Leadership

Fear and Coding in Las Vegas

October 23, 2016 by JP Nicols

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Like so many of the the fintech flock, I am about to make my annual Fall migration to Las Vegas for the Money20/20 conference. I am looking ahead to what I hope to see there, which is how fintech is becoming more and more embedded into customer experiences and customer expectations, and how financial institutions are using fintech as a differentiator. The Capgemini/EFMA World Retail Banking Report surveyed 14,000 consumers worldwide and found that nearly two-thirds said they were the customer of at least one fintech company.

I am also reflecting back on the other banking and fintech events that I’ve been to over the last couple of months— Finovate and Next Money in New York, Sibos in Geneva, BAI Beacon and the Fintech Stage in Chicago, and keynoting at three different banking conferences with groups from Massachusetts, Missouri, and half the country with the Federal Home Loan Bank of Des Moines. Plus scores of private meetings with bank and fintech executives along the way.

Besides a digital wallet full of frequent flyer miles and a backpack full of Hudson News and Cinnabon sales receipts for my accountant, the main thing that I picked up in my travels is that my industry innovation maturity map of Leaders, Learners and Laggards is evolving, but still valid.

Leaders, Learners and Laggards Revisited

When I developed the maturity map a coupIe of years ago, I defined financial institutions that were Innovation Leaders as those that prioritize innovation as a necessary business activity and support it top-down, bottom-up, inside-out and outside-in. At this stage of evolution I am seeing another difference from Leaders. They also see fintech as a force for redefining business models and improving customer experience.

The small group of Learners in the middle is growing bigger, as more banks are realizing the need to keep up in this era of digital disruption. The same Capgemini/EFMA report also surveyed 140 industry executives around the world and found that 90% of banking executives believe that the pace of change is increasing the need to innovate, and 65.3% said that they viewed fintech firms as potential partners.

I have talked with a lot of Learners over the past few months, and they definitely see the potential for partnering with fintech firms, but they are are finding it challenging to see results quickly, partially because bankers and fintech entrepreneurs seem to come from different planets. They also continue to be challenged in finding the necessary internal resources and expertise since many cannot afford dedicated full-time innovation teams. Most are trying to make due with what I call “And-I’s”, employees with the words “and innovation” tacked onto their existing job title and full time job duties.

My original definition of Laggards was primarily marked by ignorance; executive teams operating with tunnel vision around a narrow definition of competition limited to just their peer group of similar institutions. My recent experiences and conversations tell me that ignorance is now supplemented with an unhealthy dose of denial as they begin to negotiate their own fintech grief cycle.

Laggards think they are “partnering with fintechs” because they have a few technology vendors and a procurement process. They also are much more likely to view fintech as merely opportunities to reduce costs, rather than also the ability to drive better customer experiences.

Spotlight on Capital One

I’ll be talking to a lot of financial institutions and fintechs this week at Money20/20, but I will be spending some extra time with some of the Leaders at Capital One. In upcoming posts I will interview Tom Poole, Managing Vice President of Mobile Commerce for Capital One about mobile payments and integrated commerce, and Naveed Anwar, their Managing Vice President for Platform, Strategic Integrations & Community about the “platformification” of banking and how they are working with fintechs.

I will also be recording these interviews for special episodes of Breaking Banks, the world’s first global fintech podcast. By the way, it was recently announced that Breaking Banks is now the number one business show on the VoiceAmerica network, with over 2.2 million total listeners in over 100 countries.

So follow along as I report this week from Money20/20 in Las Vegas.

Thanks to Capital One for sponsoring these posts and podcasts and for providing access to their team, but all of the opinions expressed are still mine, all mine. To learn more about Capital One, visit www.CapitalOne.com.

Rise of the AND-I’s

July 19, 2016 by JP Nicols

AND-I's

Make way for the And-I’s.

And-I’s are my name for a new phenomenon I’ve noticed in financial services job titles. “And-I” stands for the words “and innovation” tacked on to the end of existing job titles. Your “Head of Digital Banking” is now “Head of Digital Banking and Innovation“.

Boom. You’re now in the innovation game. No one can accuse you of anything otherwise. It’s right there on the business card. The only thing we love more than acronyms in this business is that kind of git er done, check-the-box process efficiency.

