Rumble in the FinTech Jungle

We are living in turbulent times. Once more. Not because of a banking crisis, an oil shock or a war. This time it bears the name of COVID-19 and it is shaking up our individual lives, communities, even entire countries. Uncertainty and volatility are the name of the game for the era to come. So, business leaders have to switch on their hyperdrive in dealing with this turbulence.

As they fight their way through the turbulence, business leaders can learn much from the Rumble in the Jungle: the epic fight between Muhammad Ali and George Foreman (Kinshasa, 1974). The two opponents vividly illustrate two distinct approaches to mastering the brute uncertainty of the ring. Ali was alert to fleeting opportunities and nimble at seizing them. Foreman lacked Ali’s agility, but because of his sheer bulk, physical strength, and toughness, he could absorb all the punishment his opponent could dish out, all the while waiting for a chance to unleash his own powerful blows when his adversary tired.

Donald Sull – Harvard Business Review, 2009

If there is one article to re-read in COVID-19 times I would advise it to be this one: “How to Thrive in Turbulent Markets”. Sull (2009) draws the parallel between the characteristics of the fighters, the match play and how companies deal with turbulence. Fighters can train, study, simulate and mentally prepare for a boxing match but it is never anything like the real thing. Same story for many businesses today.

In the sector I know best – Financial Services – the name of the game for the last couple of years was called agility: be fast and flexible, able to spot opportunities fast and act on them swiftly. FinTech start-ups excelled at this part of the game. It brought spectacle and was fun to watch. Incumbent banks and insurance companies were playing catch-up. They, in turn, had size, reach, experience, an extensive client base and diversified cash-flows. David versus Goliath, with often David as the protagonist and Goliath as the antagonist in this business story.

The last couple of years the competitive storyline made way for a more collaborative one where challengers and incumbents complement and re-enforce one another. Both with their strengths – but also their weaknesses. Sull draws a striking parallel:

Companies can, like the contender Ali, employ agility to spot and exploit changes in the market. Alternatively, they can rely on their powers of absorption to withstand market shifts. Some, however, combine both approaches and display “agile absorption”—the ability to consistently identify and seize opportunities while retaining the structural characteristics to weather changes. In unstable times, cultivating and using both capabilities in combination can help companies not only survive but emerge as true market leaders.

FinTech start-ups are today’s Ali, fast to exploit changes in the market and acting on the spot. They float like a butterfly and sting like a bee. Yet as we see in today’s COVID-19 crisis, many of them are fighting to survive as their “absorptive capacity” is lacking – they are not able to “Take a Licking and Keep on Ticking”. COVID-19 is a hard-hitter and many organisations simply cannot take this kind of hurt. The buffer is not strong enough. As Sull points out, agility and absorption alone are not enough to thrive in turbulent markets. Organisations need to build an “agile absorption” capability. So agile start-ups need to strengthen their absorption capacity. Absorption mainly comes from size, diversification and a war chest of cash yet Sull describes 10 ways to build absorption in more detail: low fixed costs, cash reserves, diversification, size, customer lock-in, protected core markets, strong patrons, excess staff, tangible & intangible resources. As many of these characteristics are often lacking the “strong patrons” one could be the only one left – but will/should governments or investors keep (all of) these start-ups standing as they get hit?

The George Foreman today are the banks who invested in building strong buffers over the last couple of years, now taking up centre stage. They will be better able to roll with the punches and take a few hits. But will they be able to get out of defence and exploit today’s opportunities to take up a leading role in the COVID-19 crisis. It certainly seems like an opportunity to change existing perception after the 2008 banking crisis.

But what about this that third group of players we have not talked about yet: Tech companies interested to further move into financial services: GAFA (Google, Apple, Facebook, Amazon) and – pardon my COVID-humour – China’s BAT (Baidu, Alibaba, Tencent). In his article, Sull offers a checklist to assess your organisation’s level of agility and absorption. I invite you all to tick the boxes: GAFA and BAT are typically exemplar companies of “agile absorption”. Before COVID-19 many financial services players were worried about the increased interest and moves of these companies into their sector. After COVID-19 the fighters left standing will certainly have to face these agile hard-hitters. Rumble in the FinTech Jungle.

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