Banking, airlines, telecoms: the demons of disruption are dancing

I attended a seminar on Open Banking this morning hosted by Ctrl-Shift. Several seemingly stable industries share similar structural contradictions.

My usual attitude towards breakfast meetings is the same as my feelings for liquorice: an absolute delicacy and delight… best enjoyed by other people. I made an exception today, and got the 7.03am train into London to attend a seminar on Open Banking hosted by Ctrl-Shift.

Often one has to go outside of your home industry to gain perspective. Listening to the speakers, I had one of those “aha!” moments that crystallised a thought that had long lurked in the cellars of the Geddes wayward meme factory: several industries are all struggling with the same basic problem.

The contradiction they are dealing with is a disconnect between what the customer truly values, and what they deliver. I purposely use the strong word “contradiction”: the end user value is at absolute odds with the value proposition.

Yet the system appears to be “stuck”, and unable to align the supply and demand sides, because the IT systems are anchored onto a false or outdated assumption. Everyone else in the industry has the same madness, so nobody pays it any attention.

Banking is broken

The fundamental problem of (retail) banking is similar to that of healthcare (aka “sickcare”): the incentives are for unwellness, rather than wellness. The most profitable customers are those who get into debt and difficulty, paying the most interest and charges.

The IT systems of banks are all built around double-entry bookkeeping for transactional processes. There is no concept of a customer as a human having an emotional journey. The gig economy doesn’t exist, your rent has to go out on the same fixed date regardless of your irregular income, no matter how anxious it makes you.

The growth of institutions like payday loan providers indicates that the “value shortfall” of banks is considerable. A lot of the demand that exists for “shock absorbing” financial products isn’t being met. Users are also being forced to engage with what are effectively wholesale products like mortgages, rather than being offered “home making and life journey services”.

Airlines are awful

The air travel business also has a core disconnect, as any self-loading cargo unit will attest. The only value of a plane ride, barring the view and a meal, is arrival at your destination within some predictable time window. What is sold is the opposite: a departure, based on an allocated seat on a specific service at a fixed time.

These are not the same thing! (Just consider whether you get much value when diverted to another airport.) In a demand-centric model you would be given parameters of your departure window and arrival window, and would pay for an “option to arrive”, with a penalty SLA for it being broken.

The airline would have flexibility over how to route you over its network to deliver it. You could even vary the arrival location: somewhere like London has 6 airports with scheduled airlines to choose from.

The same route network could then be packaged and sold in different ways for segments with greatly varying tolerance for variation and enforced leisure in airports. It would decouple the arrival (of value) from the departure (not of value) and anchor the payment in the former, not the latter.

What holds the airline industry back is that all the IT systems are built around the Passenger Name Record (PNR) and seat reservation. It would require a completely new entrant to come along, possibly at scale, to shift the whole system from a “low value state” to a higher one.

Telecoms is troubled

The packet data networking business is absolutely crazy. The value is in quality(i.e. timely arrival of information). The cost is in quality (as there is no marginal cost of carriage if you can be made wait forever). Yet the products and revenues are all expressed in quantity (i.e. bandwidth).

The underlying data structure of all of telecoms is the Call Detail Record (CDR) with metered duration, which has been repurposed for data services as data volume. The product catalogue will always have “speed” as the main parameter for each product, since every possible product is a variation on a circuit.

For the telecoms industry, there is a transition from broadband Internet access to cloud application access, with 5G being a flagship technology to deliver this. The paradigm change (from “purpose-for-fitness” to “fitness-for-purpose”) is proving to be a tough one to overcome. It contradicts legacy thinking and incentives, and needs a complete rewrite of the core OSS/BSS systems.

Different concepts of change

Senior managers in each industry are aware of disruptive change, and actively plan to either engage in it, or defend against it. After all, this is well-known and taught on MBA courses. Yet senior management and decision-makers often get caught off-guard, as new entrants sweep away the old model. Why is this?