Don’t get me wrong, I’m not saying that every bank needs a full time Chief Innovation Officer (and no one needs the trousered acronym CHINO that comes with it, but I guess we have to differentiate from our Chief Information Officers and Chief Investment Officers somehow). It’s great to recognize the need to innovate and to give someone the responsibility for making it happen. It’s just that simply tacking it on without a means of support usually does not have much of an impact.

The 3 most common types of And-I’s:

Head of Digital Banking and Innovation

The head of digital banking (who was called the head of online banking just a few years ago) has already been put in charge of digitizing an analog business model, so adding innovation to their job title seems natural.

PRO: The service delivery model of financial services has been on the front lines of the disruption wars, so an effective head of digital banking probably has a pretty good handle on understanding how customers’ needs and preferences are changing.
CON: Often times, the head of digital banking’s domain is limited to consumer retail banking, and usually just the front end of customer interactions, at that. Opportunities may be missed to create better outcomes in other business lines, drive efficiencies from back office processes, or build a sustainable culture of innovation.

Head of Technology and Innovation

The only thing worse than the incorrect and incomplete conflation that ‘innovation = technology’ is its even more misguided cousin, ‘technology = innovation’, even though the two do often co-exist as a matter of necessity.

PRO: A senior technologist who understands how to make things work inside the complex machinery of a bank is definitely a great person to have thinking about implementing better ways of doing things.
CON: Senior technology leaders are under a lot of (understandable) pressure to keep all of the systems running smoothly and reliably, and to continually seek out and destroy any potential security threats. It’s hard to ask that person to spend a lot of time building and testing new concepts with regularity.

Executive Vice President of X and Innovation

If a board and/or CEO have decided that innovation is indeed an act of leadership, they may want to vest a member of the senior leadership team with newly minted innovation powers.

PRO: Any innovation efforts without a serious commitment from senior leadership is doomed to fail. Having someone with the ear of the CEO and board and a direct say in the budgeting process is a good thing.
CON: Even if the appointed senior officer isn’t the type who needs their granddaughter to help them figure out all of those apps on their new iPhone, all of that experience of the grizzled veterans can actually work against them in the innovation process. The pursuit of perfecting best practices can get in the way of discovering the next practices.

The Case for And-I’s

Hiring people with a full time focus on innovation is an expense that most banks cannot afford. The cost of a full-time, senior level Chief Innovation Officer, plus a team of supporting researchers, designers, and technologists can easily be a million dollar a year investment (or more). Plus hoodies. You can’t forget hoodies.
Infusing an imperative to innovate into everyone’s psyche and their job description is a hallmark of the most innovative companies in the world. It shouldn’t be reserved for an anointed few.
Far-flung R&D labs and skunkworks activities disconnected from the core business and its practitioners can be a rabbit hole of unproductive navel-gazing.

How to Make it Work

Use all of these people as a team, plus a few others (just none of these people), to help you build out your innovation team. But put someone in charge. Even if it’s part time, someone has to be the leader of your innovation efforts.
Establish innovation goals. What are the business goals you are trying to achieve? (See: 5 New Years Resolutions for Bank Innovators.)
Create a separate innovation governance and funding structure. Innovation projects can’t be managed like typical BAU (business as usual) projects.
Have the appropriate time horizons. Your typical ROI models, J-curves and break-even analysis don’t always work well when you’re experimenting with something new. (See: 5 Ways to Kill Your Innovation Initiative)
Don’t go it alone. Get some help setting up and running your innovation program, and don’t build everything in-house. Nimble fintech companies can build and release a whole new app in the time it can take for you to assemble the committee members required to sign off its release.

Support your local And-I’s. They need all the help they can get.

The Fintech Grief Cycle for Bankers

July 12, 2016 by JP Nicols

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As a few fintech companies like Lending Club, Betterment, and others have run into some rough patches lately, it has been interesting to note some of the reactions, especially amongst bankers (that’s just shorthand, I’m looking at you too, credit union leaders).

Some have taken this news as indication that fintech was just a bubble after all, and it is finally popping.

I think a more pragmatic view is that fintech (and “innovation” in general) has simply moved down from the dizzying heights of the hype curve. That’s a good thing. It’s the natural progression of maturing technologies and sectors. It means that fintech is moving from wild, pie-in-the-sky fantasizing to actual application with customers. Real companies are learning real lessons in the marketplace.

