Abundant Innovative Disruption–Varian’s Rule Is Almost Upon Us
(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.)
What would happen if 30 percent of your customer base turned over every 18 months? To satisfy rapid-cycle and amorphous financial customer needs, what products, services, channels, technologies, processes and partners would be needed in three, six, 12 or 24 months? How would you retire these short-term legacy offerings, while mapping seamless transition paths all along ensuring privacy and compliance? What partnerships, investments, skill sets and due diligence would be necessary to promote success?
“Disruption” is the word of the year. It is continually mentioned in politics, across supply chains, within trade agreements, by consumer delivery advocates, payment processing and use of virtual reality and artificial intelligence. As the world’s information becomes increasingly digital–records, cash, settlement, IoT–the world that once concentrated financial profiles in the back-offices of a few are increasingly being dispersed, while becoming more diverse and far more fungible.
The Backdrop: Complicated, Confusing, Predictable
We need to internalize principles that the financial services industry (comprising a wide collection of segments supporting every business in the world) is distinctive; bar no other industry, not even healthcare. Without money, its creation, its usage, its lending, its taxing, et al, the modern world simply stops. Additionally, when mapped against the breadth of state and federal regulations, negative perceptions held by many demographics and the government involvement within every part of the supply chain, there are ravine disincentives for significant innovations and chasm-like barriers to systemic, sustainable change.
Many things stand to be reformed within this world; from multiple electronic currencies, to peer-to-peer payments and lending, to non-traditional asset classes to fundraising and employee compensation. It is a collection of industries designed to protect its consumers, borrowers and providers from hurting themselves. If a “money” supply is threatened, Maslow’s premises become everyone for themselves–my survival, not yours. Like it or not, money runs the world.
Yet, underlying motivations and business drivers for disruptive innovation are caused by throttles put in place by those who believe they are ensuring the safeness and soundness of the financial world. Consumers and FinTech firms feel shut out by established players who appear more inclined to act like an electric utility than organizations beholden to savers and lenders looking to take charge of their financial future and ensure that they have many options–including privacy, security, investments, disclosures, risks, information sharing and recourse.
Moreover, the time required for existing leadership within enterprises to change is typically measured in months and years (e.g., Federal Reserve, regulatory agencies, congressional actions) rather than disruptive innovation parameters of weeks and months (e.g., mobile apps, peer-to-peer, FinTech startups).
As noted in Accenture’s Mortgage Banking 2020 brief, it puts forth that rapid consolidation will likely shutter 20-30 percent of existing lenders due to nontraditional competition, regulations and pervasive digitization. The latter item is being accelerated precisely because people feel shut out of decisions and directions being made across the financial services industry.
They are using their digital and mobile power to stitch together offerings and behaviors outside dogmatic norms while creating bespoke solutions that fit their lifestyle. The axiom of an empowered consumer spawned from the aftermath of the last housing bust has put rocket boosters on nearly all mobile banking and consumer finance solutions (i.e., distributed ledger, layered applications, partnerships with vendors, outsourcers and hedge funds).
So this is the environment into which financial innovation is introduced and into which must be changed before any idea can finds its niche. We are talking about comprehensive financial innovation. Disruptive financial innovation and financial engineering are not malicious if we can put greed and gluttony in check. Recorded history has shown that innovation itself is not unique or disruptive, but in how it is applied, commoditized and when, not if, Varian’s Rule gains traction.
Planning is Great, but Reality is Often Something Different
The desire for disruptive innovation within many leadership circles is an aspiration to “be competitive.” What they are really saying is that “we want to improve efficiencies, improve profitability across products, services and demographic targets, and we need to grow beyond M&A (i.e., expand organic offerings).”
To focus enterprises, the umbrella of expanded digital banking capabilities along with its vast digitization of data has emerged as a critical strategy and a core competency from community banks to credit unions to systemically important enterprises.
Additionally, many financial enterprises have a high fixed cost of operating, leaving limited capabilities for preparing for an enhanced Varian Rule outcome. Though many institutions are touting their internal IT startups, patents and advancements in transaction speed, the reality is many are still leveraging legacy systems and using government dictated processes, which add to costs and limit consumer responsiveness. As we say in the Midwest, “it is like putting lipstick on a pig.”
However, planning for digital change often requires a substantial modification in business approaches or models of operation due to accelerated advancements with a solution or technology grouping (e.g., smart phones). An example of how solutions once used by only those with the largest capital budgets have made themselves available to the mainstream financial services industry can be seen within Amazon’s Web Services and its most recent addition, which migrates in-house databases to the cloud with no downtime or expensive porting software–and they can even switch to different database engines. A decade after it rose to a consistent business priority to drive down fixed costs, cloud computing continues to expand and is now available to every enterprise (per the Varian Rule).
However, what is strikingly sad is that when it comes to preparing for innovative disruptions, specifics within many enterprise plans penned by expensive advisors are missing or woefully inadequate for what is forthcoming. Since 1980s “watch words” such as optimization, performance, transformation, agility and efficiency have appeared in nearly every communication in what enterprises will be doing to leverage (continuous) disruptive innovation. Yet for nearly four decades, financial service industry leadership is caught off-guard when technological advancements outpace their ability to predict outcomes.
Failure of execution resides in a fixation to narrowly focus on one or two advancements–like we are doing today with distributed ledgers and mobile apps. The reality is that the idea of the Varian Rule is being fast-tracked as multiple advancements converge–machine intelligence, investment robots, big data, sensor advancements, security, privacy, virtual reality–and embraced by a consumer base that distrusts and eschews traditional financial solutions.
The Varian Rule and Digitization
Strong job growth, steady consumer sentiments and factory orders belie a movement by consumers for a redistribution of financial controls; beyond government and beyond name-brand financial institution industry monikers. Buried within populist messages taking place in the U.S. political maelstroms we call “nominating processes” are fundamental shifts. These shifts are major factors in the rise of FinTech solutions and FinTech and retailers as financial institutions. If in doubt, try mapping them to digital technology shifts and you might be surprise by the associations.
For enterprises seeking consistent movement beyond one-off marketing programs and good intentions, a comprehensive digital strategy accounting for the Varian Rule must take navigate the following categories for sustainable success:
–Staffing, People and Culture
–Accounts and Products
–Customer Interactions, Fulfilment and Services
–Core Delivery and Integrations
–Prospecting and Marketing
–Investors, Suppliers and Boards
–Enterprise and Competitive Innovation
–Research, Sourcing and Due Diligence
–Credit, Instruments and Capital Markets
–Data and Process Management
–Regulatory Compliance
–Software Applications
–Technology
–Intelligence and Analytics
Regardless of whether the solutions are developed in-house or licensed from larger competitors (i.e., white-labeled), taking advantage of disruptive innovation requires a comprehensive, iterative plan-of-attack. Only by using a holistic approach and analysis for technology adoption can enterprises be assured of repeatable successes across dissimilar, discrete digital advancements.
Marketing alone cannot make up for the void when impacts to business models and delivery methods go unheeded. Therefore, to address questions posed at the start of this article, organizations need move beyond one-off ideals and towards the incorporation of abundant innovative disruption. And even if the Rocket Mortgage offering fades (a gaggle of disruptive innovations), advancements and behavioral changes put forth will not–just as we would expect according to Varian’s Rule. Who will offer the next iteration of Rocket Mortgage and what questions will be answered resulting in a 20-30 percent casualty rate among existing lenders in just four years?
(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
