Ch-ch-ch-ch-changes ...Turn and face the strange
We have to be bold enough to write off the past – all of it – because there’s no price for secondhand strategies
Uber’s listing on the NYSE last week has been described as a flop. Really? I’d love to own a flop like that. Imagine you start a company, and just over 10 years later it is worth $75bn? I’d get over the 8% drop in the listing price in a heartbeat.
Uber epitomises the new value game over the past decade. It’ll be one of the case studies in technology-enabled, customer-centric strategies that are disrupting every business model that came before them.
Even Uber may have to watch out. If the traffic is serious enough in Manhattan, the fare for a quick helicopter flip to JFK airport quickly updates to the point where it starts competing with the time it’ll cost you in the top-of-the-range UberBLACK. That’s tech for you, that’s data.
The power is in our cellphones, in our hands. We all know that. What is becoming clearer is that it’s all-pervasive, it’s going to take over everything old-school – well, almost. It’s not all good, but it’s unstoppable.
The cover story in the latest Economist is “Tech’s raid on the banks”. It’s a great read. It covers the concept of a “neobank”, a completely digital offering. The piece is about the future of banking, about what millennials want. Who cares? They’ve got no money or assets, right? Wrong. They are the game. Again, we all know that. My question is what we’re going to do with the past?
The challenge with change is not to know it’s coming (you’d have to live in a cave not to know that). It is to recognise the extent of it, to know what to do about it, be bold enough to invest in the new future and write off the past – all of it (yes, write it off, there’s no price for secondhand strategies).
The effect of technology on banking isn’t going to be an alternative offering. It won’t be about just closing a couple of branches. Millennials don’t want to talk to people, so no branch managers (they’ve had enough of that, putting up with their parents). They just want an answer, and they have multiple-choice options.
The price they pay is privacy invasion, personal data exploitation, tunnel vision – but they’ve crossed that bridge already.
Banks have survived (and flourished, in good times) because of the regulatory oversight that enables them to have disciplined term structure books (long-term loans in an upward sloping yield curve, funded by on-demand deposits), and exceptional debt-equity structures (with capital adequacy ratios ranging roughly between 10% and 30%) that leverage (in fact, multiply) returns on base equity.
That’s worked forever to fund economic growth, evidenced by their massive assets, which exceed $100 trillion worldwide. At some point that’s not going to matter anymore, like owning a car or a house won’t either.
The risk-return equation for the big players in consumer products is different to the banks. Sales is the imperative, and the margin built into the price of a car, a computer, a cellphone, or a watch leaves plenty of room to take some financial risk in vendor financing. You’ll get credit easier from a supplier than from your bank relationship manager (if you’re even a big enough deal to have one – and all those pesky questions). None of this will happen overnight, but there will be some winners and failures, that’s for sure.
The cost per unit of technology, at the margin, for startups, is approaching zero. With old fashioned revenue sources declining, it’s harder to make those difficult decisions to dump those big legacy assets and cost structures. First movers will win – market share will be the test.
Physical structures (branch networks) will be drastically rationalised – there’ll be only one (perhaps two) multichannel, multiproduct, technology-powered, physical offices of exchange left standing (and we know who that’ll be).
At the core of banking is the national payment system – the trusted, regulated, functional central processing unit of the economy – that makes it all work. That will stay, and grow. It’ll underpin everything from spaza shops to international trade, e-commerce, app-driven activity, music downloads, and foreign exchange – with logistics as the final checkpoint that seals the deal.Transaction based, instant and incremental credit approval lending, based on facts (not opinions), real-time data and patterns of behaviour (primarily) – that’s where we’re heading. It’s not all good, or bad, but it’s here to stay.• Mark Barnes is CEO of the Post Office.