Some will make it and some will not, but technology– financial, and otherwise– will continue to be an increasingly important part of our financial lives. As fintech companies navigate the hype curve, bankers seem to be navigating their own grief cycle about fintech and the need to innovate:

Grief Cycle

The Bankers Fintech Grief Cycle

The first stage is Denial. It is hard to comprehend that the things that have brought us so much success are beginning to be less effective. Denial is a powerful reality-distorting mechanism that can persist for a very long time (and it has). We’ve been doing it this way for years. We’re at the top of our peer group. Financial services are different than just selling books or videos. The industry is too big, too established, too well regulated, too politically protected, too important to the economy, too whatever, to be disrupted. We’re in financial services, and we have technology like a core processing system, some ATMs and a website– we already are a fintech company!

The second stage is Anger. Frustration sets in when reality begins to bevoke harder to deny: This is unfair competition! When are the regulators going to take a look at these companies and smack them back to the real world? I could do more if only I was allowed!

The third stage is Bargaining. Compromise seems like an easier path than change, and we become willing to make trade-offs now that we should’ve made earlier: I know we’re going to have to do something different someday for those millennial (never mind that the oldest of this demographic group are already in their mid-30’s), but we can just stay the course until I retire. Maybe if we just clean up our website a little and update our mobile app (or just come out with one), we’ll be OK. What if we just add the word “innovation” to a couple of our people’s job titles?

The fourth stage is Depression. As the new reality persists in the face of all of the other coping mechanisms, despair sets in. Why bother? The industry just isn’t the same anymore. Maybe it’s just time to sell.

The final stage is Acceptance. The inevitable is finally accepted, and for some, even embraced. You know, beyond the threats, there are actually quite a few opportunities in all of this. Some of these companies have some pretty good ideas, maybe we should work with them instead of fighting against them. This could actually be good for us!

Fintech is the new normal, and the bankers who move from Denial to Acceptance faster and step up their own innovation efforts will reap the benefits in this new era of digital disruption.

Strategic Planning: Stacking the Odds in Your Favor

July 5, 2016 by JP Nicols

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It’s midyear already.

Halftime.

Two quarters down and two to go for 2016. For many financial institutions, it’s also the start of the 2017 strategic planning season. That time when boards and senior leadership teams sit down to hash out next year’s budget; working together to set aside silo politics and internecine battles to focus on what’s best for the customers, and the overall enterprise as a result.

Haha– just kidding!

It’s that time when business line leaders are calculating what they need to spend quickly so they don’t lose it in next year’s budget. It’s that time when executives start currying favor and jockeying for position by letting their bosses know how much more worthy their business unit is for additional funding compared to their peers.

As silly as it sounds, it’s all pretty rational behavior, really.

Much of the strategic planning process, especially the budgeting aspects of it, are pretty much a zero-sum game. All of the bottom-up funding requests sent out to frontline leaders from the top of the organization (with varying degrees of sincerity) invariably tally up to far more in expenses and far less in current revenues than what the C-suite has already telegraphed to investors. The resulting negotiations, horse trading, and unsatisfying compromises usually end up with limited resources being spread across the organization like a thin layer of peanut butter. Starving no one, but providing the necessary energy to few.

Lessons from Las Vegas?

Unlike many Wall Street investment bankers and traders, most commercial bank and credit union leaders are inherently risk averse. Las Vegas would seem to provide few practical lessons for the latter group, despite the risk of not taking risk, as I have pointed out before.

But if you’re really serious about reaching a new level of performance, this should really be the time for doubling down on a small number of bets that show promise for outsized returns. That also means taking a few bets off the table if the odds don’t look so good.

Spreading your money around the roulette table seems like a way to hedge your risk, but thanks to the house edge, your expected loss over the long run is a minimum of 5.26%, the same as betting it all on black. Or red.

Moving from House Edge to Player Edge

The only people in Las Vegas who can make money over the long run (besides the house) are blackjack players, but not just any blackjack players– just those who:

Know the odds of every possible bet,
Understand when the odds have shifted in their favor, and
Vary their bets accordingly.

