smartfinserv

It’s been a few months that I’ve been thinking about setting up a space where key innovations and disruptions in Consumer Financial Services can be aggregated, opinions can be shared on the state of the Consumer Financial Services industry, and analysis can be provided on the current trends.

I started out on the aggregation bit, which seemed like the easiest thing to do, because it was something that I was doing anyway for my position as Payments Leader of a Consulting firm. And while I think there is some value in aggregation, it obviously doesn’t give much space for views and opinions. Hence, I’ve taken upon myself to start contributing to the discussion and engaging with the vibrant community of bloggers, twitters and curators in Financial Services Innovation. I’m a newbie in blogging so please bear with me.

Innovation approaches in Financial Services:

As a consultant, I’ve been working closely in the past 10 years within Consumer Financial Services. And throughout those 10 years, I’ve been struck by the degree to which some key players are averse to change. In most European countries, stakeholders rested on their laurels, with an unyielding grip on the payments industry. They looked at their four-point model, their interchange fees and their schemes and were convinced that nothing could change the status quo. They held on to their key metrics, such as “top of the wallet”, penetration rate and equipment rate to measure their performance on the market. For years, they were reassured by experts that this model is infallible. By those same experts whose jobs are today on the line.

And up until recently, it was quite impossible for anyone to bring about change in the industry from the inside, simply because the barriers were so great. There are many barriers, but three worth mentioning here:

• Technical cost of entry: When you start discussing consumer financial services and particular payment models, compensation and infrastructures with the stakeholders, things can get pretty technical, and unless you’ve been born, fed and raised in a clearing room, you’re likely to take a step back and just trust those experts.
• The traditional card expert’s grip on the industry: In French, we call them the “monéticien”, but I’m not sure how to translate this term in English. Simply put, it is every employee and industry stakeholder which for years, has held on to his worldview of the industry, staying within his comfort zone, while the world was moving on. Don’t get me wrong, these guys contributed enormously to the development of payment systems, ensuring interoperability, and the consumer society. But failure to anticipate the coming changes has led the industry to the difficult position in which it finds itself.
• Payments as a commodity: In some European countries (particularly in France), the lack of innovation within the Consumer Financial Services industry has reduced Credit / debit cards to a commodity.

However, the current market dynamics has forced stakeholders, to challenge, at last, the status quo, before it’s too late.

But is it too late?

In 2006 / 2007, all indicators pointed to the rapid change that was to be brought about in Consumer Financial Services, from regulatory initiatives, to the arrival of new disruptive technology and models and to the change in consumer payment and spending habits. Yet it isn’t until very recently that stakeholders realized that their perennial way of doing things was no longer viable. But that is exactly the problem. Apart from a few niche players, few anticipated the scope of change that was about to overwhelm the industry, few felt the need to question their way of doing things, and almost none had the organization and the market intelligence that allowed them to even ask that question. I’ll take another opportunity to delve into the reasons why they missed this opportunity (It may be a bit cliché, but think, Kodak, Borders, Blockbuster and maybe RIM one day ?).

So what now?

In this context, traditional players in Consumer Financial Services are mobilizing to prevent the possible disintermediation of all or part of the value chain, fighting to avoid being relegated to the role of non-value added processors. However, this defensive approach involves high risks. Without going into the rich literature available on innovation, when a new entrant / startup enters any mature industry, it does so from a premise reminiscent of Steve Jobs and his smartphone, “how can I do better?”.  While seemingly trivial, this difference in the approach is crucial to the successful launch and marketing of products and services.

To overcome this barrier and start taking the lead in innovation, some stakeholders are reorganizing to free themselves from the traditional worldview of the industry, surpass the usual IT and organizational constraints that come with being such mastodons, and approach consumer financial services in a truly out of the box way.

Others have set up innovation units that are isolated from the traditional governance and the rest of the company, particularly those working within its nuclear core, thus replicating to a limited extent, a culture that is predominant within startups. Still others have all but given up. Feeling cornered and without the ability to transcend their traditional way of doing things, they’ve accepted to move back in the value chain, while holding on tight to what they do best and crossing their fingers.

Of course, there are other approaches that I haven’t taken the time to review here. But one that is worth mentioning is the capitalistic approach to innovation. Simply put, if internal structural barriers limit your capacity to innovate, if company culture has not been (and will not be in the foreseeable future) a catalyst for innovation and if allocation of resources (HR mostly but also IT) hinder the emergence of new models, than why not leverage the assets you do have, like access to cash? The acquisition, independent operation and integration of a startup, is an approach that some stakeholders are considering. At the least, the acquisition of startups in Consumer Financial Services would give the buyer an agile platform with which to play, get their feet wet, all the while slowly contributing to bring about change from within.

I hope to go into more of the capitalistic approach in a future post.