The Future of Banking –  Promises and Threats


      The past decade has already seen a lot of industry structures being redefined with leaders going bust and new age companies taking their place. One of the industries that seems to be on the cusp of going through a similar upheaval seems to be the banking industry. 

      If you look at what a bank does at its core, it is only two things: 

      1. Collect money from parties (individuals, businesses and governments) and keep them safe and pay them whenever they need the same back. Banks in most economies pays a simple interest (and in some countries, charge a fee to safeguard the money for the party) on the money that it holds for the parties. 
      2. Invest the money that they collect in the form of loans (home loans, education loans, vehicle loans, business loans, credits) to people/businesses who need money and charge a fee (interest) for trhe same. They could also invest the money in other forms of equity or investment vehicles which gives them a better return than the interest that they pay out to their customers to collect money.

      I think that the current model, is dependent on them being able to have enough cash that come inside the bank so that they can invest the same and make a profit on that.  

      There are at least 4 trends that seem to be working on the banking industry that they need to give heed to and may be re-discover what it means to be a bank. 

      1. Changing dimensions of managing currency 
      2. Rapid rise of Peer-to-peer economy & Disintermediation through technology
      3. Changing nature of consumers

      Let’s look at each one of these in a bit more detail. 

      Changing dimensions of managing currency and its movement:

      One of the biggest reasons for banks to exist was to be the clearing house for managing and moving currency. If you wanted to transfer funds from one person/business to another person/business, you either did that through cash or through a bank. The increase in commerce, in general and cross border commerce in particular, necessiated the need to have a trusted partner who could move the currency from one party to the other without the inherent risk involved in moving cash physically. So, both the parties trusted the bank with their money and the bank was the entity that made entries in both their books and kept their money safe.

      Today banks are not the only way to transact and move funds from one party to another, atleast in a small way. PayPal (and its clones), mobile wallets and telecom operators with services like mPesa can do a lot of heavy lifting today. 

      Today there are mobile wallets and telecom operators who are able to move currency and do so much more effectively. They have been able to crack one side of the equation – payments to be made. However, they are yet to crack the other side of the equation, which is how to get money directly into the wallets without having to go through a formal channel like a bank or a credit card. I am sure that this is something that they are all working on and it is only a matter of time that they are able to find a technical solution to solve this problem. 

      One simple solution is for them to partner with corporates and businesses (where they already have a footprint) and request them to directly fund the mobile wallet with the salary payments. The day this becomes a large scale operations, we will find that banking will lose a big chunk of their business. 

      There could be regulatory issues with this that I may not be aware of and that needs to be fixed before this could go live, but I am sure that it is only a matter of time that the mobile wallets or the telecom operators will figure this out. 

      Rise of peer-to-peer economy & Disintermediation through technology:

      Kickstarter (and its clones) have already proved to the world that to fund an idea or an enterprise, you don’t necessarily need a bank. Yes, you do need a bank today to hold your money which you can then invest in an idea/enterprise through platforms like Kickstarter. However, once the mobile wallets are able to get the cash directly into their wallets, they can then integrate with the likes of Kickstarter and invest the money directly in the ideas/enterprises that they believe in. 

      Another area which is getting more and more critical is the business of bitcoins. With recent announcements from Infosys and TCS around building banking solutions around Bitcoin for their banking customers, we will see that bitcoin will have the potential to enter mainstream use. Once that happens, it will start questioning the validity and the use of regular currencies. The feature of Bitcoin that makes it much more secure is what will eliminate the need to have an intermediary like a bank to participate in a transaction. 

      What would be interesting to see (provided the regulatory environment becomes condusive) is for the mobile wallet companies and the telecom operators to adopt bitcoins and allows transactions using bitcoins. This is what will truly bring bitcoins in mass circulation and could potentially pose an existential threat to traditional banks. 

      Changing nature of consumers:

      The behaviour of consumers is going through a sea change. 

      On one side of the consumer equation is the rise of the urban and tech savvy consumer. This is happening both due to the entry of the next generation of workforce and also the technological advances that the current users of banks have seen all around them. The proliferation of mobile banks, online banking, ATM’s, mobile wallets, etc have all made the consumers tech savvy and demanding at the same time. No one wants to call a call-centre and put on hold for a few minutes. Everyone wants self service options to take care of everything that they want to do on a regular basis. No one wants to wait for anything. 

      The competitive nature of the banks have also ensured that people no longer want to wait in a que even to get a loan, if they can help it. 

      On the other side of the consumer equation is the rise of the unbanked population. Just like this population moved directly to mobile phones and skipped the evolution of fixed line phones, I believe that they will move directly to the new forms of payment systems and skip going through a traditional bank completely. Not just because banks find serving this consumer segment totally unprofitable but also due to the fact that this population has shown that they are much more able to adopt to new technological shifts that offer significant benefit when compared to the traditional route. There is also social stigma and psychological reasons whey they would much prefer to go with the new technology than to go through a traditional bank, which seems too intimidating to them. 