Learning the odds of every possible bet in blackjack is time consuming, but not incredibly difficult. Casinos sell wallet-sized basic strategy cards in their gift shops. But millions of gamblers will ignore them and bet on ‘hunches’, ‘streaks’, and ‘strategies’ more grounded in wishful thinking than in the mathematics of probabilities and statistics.

Understanding when the odds have shifted requires the ability to count cards, a practice made famous in Ben Mezrich’s 2003 book “Bringing Down the House: The Inside Story of Six M.I.T. Students Who Took Vegas for Millions” (later made into the 2008 movie “21”, starring Kevin Spacey).

Counting cards is a way of carefully tracking what happened in the past in order to better predict what might happen in the future. (Predictive analytics, anyone?) This is only true when dealing from a finite number of decks, and not true for a spin of the roulette wheel or the rolling of a pair of dice, where any one outcome is independent of all others. Card counting is not illegal, but it is against the rules of every casino in the world, because it reveals when the house edge has temporarily become the player’s edge.

All of this information can be leveraged to bet more when the odds are in the player’s favor. If most of the cards that have been dealt so far have been smaller values, then there is a greater likelihood that more of the cards to be dealt next will have higher values. This tends to favor the player over the long run (partially because it tends to cause the house to bust more often), so the player should increase their bets.

These factors will almost never combine to create a sure bet, with a win locked in 100%. As in business and in life, blackjack still has a significant amount of randomness involved. All of those tens left in the deck that you hope will allow you to draw to 21 and the dealer to bust her 12, can just as easily do the opposite.

Still, utilizing all of these strategies together can help create more winning sessions, and that’s a good thing.

Turning the Tables in the Boardroom

How can you take the lesson from the blackjack table to the conference table? How can you stack the odds in your favor this strategic planning season?

Know the odds of your existing bets. Are there any slow-growing products or business lines where you know deep down that you are unlikely to grow any faster? Especially if they are not strategically important or do not represent a significant share of ongoing profits?
Understand where the odds have shifted. Are there emerging businesses, products, or services that you’re not investing in today that you should be? Are there outside partners you should be working with to capitalize on new opportunities? Have changes to the competitive landscape exposed new weaknesses you should be shoring up?
Be brave in making your bets. One of your most important jobs as a leader is the allocation of resources. Don’t be fooled by history, legacy, and sunk costs– where is the best place to invest the next dollar? Where should you take bets off the table so you have more to put where the odds are better?

The odds can always move against you in the short run, but taking this approach can help position you to have more wins, and to win more over the long run.

May the odds forever be in your favor.

The World I Want to Live In

February 22, 2016 by JP Nicols

Demographically, I am about as “mainstream majority” as they come. I am a Caucasian, Anglo-Saxon, Protestant male who worked most of his career in the banking industry. An upper-middle class suburbanite heterosexual American to boot. No one would use the word “activist” to describe me. I’m apolitical to a fault, and I don’t talk about much of anything publicly that isn’t directly related to innovation, strategy and leadership in fintech and financial services.

So why should I care at all about this so-called FemTech Leaders movement that seeks to improve gender diversity in fintech and beyond? Why would I even show up at an event focused on empowering women in fintech, let alone promote it on social media?

Three very simple reasons.

First, it’s good business.

Financial services is an especially cacophonous echo chamber, and I want to be surrounded by as many widely diverse perspectives as possible. Different mindsets, different experiences, different approaches. Views I would have never come up with on my own.

It’s just a dumb business practice to exclude half of our population from the conversation. Especially during a time when so many threats and opportunities are impacting the entire industry in such huge ways.

Second, it’s more like the world where I grew up and live.

I had a strong grandmother and mother whose importance to my childhood would be impossible to overstate. My mom tells the story of my grandmother bringing home a pair of bright red shoes when she was younger. My grandfather told her they were too flashy and not very “ladylike”, and ordered her back to the store. So back to the store she went— only to return with a matching belt, purse and gloves in the same ostentatious crimson hue. Grandma didn’t need anyone’s permission to wear (or do) whatever she wanted. I always loved that about her.

