In this chapter, we consider the forces driving us from traditional financial services to the emerging financial ecosystem . We examine the way financial services organisations have been structured to date, and the binding forces that are keeping them that way, despite efforts to change. We discuss the factors that have allowed the ecosystem economy to emerge, and how the transition is happeningâwith some examples of organisations that are successfully bridging the gap.
The change is radical, fundamental, holistic and impacts all aspects of financial services; we consider the level of disruption that will be required or result from the transition, and ask whether relatively pain-free evolution will be overcome by a more compromising, dramatic and painful revolution.
Dinosaurs and Dynasties: The Financial Services Egosystem
Banks evolved from individuals holding big buckets of money. The guy holding the purse strings (literally, at first) called the shots. Banks grew as balance sheets and customer numbers grew and became giants at a time when labour was cheap, computing was in its infancy, and popular management theory held that hierarchical organisations were the lifeblood of the economy. Corporate pyramids, beloved by American organisations of the 1950s to 1970s, were still maintaining their apparently unassailable position as the ideal business model, riding on the back of the USâs relative economic prosperity following World War II, and subsequently adopted by the world as the cause, rather than a correlation, of that prosperity.
Banks also went through a period of rapid growth and consolidation 1 from the 1980s to the 2000s, 2 in parallel with the development of many new products and services, facilitated by relaxing regulations and greater technical opportunities. As banks grew and rewards skyrocketed, they ceased to be boring, safe workplaces and became attractive to ambitious individuals seeking to make their fortune. And those individuals were rewarded; their creativity and hard work supported the sales of a broader range of products to more lucrative markets, and profitability headed skywards too.
Banks were locked into a cycle of making money, attracting talent so that they could make more money, increasing their value and attracting more talent. Regular culls at most institutions cut out any underperformers, ensuring teams were composed of the brightest and most ambitious people. Leaders, however, were rewarded for two key metrics: building bigger teams and making more money. And it worked: as banking practice expanded to previously untapped areas of the market, a growing consumer acceptance of credit and creative secondary products expanded the mortgage books and made gambling on capital markets an increasingly profitable activity; balance sheets grew, salaries continued to escalate and shareholders were happy.
Out of the Crisis?
Then in 2008 the bubble burst, and things changedâbut not everything. After the crisis, banks recognised the need to scale back, but the consolidation continued. They were still locked into trying to deliver value for shareholders; even though valuations were in the toilet, they couldnât see a way to reduce their costs by losing key individuals without losing the ability to generate value, so those salaries stayed high, while lower-cost people were let go to bring the numbers down, and people were rewarded for the same old metrics. Because large teams selling products at volume to large numbers of customers require consistency and aggressive selling to make lots of money, originality was discouraged in favour of aggression.
The large team/volume sales approach built generations of leaders who have learned that success is earned by building large teams and making lots of money against aggressive, quarterly targets. It also selected for leaders who were good at these two things. Consequently, most of the leadership teams of banks today are still pretty homogenous; despite the recognition that aggressive, sales-oriented âgroupthinkâ directly led to the crisis in the first place, 3 it has been challenging for firms to edit out the profile of people that have formed both their leadership teams and their leadership pipelines for decades.
Banks have recognised the cultural challenge and, especially as it becomes increasingly apparent that customers are demanding greater transparency and accountability, are making committed efforts to change. However, despite widespread reform, groupthink and the underlying culture are proving difficult to shift. 4 Why is it so hard?
Cultural Barriers to Transforming for the Ecosystem Economy
Most banksâ rewards systems are still at least partially focused on quarterly sales, so while many have now included metrics supporting customer-centricity and longer-horizon decision making, an underlying culture in many institutions persists which is driven, at least partially, by short-term, aggressive sales. So the people who rise to senior positions are still those who can meet the sales targets and build large teams.
This creates a challenge for banks when it comes to selecting diverse leadership teams; if the talent pool is homogenous, theyâre struggling to find leaders from a spectrum of attitudes and backgrounds, because those new leaders just arenât rising through the pipeline. Bringing different types of leaders through the pipeline requires the existing leaders to recognise the values organisations are looking for when selecting new leaders, which is hard when the existing leader doesnât share those values.
