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Trends: What do we look for?

This entry is part 1 of 30 in the series Trends

Trend spotting and trend watching are key activities in an environment scan, which is part of the strategy process.

But what trends should we be look for and how do we find them?

The Business Model Generation book provides a great graphic for forces and trends.

IMG_0133Trends are addressed at the top of the diagram. There are 4 categories of trends:

  • Technology Trends
  • Regulatory Trends
  • Societal & Cultural Trends
  • Socioeconomic Trends.

In my opinion, Socioeconomic trends are generally associated with the forces (industry, macro-economic, and market). As I track trends I will try to track them at the more fine-grained level.

 

 

Trends tell us about the rate of change of some attribute in the environment. To be useful, we need to think of a trend as a graph with time (t) on the x-axis, the trending attribute (a) on the y-axis, and the trend shown by the curve “a=f(t)” — even if we are guessing on the shape of the curve. Most of my trend posts are vague and require more work. I will try to be more specific about which attribute I mean. Instead of saying “There is a Cloud Computing trend”, I want to say “The price of Cloud Computing is trending down” or “the terabytes of public cloud data storage is trending up”, etc.

Any help with this would be much appreciated!

 

Technology Trend: Cloud Computing

This entry is part 2 of 30 in the series Trends

I always talk about industry and technology trends as being an important input to strategy. It seems a bit vague so I have decided to create a new series that catalogs the major trends affecting the banking industry.

A key technology trend is utilizing applications, storage and compute power from the cloud. A key word here is “utilizing“. The benefits of a utility are lower costs and increased agility. These benefits come from software defined environments, cloud operating environments, and the API economy.  Security and regulatory constraints are forces but these are not trends (I assume these will be resolved to the benefit of the cloud computing trend) so I will not account for them here.

So the first technology trend that I want to start covering is cloud computing.  Banks must adopt a strategy that leverages the strategic, operational and development agility that comes with cloud adoption.  Architects in the banking industry must be informed about cloud computing standards.

My advice would be to implement any new major systems (core banking, CRM, channels) in the cloud.

Traditional corporations are abandoning legacy systems and moving to the cloud.  Banks should too–Some have already done so successfully in Africa and Australia.

I will add to this post over time. For now let me just offer another bread crumb here.

Cloud is closely related to the following banking industry trends, which I will surely blog about:

  • Increased competition from entering banks due to fewer barriers to entry.  If your strategy is “fast follower” then you have more competitors to keep up with.
  • Increased competition from non-banks.  Technology is reducing the benefits of some economies of scale and increasing others.  This is causing the unbundling and reconfiguration of business models.
  • Increased competition from existing banks.  Banks are differentiating themselves or reducing the differentiation of their competitors by rolling out new products and services faster.  They are also getting better at zeroing in on what customers want through deft experimentation.

The Cloud Computing trend is also closely related to the Big Data trend.

Industry Trend: Unbundling of banks – Lending Club

This entry is part 3 of 30 in the series Trends

I am a big fan of Lending Club.  I started investing some money there about a year ago to learn about it and couldn’t help myself from funding a few new loans each month.  It is addictive!  Before I know it I had saved a few thousand dollars.

So far I have not had any non-performing loans so the returns are very good.  As soon as a loan goes south the returns will become very bad.  Until then, I am hooked.

lendingclubI would classify Lending Club as a Two-Sided Market business model.  They provide the platform and bring together investors and borrowers.

Lending Club recently sold Union Bank loans.  Is this the unbundling of banking?  Or just Union Bank trying to compete with me?

The Financial Times reported that in mid-2013 the US lenders Titan Bank and Congressional Bank announced that they would begin facilitating personal loans through Lending Club.

Consumers are becoming more open-minded about receiving financial services from non-banks.  See the 2014 North America Consumer Digital Banking Survey by Accenture.

Digital Bank notes that:

  • FIDOR is nibbling away at the core deposit model of banks, as are Moven, Simple, Alior et al.  FIDOR Bank, in Germany, manages both virtual and real currencies.  FIDOR takes value from World of Warcraft and Diablo, along with gold, silver and euro funds.
  • Zopa is nibbling away at the credit markets, as are smava, Prosper, Lending Circle et al. Zopa now controls about 2% of the UK personal credit market, managing about £200M.
  • Currency Cloud is nibbling away at the cross-border activities of banks, as are Bitcoin, Azimo, KlickEx et al.
  • Kickstarter is nibbling away at the commercial banking operations of banks, as are Receivables Exchange, Funding Circle et al.
  • eToro is nibbling away at the investment operations of banks, as are ZuluTrade, StockTwits et al.

More on this in Industry Trend:  Social Finance.

Regulatory Trend: Deregulation – RBI granting banking licenses

This entry is part 4 of 30 in the series Trends

There is good and bad regulations and good and bad deregulation in the financial services industry. Bad regulation (and good deregulation) involves (and removes) rules that benefit banks at the expense of consumers by limiting competition in the banking industry. There is a global trend toward removing these protections in favor of more competitive banks. In the US this was about making it easier to combine state banks to create national banks. In regions like ASEAN we can expect increased ability to standardize and integrate business processes–key to growing strong regional banks with the ability to complete with the global banks.

