Here are the slides I used to accompany my story at the ALFI conference. The fund industry must really think about and action their innovation strategy to ensure their businesses are properly positioned to cater for the tomorrow’s world.
A member of the audience asked me a question related to regulation and the constraints it puts on their firms to innovate.
I have worked with and hired many lawyers in my time. The ones I liked best are not the ones who point out all the problems and issues, but the ones that took what I wanted to achieve and found legal solutions to make it happen. I think this is true with most things – we prefer proactive people to negativity. Regulation is a critical component of financial services, but don’t use it as an excuse, work with it to find solutions to achieve what you must.
Originally published in The Huffington Post on 02 April 2014.
Fact: The more we understand about the lives and environment of our target customers the better we are able to market our products to them and accelerate adoption.
Focusing on the use of technology by a market and their “Normal” level of technology sophistication can provide significant insight into the likelihood of that market’s adoption of new technology products and services, allowing firms and stakeholders to better define their target market and to refine their product offering for greater customer take-up.
Markets are complex and fascinating. Understanding how they work and how they pertain to and define your product or service are critical to the success of your business. “Will customers buy my product/service?” “Why will they buy?” The concept of “adding value” is core to any business case.
Generally and particularly so in the tech industry, your peer group – the guys you hang out with in Tech City, the guys you sit next to in your shared workspace – are not the right benchmark for your product to succeed. They are not representative of the mass market. If they think your idea is great and they are likely to use it, you really really need to double check whether less tech orientated consumers will adopt your product. There are early adopters but there are also too-early adopters. Niche products proliferate amongst tech folk, many of which will never get to the mainstream. There is a “market perception bias” due to peer group and the pressure to deliver cool innovation relative to localised behaviour. The product/service misses the mass market as it is too cutting edge.
The Adoption Curve
Most people are familiar with the Adoption Curve (The Bass Diffusion Model to give it its proper name – find out more on Wikipedia) that describes the penetration of a new product in a population. Be it subconsciously, it defines our forecasts when launching new products and, by inference, investment decision-making and capital allocation.
An issue with the model: keeping all parameters constant while varying the size of the market, the length of time to fulfil 100% market potential is always the same.
Estimates of the key parameters are made on existing sales data or synonymous comparables data. The size of the market variable is arbitrary – there is no prescribed science behind it. You can make it 1000 or 100 million and the key output, the estimate of customers, do not change except in scale relative to the initial input.
I hope you agree, this does not make sense. A firm launches a product, it is selling well. They then incorrectly assume that their existing customers are a sub-set of a very large market and build marketing strategy and estimates on sales revenue on this misplaced market definition. It will take them forever to “own” the market; it cannot be that the length of time to saturate a large, more heterogeneous market is the same as a small and more appropriate one.
Market segments are defined by habits and behaviours as well as in many cases, law. They are not defined by demography – age, location, density….though, in certain cases, demographics may act as a good proxy.
Banks don’t sell mortgages to the “UK market” they sell mortgages to people in the UK that are looking to buy property, a need driven by the behaviours the people within that group and in this example, the laws that apply, which further segments the broad market; commercial mortgages, investment mortgages, first-time buyers, etc. More granular still, individual mortgage “products” are defined to appeal to specific customer groups that are driven by even more granular behaviour; e.g. their level of risk aversion, their accumulation of wealth, their use of time.
Broadly (and maybe controversially?) speaking, I believe it is good practice for young businesses or for any business launching a new product to focus on a very small market segment, really understand it, own it, then broaden the market definition and leverage their experience and brand credibility from previous success to sell to new target customers.
Understanding your customer’s normal level of technology use is key to marketing and success
First, lets get everyone on the same page with a couple of definitions:
“Technology”, does not just relate to computers or electronics. It is more broadly defined as “The application of scientific knowledge for practical purposes” this could relate to machinery, pipes, a saucepan and even a comb.
“Innovation“, is not just invention, is not just a new product or service, I define it broadly as “something new that adds value”. This could relate to a process, a product or service, a business model.
Combining the two, “technology innovation”, therefore is the application of scientific knowledge to create something new that adds value.
