A profit focus may leave banks behind in innovation

You can sense an audience’s reaction as you present ideas on innovation. Sometimes it’s warm and engaging, sometimes distant and thoughtful, and occasionally remote and cynical. I experienced all three reactions when presenting at a bank’s annual leadership conference recently, with the third being the reaction I like the least but enjoy debating the most.

This was a third of the way through my dialogue about how transactional branches need to be shut down, as mobile delivery through contextual, intuitive servicing is the new focus. A hand was raised in the audience, and a manager loudly opined: "This is all well and good, but where is the money?" Ah… the old 'show me the money' statement. I’ve heard it regularly and, in fact, most regularly from this particular bank.

Purely due to time and structure, I couldn’t answer the question raised properly until the end of the presentation – this wasn’t supposed to be an interactive workshop, maybe it should have been – and, as a result, the rest of the presentation had a mood change among everyone to 'show me the money'.

All the innovations I talk about regularly – new forms of currency, value exchange, hybrid real life and virtual economies, alternative commerce systems, the use of big data and the threat of those who get it, the mobile world of revolution from Africa to the US, etc – were now tainted with the 'show me the money' undertone.

An innovation presentation on the future of banking is not supposed to be a presentation about the business case for new banking models, although maybe it should be. I’ll work on it next year.

A guard against complacency

But here’s a story about why the 'show me the money' crowd have the wrong focus. There’s an old bar in my town called The Branch. It has been there for hundreds of years and has a regular and loyal crowd who drink there. It has always made money by selling nuts, crisps and sandwiches, along with high-priced spirits and beers. It doesn’t serve a decent wine, as no-one came to The Branch and asked for wine, but the beer is the focal point for the largely male crowd who attend there.

A few years ago, a little bistro opened nearby called The Upstart. The Branch's manager wasn’t particularly concerned about it. After all, it was positioned totally differently to The Branch, in a different market with a different focus. It served wine, when The Branch didn’t. It served hot meals, when The Branch didn’t. It was more like a restaurant than a bar, and it didn’t serve beer and didn’t have a loyal customer base.

The Branch's manager thought that The Upstart wouldn’t succeed and, even if it did, that it wouldn't affect The Branch's business. But The Upstart thought differently. The Upstart didn’t know if it was going to make money, but had seen the idea of hot meals and wine working overseas and believed it could work here.

After a while, The Upstart had a few loyal customers. They were mainly families, and these families often included people who previously went to The Branch. These folks could not afford to have a night at The Upstart and at The Branch regularly, and slowly the loyal customer base of The Branch were all too often to be found in The Upstart’s premises.

Eventually, The Branch could see it was losing business and so the manager changed his ideas a little. He began to serve wine and hot food. But the crowd didn’t buy it. They didn’t like the dark and old view they had from The Branch and soon it was abandoned, apart from a few loyal souls who were dedicated to their beer and sandwich.

Meanwhile, the Upstart was enjoying a buoyant business, with high-margin food and wine purchases in volume, and so the new business was not only making a profit, but a substantial one.

Priority shift

The moral of the story is that, with innovation in banking, you shouldn’t necessarily look for the profits but should seek to avoid the losses. It is difficult for new entrants to get into banking. However, if new entrants erode the fringes of the banking model where they can enter, then it is often around the parts that make money, such as credit and loans, insurance and mortgages.

This has been shown to be the case regularly through the past few decades and the danger is that all that the bank will be left with is the loss-making deposit account of the corporate and consumer. If that’s all you want, fine; but it’ll give you losses as you lose cross-sell opportunities. This is why banks need to fear the upstart chipping away at their higher margin business as, in most cases, banks only have something to lose rather than gain.