When there is a “tectonic” disconnect between demand-side value and supply-side product, it sets up great stresses that can be suddenly released. If you are unaware that you are sat on an earthquake zone, then you will not take suitable precautions. Preparations for rare but catastrophic business events don’t give you short-term rewards.

The senior management often work on a sales-driven “conquest” model of strategy, where there is a fixed field of play, such as today’s financial services or telecommunications markets. Individual players compete, so a brand like First Direct can enter the UK banking market, and take share away from older and more established players. The defence is to improve your product, and strengthen its distribution.

A contrasting model is that of “corrosion”. The market is a “system of systems”, and a new ecosystem can arrive and completely displace it. This is what happened to Nokia and BlackBerry, who thought they were fighting for market share, when their real battle was for relevance. The only defence is to engage in ecosystem-level strategies of cooperation.

Another audience member suggested a third approach, which was “metamorphosis”, where strategic change attempts to evolve the nature of the business. This hints at the classic Japanese concepts of kaizen, kaikaku, and kakushin as continuous, step-wise and transformational change. The theory is that a lot of small improvements cumulatively become a large transformation.

A feature or a product?

A problem with traditional strategic management is that it fails to account for the “game changer”, whose possibility space is far larger than your own. This is someone who changes the size or scope of the “field”, or the rules of the “game”. It obsoletes the strategic plans and technical systems of the incumbents.

A common and core “game changing” approach is to turn one industry (with a stand-alone revenue model) into a feature of another (with no revenue attached, making the old back office systems obsolete, and their constraints unimportant).

So the smartphone has consumed satnavs, CD players, alarm clocks, MP3 players, and more. Each of these has become just a feature of a bigger system.

If your strategy is “conquest”, but your field of play is surrounded by a “meta-industry”, then your strategic plans become irrelevant. “Metamorphosis” is only good if you didn’t make a category error in the first place; you cannot turn a caterpillar into a camel, nor can a butterfly resist a competitive environment filled with birds.

We can see this playing out in the advert above for small business bank accounts. The company Tide, one of many new challenger banks, is turning banking into a mere feature of your accounting and business automation application.

In the wider economy, Amazon seems to want to make every industry based on SKUs into a feature of Amazon. As was noted in the seminar, Amazon is already de facto a bank by making business loans to its merchants.

Change the game, or die

In the long run, the customer always prevails. They alone define the value of the product or service, which comes entirely from its use. They alone supply the resources on which any industry exists.

This means every industry needs to seek out and support its “game changers”to create the strategic options on reinvention. If you are already in an economic earthquake zone — like banking, aviation or telecoms — it’s too late to begin hiring when you feel tremors. The demons of disruption won’t delay the dance.

In banking, it means allowing new “lifestyle management services” to take over and cannibalise the existing business. What you buy can say a lot about the risks you are taking, and the life choices you are making. Would you swap banks if they could use supermarket and restaurant data to help you make better eating choices, and avoid your foot having to be chopped off due to diabetes? Quite possibly so.

Thus the new “Wellness as a Service” industry could de facto end up “gobbling up” chunks of consumer retail banking. Whilst it may sound far-fetched, who foresaw how Google and Facebook would quickly obsolete the revenue models for many mobile services from the early 2000s, whilst Apple enabled whole new ones?

Indeed, we’ve seen credible proposals for the whole National Health Service in the UK to be funded by data acquisition and sale of patients. The kind of “machine learning behaviour change” start-up that would enable these business model transformation already exists. Privacy concerns and liability can be addressed with “double-entry data keeping”.

For airlines, I have extensively discussed the potential for strategic change in previous articles.

Finally, there is telecoms. For that, the answer is simple. If the value and costs are in quality, maybe your product revenue model should be, too? You don’t want to just become a feature of the Amazon cloud, now, do you? That would be so very… liquorice.

If you want to learn how to change the game, come to the workshop I am co-hosting on 8th December to find out how. Nobody else has the insight, technology and expertise to do scientific network management for cloud computing.