Lets say there is an arbitrary line that represents the technology innovation that is available to us. The further along the line the more “high-tech” the product and service. We can benchmark a “Normal” (mean) for the sophistication of technology people within homogeneous groups are comfortable using on a regular basis. Either side of this Normal, is a range that represents the inferior and new technology that we are willing to utilise today. For a very large market definition, this is, unsurprisingly, normally distributed.
As time goes on and users accept and use more innovative technology, the normal shifts to the right, i.e. the normal level is at a level of more sophisticated technology tomorrow than it is today. This is usually an incremental transition and takes time. There are very few “disruptive” products or services that have led to a large shift in the normal level of technology utilised by a market. “New and Improved” trumps disruption every time. To ensure you acquire rapid acceptance and use of your service or product, you need to target somewhere to the right of the normal line. Excellent – all fits well with the adoption model.
But wait, we know there are more distinct groupings within the population. What if we were to consider the habits and behaviours of “technophiles” and “technophobes” as exogenous to the mass market?
To generalise, technophiles are more likely to adopt new technology innovations and will be less accepting of inferior technology, while technophobes are less likely to adopt, relative to the mass market. The chart is likely to look like this, with technophile and technophobe adoption of technology skewed appropriately.
Now let’s make this more useful; let’s multiply the y-axis by the size of each market segment to give us a representation of the number of consumers likely to use the product:
Where do you want your product to sit?
To me, it’s fairly obvious that, for a product to be successful in the mass market, a business should be targeting the technology sophistication of the product to be slightly inferior to the normal level of technology sophistication acceptable to a market of technophiles. I.e. if the guy sitting next to you in google campus or a.n. other tech workspace thinks your product is cool and innovative (for them), it should ring an alarm bell in your head – check, re-check, and check again what is normal for your mass market.
Originally published in The Huffington Post on 5th March 2014.
Although I agree that Banks and Financial technology firms should be looking to partner and work together where possible to improve the proposition for customers, I don’t necessarily believe that this strategy will make banks more innovative and provide better services for you, I and our businesses.
As I have stated before, innovation occurs at 4 levels correlated with increasing returns for the business and customers:
- Business Model
- Industry – changing the way participants compete
My experience in financial services is that banks are pretty good at Level 1 – by buying in tech to improve process – and not too bad at Level 2 in certain areas.
Just look at the advances in process and products around capital markets such as electronic trading, algorithmic trading and prime brokerage. They are pushed to be innovative in these areas as the buyers, other financial institutions, hedge funds, etc. have significant power.
Downstream, in commercial and retail banking, there is less evidence of innovation in practice; chip and pin was a startling improvement that put the UK ahead of most other countries, but then we look at areas such as international payments, where the correspondent banking system from the 70’s is still in place, or invoice finance, where I have personally seen green screen terminals in a bank that run core processes.
It is still far too common that banks, rooted in tradition, try and keep the benefits of innovation for themselves rather than sharing with the customer equitably. This has to change; when it does, it will be the foundation of a new evolved industry.
For banks to become more innovative requires them to adopt a change in approach (be it slow and adaptive) to the way they do things, to the way they frame their role as a service provider, to they way they define and then execute their strategy.
This change requires buy-in from the top, from the board. It will take time and needs to be planned and controlled to fit with the bank’s culture and to avoid widespread disruption. Openness and collaboration with the rest of the bank is key; not just for others to see the benefits in the new approach, but to be inclusive and create a stakeholding. Segregating the (innovation) team is the biggest mistake that can be made – it will stir resentment that will lead to failure.
The CEO of one of the larger European banks I have worked with put it to me quite eloquently,
“Our business is like a large oil tanker, it takes a lot of effort to make it change course. What we need are a few agile speedboats that buzz around the tanker. Eventually, as more speedboats catch the tanker, the wake of these boats will help make the tanker turn more easily.”
We have not really seen a major bank challenge the industry with innovation at Level 3 and 4. Saxo Bank and Well Fargo are recent examples of business model innovation, but it has not called the larger players to account.
I am certain that, as has occurred in other industries over the past 20 years, a new entrant or existing player will grasp the reigns of innovation, be it organically, or, more likely, acquiring capability through external talent, so wholeheartedly that it fundamentally changes the way the industry competes – Level 4. This is where real value is delivered to all – Apple (Music industry), Ryan Air (airlines), Skype (communications). We are on the verge. I am so excited to be involved in the new dawn of financial services.
