Recent divergence between size and efficiency favors the smaller and nimbler. But banks, already suffering the crushing complexity of their myriad inherited infrastructure and business practices, continue to grow most rapidly via mergers and acquisitions. Looks like diminishing returns and the using up of all the easy takeover targets are combining to spoil the party. The open bar is running dry.
My somewhat tongue-in-cheek observation was this now makes players out of smaller institutions. But relationships, and customer bases, still have currency. Yes, today, a nimbler competitor has many advantages, and doubly so if they might also know all the customers already. (Right, Mark Zuckerberg?) But the banking brands currently dominating the market aren’t going to go away quietly. The combined weight of all that capital is going to have its say.
Competition based on product and business innovation will clearly continue. Facebook will wedge itself into the payments market, and, consequently, PayPal will lose some elbow room, and banks will have fewer and fewer excuses to keep their heads in the sand. But dealing with financial regulation is a core competency, and it’s fair to say that Facebook knows very little about that. Yet. So, while Zuckerberg’s minions complex-up their systems to respond to all the new rules they’ll be facing, I think the most important response from banks may have very little to do with payments. I think the key to beating any and all unforeseen competition will start with being better at complexity than they are.
The key is to Run Simple.
Over my (won’t say exactly how long) career in software, I have seen my share of Schumpeter’s “perennial gale of creative destruction”. Back in the day, McCormack & Dodge settled its argument with MSA (and reached the very top of the market) through a very bank-like succession of acquisitions by Dun & Bradstreet, but as anyone unfamiliar with those brands will testify, it didn’t save them from eventual irrelevance. The complexity of maintaining both the Millennium and IE environments was never resolved. The intransigence of dueling relational database schema beneath incompatible, pick-your-poison product architectures reared its ugly collective head. “Running complicated” was their demise.
Banks today have better examples to follow. Their customers want consistent experiences, not an amalgamation of random pieces. Their infrastructure budgets want a unified architecture, not the proverbial plate of code spaghetti. Their regulators want a single view of operational, management and regulatory data, not a private set of cooked books. Banks’ key is to Run Simple.
Check out the recent discussion by Derek Klobucher in Forbes BrandVoice. Read how tearing down silos changes the way banking is done.