In his masterpiece, The Sun Also Rises, Hemingway captures a short business conversation between two characters: “How did you go bankrupt,” asks the one, to which the other responds, “Two ways. Gradually, then suddenly.”
The gradually then suddenly dynamic perfectly captures the pace of transformation perceived by the outsider when observing industries impacted by radical change. Perhaps you hear about a new service or innovation, maybe not even fully understanding what it is, until seemingly overnight it has utterly transformed a familiar industry – like Twitter did news media or Instagram did marketing. Often this type of transformation seems so abrupt and unexpected partially because the disruptor wasn’t previously understood to occupy the industry it ultimately upends.
For those within industries looking to maintain their positions as emerging giants lurk, it’s crucial to identify and respond to these shifts when they are still firmly in the gradual stage. It is here where the traditional business banking industry now finds itself. If traditional banks want to avoid losing relevance and customers to quickly growing services like Square and Shopify, which operate much differently than traditional banks, they’re going to have to act quickly and boldly, refocusing on problem solving as opposed to repeating their failed playbooks of appealing to specific customer bases.
Banks’ Self-Image Problem
Today, the business banking industry is changing. This is largely because small and medium sized businesses themselves are changing on the backs of a slew of new apps and services which enable business owners to outsource many core business operations, including financial ones, to seamless integrated solutions, such as Square, Personio, HubSpot etc. These services are extremely appealing to entrepreneurs as they reduce barriers to entry and enable them to focus primarily on their core business—improving their products and customer experience. Similar changes are afoot in the corporate banking sector, taking shape gradually—soon to be suddenly.
The corporate banking industry has remained unresponsive to the types of shifts occurring in the business banking sector and frankly, in the trance of a cognitive dissonance about their own role within the business ecosystem. Banks have historically tried to convince the business community that they need “customized” solutions and that “bankers themselves” are core to the relationship and businesses’ journeys. While this may have been somewhat true by necessity, the emergence of new choices for entrepreneurs is beginning to expose that assumption as a delusion of grandeur and self-importance.
The harsh truth is that while banks see themselves as enablers of business, entrepreneurs and business managers tend to see them as the direct opposite—gatekeepers that require them to perform myriad lengthy, bureaucratic processes before they can launch their businesses.
Gradual Shifts in Seemingly Unattractive Segments
In the classic digital transformation cycle, markets change first in niche—well-defined, but somewhat irritating—segments that are generally unattractive to the large incumbents. In the banking industry, these changes can be seen over the past decade in the product category of payments and the fragmented landscapes of hospitality, and retail e-commerce or professional services.
As banks viewed these value pools as unattractive, small, and uncertain, a series of startups drove innovation to address these under-served segments based on strong convictions of future change and are now thriving as a result. If banks don’t feel threatened by these developments, it’s likely because they haven’t come to terms with their true potential.
Gradually Poised to Become Suddenly
Today, an entrepreneur opening a modern and digitally-connected business—say, a restaurant—can use Square not only to take payments, but to manage booking capabilities, order management and delivery systems, and to generate strong digital insight and data analyses to help optimize a business. Using Square, they can even set up a basic checking account and take out small loans to finance day-to-day operations.
An entrepreneur looking to start an e-commerce-centric business is likely to utilize Shopify to build their site as it is quick, easy, and integrated. Through the integration of Stripe, Shopify can also handle many of that business’s banking needs.
While these business owners will likely still need a bank account, they are not likely to need, or want, the whole gamut of services offered by the banking industry. The number of complex tasks outfits that Square and Shopify handle for these entrepreneurs through a single, digitally integrated, platform with minimal barriers to entry is a value proposition with which traditional banks can’t compete. This makes entities like Shopify and Square sleeping giants of the banking industry—gradually swallowing up value pools and positioning themselves to suddenly emerge as leading banking services for small and mid-sized businesses—without being banks!
Further, if there’s anything that could turn suddenly to ostensibly immediately, it’s Big Tech cannonballing into these value pools. Rumors have long persisted that Apple could introduce a suite of solutions for #SMEs—an obvious next step for a company with such wide and deep hardware penetration. Think of a small business in the creative industry that uses Apple devices, why not bake in an entire suite of software solutions into those devices, leveraging the experience gained from working with Goldman Sachs?
Business banking is further along this transformation cycle than corporate banking, but that is soon to change, and when it does, even those outside the sector will begin to notice the “sudden” transformation. Companies like Spryker are positioning themselves as dedicated players capable of digitizing more complex B2B transactions for use among larger corporate institutions. At the same time, industries are moving toward digital operating systems in everything from scientific research, to logistics, mobility, and energy. Banks draw much of their current revenue from these industries and they’ll need to be able to plug into these operating systems to remain relevant and informed partners.
Meeting the Challenge Through Innovation
Banks looking to fend off the threat of digitally based disruptors will need to redefine their value proposition to customers and their best chance of doing so is to adopt strategies similar to the non-banks. Instead of focusing on tweaking how they market themselves, banks should identify core business challenges across one or more industries and solve those problems by developing superior technologies and customer experiences—an R&D process where breakthroughs are also prone to the gradually then suddenly dynamic.
Opportunities for innovation are plentiful; most complex industries remain rife with inefficient manual processes that cost operators billions and are ready to be translated into value pools for those who can build tools and systems to improve and automate them in a scalable way. But identifying and responding to these opportunities requires listening.
Banks should engage their customers and let them tell the banking industry what problems they need solved, and then leverage their resources, standing, and relationships to develop responsive solutions. These solutions will have a different form and shape than the current workings of traditional banking.
Banks will need to move away from a transaction-oriented business model to a circular one by connecting different companies and industries digitally and enabling collaborative business models. By leveraging their expertise in navigating regulatory landscapes, banks can position themselves to become digital infrastructure providers for specific sectors, while still monetizing via payments and loans.
Banks should view an environment in which so many industries are facing uncertain times and a plethora of new, complex problems from supply chain disruptions, geopolitical tensions, and tumultuous economic climates as an opportunity. With no shortage of problems to solve, banks would be wise to explore new entry points that present the possibility of game-changing payoffs. Their traditionally timid approach of adding some “digital sprinkles” to their existing operations is not enough to meet the moment, or escape the threat of gradual, soon to be sudden, changes that loom.
