Tuesday, 11 August 2015
Is it time to debate the Digital Only business model?
For many bank executives today, there are very real concerns about the impact on their business models by so called digital disruptors. The question is how long will that disruption last, and is being digital enough of a differentiator to create large corporate casualties?
If you are like me, then you must be getting tired of seeing messages about 'Unicorns' and how Uber owns no taxis, and AirBnB has no hotels blah, blah, blah.
I also detest the numerous millennial infographics about what they have and haven't done or think about banks. The latter is just nonsense, because it makes huge assumptions about an enormous generation of people, and I am sure has a very limited number of participants.
Millennials are considered under 30, so if you assume all those under 20 plus all those in the world who don't have any money and therefore are unbankable then of course a huge percentage of them haven't been to a bank branch, or prefer a bank. I bet most of them don't have any money or have clean, running water either. However, for those 20 something's that now have a job and hence a salary... they only need a basic current account and mobile/online banking for now, but as they get older and earn more, and need to plan for stuff with a family, and investments and retirement, that will change. The Millennials of yesterday will then seek the additional services of a bank, and talk about the new young people, who don't like or need driverless cars or anything that is not a holographic augmented reality.
The numbers game is just that a game. If 32% have not been in a bank then 68% have been in a bank, and if 27% don't like banks then 73% must LOVE banks? So please... stop with the millennial messaging, and lets give those billions of people the respect that they are not all the same, and might actually have individual preferences.
As for the 'Uberisation of Banking', then let's just think about the long term merits of that. If all banks in 5 years time were Uber Banks, then would the industry not have just commoditized itself? Why would any industry business model want to evolve to a point in which it can make itself replaceable in a few clicks? It won't happen... not because digital isn't the way forward, but because it is still the non-digital services that represent the value proposition of the business. It's their people, their products, and the way they service their customers that determine their success – digital just helps them to do this. At the end of the day it is still good, old fashioned values that determine consumer loyalty and acquisition – bank executives would do well to remember this. I would contend that Uber is not actually a digital business, because the most important part of the business is the driver and his or her car. I have had numerous bad experiences with drivers – some of them rude and dishonest, and some who just didn't turn up and charged me anyway. I also had great Uber drivers who complained that the income earned from the company was just two low in certain areas and were abandoning Uber. They were going to Lyft. So guess what... I tried Lyft and now I am wondering why I should use Uber again.
The same logic could be applied to AirBnB, Amazon and all those other companies we keep hearing about with ridiculous valuations. A word of caution to those investors who are actually believing such valuations... you are only as good as the next best thing. Remember ICQ, then AOL messenger, then MSN Messenger, Blackberry, Skype, Facebook messenger, whatsapp and snapchat... do you see where I am going here? All these companies that command very high P/E ratio's and don't actually form the core of the business will only succeed until the novelty is replicated, and something comes along that is just a little better, or more fashionable. If I can go from Uber to Lyft, AirBnB to Onefinestay, and Amazon to Ali Baba with no repercussions then you have to question how resilient the digital business model is. To be clear, I am not disputing their brilliance in innovation, but the sad fact is that innovation of this type is easily copied and often the early success is short lived. Innovation alone is not a guarantee of industry dominance, it is only what gives you a head start.
For banks, I would argue that being a digital only proposition may yield great fruits now and maybe for the next few years whilst everyone is getting to grips with what that means, but inevitably the winners will be those banks that not only do digital well, but also provide a good customer service, and yes... branches that compliment their digital services, offer trusted advice from experienced humans, and service staff that genuinely treat their customers like kings. Yes going digital is something banks need to do, but it is not a guarantee that once you have done this, it is all plain sailing thereafter. For the incumbent banks, the road will be long and the lessons learnt will be tough, but if you focus on what you do well, and perhaps partner with a digital bank that does what it does well, then your probably going to be alright.
By David Horton, head of innovation at Synechron.