      What could Banks do to stay relevant and thrive:

      Given that these changes are happening all around the banks, in my opinion, the banks that could potentially ride these trends will actually come out winning on the other side in a couple of decades when compared with banks that fight this change. Some things that banks could do to ride this change could potentially be as below: 

      1. Make your Own Investment: Pro-actively provide a service for their customers (investors) which offers more control over the funds that they have invested in the bank, if they so desire. As not all investors will want to take this service up but I am very sure that there are customers who will lap it up. This could be a service similar to Kickstarter where investors can decide if they would like to take the risk on the business/idea rather than the banks to take the risk. The bank can then become the platform for people who want to invest and for people who want to seek money to pursue their ideas. This service is very similar to Kickstarter with only one difference being that the scale of operations could be significantly different and the model will allow the investor to get a financial returns on the investment that they make and not just be a part of the community that promotes an idea/business. Banks will be able to do this either by revamping the underlying architecture or by starting a new subsidiary that has this as the only product.  
      2. Partnerships:  One of the most important things that banks need to do is to identify new partners that can enable them to bring new products and services to new segments of consumers or businesses. These would be partnerships that currently no one is thinking of. Partnerships that are so off the radar now, but when made, will suddenly create a significant opportunity.  
      3. Overhaul consumer experience: One of the easiest and the fastest things that banks could do is to do a complete rethink of their customer experience. One interesting things that we have seen here is a bank offering video call faciliuty for their customers from within their mobile app. This addresses both the need for self-service for most things and the convenience of speaking to someone at the bank if needed. More such ideas need to be explored in order to make every interaction with the bank an extremely simple and a delightful experience for the consumer. 
      4. Rethink their role as a bank: The most difficult but the most important change that a bank will need to do would be to rethink their role as a bank. One trend that I think we will see will be banks who identify a niche consumer segment and just serve them and serve them really well. The days of the large multi-purpose conglomerate bank will be numbered, at least for most such banks. 

      All said and done, banks need to act – take action now, set-up think tanks, explore technologies, understand consumer segments, explore ideas. They are today in a situation that they need to keep moving to stay relevant. It is a questions of survival for them right now, whether they like it or not, whether they agree or not. 

      These are exciting times for this industry and as a consumer, I am excited to see what this industry will morph into. 

      Google to Alphabet and a New Model for Organisational Growth

      Larry and Sergey

      Google founders Sergey and Larry have the knack of doing unconventional things. They have done it again by giving birth to a parent company for GoogleAlphabet.

      In a blog post, that seems to have surprised almost everyone, Larry explains their reasoning behind the need to create Alphabet and how the new structure will provide focus, leadership and independence to all their businesses, while allowing both Sergey and Larry the time and latitude to focus on their moonshots or the big bets that they are going after.

      In my opinion, the move is a good move because of the following reasons:

      1. This move brings clear focus to each of the lines of businesses, as they will all be run almost like independent businesses, with strong leaders. This allows for the company to not only focus, be creative and push the limits in each of these companies.
      2. This also means that there will be some of these moonshots which could potentially get killed along the way as they will no longer have the large umbrella and the cushion of the billions of dollars of profits and will now move to be truly operated like startups. This is a good thing for the ideas that Google is going after.
      3. This move also ensures that the leadership strength of the company will be really strong and when they need a replacement for Sergey or Larry, there will not be any dearth of leaders around.
      4. This also means that Sergey and Larry can continue to focus their energies and thoughts on pushing the limits on their moonshots, which is where they can have the biggest impact, both on the company, their investors and the larger world for that matter.

      It is a well known fact that as companies become bigger, it gets difficult to sustain the culture and innovation becomes difficult as teams become bigger, budgets become bigger & inertia kicks in. Though Google has, for a long period of time, managed to stay innovative, it was time for them to shake things up at the first signs of decay.

      Most organisations tend to ignore this and go out an buy companies to continue to grow, if organic growth slows down. There comes a time in the life of such organisations, when the burden of keeping the lights on becomes more and more tougher and slowly but surely the organisation dies.

      This is very similar to the human life-cycle. When you are a kid (startup), you are all excited and curious and open to new ideas and learn stuff. As you grow older, you start to curb your natural tendencies to be curious and start to conform to social norms. At some point in time, you completely lose touch with that curious and open part of you. You slowly age and at one point in time, you die. As with people, some die young, some live long and some live to be even a century old. Also, seems to be the time frame that companies typically live.

