What's this all about?
When it comes to contextualising financial services at scale and embracing the vision and energy of entrepreneurship, major banks in Europe have lagged behind their American and Chinese counterparts. In the following article, Head of Innovation Conor McAleavey considers what could be achieved if one of the main European players took a leaf from the Ping An playbook and mixed it with the entrepreneurial co-creation methodology of FoundersLane. Conor also ponders what it might look like if that antidote was applied to the Irish home-buying experience.
Read on if you:
- Are curious about how digital ecosystems can impact banking
- Dig what Ping An is doing for financial services in China
- Want to understand how the ‘entrepreneurial co-creation’ approach could be applied to financial services
- Take an interest in the future of banking
Bill Gates famously once said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”
While he probably meant this in the broader context of technological and business model change, it seems to me to be exceptionally relevant when it comes to the modern era of the Irish financial services industry.
Imagine for a second that you could go back, even just five years to 2015, to tell an Irish banker that by mid-2020 there would be a new start-up bank in town with over one million users and a valuation greater than the combined market caps of both AIB and Bank of Ireland. He or she would have thought you very naive. Yet, that is exactly what happened.
However, that is just five years ago, only half the timespan Gates was referring to. So, just imagine the disruption that will continue to happen between now and 2025, never mind 2030.
Digital ecosystems are eating the world
There is no historical precedent for the pace of change that the world is currently undergoing within the context of technologically-enabled business models. There was a time when companies and technologies held sway over entire industries for decades on end, their dominance being handed down from generation to generation. In the 1950s, for example, the average age of an S&P 500 company was 60 years. These days, businesses can emerge from garages and college dorms to create and dominate entirely new industries in a very short space of time. As of 2020, that same S&P 500 average is now below 20.
The main reason for this is the awesome efficiencies and distribution power that platform-enabled digital ecosystems can bring to bear on almost any industry. On the consumer side, they offer extraordinary choice and convenience, while on the supply side, they are asset-light and have almost zero marginal cost of adding new services and suppliers. These factors make it near impossible for traditional marketplaces and linear business models to compete against them.
For those of us in Europe, and especially in financial services, we have yet to feel the full force of these digital ecosystems. All seven of the largest public companies on the planet are either American (Microsoft, Apple, Amazon, Alphabet and Facebook) or Chinese (Alibaba and Tencent) companies, with fully or partially platform-enabled business models.
The fact that digital ecosystems have yet to dominate Europe, as they have in other parts of the world, should not lull incumbent European companies into inaction. The unfair advantages that these hegemonic ecosystems possess mean it’s only a matter of time before they are eating up industry verticals all across the continent.
Contextual financial services
So, if we accept that by 2030 the distribution mechanisms in banking will look nothing like they do today, what is an incumbent bank supposed to do?
I personally believe they need to take a practical short-to-medium term view as well as a more ambitious medium-to-long term approach. In the short term, they need to continue to digitise their product offering. However, if they think they can transform their ailing business models by digitising analogue products (in effect, replacing branches with apps), they are clearly not recognising both the opportunity and threat posed by hyper-efficient digital ecosystems.
In the medium-to-long-term, they need to learn from the big ecosystems and embrace the concept and inevitability of contextual financial services: products and services that appear at the point of need but are otherwise unobtrusive.
When it comes to the contextualisation of financial services at scale, Ping An is the undisputed king. Traditionally a fairly run-of-the-mill insurance provider, it transformed its entire organisation with arguably the most progressive and successful digital strategy in the world. A two-pronged strategy that has ecosystems and customer contexts at its very heart.
The first prong involves Ping An building and acquiring ecosystems, which it then uses to distribute its products at the exact point of need. Autohome, which Ping An owns a controlling stake in and which is the largest consumer automobile website in China, gives it the ability to surface car insurance and motor finance right at the point of need for the platform’s more than 400 million users. Ping An’s telehealth platform Good Doctor, which boasts more than 300 million users, offers a similar distribution model for its health insurance services.
The second prong involves Ping An exposing its products and services via APIs to be consumed by third-party websites and ecosystems. So, for instance, if you are a flight or hotel aggregator, you can expose fully contextualised Ping An travel insurance right at the point of need during your customer’s booking journey.
Ping An gets ecosystems and it understands the power of data. It also gets that the future of financial services will not be powered by the traditional linear approach of ‘design, manufacture and distribute’ via a single regulated entity, but that instead the borders between what is and what is not financial services will continue to blur.
