms, think Uber. That’s essentially an upgrade of the late 1990s Application service provider-thin client model of platform that has people raving, has VC money gushing, but is not era defining. Integration is era defining.

For banks to move to platforms they have to look beyond Uber or the two-sided market model. They need to think how to deal with  x 10 the number of customers on a small business platform, how to engage the developers who might innovate around it, how to brand a platform with no ethnic or nationalist legacy, and how to promote brand inspirationally. They need to learn new traction rules. They have to go beyond departments to a Netflix style of internal platform configuration so that they can move with agility to solve problems as they scale.

In that context E2.0 makes sense too because suddenly everything you want people to do comes back to how they communicate, project the brand and engage people online at low unit cost.

The challenge though is how to get a departmentally silo-ed organisation with a traditionally minded executive team to see itself owning a platform that requires a totally new skill set. In that context here are some thoughts wrapped up in the takeaways but here is a final piece of evidence to ponder.

In a recent study of innovation capability among banks, conducted by The Disruption House, we found leadership to be the single biggest deficit of these august organisations. The graph compares the top 10 companies in terms of innovation capability from a 2013 study of innovation across all sectors (blue line) with a 2015 study of financial institutions (red line, including companies like Alibaba), with the top 10 banks in the same study (yellow line) and the top 10 Globally Systemically Important Banks (or G-SIB, green line). It shows the G-SIB with the lowest innovation leadership capability.

Figure 3. Comparing Financial Institution Innovation Capability

fintech comparisons


  1. Large scale economic change is upon us, even if we set aside any notion of some new technology or idea being disruptive. The old supply chain complexity model is flatlining.
  2. The momentum lies with smaller businesses that need different types of support
  3. Platforms are the answer but we are over-seduced by the Uber model and should be looking instead to integrated platform models.
  4. To do that, large organisations, like banks, need to develop an inter-generational leadership dialogue.
  5. The inter-generational leadership dialogue is a forum that large banks, and their peers in other industries, now urgently need in order that they can explore options openly. Optionality as a strategic tool was explored in this Gigaom paper. Process model innovation is an imperative but the ones who have to make it succeed are likely not the ones who commission the change. Difficult pill to swallow for many banks but leadership has to be a shared vision.