Originally published in The Huffington Post, 05 November 2012.
Its been brewing inside me for a while and I need to shout it out; “BANKS ARE USELESS AT TECHNOLOGY”.
Its not the people that work there that are at fault – given the salaries paid to technologists, product managers, project managers and the like, banks probably do have some of the best and brightest talent. No, its not their fault, well, not directly anyway. It’s the incentives; conflicting objectives between teams and departments lead to bureaucracy, bureaucracy leads to inefficiency, inefficiency leads to costs and long delivery time frames leading to poor projected and actual returns…leads to anger, anger leads to hate, hate leads to suffering. Yoda kind of got it, I am sure you do too.
Please bear with my statement of the obvious – we live in a remarkable digital age. The evolution of technology, the invention and innovation, over the past 15 or so years has been astounding. Do you remember the computer you had as a child? A Commodore 64 or Amiga? An Amstrad CPC? Do you remember your brick of a first mobile? Do you recall sending your first ever email, MSN messaging someone for the first time, the introduction of Google, Facebook, Twitter and Skype?
It really is staggering when you think of how technology has moved forward at such lightening pace and the way that services you could not have dreamed of (and did not, or else you would be filthy rich) have been enabled to enhance our lives.
Today, our needs in relation to services are fundamentally shaped by technology. We explicitly and directly infer what is possible through innovation in analogous services. Implicitly, the way our lives have been re-structured as a result of technology enabled services gives rise to irritation and frustration when we are slowed down by core services that lag way behind in terms of usability. Technology enabled services have helped service providers reduce their costs, the benefits of which, in turn, are passed on to customers in terms of lower prices – we expect most apps/services to be low cost or even free.
If you haven’t got it yet, wake up – financial services, to a troubling degree, are dominated by banks, Banks, particularly commercial banks, don’t do technology at all well. We want user friendly, intuitive, low cost and value added technology enabled services. Pigs might indeed fly before I get an online solution from a leading bank that actually gets close to what it could and should do.
Let’s take international payments as an example. At present, 85% of all international payments are still conducted with a bank. Making a cross-border payment is complex and time consuming; the process lacks transparency on pricing and has unnecessarily high operational risk – over 30% of international payments run into “problems” that are costly to repair, both financially and reputationally.
The infrastructure designed to support the hundreds of thousands of transactions taking place each day is archaic – developed in the 1970’s. Shockingly a lot of the process is still manual. All of these inefficiencies are passed on to the customer as a cost; SMEs in particular often pay through the nose for a service that is far from satisfactory and consumes too much resource to manage. The most ridiculous thing? A bank cannot tell their customer when the payment is going to arrive in the beneficiaries bank account, nor tell the customer how much the full cost will be.
We have gotten used to lacklustre service, become apathetic to the status quo.
In contrast, non-bank cloud-based platforms – whether Software-as-a-Service (SaaS) or Platform-as-a-Service (PaaS) — connect businesses more effectively to a host of currency exchanges and deliver optimisation across and within international payment networks, delivering more transparency on fees and reducing the incidence of failed payments. The level of automation across processes and the use of cloud services, enables low cost operations and scalability, enabling them to lower their fees. It goes without saying that these technology led businesses make the lives of customers easier by delivering user friendly and intuitive solutions that significantly improve the customer’s workflow and reduce administration overheads.
We need banks, but the way in which use them has to change in order to receive better financial services.
I believe that the future of financial services has parallels to the evolution of the telecoms market or the way we use electrical power. There are utilities that deliver and manage the “plumbing” – the lines and power stations etc. On top, sit a plethora of service providers that can package these services in an effective way to meet the needs of their customer niche. Focusing on a core set of capabilities at each level such as this allows the operators of the pipes to benefit from massive economies of scale that they then pass on to their subscribers, who in turn share the benefits with their own customer base.