There were multiple factors that enabled Ping An’s regeneration, not least the scale of China and the visionary leadership of Peter Ma. That said, not every incumbent bank has a Peter Ma, and their strategic playbooks are generally antithetical to any radical approach to business model evolution. But what if there was a way to change that?
The entrepreneurial co-creation process
Large organisations are optimised for steady incremental growth and many are, in effect, inert. Over time, they have developed immune systems which quickly kill off any large-scale innovation project that is seen to be disruptive to their existing business model and that fails to align with their risk-based approach to achieving steady predictable results.
However, as the digital revolution continues to wreak astronomical change on every industry in the world, this inertness presents an enormous threat for those organisations that do not embrace that change and evolve their business model.
In a recent book entitled ‘Fightback – How to Win in the Digital Economy with Platforms, Ventures and Entrepreneurs’, authors Simon Torrance and Felix Staeritz (CEO of FoundersLane) confront this very dilemma and prescribe a very practical framework and methodology for how big businesses can address it. They call it ‘Entrepreneurial Co-Creation’, or ECC for short.
The ECC process is designed to help large incumbent companies circumvent their organisational immune system and partner with “inspiring entrepreneurs to collaborate with remarkable results”. In effect, it brings the imagination, vision and energy of entrepreneurship to bear on large scale strategic opportunities in partnership with organisations that are rich in monetary and relational capital.
The fundamental aim here is to turn the lumbering old organisation into what Torrance and Staeritz call an “ambidextrous organisation”. An organisation that can “protect, optimise and expand its core business while generating enough dynamic new businesses, products and services to position it for success in a fast-changing and largely unpredictable world”.
A key tenet of their practical framework is the creation of what they call an ‘Entrepreneurial Growth Board’, which sits between the existing business and the newly dedicated ‘fast-track the future’ business unit that is charged with co-creating new digital ventures in partnership with successful tech entrepreneurs. The new board is there to ensure that the new unit is not only equal in prestige to the core organisation but is a vital link to ensure that “requirements and learnings, assets and information can be transferred backwards and forwards between the two”.
The board is there to act as a steering committee and to make strategic decisions. Most crucially, it also governs how and when the new business unit can “leverage the assets of the core organisation and it has the authority to take crucial buy/build/partner decisions” when required by the tech entrepreneur.
In many ways, what they are describing here is a solution to the classic Innovator’s Dilemma. However, this idea of co-opting tech entrepreneurs and digital disruptors to work alongside big business to cocreate new digital ventures is a unique perspective and one that they have proven across multiple geographies and verticals.
I couldn’t possibly do the book justice in a few short paragraphs, but the key message here is that there is a proven method for incumbent businesses to transform themselves into ambidextrous organisations; to break free from their traditional approach to steady growth and build new and transformational digital ventures that have the potential for exponential growth.
How might all this be put to work for banking in Ireland?
If there was ever something in dire need of disruption it’s the Irish home-buying experience. With the highest mortgage interest rates in the eurozone, it operates within an archaic technological infrastructure, with an infuriating application processes, a suspiciously opaque bidding system and offers minimal coherence within a disparate process-heavy ecosystem. Friction, frustration and inefficiency abound at every turn.
For a moment though, just think what could be achieved if one of the big banks took a leaf from the Ping An ecosystem and customer contexts playbook, and mixed it with the Entrepreneurial Co-Creation methodology of Founders Lane.
Perhaps it would be possible to build a home-buying ecosystem where a borrower could search, bid, borrow and buy their dream home on a single platform. Where each service and product is contextualised within the buying process at the exact point of need. An ecosystem where the near-zero marginal cost of adding new properties, professional service suppliers and lenders gives the consumer the ultimate in choice, convenience and transparency.
For many banks, this may seem like a fanciful idea because of the frustration with their technology and their obsession with defending an outdated business model. However, it is my view that with the correct framework, tech-founder energy and an entrepreneurial growth board willing to sanction the build-or-buy of a new data and API-driven platform this is not only achievable but utterly necessary.
If the last five years are anything to go by, the emergence of a modernised home-buying ecosystem in Ireland is all but inevitable. The only question that remains is, will an incumbent Irish bank have the foresight to do this before one of the existing or emerging digital giants gets there first?