A current example is that the Reserve Bank of India (RBI), after a gap of 10 years (4), is granting new banking licenses.  Niche banks are being considered as opposed to only universal banks as in the past.  India’s banking industry is progressively being opened up to competition from foreign banks (3)

Two licenses were granted in the first round on April 2:

  • Infrastructure lender IDFC
  • Microfinance company Bandhan Financial Services.

These two entities will need to begin operations within 18 months (2).

Large corporate houses will be considered based upon objectives, credentials, track record and how funds will be deployed (1).

So far not approved by the Election Commission (EC):  Aditya Birla Nuvo, L&T Finance Holdings, and Reliance Capital.  Janalakshmi, another microfinance company, had also applied for a banking license.

Other applicants under consideration include:

  • India Post.

New licenses will be granted on an “on tap” basis (as opposed to in tranches) and as part of a “differential licensing system” (to create differentiated banks as opposed to universal banks).  A differential licensing system might create segments such as affordable housing, low-income groups and economically weaker sections.  One intent is to avoid creating clones of existing banks.

Entities that fail to secure a license may acquire a stake in an existing bank.  For example, there were media reports that L&T Finance, which had failed to secure a license in the first round, “was eyeing a stake in YES Bank”.

PROBLEMS

Less than 60% of Indians have access to banking services (over 40 per cent of India’s 1.2 billion people continue to remain financially excluded).  Increasing inclusion is one aim behind deregulation. (6)

There is an effort to improve the asset quality of Indian banks by reducing the high incidence of non-performing loans.

Banks will also need to find innovative ways to raise capital as there is a general need for more capital as they migrate to Basel III framework (2).

A previous “in principle” banking license granted in 1996 was unsuccessful with the bank going defunct and the well-connected promoter fleeing the country (4).

OPPORTUNITY

New banks (and existing banks preparing for new competition) create opportunities for tech firms, such as IT outsourcing and best-in-class technology for digital banking (5).  A senior official of a global IT and consulting company was quoted as saying “The technologies used by the financial services company have seen massive changes in last few years. Since the new banks do not have any legacy platform or software, it gives the service providers like us an opportunity to create digital banks of the future.”  “Even as it is difficult to asses the size and shape of the new banks at this point, a rough calculation by experts shows that the opportunities for technology companies could be anywhere between Rs 100-600 crore a bank.” (5)  I think this equates to about $17-100M USD per new bank.

The overall opportunity size would depend upon the number of new banking licenses–2 for sure, good odds on a third (India Post), and possibly more–but with only 2 of 25 applicants being granted licenses in this round it didn’t seem likely under the previous government.  However, the new government says they want more and are writing new guidelines to be ready within 4-5 months (9).  There were legitimate concerns behind not granting “industry houses” (large conglomerates) licenses.  Granting corporations who are active in real estate a banking license could endanger the economy.  Industrial houses, if allowed to enter the business of banking, can play mischief by using public money for their own benefit and denying money to the competition (8).

Software needs for a bank are vast.  “Core banking solution: Indian banks typically prefer Infosys’ Finacle, TCS’ BaNCS and Oracle’s Flexcube.”  Other software includes: “Data warehousing, CRM, applications for business functions such as finance, HR and ERP; solutions for internet banking, phone banking.”  Also required: “Back-office support, application support and maintenance, software upgrade” (5).

Experts name “TCS, Infosys, Wipro, HCL Technologies, IBM, Accenture and HP” as those that would be in the race for getting business from the new banks.  Some experts and bankers said that “in line with model adopted by the recently launched Bharatiya Mahila Bank, these new banks may look to outsource heavily and depend on consultants as system integrators to manage their IT infrastructure efficiently. This, they says, is a preferred option these days, as it reduces complexities relating to technology allowing bankers to focus on their core job” (5).

IT vendors stand to benefit on an ongoing basis from these new banks, as a tier-I banks spends 3.5-4.5 per cent of its revenue on technology, said Arup Roy, research director at Gartner.  “Time-to-market is a big factor today, and thus it is very important to use technologies like cloud to get support on that front,” Roy said, “RBI has also mandated banks to have branches in rural areas, which will also lead to increased dependence on technology. Given the fact that these are going to be new entities, their annual spending on IT would be heavy and could be around 3-4 per cent of their revenues” (5).

But how can you build out all of the IT for a new bank in 18 months?  One idea would be to build it out in the cloud.  This has been a successful approach for banks seeking to increasing inclusion in Africa.