      Typically, this is the model that almost all organisations follow. By being unconventional in their growth strategy, Google have started to pave the path to a radically different model for growth.

      One such model that i would like to propose is based on the bacteria life-cycle.

      In this model, companies typically continue to divide and create new organisations as they grow bigger. Just like there are bacterias which will go on to create new life form like dinosaurs, plants, animals, but  at the same time continue to live in their most basic forms. Similarly, some of these companies that split, might go on to become large companies as well, but most of them will continue to remain as these small companies that are growing rapidly and continue to give birth to many more companies.

      Just like this life-cycle of bacterias have allowed them to continue to grow, give birth to other life forms and remain relevant, this model of organisational growth allows the companies to continue to grow and stay relevant for unbelievably long periods of times. There are not many companies that have followed this path as this is no where close to the conventional approach to run a company.

      This in my opinion, will be the model that future companies will experiment and learn from to stay relevant for long periods of times.

      What is your thought on this?

      Shift from Competing Organizations to Competing Networks

      In the past few years, I have started seeing a definite trend that is shaping up and one that can have an immense impact on all of us and how we do business.

      There is more competition between networks of organizations competing with each other rather than individual organizations competing.

      This was prevalent in the B2B space in the IT industry, where software vendors would team up with hardware vendors and implementation partners and go to market together. They win the deal together or lose the deal together to a different network.

      Airlines around the world always had these networks (star alliance and partnerships with hotels and car rentals, etc).

      Now, you could see this trend in a lot of other industries and in B2C space as well. This is evident with the number of co-innovation or open innovation programs that are being run in every industry.

      P&G runs a program called Connect + Develop which has already delivered some block-buster products for them.

      Apple could not have been as successful as it has been without having the strong network of app developers and content producers for their devices. Apple also depends on the various vendors from whom it sources its hardware parts from. What happens if one of its supplier fails to deliver its commitment? So it is for Google’s mobile platform. Microsoft is struggling because of their weak network.

      Google even tried its attempt at cross brand promotion with their association with Nestle (Android Kit-Kat)

      This alludes to the fact that it is no longer sufficient to increase your operational metrics but to start re-imagining how you  could create a seamless network that when comes together is much stronger than each one of them individually could be.

      This requires us to re-think about how we are organized and how decision making happens within organizations. This also calls for a highly empowered front-line staff (sales, service and support) that is able to read the market forces and decide the best partners to work with in a particular market for a particular product category and has the power to take the decision without having to go through a long process of approvals.  

      What would make this trend even more interesting is if some of these organizations are able to seemlessly share information about common customers.

      Imagine if you book an airline, a hotel and a rental car. You provide your information once to the airline and not have to bother about it at all, as the airline shares your information to the hotel and the rental car seemlessly, so that they know exactly who you are and what your preferences are and the loyalty programs are inter-connected to all these service providers and the right points are automatically credited to your account immediately and seemlessly.

      Imagine if you go to a grocery store and pick items that you need and find that there are some items that are not available or the brands that you need are not available. You inform the same to the billing clerk and he adds them to your purchase and the items that are missing are delivered to you at your home same day or next day depending on when you place the order, courtesy of the network (the retailer has a connect with their supplier, who ships the item with a shipper like fedex and the package is delivered).

      In such a future, it is not enough to partner on a need basis and only to sell something. It is crucial that the flow of information is seem-less through the network.

      Organizations that are able to achieve this seem-less information sharing first and are able to execute on them will have a big first mover advantage. This kind of capabilities are very difficult to replicate, which in turn means that the entire network now has an enviable and sustainable competitive advantage.

      Now, couple this with the diminishing importance of branding as Itamar & Emanuel argue in their HBR post and you now have the recipe for small, nimble players being able to compete and win against big monolithic organizations. There is one such network already functioning, in the highly competitive automotive manufacturing industry.

      These are my thoughts. What do you think? How difficult is it for organizations to be able to create such a network and thereby competitive advantage? Do you agree that this could be a possibility in the next couple of years?

      Please share your thoughts so that we can continue our discussion.

      You could connect with me on twitterLinkedInFacebookGoogle+.

      PS: Some very interesting posts that I have read about this topic are here.

      Some Possibilities for Re-inventing Video Advertisements

      One of the most sacred piece of consumer advertising in the past was the 6 second spot in Television. Advertisers qued up to buy the spots and display their advertisements. Ad agencies and spot buyers were in vogue as they were the levers that enabled brands in their quest for more consumers.