If banks focused on the “plumbing” – capital markets and their operations, deposit taking and making decisions on the allocation of capital – rather than trying and failing to compete in technology enabled customer services, they would unquestionably be more efficient. Customers can be better and more cost effectively serviced by the raft of “New Finance” firms focusing on packaging specific services, such as international payments, loans, asset finance, cash management etc, that are emerging and sit on top of the bank’s plumbing, These firms are principally technology businesses and marketing specialists. They are focused, they are agile and they are the right way to access financial services. Of course, just as in other industries, some of the banks will evolve exceptional capabilities in servicing customers, but only if they change their approach to product development and innovation; they need to stop focusing on delivering products that they think the customer needs and start delivering products that customers actually want – pull demand rather than push supply.
Imagine the benefits of logging-in to an independent personal finance application in a new world of financial services. The application connects directly to a host of banks. Aside from getting a better more useful view of your finances and budgets, you would, for example, be able to request a new loan and you would get the best rate for which you were eligible and qualified for, across all banks, click a button to accept, and its done. No forms, no applications, no bank names – you interface with financial services through the application provider, not the underlying institution. It doesn’t really matter where your money is held as long as its safe, it does not matter who is lending you money.
We need to re-wire our minds, re-think what is necessary and what is not. Better understand the pros and cons of one way over another. Actually, scratch that – we don’t have time to think. Just listen to me. New Finance services are here NOW. The more customers vote with their feet and switch to use these services, the more innovation will take place and the more customers will benefit. I am not talking about industry disruption. I am talking about industry evolution. The time is right, the stars are aligned, the writing is on the wall…yadda yadda yadda. Just go make the switch for goodness sake.
Originally published in The Huffington Post, 20 August 2012.
Part 1: We pay less get more
“Innovation” – one of the most hackneyed terms of our era. Though I have perfected the cover-up of the reflexive reaction over time, I silently wince when I hear or read it and am certain the flash in my eyes is susceptible to any astute observer.
Proponents of the term rarely fathom its true definition; it is has been bastardised as a synonym of “new” or “invention”, which, to me, is a distance from the true meaning. Newness is only half the story.
Innovation is a wonderful thing. I just wish it would lose its PR chic, that it would not be so lavishly splurged in reference to anything firms, particularly technology firms, do/produce.
To me, innovation is a process of enhancement wherein the status quo is substantially altered and, in doing so, significantly improves performance or value.
Innovation can occur at any of four levels:
3. Business model
4. Industry (the way firms compete)
For innovators, rewards scale the further along the chain they go – Ryanair is a great, though controversial, example of innovation at the Industry level that has reaped the firm considerable return.
Apple (yawn!) are the distinguished example; it is iTunes and the app store, the dominant marketplace for digital content and applications that has made them the goliath they are today, with product innovation – the iPod, iPhone, iPad – delivering revenues as a consequence, rather than as standalone products.
In most cases, real innovation is focused on delivering benefits to customers that in turn drives business revenue. Even when improving processes internally to streamline costs or to improve efficiency/speed of delivery, the benefits are usually passed on to customers; improving customer satisfaction and capturing market share as a result.
Broad benefit, to customers and innovators, of innovation makes for rational strategic choice – if a firm in a competitive industry were to innovate in such a way as to purely maximise their own benefit, they would quickly fall to the wayside as other firms implement similar change and differentiate by sharing the derived value with their customers.
Even monopoly-like industries and their firms, for example Microsoft in the OS market, recognise that their dominance can be eroded in the blink of an eye should they try and retain innovation benefits purely for themselves and ignore their market. Lower prices, improved services and product features, easier access and improved usability are regularly delivered by all the incumbent behemoths (ok, let them off, MS do at least try) across industries; if they choose not to, they die.
Part 2: Selfishness
Interestingly, the one obvious contrary to this paradigm (apologies – another term I find cringing, but I am being lazy and it fits in the sentence) is in banking, Specifically the UK banking sector.
Electronification of processes, saving the banks time and money, has not led to lower costs for the majority of customers. New products have caused more issues than deliver value; complex derivatives clouding risks but promising high returns have led, as in the case of Mortgage Backed Securities, to cataclysmic losses for some investors.
Where the basis of competition has changed in the industry as a result of innovation, dividends have been generated to a sub-section of banking clients, large corporates and other financial institutions, but not to the masses of SMEs and consumers.
