Why App stores for banks ?

App store for banks is nowadays becoming very fashionable and trendy. Bundling banks' services through an API is either done by the bank itself (BNY for example) or by fintechs connecting to different banks (Plaid, Open Bank Project, .. just to name a few).

But behind the hype, there are sound reasons for banks to develop in this direction. As banking is not the only industry making this move, there is already a bit of research backing this strategy.

Banks have to face an ever increasing competition from fintechs. In that context, it is interesting to have a look at what has already been researched in the field of organic growth and innovation within large companies.

Innovation normally occurs in a corporate model for established companies and in an entrepreneurship model for startups. Those two models have a lot of similarities (Engel,2007). In order to more efficiently compete with new entrants, established players are looking at a mix of those two models called: ”corporate entrepreneurship” which is: “the process by which teams within an established company conceive, foster, launch and manage a new business that is distinct from the parent company but leverages the parent’s assets, market position, capabilities or other resources” (Wolcott & Lippitz, 2007). 
In this research, the authors identify four models to organize corporate entrepreneurship depending on two dimensions: who, within the organization, has ownership of new business creation and who is funding the needed resources:

©Wolcott & Lippitz

Enabler model 

In the “Enabler” model, the company needs to have a strong base of “intrapreneurs“ who are able and willing to build new ideas and products. This needs to be implemented over time having a strong hiring process making sure that employees have a real entrepreneurial spirit.

Producer model

The “Producer” model can be set up independently from the existing teams but needs a lot of capital and full binding from top management. It also lacks support from the existing business lines with which the producer department may be felt to compete.

Advocate model

The “Advocate” model is probably easier to set up but requires highly trained individuals able to evangelize the whole company triggering the finding from the business lines.

Uncertainty

But what matters most as shown in this research as well as many others is the ability to face uncertainty: “In the early stages, all innovations are defined by uncertainty. If no uncertainty exists, then an organization is simply not innovating.” (Wolcott & Lippitz, 2007). This clearly connected with the learning process Ries is describing in "Lean startup" and also by Breuer : “If venturing is understood as a learning experience, pacing progress with suitable milestones, and sustaining passion become a constitutive moment in self-directed team learning.” 

Facing uncertainty is an issue for established players which have been spending a lot of efforts in cutting costs, optimizing their processes to minimize failure and maximize certainty 

Referring to the four corporate entrepreneurship models, it may seem easier for institutions to adopt a “Producer” model which is requiring a lot of capital but less diffuse involvement in the company.

But from an absorption capacity view point, this kind of setup tends to be less efficient: “A difficulty may emerge under conditions of rapid and uncertain technical change, however, when this interface function is centralized.” (Cohen & Levinthal, 1990). Centralizing in a group the connection to external knowledge may not give all the possibilities an extended communication throughout the company may provide.

On top of corporate entrepreneurship, companies can also access new knowledge interacting with startups (Weiblen & Chesbrough, 2015). For this, they need to screen more than before those startups to identify sources of external knowledge. They also need to understand what they can bring to these startups and finally they need to be clear about their expectation from their collaboration with startups. 

Research is highlighting four possible models of interactions between large companies and startups:

• Venture capital, taking a stake in a startup; 
• In-out corporate incubation, where the big corporate act as an incubator for its own ideas but not fitting the core business model; 
• Out-in corporate incubation where big corporate identify some promising startups which they incubate; 
• Inside-out platform where large companies setup a platform with their technology, welcoming startups to contribute in building a full ecosystem (Apple iPhone platform is one example of this approach). 

The first two models involve capital sharing whereas the two others do not. A capitalistic relationship can be an issue for both parties: having a stake of a startup bought by a bank can help bringing resources and customers but it can also limit the startup’s freedom to collaborate with competitors. For the banks, it mobilizes capital and the negotiations are sometimes difficult regarding the price as there are numerous unknowns to valuate properly startups.

