Disruption is nonsense and digitisation is a waste of time

From "Make America great again" to "Stop the boats" in my own backyard, populist slogans have a way of capturing the hearts and minds of the masses. Unfortunately populism is not limited to politics but has made its way to every other industry even Financial Services. The common theme in populism is to find a bogeyman that can be vilified which will throw logic and reason out of the window.

"Disruption" and "digitisation" (or "digitalisation") have made it into the common persons lexicon and whenever uttered, facts, logic and reason are no longer required especially in the financial services industry. Say these words long enough , ala Trump or Duterte, combine it with "fintech" or "dinosaurs" and you will be considered a guru or influencer in the industry. Sadly, populism is making its way into business strategies as well.

These two words have been overused in the financial services industry, so much so its becoming meaningless and diverging away from the original intents and purpose they were coined. Take for example how the word "digital" is used in banking. In 2018, all major financial institutions in Australia had the word "digital" in their annual report. How may times were these words uttered? Together, all majors had the word "digital" appear a staggering 133 times, up from just over 20 in 2016!

Combined, all major banks in Australia had the word "digital" appear a staggering 133 times, up from just over 20 in 2016!

What's driving this? All to do with populism and the hype around all things "digital", which often renders the entire conversation meaningless (think "Make America Great Again", or in my own backyard "Stop the boats". Fancy slogans but utterly meaningless). For example, CBA indicates that they have 6.5 million digital customers. Huh? What does that even mean? Unless you have been a hermit living in a cave shunning all forms of technology, you are most likely to have a CBA mobile banking app installed if you are a customer and would use this regularly.

The absurdity of all this is of course driven by populism and the need to pander to the deafining babble of the so called influencers and pundits who often take centre stage at major conferences and thus obtain significant media coverage. Its not just the major banks, but this lack of sound reasoning is embedded in the psyche of the so called challenger banks as well.

Michael Porter, in a paper published in HBR in 1990s talks about what is strategy (I do encourage you to read it here). He clearly articulates that obtaining operational efficiencies is not strategy. But this is what most challenger banks are doing, staking their strategy on operational efficiencies delivered through digital channels.

A company can outperform rivals only if it can establish a difference that it can preserve. - Michael Porter

Being digital only is great as it provides bragging rights, speaking engagements at conferences and of course enables the founders to appear on our mainstream media unfettered. But is it enough to sustain an on-going business model? Take for example, the recent launches of a number of digital only banks in Australia. All of them share a similar strategy - improve customer onboarding efficiencies and promote the sentiment, i.e. "move to us because we are nicer than the big banks". And oh, we are free too (in case you are wondering, all major banks do not charge any fees for consumer bank accounts as well!).With so many new digital banks, both domestic and international, entering the Australian market, I fail to see how all these banks will compete, especially in a period of economic slowdown (where savings rates having declined to 2.4%).

Ignoring all the economic and financial fact, which most challenger banks ignore, let's say I have decided to open a new bank account, and yes I am going to stick it to the big banks and choose one of these neo banks. How do I choose? What is my decision making criteria? Banking app colour? Then it has to be blue for me. I know I am being silly here, but here's the thing, being digital is NOT a strategy.

This is where Clayton Christensen comes in with his concept of "disruptive innovation". Way before the word "disruption" was used, Christensen wrote about seismic shifts in industries and how disruptive innovation causes them. But its not the disruption that most have become familiar with. For example, Uber is considered synonymous with disrupting the taxi industry but Christensen doesn't consider this disruption as the service provided challenges the industry directly rather than employ the key factors he considers to be characteristics of disruption:

1. Lower gross margin
2. Small target market, i.e. customers that are underserved or not served at all
3. Simpler products and at times is inferior compared to incumbents
4. Performance that is often unattractive when compared to existing solutions or when compared against traditional performance metrics

When using this definition, challenger banks are not considered "disruptive". But certainly they can use this strategy to build enough ground to create a good value proposition. One challenger bank that has done this is Revolut. They didn't start out as a bank, but built their customer base on the back of a prepaid card linked to multiple currencies (i.e. specific target market instead of "everyone"), used existing currency pairs and charged a small margin (lower margin than incumbents), the product was simple to use, i.e. linked a to card that customers would be familiar with and they didn't offer all currencies (compared to banks, they had a smaller offering).

I don't know the total size of cross-border travellers, but my guess - truck loads. As all travellers would attest, sometimes all the different currencies can get confusing and the fees and charges charged by banks a little obscure. Revolut charges between 1 - 1.5% and this is made clear. Is the strategy clear? You bet! A good reason to open an account, and perhaps sign-up to a bank account so I can continue to keep my currencies in a single place. Revolut has managed to gather 3 million customers, and will increase further with their global expansion (NB: Revolut will be launching in Australia soon)

But for the rest of the Australian challenger banks? You are definitely not "disruptive" until you have a better story than "You can trust us, we are not a big bad bank". Words such as "digital" and "disruption" has been so overused that they have lost all their meaning.

Remember, just being digital or calling yourself digital does not guarantee success. Don't take my word. Just ask Digital Equipment Corporation the first company to use the word digital. Key is to stop listening to self-proclaimed gurus, and I encourage you to think for yourself. Success is often grounded in clarity in thinking, not emotional populism.

Enjoy the journey.