While a focus on more rigorous recruitment screening has vastly improved selection processes for senior roles over the last two decades, at senior levels relationships are built on common values, which is likely to lead to self-perpetuating culture on the executive team and the board. And even when new types of leaders make it through and are selected, weâve seen outliers (often women), brought in at least partially for the diversity they can bring to the team, only to be managed out after 12â18 months because they canât agree common ground with the pre-existing team. Studies have shown that any minority group needs representation of 30% 5 to have an effective voice in a group; so bringing alternative views to the table in dribs and drabs is also setting them up to fail.
This problem persists, despite some enlightened leaders who fully understand the need for culture to change; these leaders are driving culture change programmes, often forcing the education top-down and expecting their executive teams to enforce them. Top-down is the most effective way to drive cultural transformation, as role modelling is key to changing values and behaviours, but itâs also tough to implement when the majority of the senior people in an organisation have long-learned values and behaviours which support the hierarchy and pressure selling approach, often over decades.
Moving from a hierarchical focus to a service aligned, capability oriented organisation takes more than cultural transformation; it requires a fundamental change to how the organisation is structured, how people are rewarded and how power structures work, and the last section of this book is dedicated to how those organisations look. Asking your homogenous leadership team, for whom managing a large hierarchy has been a foundational career goal, to drive this change is not just asking turkeys to vote for Christmas; itâs also asking them to become different people.
Cultural training can help to move the needle, but the chances of building a team with a majority hit rate, or even that 30% figure needed to be effectively represented, in changed attitudes is small. Together with structural change, a key driver for cultural transformation is a change to rewards metrics, which is something that not just executive committees, but especially boards, struggle with, while performance is already impacted by flatlining interest rates, the cost of implementing regulatory changes and reduced customer growth. Boards and executive committees are responsible to shareholders, who have in good faith invested in a profitable enterprise; while they can see a future where things need to change, itâs very hard to justify turning off the tap in the short term, to achieve longer-term survival.
So weâve seen many banks and financial institutions making serious efforts to transform, often recognising how critical cultural change is in driving transformation, but falling at the point where they try to make those changes structural and drive the business towards a flatter, ecosystem ready structure. As we discuss in the last section of the book, itâs difficult to provide customer-focused services in a traditional hierarchy; cultural change will only survive if leaders are seen to walk the talk, while if workersâ experience is that nothing really changes, the cultural transformation initiative is perceived as lip service and a waste of time and money, leading to workers becoming disillusioned with the idea of change.
Values driven cultural transformations like these in banks have, therefore, frequently failed, as they fail to address the hierarchical structure of banks. Only in a small number of examples have they been successfulâING 6 is a good example of a bank that has embraced a values driven transformation to the extent that leaders are required to adopt not just the values, but the (IT in this case) skills that are central to delivery of the bankâs vision. This has meant restructuring the organisation, changing the way people are rewarded and letting a large number of people goâchanges that, as ING has demonstrated, can be made with determination and the willingness to transform from top down, but are proving too much of a challenge for many banks, even with the looming crisis coming visibly closer.
If Not Banks, What?
And that crisis surrounds the banks today. As we examine throughout this book, there is a growing ecosystem of non-bank financial services emerging outside the banks, attracting growing customer numbers and seeing mainstream adoption by the banksâ traditional customer base. Alipay, the Chinese digital wallet sensation, and M-PESA , the West African mobile money solution which has transformed financial inclusion in Kenya and elsewhere, are both examples of this. Itâs easy to identify the technology that has enabled some of these services to emerge, but itâs also important to acknowledge that the growth of this ecosystem has not been driven so much by technology innovation as by customer needânecessity, as usual, being the mother of invention.
Non-bank financial services have always been with us; since before banks even existed there were money lenders and alternative structures, such as guilds and less formal community groups, supporting business growth and sharing financial risks, and these have persisted in parallel with the formal banking systemâsome becoming regulated under the same rules as banking and others, particularly lenders, managing to dodge inconvenient regulations and consumer protection rules. Because banks have been able to build large customer bases through their unique relationship with central bank -issued currencies, fractional reserve lending and strong regulatory protection, they have continued to dominate financial services, while non-bank financial services have been offered at often prohibitive premiums, to customers who, in many cases, are least able to afford them because they fail to meet the high standards of identity and credit history required by the banks.
But alternative financial services have exploded over the last ten ye...