Exploring the two last models, the out-in model is pretty unlikely and limited considering the very low R&D efforts within banks.
The Inside-out model is the clear trend those days, where many banks are trying to present an API of their systems in order to develop an eco system on top of their services like Apple and Google did with their smartphone technologies. This approach is also fitting with the "Producer" intrapreneurship model which is quicker to implement for companies like banks that have no innovation culture.

This analysis is supporting the trend seen in many organizations where a dedicated department ("Producer" model) is in charge of building an API and relationships with outsiders in order to build an eco system (Inside-out platform) and increase innovation grabbing knowledge from the startups banks interact with.

The Fintech revolution is on-going

“Be nice to nerds. Chances are you'll end up working for one.”  -- Bill Gates

Many bankers would not like this quote! Nevertheless the situation Bill Gates pictured is becoming quite tangible in the financial services industry today.

Figures tend to show that technology is becoming the main focus in the banking industry : in 2014, 2957 M€ have been transacted over alternative finance market representing a growth of 144% compared to 2013. Moreover, fintech have drawn in 2013 3B$ investments which tripled to 12.21B$ in 2014.

Even though the financial services industry is highly digitalized, its transformation pace cannot be considered as high as in other industries like music or film industries. In those industries for example, the distribution model has been changed many times over the last twenty years.

This situation is changing as fintechs are now starting to compete with the most established players as Netflix or Spotify did some years ago against the majors of the film industry.

Banks have difficulties to fight against those disruptive startups. A large number of players are entering this market, among those very big internet actors like Apple and Google which already have a strong connection with the customers. In such a case research says that existing mature corporations find innovation especially challenging.

Although none of these new entrants is competing with the established players on the whole value chain, the number of those entrants is making the big players nervous about their future as they feel attacked on every segment of their product offerings.

These new entrants have been competing with big players, first on low margin segments like transactions where the big actors are not competitive due to their legacy. Over time, those actors are now expanding in other areas where the value added is much bigger like wealth management. Using up to date technologies the fintechs are able to score their customers much faster than larger companies, aggressively competing against banks on traditional activities like financing.

The fintech startups are mostly inspired by the methods that have been summarized by Eric Ries in his book Lean Startup which advocates a completely different approach from the regular one used by most large firms.

Not only are those fintechs using agile methodologies but also disruptive technologies like “block chain”[1]  that are coming in the near future. This is likely to revolutionize the payments, both for currencies and securities getting rid of intermediaries. 
Another technology like Big data is now capable of digging into huge amount of transactions in order to extract patterns and predict behaviors. Thanks to their creativity startups will take advantage of those two technologies to create new services that exiting actors may not think of, bringing the competition to another area.

This period of time is very similar for the financial services to the one the entertainment industry faced 20 years ago with the raise of mp3 followed by other disruptive technologies which deeply transformed the industry landscape.

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[1] A blockchain is a public ledger of all Bitcoin transactions that have ever been executed

Project portfolio representation

Large corporations often struggle to represent their huge projects portfolio in a structured and readable manner.

Of course, there are number of ways to present projects portfolio from a performance point of view. SPI, for example, is comparing the earned value to the planned value displaying along the projects maturity. CPI does the same comparing the earned value to the actual cost. Others are trying to highlight the projects dependencies in order to represent the portfolio's complexity linking graphically the projects together. Others represent the projects risks highlighting the ones on which management should focus attention.

All these representations are analytical and do not show much about the projects functional impacts.
Grabbed into Back Office and Operational risk from Mervyn J. King, there is another very interesting representation which shows how the corporate strategy is declined into number of projects and how much impacting these projects are:

© Mervyn K. King

In this representation, it easy to understand which company's areas are impacted and how deeply each project is impacting each department. This view is nicely complementing the other representations mentioned earlier.

Open innovation and private banking

In the last years, banks have been attacked in many segments of their value chain. New entrants like Pay Pal and more recently Apple have been very successful in developing activities in new areas. Moreover, other competitors are growing all along the value chain, attacking niche markets one after the other. Even though there is no global new competitor yet, the pressure banks are feeling is definitely increasing.

