Reinventing the Business Models for Fin/Tech Incumbents

It is a no brainer that digital technologies transform the way people work and live, and this transformation is happening at the fastest pace ever. Thus, as stressed numerous times, in order to stay relevant, financial services firms need to choose how they will adapt to a broadly reordered marketplace.

Nearly every financial service and product can be improved, as well as provided more efficiently and with greater customer delight than it is today using available digital tools. To stay competitive in their existing core businesses and secure the top positions, financial service incumbents will need to pour significant resources into digital transformation - much more than they are doing it to date.

In order to secure top positions, financial service incumbents will need to pour significant resources into digital transformation.

For those core businesses on which firms choose to focus their digitization efforts, dramatic cost reductions are possible. However, retooling incumbents’ businesses for digital efficiency will not in itself create shareholder value. Competitive pressure will mean that most cost savings are ultimately passed on to customers (which has its benefits as well). Hence, digitizing incumbents’ existing businesses, if done properly, will preserve shareholder value, but not increase it (which is the ultimate goal).

In order to increase value, a different approach must be taken. As I have written in my last week’s post, incumbents looking to construct and sustain new competitive advantages can best do so by organizing their overall transformation journey using the archetypes inspired by the tech industry.

Incumbents striving to sustain their competitive advantage must re-organize their transformation journey using the experience from the tech industry.

Each archetype describes a differentiated role a firm (or business unit) can play in financial services ecosystem, as well as the capabilities it needs to focus on which will provide it with sustainable competitive advantage. I will not go in detail with regards to this, as all of it is briefly reviewed in my earlier post. Let us just quickly remember those archetypes, which are the following: demand aggregators, component suppliers, or platform providers.

However, what needs to be discussed today is the things that incumbents have to keep in mind when choosing one archetype or the other. Some observations worth pointing out:

• The component supplier archetype draws on many of the competitive advantages that incumbents enjoy – highly regulated status, for example. Hence, it may well be a logical choice for many financial services firms. On the other hand, because it may be the natural act based on current advantages, incumbents who make this choice will have to work hard to differentiate themselves sufficiently enough to drive new value. And that most definitely will not be an easy task.
• Would-be demand aggregators will face solid competition from other demand aggregators who will compete for attention with the same customers. In a digital world, personalized services on mobile devices will outplay physical presence and geography. Also, due to low barriers to entry, digital services can be scaled at virtually no cost. Therefore, scarcity is customer attention, and competition for scarce attention will come from current competitors as well as near-market and out-of-industry players.
• Successful platform businesses can be extremely valuable. They are also rare, as the top one to two firms in a given space tend to dominate, leaving the rest behind. In the tech sector, many companies vie for platform status, few achieve it, and the formula typically requires viral adoption from highly-committed customers, which then stimulates others to build complementary offerings with platform services, which then allows the platform provider to build adjacent services that ultimately lead to network effects. Aspiring platform providers will likely already have products or businesses that have achieved widespread adoption, which increases the likelihood of achieving network effects in an acceptable time horizon.

Bringing it all together

To sum up, we must stress that incumbents need to choose an archetype (that fits best) for each business unit, so they can coherently invest and build the capabilities needed to create new sources of growth and increased shareholder value. Choice of an archetype is crucial, but if chosen and utilized correctly, it can bring enormous value – both monetary and in terms of customers. See Exhibit 7 (source: Oliver Wyman) for your reference.