My mom is naturally curious. She doesn’t have a lot of so-called formal education, but she has what we call “the figure it out gene”, and I wrote before that she has a PhD in common sense (2019 Update: my mom lost her decades-long battle with COPD this year). It’s not that she doesn’t appreciate formal education. She grew up in a different era in a blue collar family that worked early and often, but she made sure that I was the first person in the family to go to college. “When you go to college…” I always remember saying to me when I was young. Never “If you go”. She instilled in me my love of reading, learning, and traveling, and she encouraged me to explore, take risks and be an early adopter. I wouldn’t be who I am today without her.

My wife is a lot like my grandmother. She didn’t listen to anyone’s career advice about who paid the most or who had the best perks, she devoted her career to helping women who were victims of violent crimes. She has been paged to the emergency room in the middle of the night more times than I can count, got injured in a courtroom brawl, threatened with being thrown in the back of the paddy wagon by a police officer who didn’t appreciate her staunch advocacy for a victim’s rights at the scene of a crime, and helped survivors and their families deal with evidence and testimony that is truly unspeakable and heartbreaking. She could have made more money working at the local mall, and she wouldn’t have had it any other way.

I want more awesome women in my life, not fewer.

Finally, it’s more like the world where I want my daughter to work in and live.

There is another awesome woman in my life. She went from wearing diapers to school uniforms to college sweatshirts to an employee ID badge in what I swear could have only been a few short years. She went to an all-girls school where the motto was “Giving Girls Their Voice”. We, and she, saw first hand the power of every leadership position of every class and every club being held by a girl, and the power of every Ravens’ sporting contest being THE big game— not just the second-rate ‘Lady Ravens’ alternative to the boys’ teams.

These leadership lessons stick with the girls through college and beyond, where the harsh reality of the other 50% of the population invade these artificial constructs. By then they are unafraid to raise their hand in a crowded lecture hall to answer a professor’s tough question, or even better— to disagree with a point in the book. They don’t think twice about whether it’s OK to run for class officer, or play sports, or start a new club on campus. They major in whatever the hell they want.

My daughter found her own voice and I don’t ever want her to lose it.

More Work To Be Done

That’s why the FemTech Leaders movement is so important. It’s not about creating an exclusive group just for women to feel better about being in the minority, it’s about connecting the power of the minds and spirits in all of us to make this industry and this world just a little bit better than the way we found it.

Let’s not stop here though. We have massive under-representation of ethnic, racial, religious, orientation, and other minorities in fintech and financial services. The same benefits of diversity are only multiplied when we make a broader effort of inclusion.

So, my reasons may not be particularly high-minded or socially conscious. I’ll leave it to someone else to inform and inspire you with statistics on workforce participation and pay gaps, and the economic inequalities of non-inclusion.

I just know the world that I want to live in.

Your Fast Follower Strategy is Riskier Than You Realize

February 8, 2016 by JP Nicols

In my last post Leaders, Learners and Laggards I talked of banking leaders who describe their approach to innovation as being a “fast follower, and how my typical retort is that they are half-right— most of them are definitely followers, but there usually isn’t anything fast about their approach.

This has spurred some great discussions on social media, including some comments from people who defended the fast follower approach as a sound strategy. So it appears some clarification is needed on my overarching point.

A fast follower approach in terms of making big public bets on new products is absolutely a proven strategy.

A Great Strategy When Well Executed

Apple is often cited as one of the world’s most innovative companies, but they are not known as a bleeding edge pioneer of new technologies. The Apple computer was not the first personal computer, the iPod was not the first digital music player, and the iPad was not the first tablet computer.The iPhone was not the first smartphone, but it controls 92% of the profits of the global smartphone market.

The Apple Watch is not the first smart watch either, as any Android fan will be quick to point out, but within the first quarter of its release it reduced Samsung’s global market share of smart watches from 74% down to 8%.

Within the first quarter of its release.

Within one year Apple became the second largest watch manufacturer in the world. (For way more detail on how Apple, Amazon, Google and Facebook are taking over the world, watch Scott Galloway’s breathless take from the DLD conference.)

The ‘first mover advantage’ theory established in the early days of high tech in the 1980s was pretty much dismantled by Peter Golder and Gerard Tellis at USC in 1993. They found the almost half of product pioneers failed, and even those that didn’t fail had lower average market share than later market entrants. Countless stories abound today of product pioneers being quickly supplanted by upstart rivals.

The Fast Follower strategy is viable, but the operative word is fast. At least in relative terms.