Digitalization is a disruptive change in this industry which is creating space for new entrants. Fortunately for banks, the entry ticket is rather high as regulation is heavier and heavier every year (Mifid 2 and Basel 3 for example). Nevertheless, the regulation cost is also increasing for established banks cutting down profits and limiting the investment capacity in new territories. Furthermore, some niche areas are not fully regulated, leaving space for new entrants on markets with potentially high margin.

More specifically for private banking, we see new comers taking fully advantage of digitalization, not being slowed down by legacy cutting down costs and bringing a compelling value proposition to the market.On top, web giants like Google, Apple, Yahoo, are always seeking to expand. Banking sector could be for them a very attractive area as they already own the customers, have already access to a huge amount of information and have outstanding technological capacities. Banking knowledge is for them the only missing part.

In addition, to make things even worse, the fundamental value the banking industry was bringing to its customers, trust, has been quite damaged with the financial crisis. New entrants have not any more to overcome this entry barrier.The agenda for those banking organisations is rather challenging:

• Restore trust
• Streamline processes to reduce cost
• Increase product offering to compete with new entrants  

New forms of relations between companies and customers are emerging. Open innovation is becoming more and more popular in various industries. A recent book "Leading open innovation" is listing and detailing the various aspects of this approach. Some of those ideas could be applied to the banking industry though introducing a complete paradigm change in the customer relationship.

Restore trust

Restoring trust will be a better shield than regulation against competitors. Having a stronger and trusted relation with our customers will protect the banking business. To reach this goal, transparency will be the key word to rebuild the trust with the customers. In that matter, open innovation can be of great help, bringing this needed transparency. For example, active web communities enable to interact directly with customers, listening and understanding more their needs as well as explaining better the products and services and their associated costs.
This will require a deep and challenging transformation of existing sales and support teams to take fully in consideration these new interaction channels. 

Streamline processes

Banking processes can be streamlined. Digitalization is giving the opportunity of deeply transforming manual processes which are not any more in sync with most customers expectations. As a well known example of this disconnection between customers and banks, branches are less and less visited and are still being opened only when customers are busy working. Most of those branches are generating a very high cost not bringing back expected revenues. 

For streamlining processes, open innovation techniques could again bring some help : for example, one could setup an internal contest to voice the numerous ideas that are already within the company. An innovation team could trigger such a contest through an intranet channel, collect and prioritize those ideas from the employees and propose to top management an implementation plan of the selected ideas.
For the implementation phase, some projects could also benefit from open innovation : external innovation contests could be used to speed up the digital transformation of banking actors. Compared to its web competitors, the banking industry has not the same intimacy with technology and digital channels. Seeking for outsource resources will help to faster the digital transformation. 

Increase product offering

In the private banking area, customization is the rule. Customers want a dedicated service matching their needs. Here again, open innovation could bring new ideas : the toolkit approach enabling customers to customize products is a powerful way of enriching the product offering without bearing the full cost of it. It also enables to tailor the products to the exact needs. 
As an example, financial products could be inspired or even created by customer input, wizards could customize the service offering matching more customer needs, managed communities could help to share information along customers and identify new needs. 

As a summary, banking industry is declining and adopting leading edge approaches like open innovation is key to bring back banks in the forefront and radically change their image.

Season Greetings 2015

At least in Europe, economical crisis is still around... As the evolution pace in the IT industry is not slowing down, companies are squeezed between limited resources and growing needs in the IT space. Optimizing is therefore quite high on the agenda.

Hope that some of the ideas developed here will help in that matter...

All the best for 2015 !

Digitalization phases

Digitalization is not coming in one go, it goes through 3 main steps. 

Some industries have been involved much earlier than others in the digitalization revolution. Capital markets have been involved in such a transformation more than 25 years ago when they became more and more electronic. This continuous process over 30 years supported by tremendous investments has been radically transforming this industry. This is not only true for capital markets, similar patterns apply to very different domains like airline, telco, … Later with the bloom of e-commerce, similar things started to happen in the brick and mortar world. Could some of the patterns we have seen from the digitization early adopters apply to the e-commerce world and to which extend?

