"Why banks are well positioned to aggregate their ecosystem"

Fredrik Hacklin,
Associate Professor at ETH Zurich

Prof. dr. F. Hacklin is heading the Corporate Innovation Lab initiative, Department of Management, Technology and Economics at ETH Zurich. His model of industry convergence is the outcome of more than 10 years of practitioner-oriented research, working closely with companies mainly from high-tech industries.

Interview by Tine Holvoet & Marion Dupire

What is industry convergence?

How is it possible that leading giants such as Nokia or Palm, who have been shaping their industry, can fail so dramatically, and all of a sudden?

When we look closely at what happened to the telecom industry, take Nokia with the rise of Apple, or to the music industry which suddenly found itself competing with players from the electronics and entertainment industries, we see that disruption is not only driven by new ventures introducing alternative products and services. Disruption often comes from companies that have been around for a long time in unrelated industries.

The phenomenon that is going on beyond disruption and entrepreneurial entry is what is called « industry convergence ». Industry convergence is a process through which previously unrelated companies suddenly become competitors.
The term stems from the 60’s, trying to understand the changes in the railway and machine tool industry, and was picked up again in the ‘90’s in the field of engineering and technology. Obviously it’s a key concept to try to understand the challenges of digitization today.

How is the financial sector affected? What would be the new rivals of the financial industry?

Digitization is reshaping many industries, including the financial services sector. In US and UK specifically, we see massive disruptive entrance by new technology providers. Analytic tools, big data, access to online platforms are catalyzing these alternatives, rather than improving traditional financial skills.

Again, this disruption does not come from start-ups only. Facebook and other companies in the GAFA-family (Google, Facebook, Amazon, Apple) are big incumbents which were not competing with traditional financial players in the past. When they acquire their licenses as e-money institutions, they can start offering banking products.

In the financial sector, anyone having a huge customer base, combined with the ability to track behavior, can be a potential competitor. Apple and Google are the usual suspects, but they are not the only potential rivals. Think of telecom players or energy suppliers! These companies have invoicing relationships with a large number of households, which is a tremendous asset. Moreover, they are veteran at invoicing and usually enjoy good reputation. For instance, imagine green energy suppliers introducing trading platforms where you can accumulate coins for responsible energy usage and trade them for paying your telecom bill. Obviously, one threat for those incumbent organizations is to become commoditized and degraded to stick to their original business. The quandary for both incumbents and new entrants stays the same: a dilemma between trust and risk.

How can financial institutions react?

It depends on who you are today, as firms co-evolve with industry convergence. The diagram below illustrates your strategic choices. The horizontal axis sets for the stage of industry convergence: is your industry already converged? The vertical axis represents the company lifecycle: are you a young entrant or an established incumbent?

Banks and insurers are mostly mature incumbents and the financial industry in EU-countries can be seen as rather in an early stage of convergence. As such, financial institutions can be ecosystem aggregators or either wait and become business remodelers in a later stage. However, there is a risk in waiting too long, ending up in a situation where new models are already created by others. would encourage financial institutions such as banks and insurers to think of their role in becoming what we call ecosystem aggregators: « can we leverage existing assets and market experience by orchestrating a platform for complementary innovators? »

Furthermore the EU directive PSD2 should be seen as a perfect opportunity for banks to become ecosystem aggregators. It should be considered as a tool to collaborate, introducing innovative solutions to their customer base.

Financial institutions can now design the playground, invite others to be part of creating something great and be perceived as open and fair. The question how new services and products will translate into making money is only relevant when these services and products become more mature. The « raison d’être » of these innovations is challenging the market and showing what’s possible. Take the example of WhatsApp and Instagram, new firms that now are integrated by Facebook.

Last, I advise young technology pioneers, to wonder: « can we develop superior technological solutions that directly advance the convergence between industries? ». They should think about driving standards, becoming a technology of choice and building non-exclusive licensing.

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