And that is what is missing from most financial institutions, who measure speed by the decade.

Where’s My Jetpack?

As a child of the 1960s, I was promised a jetpack and vacations on the moon. Those were scaled back to a hoverboard and a time-traveling DeLorean in the 1980s, but the future destination of Back to the Future has come and gone with no such improvements in my daily life.

But I do carry around in my pocket every day a the equivalent of a 1970s supercomputer, I regularly video chat with friends and colleagues all over the world on it, and I can now summon my self-driving car from my watch.

The Gartner Hype Curve is a useful construct to visualize how exaggerated expectations come down to earth in the short run. Some ideas die off, and others are iterated upon and adapted, and their lifespan is extended. Sometimes the passage of time can also help the market catch up to those that were initially ahead of their time.

Ideas don’t exist in a vacuum, they catch on (or not) in a society of humans through a fairly predictable pattern that Everett Rogers called the Diffusion of Innovation curve.

This bell curve shows how early or late segments of the population adopt new ideas. Innovators flock to new ideas, followed quickly by the Early Adopters. Over time some of these ideas are picked up by the Early Majority, followed by the Late Majority, and eventually even the Laggards.

Trailblazers, Traditionalists, and the Chasm Between

In 1993 Geoffrey Moore introduced to Rogers’ curve the concept of the ‘chasm’ that exists between the Innovators and Early Adopters and the rest of the segments on the curve. Left of the chasm, people live to explore new ideas, and they are willing to take a reasonable amount of risk in order to reap the benefits of being early. They are the first buyers of new products, the ones waiting in line overnight for the pride of owning version 1.0.

Right of the chasm is where phrases like “Nobody ever got fired for hiring IBM” come from. They want to take zero to very little risk, and they are willing to accept a relatively limited upside in exchange for this reduced risk.

These two broad groups— the left and right sides of the chasm— align closely with the groups I have highlighted before as Trailblazers and Traditionalists. Trailblazers want to explore the unknown and establish next practices, while Traditionalists want to master the known knowns and enforce best practices.

The picture becomes even clearer when you plot the two curves together. Ideas must cross the chasm to have commercial viability.

This highlights the challenges of truly being fast when you’re a follower.

The kinds of companies full of Trailblazers that come up with groundbreaking new ideas often do not have the very different skills of scaling up those ideas for mass market adoption. This goes a long way to explain why the first movers often fail to maintain commanding market share over the long run.

Likewise, mature organizations in mature industries full of Traditionalist employees, like, say, financial institutions, often don’t have the skills (or inclination) to develop and incubate new ideas. Hence the launch of new bank innovation teams and labs in recent years.

The Key to the Fast Follower Approach

The danger is in waiting too long so that the new idea— once groundbreaking and with the potential to set your institution apart from the pack— is now mainstream.

Before long, mainstream becomes table stakes. The longer you wait, the wider becomes the customer experience gap— the gap between what your customers have come to expect as a minimum, and what you actually provide them.

As Innosight’s Scott Anthony puts it in Harvard Business Review:

“But make sure that when you say that you want to be a fast follower you aren’t really saying, “Can’t I just go back to running my core business?” Too often people find that when it is a strategic imperative to respond, it is too late.”

So a fast follower approach can be a wise one, providing you’re actually fast enough to capture an idea on the upside of a growth curve.

Otherwise, it’s a riskier strategy than you realize.

Leaders, Learners and Laggards

January 27, 2016 by JP Nicols

I talk with a lot of banking leaders who describe their approach to innovation as being a “fast follower. My typical retort is that they are half-right— most of them are definitely followers, but there usually isn’t anything fast about their approach.

Pioneers are the ones who get hit with arrows, and it is only natural that bank executives who are (quite appropriately) concerned with avoiding and managing risk as a large part of their job duties don’t want to be out on the bleeding edge of innovation.

New ideas are unproven, while existing products generate today’s earnings from existing customers. The idea of diverting precious limited resources and managerial attention toward unproven ideas makes prudent managers understandably uneasy.

The risk of not taking risk

Today more than ever, though, leaders should also be concerned about the risk of not taking risk.

The risk of not taking risk is much harder to identify and manage. It’s the risk of not investing in new ideas that can keep the company competitive, or even leapfrog the competition or create new products or markets.