When I first started in the Capital markets IT in 1988, digitization was the big thing just been introduced, we were moving from video terminals (already somehow electronic) to completely digital workstations connected to the various financial networks and exchanges. Quoting and trading were possible fully electronically which brought more speed and efficiency, it was great.
But after a while I clearly remember traders telling me: “this is great stuff but I cannot do much more than what I did in the past, I am still working the same way I was before, manually quoting those products even though I receive a huge lot of digital information”.
Then we started to use more the power of this new toy: quoting more products, trading electronically. In this phase we were going beyond the limits of the previous setup, we could go back any more to manual operation. 
Over the years the trades and product volumes increased so much that the traders were not able to manage the business the way they did. Quoting thousands of products is not possible individually for each product even if this is automated. The operator cannot follow those products individually and the bank cannot afford to increase the number of traders in proportion with the number of products traded.
This pushed us in another paradigm being able to manage all those products globally. We had to put together a model fitting the behavior of classes of products so that traders can concentrate on adjusting the model and analyzing the detected exceptions. In this last phase, digitalization completely disrupted the way products were elaborated and priced. This story illustrates the different phases of this digitalization process. 

To sum up those steps, first phase improves speed and efficiency of the same business. Second phase moves the business away from its original form up to a point where a new paradigm is needed. Third phase introduces the new paradigm that phase two was pushing for. At that stage the business has little in common with its original stage.

This concept can be extend to other industries even if they provide tangible goods: the matter is to cover all sorts of customer needs multiplying the number of products reaching ultimately a full customization.

One example, even if it is not coming from the a full customization is the airline industry: it is common to say that all customers in a plane are all paying a different price. Prices are adjusted almost real time based on a number of critical factors. Big teams are mobilized in each airline company to analyze and model the customer behavior in order to optimize pricing, trying to give to their companies a competitive advantage.

More recently, we have seen a huge attraction for a new technology called “Big Data” which purpose is to analyze huge data sets and perceive from there customers’ behaviors. This is clearly entering in this third phase were customization is so wide that no one can handle it any more without a proper model.

Culture and international companies

International companies are said to have a very strong culture. In fact, this is mandatory not only to motivate employees but also for offsetting cultural differences coming from different countries.



Even in Europe where cultural differences are supposed to be smaller, bridging cultural differences is important. As an illustration although it may appear as a cliché, different cultures such as Italian and German do not have the same approach regarding work. For example, efficiency is favored in Germany, spending less time at work whereas commitment is measured in Italy through long hours. Another example is the way work is organized: in Germany structured plans are preferred whereas they are viewed as a lack of creativity in Italy. Management is also perceived differently: considered more like a coordination role in Germany opposed to a leading role in Italy. If no one tries to bridge these differences, a mixed team will soon be impacted by these divergent views.


Cultural differences are influencing the way a company is organized and run. These differences are impacting companies on all levels: on the entire company, on managers, on teams as well as on projects.

Company wise, the company’s culture must be very strong to be able to offset cultural differences coming from various countries. If not there is no common ground for basic things like work hours, signs of commitment, …

Even if a strong corporate culture is in place, on a managerial level, managers have to understand and respect those cultural differences otherwise, they will be less efficient or fail. There is a limit to what you can force people to do. Respect is not straightforward in heterogeneous environments: a common behavior is to reject what is different.

From a team management perspective, diversity is a constraint but can also be a clear advantage if managed smartly. The art of management is using resources in the best possible way; in an heterogeneous environment this is made even more difficult as differences among people are wider. Therefore, identifying the best fit between people and tasks is more difficult but can be truly rewarding if a manager pays sufficient attention to differences.

Cultural differences also influence politics and consequently projects and project governance: depending on the culture, visibility is not always given to the same projects. In some organizations, business cases will be the main driver trying to maximize the value/cost ratio. For others strategy and long term plan may play a stronger role, for others a country can also be in the driving seat, …

Managing diversity does not mean that there is no common ground: vision and strategy are key to motivate teams: even from different backgrounds, understanding together what we are aiming at has been a powerful lever for success. Of course diversity is making this exercise more difficult as the vision and its implementation have to be translated and adapted to each culture.