An obvious example is in Foreign Exchange. Liquid electronic markets coupled with electronic distribution have significantly reduced tangible costs to a bank’s largest customers, but the benefits that could be delivered to you, I, and our businesses have been greedily retained by the banks as profit.
We, as customers, don’t help the situation; we don’t act. The elasticity of demand for banking services (measured against a broad range of factors including price and reputation) is relatively flat through history.
Recent statistics paint the picture starkly – out of 64 million bank accounts in the UK, only 60,000, less than 0.1%, have voted with their feet and shifted banking provider in the four years to the end of 2011. Even then the likelihood is that the switch was to one of the other three big banks.
For specific services at the consumer and SME level, banks rarely bother with improving services and incurring R&D expense. Why should they? They (rightly?) feel they are not going lose nor gain any customers regardless. Things, however, are changing.
The fact that 1) banks don’t share their innovation benefits with customers 2) banks can avoid innovation in services altogether, spawns opportunity for innovators to do the opposite.
Alternative, technologically innovative banks, such as Bank Simple, Holvi and Movenbank, will launch in the UK soon. barring deposits (looking after your money is something banks arguably do pretty well), specialist new finance firms that take a sliver of the financial services value chain and do it exceptionally well, also provide real alternatives for our financial service needs.
Aside from the obvious improvements in services received and lower costs, by instilling real competition in financial services through supporting new finance alternatives, we will wake up the banking sector. The banks will realise that they need to do better, that they need to innovate more and share the benefits with their customers. The “market” would be better off.
To see the effects of customer led industry reform, look at the music industry. The innovation of electronic music and video distribution that has been adopted on mass by customers has driven a fall in prices of traditional CDs and DVDs. The legacy incumbents of the music industry are slowly collapsing or are evolving to compete effectively in the new market; all to the benefit of the customer.
Innovation, combined with customer adoption is a powerful force. Use it.
The tipping point has been reached – banker bashing has gone too far. The hysteria and portrayal of the “despicable” individuals that work in financial services is yet another story that the media has spun beyond the realms of reality and reason.
Sure, there are unscrupulous and venal individuals in the industry, but no more than in any other. Labeling all bankers as evil incarnate, motivated by greed, is ridiculous. The “99%” are ordinary hard working people that live down your street, that take days off to attend their kid’s sports day, that would rather be at home with their family then jumping on a private jet for a hedonistic all-nighter in Monte Carlo.
I have never met anyone in the industry like those that have been described in the press of late. The attacks on the culture and, more worryingly, individuals and groups, is creating a sideshow that is stealing the focus away from the real issue – how to change financial services for the benefit of the customer and the UK economy.
It is not the fault of individuals that financial services is failing. The industry is not structured in a way that suits today’s business and consumer needs. We should not be focused on demonising people who are typically as honest as the rest of us. We should instead be looking at the wholesale change to banking structure, and business models therein, that is needed to improve customer service, transparency, trust and to lower costs.
A movement is already under way. We are living in an age where change in the management and delivery of financial services is occurring at lightening speed. However, it is not the legacy banks that are at the forefront of this evolution, nor the policy makers and regulators that are simply applying cheap sticky tape to gaping fractures. It is “New Finance” that is gaining momentum; entrepreneurs and small businesses that are leveraging technology to address the fallacies of the system and to improve the industry for you, I and our businesses.
Perhaps the current hysteria will finally be the catalyst to encourage customers to vote with their feet, as that is ultimately what is needed to make change happen. It is astounding that 85% of business banking and a similar proportion of consumer/retail banking is still conducted with the 4 major UK banks. In a recent survey conducted by the Payments Council, 2 out of 3 people in the UK said they were still loyal to their bank despite the brand and trust destruction the industry has suffered over the past few years. Over the five years to 2010, 80,000 customers switched their banking provider – that’s less than 1/8th of a percent of the 64 million+ accounts held in the UK.
Competition, innovation and a re-focus on the customer is the key to improving the practices in financial services and to deliver better services, fairer services, for consumers of financial products. Rather than holding all bankers to account, lets drop the hype and focus on the real and practical change that can cement an era of New Finance. The power is in the hands of the customer – you must embrace the new, alternative, cheaper, more transparent providers of financial services and thus feed the seeds of a better system.