...if adopting technology simply strengthens your current business, as opposed to making it uniquely possible, you are not a (disruptive) tech company.
It's a question with a seemingly simple answer.
When does a bank become a tech company? Or for that matter, when does any company become a tech company?
Today, every notable company runs on software, so the answer isn't as obvious as it seems.
Ben Thompson (Stratechery) tackles the question:
The question of whether companies are tech companies, then, depends on how much of their business is governed by software’s unique characteristics, and how much is limited by real world factors.
Thompson wants to know whether WeWork and Peloton are tech companies. Both have recently filed to go public, and investors have a lot riding on this question (though...there are a few more concerning questions).
WeWork rents office space. Peloton sells exercise bikes, treadmills and workout classes.
Just ten years ago, it would have been absurd to even consider them as tech companies. But today, it's an open question.
When we need to consider whether an exercise bike is a 'software platform', software has truly eaten the world.
Ben Thompson list five characteristics. If a company's software does some or all of the following things, it might be a tech company.
I found Thompson's approach a deeply useful way to think about Kunai's work with financial services companies. I'm sharing it in the hope that it's also helpful to you.
Before we apply this framework to banks, let's establish a baseline through Thompson's analysis of WeWork, Peloton, and Uber.
WeWork rents office space, and they use software to manage the process. Peloton sells bikes, and they use software to offer interactive workout classes that can be used with or without their hardware. At what point do these offerings tip the scales to thinking of them as full-scale tech companies?
Thompson begins with WeWork:
1 out of 5. Based on this analysis, WeWork is still a real estate company; despite some semi-interesting software, they don't pass the tech company bar.
Here is Thompson's framework for Peloton:
2 out of 5. Also quite iffy, though there is more potential here than for WeWork. Thompson notes that Apple, as a hardware company, has some of Peloton's limitations.
Before we move into banks, let's take one more of Thompson's stronger examples, Uber:
4 out of 5. Clearly a tech company.
If you've worked at a bank, the answer is clearly no.
I'm trying to answer a different question: what it would take for a bank to one day be considered a tech company? More specifically, how do we identify the types of software projects that have a strong probability of making the shift?
I use Capital One as my example, because I spent three years there, working in various roles. I also believe that from top to bottom, Capital One clearly intends to become a tech company.
One: Software that creates ecosystems
Two: Software that has zero marginal costs.
Capital One's main business is credit cards. Therefore, the cost of bringing on a new customer is calculated in risk, rather than dollars. Software has already made the cost of bringing on new customers even more negligible, and new machine learning models may enable the bank to test algorithms that further reduce risk at every end of the market. Startups like Brex show us that there are dozens (if not hundreds) of credit innovations that take us far beyond FICO scores.
Three: Software that improves over time.
Capital One's customer apps can theoretically improve forever, and most banks are aware of several useful features they will be working on years into the future. These features are certainly compelling, but there are few barriers that prevent competitors from replicating them quickly.
Four: Software that offers infinite leverage.
Due to several limitations, servicing clients outside of the United States is an arduous task, so Capital One is more or less limited to the US market.
Five: Software that has zero transaction costs.
It costs little to nothing to bring on a new customer. In that respect, transaction costs are extremely low (again, partly because money itself is essentially a virtual good).
Beyond on-boarding, many of the transaction costs in banking are artificial. It costs very little to enable a merchant to accept your credit card. It shouldn't cost much to enable an overseas wire transfer. Innovative fintechs are figuring out how to reduce these costs, by maneuvering around large banks and government regulations, putting pressure on banks to eliminate artificial costs.
A loose 3 out of 5. Much more than I expected when I started this thought process, but as noted, this is partly because money is essentially a virtual good.
We will now follow Thompson into most important step of his framework: understanding a company's capacity for disruption.
The true mark of a tech company is whether or not their technology is disruptive.
For example, Uber's ecosystem of drivers and riders was fundamentally disruptive. The ecosystem simply didn't exist before Uber. Moreover, creating this ecosystem gave Uber a winner-takes-all or at least a winner-takes-almost-all advantage - meaning that once the network scales to a certain level, it is extremely difficult for another incumbent to enter the space.
Here is how Clayton Christensen characterizes disruptive technology in his classic work, "The Innovator's Dilemma":
Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.
