Pace of change is a power law
Everything that made senior bankers successful is what makes them less able to thrive in the digital economy.
Bankers who graduated business school in the 80s and 90s became successful in building ever-larger balance sheets and working with large suppliers over multi-year deals to reduce their cost structure. This was the right thing to do at the time. When the supply of low-cost goods is scarce, those who can get to low-cost win.
This model has worked since the industrial revolution. Successful senior leaders continued to focus on what brought them success. The larger the deposit base, the more competitive a lender can be in pricing and the higher net interest margin they can squeeze from their core business.
If you're late to digital, you can't buy back in with scale; you have to recognise first that everything has changed.
Digital has changed the game
We live in the attention economy. The focus has shifted from reducing the cost of supply as the scarce resource to demand being scarce. In this game, everything the senior execs know starts to change.
Annual budget cycles work when you have to drive scale
Long vendor contracts work when you have to drive scale
A culture of centralised decision making makes sense when you have to drive scale
Operating models have to manage the analog world when you have to drive scale
But in the attention economy, this all breaks down—annual budget cycles and centralised decision-making dis-empower product teams and those closest to the customer. Long vendor contracts and the assumptions baked into the operating model create a drag on delivery and pace.
You can see banks' decision-making in their tech estate
Banks had to have mainframes in the 80s because networks were not fast enough to really support distributed workloads. So engineers wrote code to run inside the mainframe to meet the business's performance demands at scale. This codebase became so complex that change became riskier as the years moved. To meet market demands, incumbents layered new tech on top of the old tech until most incumbents' tech estate resembled sedimentary rock.
Banks that try to lift and shift their existing workload into the cloud are lifting all of their assumptions about culture, operating model, vendors, and how they make decisions into the cloud. This won't reduce cost; it will just add another layer to the mess. (Although it will no doubt make big consultancies a ton of money).
Winning in the digital economy is about pace.
Pace of change is a power law for growth.
A power law is an exponential curve, where the winners share the majority of the benefit. This applies to finance, where those shipping features faster are also growing users and revenue faster.
Incumbents are trying to make change faster but without paying their tech debt. They're hoping a lift and shift to cloud or adding some microservices around the edges might help. It won't.
In the attention economy, buyers will virally adopt the solution that has the most functional utility. It has to solve their problems. Customers are awful at telling you what they want. Customers are very good at telling you their problems.
Square is an example that:
Solved a customer problem for underserved customers (small merchants)
Made the initial product super easy to use, driving virality
Layered in adjacent services to drive profitability
This is where the banker that lives in the back of my head says, "but customers have their direct deposits with us and are very satisfied". Firstly, those deposits aren't making the margin they used to. Secondly, they're dwindling as the "window" banks can address in the market shrinks. Thirdly, as the old researcher adage goes, "you can satisfy anyone so long as their expectations are low enough."
Square is growing its profitable revenue, banks are not. At best they’re standing still.
Like many born-digital businesses, Square focuses its teams on capturing the attention (daily active use) of its users as a core metric. It is now adding lending as it reaches scale to own more of the economics, but that's not where it started.
Banks have paid consultants 10s if not 100s of millions to implement "the Spotify model" of tech delivery and missed the point. Running your tech teams with Spotify governance makes no difference if a strategy team makes product decisions, vendor contracts are fixed for 10 years, and the operating model cannot change.
The new architectures for banking will move:
From monoliths to primitives
From whale vendors to schools of fish
From siloed platforms to horizontals
But only those who fix their budget cycles, incentives, culture, procurement, and operating model will get there.
Banks can do it. But it's going to require betting big on solving tech debt, being brave enough to make a multi-year investment, and empower the teams to make their own decisions.
