Banking on Disruption: TCS and the Clayton Christensen Institute


TCS and the Clayton Christensen Institute have collaborated to produce a series of articles and whitepapers that explore the future of industries through the lens of a set of fundamental theories developed by Harvard Business School Professor Clayton Christensen (Mr. Christensen is a TCS Board member). The theories offer a form of what-if analysis that leaders can leverage to better understand the cause and effect between actions and results. These theories include Disruption Theory, the Theory of Jobs to Be Done, and Modularity Theory. In this case, the author focuses on the disruptive potential of innovation, and this first piece in the series tackles Disruption in the Banking Industry.

The approach represents one aspect of a Future Thinking exercise which seeks to understand the disruptive potential of current innovations in each domain. It is a component of the “See” phase within the future framework described recently via this Post. The scenarios in this case are domain specific (payment, wealth management, and lending), with the ecosystem component of the framework focused on the current financial infrastructure. The response component represents a conclusion based on the application of the above-mentioned theories. Some key findings from the article:

As it stands today, virtually every product category in retail banking is under attack from a host of entrants. From payments, to wealth management, to personal loans and mortgages. Their analysis reveals that banks have two clear choices for market maintenance:

  1. Employ a sustaining strategy by adopting the innovations that are launched by entrants, so long as they build on existing performance
  2. In the event that current business models cannot profitably support new innovations, build an independent business unit with fundamentally different DNA from which to launch new products or services.

That second choice seems to be gaining traction, acknowledging that culture, priorities, and current incentive models are difficult to overcome. Each product category is addressed in the article:

PAYMENTS

Conclusion: disruption in payments is difficult, with the principal competitive challenge stemming from the reliance that any innovation relies on established organizations who control the infrastructure and the value network of payments. Any success that entrants have effectively keeps incumbents in business as well.

WEALTH MANAGEMENT

Conclusion: current innovations are sustaining, not disruptive. Innovations like robo-advisors have automated the process of on-boarding and made it easier for individuals to avail wealth management services. They have improved upon existing performance but not altered the existing business model. As with all sustaining innovations, the incumbent response has been aided by the fact that they do not need to throw out their business models to launch their own robo-advisor services.

LENDING

Conclusion: whereas incumbents appear to have a competitive advantage in both payments and wealth management, lending presents a different picture. Should peer-to-peer lending gain significant adoption amongst borrowers and retail investors, it could serve as an alternative to bank-led lending in many situations, thereby reducing banks’ power to set interest rates. Marketplace lending, which enables people to lend directly to one another, coupled with the presence of investors looking for yields, is creating a situation with enormous implications for incumbent lending institutions.

INCUMBENT RESPONSE

Every scenario analyzed has a series of potential responses. Based on this analysis, the author presents two possible incumbent responses (text straight from the article):

The Sustainer Bank

One approach that banks have chosen to employ is redesigning themselves around evolving customer behavior and technology while retaining the core of their current business model. In this way, they are able to focus on an improved customer experience by adopting the very technologies that have contributed to the rise of entrants. None of the technologies that are being utilized by entrants—such as the internet, mobile phones and advanced analytical tools—are inherently disruptive. They are equally useful for a bank that seeks to deploy them to create improved products and services for their customers.

The Independent Bank

The capabilities of a mature organization reside in its processes and priorities, which are extremely difficult to change. Processes denote both concrete functions such as capital management as well as relatively abstract ones like decision making and communication. Priorities denote the objectives of an organization around growth and profitability. If an innovation effort is incompatible with the processes and priorities of the organization, it is unlikely to succeed. As an example, if a particular innovation promises lower profitability, the processes and priorities of the organization are likely to starve it of the necessary resources despite the best intentions of the organization’s leadership. This is because the hierarchy of management that controls resource allocation is bound by the existing processes and priorities and will find it easier to route resources to other initiatives that promise to retain profitability such as ones that reduce cost. When a new business model is required due to conflicting processes and priorities, banks must create an organization that is completely independent from their current one.


This second response as I mentioned earlier seems to be the path of least resistance. In most cases however, there is still a capability link between the core business and the growth business. How that link is managed spells the difference between success and failure. This challenge is described and addressed nicely in a recent book titled Dual Transformation.

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