While the payoffs can be huge, this is not a risk-free investment.

Not all new ideas will pay off. Some will be be total failures, and this is a hard reality to accept for managers who spent their careers making safer bets and avoiding losses. That’s the core operating model of banking, where nearly 99% of loans made are expected to be repaid in full with no loss.

A Fixed Income Investment Approach

Traditional retail and commercial bankers are not venture capitalists, where five total losses and four break-evens in ten investments is simply the price to be paid for a shot at the one homerun that pays off all of the other bets and then some.

Bankers are more like fixed income investors, where the best outcome is a return of principal, plus a single digit interest rate spread on the principal.

The formula for winning that game is taking a large amount of relatively safe bets, with a pretty high confidence level that the risks involved are well known and quantified.

And so has gone the approach of most bankers, not only for their loan portfolios, but by extension their very business models, for literally centuries. This approach works well when the competitors are all similar and all are playing the same game by the same rules.

However, when new disruptive forces shake up the status quo, and new competitors this approach carries hidden risks.

Like the risk of not taking risk.

Enter the S Curve

Most businesses have S Curve growth cycles— a flattish early period during the business’s launch and early adoption, followed by a period of steeper growth which eventually declines as the business matures. If new products, customers or markets cannot be harnessed to jump to the next S curve, the business will die out.

How do they ‘jump the S-Curve’, as Paul Nunes and Tim Breen put it in their book Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There? I think this is an especially troubling question for banking leaders.

This is a new phenomenon for banks, whose fixed-income investment approach to management has led to a more stable (and lower) growth trajectory, once adjusted for economic and interest rate cyclicality. In other words, what has historically caused variability in bank earnings has been changes in interest rates and economic conditions (and therefore loan losses and reserves), rather than major competitive shifts in the marketplace.

Until now.

The rise of new competitors and new business models in financial services are forcing bankers to confront the S curve for the first time. Companies who thrive in dynamic industries are used to using innovation to effectively transition from one curve from the next.

Innovation is all about creating new options, and this is becoming increasingly important in banking.

Leaders, Learners and Laggards in Innovation

I have talked and written before about Leaders, Learners and Laggards in innovation.

There are just a handful of banks we could consider leaders in innovation. Leaders deeply understand the need to innovate and they prioritize ongoing innovation as a business activity just as necessary as compliance and asset-liability management. Senior leadership, from the CEO on down, require and reward innovative thinking, and they set a growth agenda for the company that puts emphasis on generating new sources of revenue. They try to disrupt themselves before someone else does it for them.

But Leaders don’t just rely on top-down strategies to improve and expand their business, they also encourage and invest in bottom-up innovation. Likewise, they supplement their internal innovation efforts with external involvement and investments in incubators, accelerators, hackathons, venture capital, and lots of other ways to engage in and help develop the broader ecosystem. Innovation is a 360 degree activity for Leaders.

A slightly larger, and growing, group of Learners have just begun to realize the need to innovate. Learners may even have pockets of innovation within the company currently, but they haven’t really embraced innovation as a business necessity. Early Learners may be infected by FOMO, the fear of missing out that arises from seeing others’ success, and they may be tempted to make token gestures to drive appearances rather than actual results.

Early Learners may also think that merely adding the word ‘innovation’ to someone’s job description is a major accomplishment. If they are truly committed to learning though, they will discover that ongoing attention and support is needed to get business results from innovation. Later stage Learners start to realize the benefits of their efforts, and start to make additional investments to accelerate results.

Unfortunately, there is still a long tail of Laggards, the institutions that still don’t even know why they should innovate. Laggards still have tunnel vision on the way things used to be, so they can’t even see the changes happening all around them. They are convinced that success is just about perfecting their existing products and services, and they very narrowly define their competition as just their peer group of similar institutions.

Moment of Truth for Laggards

As the release of loan-loss reserves is no longer fueling bank earnings, and interest rates and loan spreads remain low, banks must innovate new revenue sources and new ways of delivering customer value. The gap between the laggards and the learners and leaders will only expand, and many laggards will be acquired by faster moving institutions.

Many laggards are simply unable to sense the shifting landscape, while others have willfully disdained what they perceived to be the riskier path of trying new things. The true cost of their inaction and ignorance will be borne out in the coming months and years.

