Digital banking: Lessons from the digital disrupters

Helen Avery
Published on:

The world’s biggest banks have been slow to embrace the digital era. What can financial services CEOs learn from new, tech-based companies that have successfully disrupted other industries? What needs to change?

Steve Kaufer-400
Stephen Kaufer, CEO and founder of TripAdvisor

Entrepreneur Lisa Gansky started Ofoto in 1999. It was the first digital and social online photography website at a time when the masses were still using film. It heralded the digital disruption that the photographic industry was about to witness. 

In 2001 incumbent Kodak bought Ofoto and Gansky moved over to run Kodak’s digital business. It was Kodak’s for the taking. Kodak owned all the rights for digital capture – all the intellectual property surrounding digital photography. 

Kodak had even created the first digital camera. As customers transferred from film to digital, Kodak was in prime position to shift its entire business and take advantage of the innovation.

In 2008 Ofoto (then rebranded to Kodak Gallery) had 60 million customers. Yet by 2012 it was bankrupt. Why?

According to Gansky, it was because Kodak could not make the switch from its old business model that focused on film, to a new model driven by digital.

"The firm made 80% margins on film. A new business model with a different ramping rate and nowhere near that profitability initially just couldn’t convince the senior executives to make the shift." Rather, digital was considered a side-business.

"Those running the company thought the shift to digital would be slower, emerging markets would grow with film and that they had time to ramp down the film side of the business while the digital took over – but the shift happened almost overnight. One day film was there, the next it wasn’t and Kodak was too late," says Gansky.

Kodak’s fate may have been determined by innovation in the photography sector, but it is an example being replicated across industries far and wide in the digital age. An example of large incumbents that ought to be the frontrunners, but instead cannot let go of their former profit-generating businesses and make way for emerging and more relevant business lines driven by technology or social interaction.

julie mossler Waze-large
  Letting community be the driver of your business seems to be the emerging force behind disruption across industries

Julie Mossler

There are stark lessons here for the banking industry. As one consultant points out: "The boardrooms, executive conferences and meetings of the banking sector are looking less and less like their customer base. We see heads of business that are more focused on upcoming retirements filled with golf courses than mobile cash transfers via start-ups and use of the sharing economy. 

"And they’re not open. They come from an era of being aggressive or defensive in business. They don’t understand sharing or the social element the world now operates in, let alone digital technology. The innovation they are signing off on appears more like lip-service than actual hardcore embracing of technology. They are on a burning boat twiddling their thumbs."

It’s a sweeping statement that many banks would argue is unfair. HSBC announced a $200 million investment in May in tech start-ups. In July, Santander announced a $100 million venture capital fund for financial technology suppliers. 

Barclays has its very own building, Escalator, to run an accelerator for so-called fintech start-ups over three months. Wells Fargo recently announced an accelerator programme. Citi Ventures scouts and seeds fintech start-ups. And just about every big bank seems to be supporting a bootcamp or fintech lab/hackathon.

But there’s a problem: the changes that have occurred within retail banking seem paltry compared with the overhauls in industries such as publishing or travel. Who doesn’t buy their books online, if buying physical books at all? Who doesn’t book their own flights and hotels using peer reviews or online platforms instead of going to a travel agent? 

Consumer behaviour has been transformed across sectors, yet US banks are still working with checks. In most countries cash transfers abroad cost vast amounts in commissions. Payments take days to clear and appear in accounts. Branches waste hours of valuable time with their doors closed. 

ATMs charge for withdrawals of a customer’s own cash – because as one head of a retail bank in the US explains: "Why should we pay for the real estate and let other bank customers use our branch for free?" There are at least five solutions to this problem that don’t involve making an individual pay $6 to take out cash.

Could the banking industry drown in a flood of relevant, cheaper, more efficient service and product providers unless someone at the helm of the large retail banks has the courage to make a noteworthy shift? 

"Virtual currency was a pariah, but not anymore. Bitcoin is now bigger than Western Union and catching up with PayPal," points out Eddie George, founder and CEO of NewFinance, a global network for thousands of fintech start-ups and peers.