Tunnel Vision--Competitively Doing What Others Do for the Wrong Reasons

Dangelo, Mark mark@mpdangelo.com

March 01, 2016

(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.)

Across investment firms and within boardrooms, names and excitement with emerging firms has clearly overtaken those established during the last memorable expansion cycle of 1997-2001. It spawned large numbers of incubators, spinoffs from universities and carve-outs from corporate "emerging technology" groups that spurred NASDAQ to record highs and million-dollar venture capital commitments for ideas drafted by smart people.

Billions were "invested" by hopeful financial firms (e.g., Atomic Tangerine) seeking to change the competitive landscape--they didn't want to be left behind. Having personally been involved in that cycle, I can say much of it was eventually written off along with a desire to "redesign the enterprise" using emerging technology. History tends to repeat itself.

That was a decade ago. Since then, the euphemism of "financial engineering" decimated bank risk taking, ushered in "War and Peace" style regulations and cost hundreds of thousands of those involved in the last "technology investment" cycle their careers.

Since 2012, it is noteworthy the number of financial services incubators, innovation teams, patents and technology teams that have been created within the organizational walls (collectively labeled iFin groups herein). Yet, in a time of declining bank valuations and a significant worry of a recession or slowdown, bank spending on joint arrangements with FinTech firms or custom (patentable) internal developments have risen from $2.9 billion in 2013 and projected to be more than $8 billion by 2018.

These projections are very conservative as other statistics already have 2016's investment exceeding $20 billion--an 18-fold increase over seven years. One can readily expect that more than 90 percent of these FinTech-like "investments" will be written off to zero--and let us hope they were not capitalize on the balance sheet.

Just last week, JPMorgan announced it was increasing its budget 20 percent for cyber security, app development, block-chain (i.e., distributed ledger) and other corporate initiatives tied to digitization of the financial base. It is safe to say, we are as an industry entering the next phase of rapid technology investment--larger scale, larger budget, greater expectations and greater risks.

Same Horse--Muted Color
Competitive pressures during times of narrowing margins and profitability (e.g., more than $40 billion in Q4 2015), create an expectation that future growth can be fueled by efficiency, technology and mobility. Moreover, there is a belief that instantaneous delivery is more important than features, layering, integration and ever stringent security (e.g., privacy, protections, identity). If you doubt this, turn on the radio for an hour and nearly every banking commercial is centered around speed for customers.

For some incubators and joint ventures underway, banks marketing agencies are seeking to make the most noise they can to attract the interest of consumers who are already overwhelmed with app, software and hardware choices. Statistical evidence points to more than 100 apps running on the average smart phone and if the Varian Rule holds true (i.e., luxury to mainstream implementation), much of what is expensive, bleeding edge financial solutions will be assessable to the average Millennial in the next few years.

What appears to be accelerating across the banks marketing messages are "cooler" interfaces, "why wait" delivery, "your lifestyle" features and my personal favorite "faster everything." Whenever I hear these themes I picture competitors performing the Keystone Cops routines jumping in and out of their cars seeking to catch the other.

Globally, as interconnected society's move from mobile interfaces (e.g., PCs and laptops) to smart-device interconnectivity (i.e., small, personal or wearable intelligent artifacts connected to ubiquitous Wi-Fi) fueled by demographic, age and technology advancements, there are fundamental and permanent shifts taking place.

For example, payments and clearing represent a concentrated focus as smart apps displace the need for cash while accommodating the growing demand for P2P transfers. Yet, if we look beyond the hype, banks or tech firms are trying to propagate traditional principles by simply using a new wrapper. If they don't, impacts to fee-based income, market volumes and financial supply chain importance may diminish. Therefore, while banks believe they are "ensuing their future" they are alienating themselves from their consumer base and setting themselves up for consumer advocacy blowbacks.

Increasingly, as banks spend millions securing patents for their share of technology innovation, they also lock themselves into their investments thereby limiting innovation and new ideas from sprouting in the future. It also sets up banks to be more like patent trolling firms and less like banks as time goes on all in an effort to protect (or secure) income at the expense of recognizing and capitalizing on rapid, iterative cycle changes across consumer profiles.