As Warren Buffett says, “Only when the tide goes out do you discover who’s been swimming naked”.

The Four People Who Ruin Innovation

January 19, 2016 by JP Nicols

Innovation is fun. Except when these types are around. How many do you know?

The Hypemaster

The Hypemaster is, well… a master of hype. Everything they’re working on is amazing, and you must absolutely drop everything and check it out. Right now! “Hey we’re getting ready to launch Hypemaster.io, check it out and let me know what you think!”

I love meeting new people and seeing new ideas, even though I usually don’t have a lot of free time to look at a stranger’s project and give them a bunch of free advice. But I try to be helpful, so sometimes I do it, if the approach is right.

The Hypemaster doesn’t respect your time or your own commitments, and they really don’t even want your advice anyway. They just want you to promote their link on social media, or worse, ruin your friendships by introducing them to other people. Their project descriptions are stuffed with enough buzzwords to make Dilbert’s pointy headed boss jealous. “We are radically disrupting this vertical with a full stack digitized approach to the blockchain, with fully-configurable architecture and a lightweight contextualized interface”.

Natural Habitat: Startup Conferences, Conference Apps, Twitter DMs, LinkedIn InMails

The Innovation Snob

Nothing is cutting edge enough for the innovation snob. 3D Virtual Reality? Yawn. It’s been done already. Self-driving car? The Innovation Snobs claims to have been into them 10 years ago, but it’s too mainstream for them to bother with now. They think Elon Musk’s rockets are too similar to what NASA did in the 1960’s.

Continuous improvement and incremental innovation are an important part of keeping a company growing, but they are nothing but eye-rolling material for the Innovation Snob. Solving real problems that paying customers care about is the true heart of innovation, but the Innovation Snob only wants to see something they have never seen before. Preferably on a touchable hologram emanating from a smartphone that hasn’t been released yet.

They also think they are the only ones entitled to an opinion. Everyone else is a pundit, armchair quarterback or wannabe, they’re the real deal, damn it.

Natural Habitat: The Bar after the Conference, Finovate Twitter Feed, Facebook Comments.

The Disruption Denier

The Disruption Denier is the 180-degree polar opposite of the Hypemaster. NOTHING is impressive or impactful to them. All of the good ideas are already taken. Anyone with a new idea is simply a charlatan trying to separate you from your hard-earned money. They’ve been there, done it, got the T-shirt, and knew better the whole time. They also know far better than than you now that your new idea will never work. They’ve tried it before. Didn’t work then, won’t work now.

Disruption Deniers think they alone have figured out how the world really works, and that the current state of affairs is permanent and unchangeable. Worse, they sometimes are even convinced that some previous era was actually the ideal situation, and that most progress made since then is regrettable.

Sometimes this perspective comes from a comfortable perch built from doing something that did indeed work just fine in the past. Usually though, it really just comes from a dark and bitter place where they just don’t want to accept their own failures, so it makes them feel better to lash out at others, usually through drive-by assaults in the comments section.

Natural Habitat: Mid-Level Management, Golf Courses, LinkedIn Group Comments on Others’ Posts

The Chameleon

This person can be hard to spot. They might seem at first to be a Hypemaster, singing the praises of the hottest piece of technology, especially if it isn’t exactly brand new. At other times, they may appear to be a Disruption Denier, clucking at some previous market darling’s fall from grace. They gyrate wildly from pro to con, and from fanatic to critic.

They were the first to tell you how excited they were about the Apple watch when it was announced; but now that their friend is less than enamored, they tell everyone how much it sucks. All through secondhand knowledge, because they won’t buy their own until Version 5 comes out.

The chameleon has an incredible ability to blend in to its immediate surroundings; sensing the environment around him and adapting to it quickly and without notice. Apparently the price for this superpower is a lack of original thought and reasoning ability. They do, however, possess 20/20 hindsight.

Natural Habitat: Company Lunchrooms, Cable News, Facebook, Twitter (main feed)

Everyone around you is either helping you get to where you are trying to go, or they are not. These people definitely are not. You can’t always pick your boss, your coworkers, or a lot of the other people you come across daily, but your innovation efforts will improve if you get rid of these people.

And you’ll have a lot more fun.