      All this is about to change and the advertising agencies are in for a disruption. This opinion of mine is based on the following trends that I see playing out in the markets:

      • Despite having changed medium (Television to online streaming videos), video advertising did not change. They still play advertisements either at the start of the video or in the middle of the video, just as in Television, maybe with a little more control on the target audience.
      • Compare this with the evolution of online advertisements. From the old banner ads to targeted, contextual advertisements even within your email client (Gmail) or promoted tweets in your twitter stream.
      • Most brands have now become content creators and act more like media houses online. Most of the brands have their own content team and continuously generate content.
      • Recent announcement of no-cash deal between Kit Kat and Google to name their latest Android release Kit-Kat.
      • More and more brands want to create original content to get the attention of a specific niche of the consumer market. From streaming content created by the studios to creating their own original series, Netflix has come a long way. Same is the case with Coca Cola. The amount of original video content that they develop and share online has increased multiple fold.
      • Advertisement free content (ad free HBO) is becoming more prevalent now than ever before.

      All of these trends point to a future of video advertising which is very different from the current 6 second or 20 second ads.

      I think that based on the existing trends, we shall see the following:

      • More brands will come together and plan joint campaigns. For example a washing machine brand, a detergent brand can come together and do joint campaigns. IF brands can tie up with other brands that can be logically coupled (same consumer, part of the same “jobs to be done” family of tasks, similar positioning, etc).
      • Brand placements inside of the movies and Television series has been around for a long time but never became mainstay. This will change. We shall start seeing more and more brand placements in original content.
      • This could then potentially lead to original content being created around these brands. For example, there could be a series like Friends, where every time the friends sit together and share memories, they do it with a can of Coke. Every time they speak on a phone, they use an iPhone or a Samsung Galaxy S4. It the story requires them to go out for a trip, they could visit India (of course sponsored by the Indian Tourism Industry). You get the point. What is even more interesting is that It might even cost much less to create these content than to pay for a six second spot during the program for the brands. This also enables the brands to have control on the audience segment that they want to create the content for.

      So, you can see a host of original video content being produced by some of the leading brands.

      Is that good or bad for the brand, I don’t know. However, this is great news for all the artists who have ideas and want to convert them into original series. They will have a lot more people willing to invest in them to create good high quality content.

      As a consumer, I don’t mind who creates the content as long as the content is interesting and engaging and I am not interrupted in between the program to show some advertisements.

      So, this does create a positive cycle for everyone involved.

      Do you think this is what we shall see in the near future or if my understanding is totally flawed? Lets discuss this as comments on this blog or on twitter.

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      The Real Higher Education Challenge

      Recently, there has been a lot of discussion around Higher education and how this is creating student debt at an alarming rate. There are estimates which out student debt in US alone at more than a trillion dollars. The common thinking seems to be to look at ways to reduce the overall cost of delivery of education. MOOC’s seem to be the flavor of the season as they can obviously reduce the cost of delivery by leveraging technology.

      However, in my opinion, we are trying to address a symptom and not the root cause. I think that the root cause of the education problem is the reducing relevancy of the education provided in this course, that leads to lack of employment to all.

      So, if we really want to disrupt the higher education industry and solve the challenge, we need to find a way to address this issue of relevance to businesses, that without burdening the students with debt and at the same time leverage the current institutions.

      My suggestion to solve this would be following:

      Higher education needs to be offered in two streams:

      • Full time courses as offered now but with a slight change. Instead of just offering the course, the universities help set up businesses that are being run by the students. The businesses get passed on to every batch of students as the current set of students graduate. This coupled with the classes that they attend in the university can not only prepare them well for their subsequent future in corporates and at the same time provide them an option and experience of starting and running their own businesses. The students can then choose their path as per their individual choices.
      • Offer life long memberships to students, who instead of paying their annual fee and studying, agree to pay a small amount monthly or annually in return of being able to come and attend a short term course (4 to 6 weeks) whenever they want to. This way, the college will continue to get funds to run the university and at the same time people will get to learn whatever is relevant and whenever they need it. This solves all the current set of challenges: Student debt (which will not pile on as the students pay a small fee over long periods of time), funds for universities (as the universities will be able to get the fee from a lot of students who are still not in the college) and the students get to learn what they want to, when they want to, so that their learning is relevant.

      Once universities are able to do both of these options in place, they will start to become relevant again. Of course, they can continue to work on reducing the cost of delivery of the courses by using MOOC’s and other technologies as well. These will improve the efficiency of the universities thereby allowing them to survive with lower cash flow than otherwise.

      Of course, these are just a couple of ideas. I am sure that if we agree that the most critical area where disruption is sorely needed in the current higher education is in its relevance, then we can come up with a lot more ideas which could be used to solve this challenge.

      Whatever we do, we must hurry as I think that time is running out and we need to find a way to address this at the earliest or we might risk loosing some of the most important institutions in the world.

      What do you think? Please do share your opinions so that we can continue the discussion.

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      PS: Dr. Clayton Christensen discusses disruption in higher education