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.

Pulling back the curtain on Aereo

Aereo’s greatest utility was the ability to watch must-see live TV on a phone or tablet in more or less real time, but that type of content makes up only a fraction of most broadcast channels’ lineups.

Using crowdfunding to accelerate disruptive innovation

While the overwhelming majority of projects on crowdfunding sites like Kickstarter are launched by individuals or small teams trying to convert an idea into reality, some established companies are using crowdsourcing infrastructure and community as a way to create new products, even when the companies don’t ‘need’ the money, per se. In effect, the crowdfunding exercise can become a better way to research the market and test product ideas. And then, potential customers vote with their money.

Jessica Leber, Backers with Benefits: Why Companies Are Outsourcing to Kickstarter

“Crowdfunding is the ultimate form of consumer research,” says Scott Popma, an intellectual-property lawyer who advises companies about crowdfunding. “You are not just asking people’s opinions—you are getting opinions with their money.”

For Securifi [well-established manufacturer of the Almond ‘smart hoome controller’], the campaign is helping it do early marketing and solicit high-quality feedback from enthusiasts while the product is still in development—far preferable to hearing criticism or getting a negative review after it is released. Right now, as a third-party seller on Amazon, Securifi can’t contact most people who have previously bought products to ask about their experience, or to promote future features or products. “We now know very few of our customers,” says [CEO Ram] Malasani. “We’re just removing the layer between ourselves and our customers.” They’ve already received more than 700 comments and messages.

Game companies with huge fan bases are among the largest businesses that have taken to the Kickstarter platform. Double Fine Productions, a decade-old independent studio that has won several awards, raised $3.3 million on the site from 88,000 backers last year, aiming not only to finance a new game but to “develop it in the public eye.”

For Days of Wonder, a maker of digital and board games, using Kickstarter was also not about the money. The campaign it launched in January was primarily meant to help determine whether its employees should devote months’ worth of resources to making an Android tablet app for their popular iPad game. Some customers had been requesting it, but in reality, few people have Android tablets yet.

The company set a goal of raising $190,000, a threshold it felt would establish sufficiently promising demand. The money itself was so beside the point that the company canceled the on-track campaign midway through. CEO Eric Hautemont realized that iPad owners and board-game fans were donating, so it wasn’t helping answer the primary question about Android demand.

This experience points to the challenges of using Kickstarter as a research platform. “We learned a lot,” Hautemont says. “We’re planning to relaunch it in March, focused on Android.”

I can see this becoming a part of the DNA of social businesses. Not necessarily using Kickstarter, but in many cases where companies are planning on rolling out consumer products it could be directly on Kickstarter.


The bane of making changes in an established product line is the fear of cannibalizing sales while incurring higher costs. But at the same time, companies have to innovate, or they get lapped by young innovators. This is Clay Christensen’s Innovator’s Dilemma.

Imagine an eager product manager, Kati, who is contemplating a dramatic pivot in an established but dwindling consumer product, a baby carriage. After getting some push back on her ideas internally, she devises a Kickstarter campaign to gain support and feedback on a radical redesign (here I stole one from Evan Garrett and Dan Levin as eye candy).

She touts the features of the Strolla — better springs, doubles as a baby chair because of its height, seat comes off to serve as a bike seat, can be pulled up and down stairs, etc. — and starts gaining support. Hundreds sign up for the seat, and great comments stream in. With that feedback she approaches her management, and makes her case with hard data and $150,000 in pledges.

That could be the tipping point to break the logjam in the corporate mindset. And if her management is too stupid to go along at this point, she can always leave the company and start her own company.