Ben Thompson makes the same point, in reverse:
...if adopting technology simply strengthens your current business, as opposed to making it uniquely possible, you are not a (disruptive) tech company.
From this perspective, it is obvious that banks are not tech companies. Banks have gone online, they have developed apps, and they are playing with technologies like artificial intelligence. However, in each case, the technology is strengthening the bank's ability to conduct business as usual, rather than pushing it into uncharted territory.
We can look back over the last twenty-five years and make the point definitively. Since the advent of the Internet in the 90s, no bank has achieved a disruptive advantage over its competitors.
Where will you find the most potentially disruptive projects at a bank?
I'll discuss two of my favorite examples below, and I'd love to hear yours in the comments.
Software that Creates Ecosystems: Open Banking & Real-Time APIs
In the 1970's, a young executive named Dee Hock convinced the leaders at Bank of America to let him spin out its credit card business, so that other banks could leverage its system. The result was Visa, which became the foundation for the modern credit card ecosystem.
Banks have a similar opportunity today: Open Banking.
Large banks sit on a massive trove of data. They have also spent years cleaning their systems, refining their data and customizing their processes to satisfy regulators. This combination represents an insurmountable moat for even the most well-funded startup companies.
Fintech startups are springing up all over the place, and they have their own clear advantages: innovative services and better customer experiences. Their services could be enhanced significantly (and in many cases, be made possible) with access to large bank data and processing.
Banks are beginning to realize the power of Open Banking, but their APIs continue to be limited and historic, rather than open and real-time.
Fintech startups are just the beginning. Retailers, tech companies, schools, and countless other organizations could leverage banking data to provide financial services to their customers. The disruptive advantage starts at home: Open Banking would make it possible for banks to integrate their own data across products, making it possible to offer better services and more consolidated customer experiences.
The disruptive advantage belongs to the first large bank to develop and market a standard that others are then asked (forced) to use.
Open Banking is also a minefield. The business risks and regulatory constraints are concerning. Of course, that is also true of....every other innovative banking idea ever.
Software that has Infinite Leverage: Bitcoin
Yes, it's that time again...time to talk about cryptocurrency. No matter how much banks insist on closing their eyes and ears (and sorry, doing one random blockchain project in your innovation lab does not count as opening your eyes and ears), Bitcoin offers more potential leverage than any idea in financial services during the last 50 years.
For the purposes of ideation, I want to focus on the feature-set that Bitcoin and other cryptocurrencies represent. Bitcoin may eventually crash and burn, but now that it has existed for a decade, its feature-set will have an indelible effect on banking.
Bitcoin breaks Thompson's framework, because it turns the good itself into software. Bitcoin is programmable money. Peloton can't build a software version of a bike; WeWork can't build a virtual office space. Bitcoin turns money itself into software (of course, as I've noted above, money is a fairly virtual good in the first place).
Because it can be transferred without needing to be converted, Bitcoin has worldwide leverage. People can send money across borders and oceans without incurring significant transaction fees, even in cases where their government is crumbling and openly hostile.
If I were still working at a bank, I'd be lobbying to work on any project relating to Bitcoin. Yet, in the absence of that, there are many opportunities to emulate the enhanced monetary features of Bitcoin, such as payments.
Most of the transaction costs involved in remittances, inter-bank transfers, and merchant fees are artificial: they are not accurate representations of the labor or computing power involved in executing the transfer. With alternatives such as Bitcoin becoming viable options, large banks will need to respond. The first one to create an alternative standard that becomes ubiquitous will have a disruptive advantage.
This article started as a note to self. I wanted to figure out how Kunai could target potentially disruptive opportunities at large banks, and I found Ben Thompson's framework to be a helpful tool for a thought experiment.
Sandeep: Tell me a bit about the early part of your career.
Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.
Sandeep: What is something you learned during this time that helped you with consulting?
Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.
Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.
Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.
Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an acquisition...consulting skills definitely translate into the corporate environment.
Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.
Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?
Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.
Sandeep: What has stayed the same?
Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not change...it's what I love about consulting.
Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?
Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.
Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?
Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.
Sandeep: Tell us about a business hero of yours that I may not have heard of before.
Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact
Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?
Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.
Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?
Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.
Fintech is enabling businesses to do more with less. As companies embed financial services into their products, the future of banking is under threat.
In the 18th and 19th centuries, the East India Company rose unchecked into a position of unprecedented power in India. The results were catastrophic.