Think of it this way: if we spend 18-36 months securing a patent or patents, how likely will senior management be to consider alternative solutions thereby making "legacy" patents a barrier against rapid market changes in currency, lending, settlements and research? Moving to understand the existing and future role of iFin teams is a critical principle for measuring contribution across the enterprise.

--What happens when artificial intelligence expands, vast data analysis becomes a compartmentalized solution and virtual reality interfaces and apps take wider adoption (i.e., Varian Rule) against the "sure bet" of smart devices?
--Are banks designed to become FinTech protectors against patent licensing as part or in lieu of their established charters and investor demands?
--What do we think the regulators will do with this and will be it classified as anticompetitive and monopolistic after uncounted millions spent back-stopped by taxpayer promises?
--Are conservative bankers going to become less risk adverse using internal patents or solutions from their iFin groups or more if they become irrelevant for those non-banked or underbanked (representing nearly three billion people)?
--What will consumer advocacy and governance groups do when iFin offerings contribute to discrimination practices (built into the software, apps and layered tech)?
--With high valve skills sets in short supply, are banks diluting their focus and returns by trying to be something they likely lack the leadership, self-destruction resolve (i.e., to destroy what exists in favor of what will grow) and a culture to not only obtain necessary personnel but to keep them within a culture that will remain highly regulated and risk-adverse?

There has been a great deal of fear and mistrust sown over the past three years in media articles regarding "banks being left beyond," "banks becoming irrelevant against new technologies" and "FinTech firms and retailers becoming banks." A significant amount of these themes can be found in well-written professional services articles and from interviews conducted at tradeshows and association events. But it is a case of following the boy who cried wolf and instead becoming a lemming heading into the sea?

Hype Be Damned, Enter the Slope of Enlightenment
It is not to say securing patents to protect an innovative method of operation is ill-advised, but it also has been done in a prior cycle with equal enthusiasm. However, to promote growth and innovation, iFins have to recognize and accept their own limitations, biases and cultural boundaries when applying globally widespread digitization to their products, services, processes and iterative adaptations.

To the point, iFins need to be enveloped by demonstrative boundaries.
--How will these investments in team and technology be leveraged or pared in down-cycles or irrelevant pursuits?
--Beyond quick marketing wins, how will arbitrage of solution setting be accomplished and by who?
--If there is a global or non-banking leverage for an invention or patent, who and how will this be accomplished beyond the inventors for maximum returns?
--How are investments (capitalized or expensed) to be dealt with to reassure investors and corporate sponsors that "not invented here" doesn't turn into "not our priority"?
--What filters and processes will be applied to eliminate digitization biases?
--How will iFins be rewarded, measured and disbanded (repurposed)?
--How does the use of external patented layers along with compartmentalized building blocks of technology, consumer experiences, joint ventures, KPO and BPO and data isolation mesh with internal (sometimes directly competitive) standards and patents against delivery solutions?
--Who resolves iFin issues along with command and control disagreements against business line manager demands in opposition to the "speed of smart device innovation adoption?"

There are many others, but bankers already have a history of enveloping the hype, while discounting the eventual disillusionment and financial consequences. Like an angry political constituency, consumers continue to confound banking strategist due to their "thinking they know their customers."

Comparable to politics, iFins will soon experience their own revolt and widespread write-downs just as once invincible brands such as Google Amazon and Apple lose their luster and consumers shift their attention and behaviors to something new. Moreover, brands of banks are also held in the lowest regard among industry rankings and consumers, investors, regulators and media outlets will punish these "unanticipated consequences" with extraordinary zeal.

The bravado of "we know better than anyone else" recently raised its comical satire were a CEO stated that big banks are driving the pace and path of smart banking, technological customer acquisition and rapid innovation above everyone in the industry--and even outside it. Funny thing about those leaders that survived the Great Recession, their retention has fed the egos and arrogance within their ranks. We have been on this threshold before.

The follies of not accepting risks, framing investments and the size of market retribution are just marking time by doing their pushups in the parking lots--waiting for the reality to take hold. Let's take our own inventory and account for realities--before this excitement turns ugly.

(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)

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