Sources:

  1. http://www.business-standard.com/article/finance/many-more-entities-will-get-banking-licences-114040301044_1.html
  2. http://www.business-standard.com/article/finance/norms-on-niche-bank-licences-this-year-rbi-114050801343_1.html
  3. Business Monitor: Q3 2014 India Commercial Banking Report
  4. http://www.business-standard.com/article/opinion/subir-roy-the-rbi-gets-it-right-114040801140_1.html
  5. http://www.business-standard.com/article/finance/new-banks-spur-fresh-opportunities-for-tech-firms-114040400129_1.html
  6. http://www.business-standard.com/article/finance/the-challenge-a-bank-account-for-everyone-114041900903_1.html, http://www.business-standard.com/content/general_pdf/042014_02.pdf.
  7. http://www.cognizant.com/InsightsWhitepapers/Obtaining-New-Banking-Licenses-in-India-Challenges-and-Opportunities.pdf
  8. http://online.wsj.com/articles/new-indian-government-seeks-issuance-of-more-bank-licenses-1401376516
  9. http://articles.economictimes.indiatimes.com/2014-05-29/news/50181992_1_new-bank-licences-bandhan-financial-services-small-bank

Industry Trend: Immediate everything – Payments

This entry is part 5 of 30 in the series Trends

The mobile digital lifestyle is raising everyone’s expectations about how quickly things get done.  It is the “watched pot never boils” phenomenon — if you are look at your phone every 5 minutes things take longer than if you visit the Web, ATM, call center or branch much less frequently.

The demand for immediate payments is a good example.  The increasingly global mindset of consumers makes this new requirement applicable to international payments. Real time international payments could help SME’s free up cash flow. Check out this article by Kris Kubiena.

As always, more on this later…

Market Trend: Branchless Banking

This entry is part 6 of 30 in the series Trends

Customers are becoming more open-minded about branch-less banking. See the 2014 North America Consumer Digital Banking Survey study by Accenture.

But most still do use the branch and call center. In fact, the more they use digital channels, the more they use the physical channels. See McKinsey: The Future of U.S. Retail Banking Distribution.

 

Market Trend: New Market Entrants

This entry is part 7 of 30 in the series Trends

Customers are becoming more open-minded about receiving financial services from non-banks.

See the 2014 North America Consumer Digital Banking Survey study by Accenture.

Accenture estimates that “competition from digital players could erode as much as one-third of traditional retail bank revenues by 2020.

…and notes that “Alibaba, China’s equivalent to Amazon, became the world’s fourth largest money-market fund only nine months after entering the business.

…and “Google now offers a plastic debit card to go with its mobile wallet.

…and “bank leaders cited ‘new market entrants’ among the three biggest risks they saw in the year ahead.

See The Everyday Bank by Accenture.

Digital Bank points out that today non-bank providers handle over 15% of all payments worldwide, up from almost zero 10 years ago.

Deloitte observes that both sides of banks’ balance sheets are threatened by the security markets. This includes the new peer-to-peer lending services.  Start-ups with experienced bank management are entering the traditional banking markets to capitalize on an expected cyclical upswing in profitability and are able to secure funding on this premise.

Market Trend: Banks Extending Their Reach

This entry is part 8 of 30 in the series Trends

Customers are becoming more open-minded about banks providing services beyond traditional financial services.  This includes modest extensions from providing proactive advice on spending and investing to dramatic extensions such as finding and researching products.

See the 2014 North America Consumer Digital Banking Survey study by Accenture.

Accenture comments:  “In becoming an Everyday Bank, the bank evolves beyond its traditional boundaries to build a digital ecosystem with existing provider partners and other key players in areas such as home goods, health, travel and leisure, communication, and transportation. The bank customizes its offerings in these areas based on its analysis of a customer’s transaction data, and it presents these offerings in a consistent, omnichannel setting, with presale advice, discounts, post-sale support, cross-sale opportunities, and more.”

A good example of this is Cardlytics, who analyze credit card transaction data and match it to merchant offers–all without any data leaving the bank’s firewall.  Offers are included in the account statement.  Accenture notes that “For the customer, this is virtually effortless cash-back on day-to-day spending. One major U.S. bank has given more than $17 million back to customers through the program. Banks share in merchant commissions, which are typically in the range of 10 percent on resulting purchases.” in The Everyday Bank.

everybank graphic

Also in The Everyday Bank, “BBVA’s acquisition of Simple, a digital U.S. bank, cast a spotlight on the new generation of personal financial management (PFM) tools, which are central to Everyday Bank‘s strategy. To help customers analyze their spending, the bank captures more than 80 transaction characteristics each time they use their debit card. By helping consumers manage and forecast day-to-day spending, these kinds of tools help drive trust, loyalty, and revenue. Whereas the average U.S. consumer visits their bank branch three times per month, Simple customers interact with the bank twice a day.

The report has other stories about banks extending their reach including:

  • a mobile app by Garanti (Turkey)
  • a car-buying service by USAA (a top-30 USA bank)
  • augmented reality mobile apps to help with house-hunting by Commonwealth Bank of Australia, Barclays in UK, Hana Bank in South Korea, and JP Morgan in the United States.

Industry Trend: Dual Strategies

This entry is part 10 of 30 in the series Trends

Organizations will begin pursuing dual strategies: to continue the focus on core business in their primary industries; and to seek growth opportunities in their chosen specialized functions across other industries. Specialization will drive industry convergence as competition expands around specific, common value chain functions.

dual strategies

From IBM’s Digital reinvention Preparing for a very different tomorrow by Saul Berman, Anthony Marshall and Nadia Leonelli