Mark P. Dangelo: Purging of Underperforming Innovation Firms Is Accelerating
Mark P. Dangelo is Chief Innovation Consultant with BlackFin Group, Laguna Hills, Calif., responsible for leading and managing innovation-led business transformation and technology projects and innovation-based advisory services. He is also president of MPD Organizations LLC and an adjunct professor of graduate studies in innovation and entrepreneurship at John Carroll University. He is the author of four innovation books and numerous articles and a regular contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.
More than 6,000 U.S. banking brands have disappeared since 2000—the number remaining will reach just more than 4,500 by year-end. In 2020, U.S. patents granted topped nearly 400,000, up from the 186,000 in 2000, with the greatest jump in this trend taking place in 2010—post-Great Recession.
Additionally, the number of fintech vendors will exceed 13,500 by end of 2021 from the 10,000 it started with when 2020 closed its books. For banking, mortgage and financial services (#BMFS), innovational advancements are rapidly accelerating against a smaller number of competitors. Each controlling larger consumer and corporate asset bases. Also, BMFS employees post-Covid are signaling a “great worker exit” (e.g., > 35%) from firms unwilling to adapt to changing quality-of-life demands for flexible work arrangements with unaltered salaries, benefits and promotability. In the end, with traditional, standardized products such as mortgages now a commoditized offering, how will success be defined?
The Wind Up, and the Pitch …
The digital revolution since 2017 has remade finance and mortgage operations—indeed, for BMFS the story is unfolding that only the transformative nimble entities will survive. Digital offerings are not only about technologies but defined and delivered in operational capabilities against changing consumer behaviors. Competitors who are non-traditional (e.g., Upstart) have embraced the FinTech and RegTech offerings all to adapt to shifting market segments, while ensuring that they are not viewed as dogmatic adhering to time consuming fulfillment approaches. Likewise, competitors have fully internalized the technology, personnel, and process model of using “as a Service” or aaS to shorten transformation cycles, adapt to customer behaviors, thwart competitive offerings and remake the provisioning principles that required months and years to secure a viable ROI.
As Industry 4.0 expands the use of cloud computing, the internet of things (IoT) reaches 70 billion devices, use of layered and container driven innovation alters the innovation lifecycles, process streamlining using learning algorithms and artificial intelligence alters reality, the universal explosion of the six “V’s” of data underpins behavioral targeting and the quest for efficiencies and profitability using all things digital, has in just five years, boosted profitability and remade customer expectations for the remainder of the decade. Moreover, these advancements have expanded the needs of system-to-system interoperability and robust collaboration between financial supply chain partners often representing the exchanging of thousands of data elements for a discrete financial product.
For BMFS leaders, the impacts to staff (e.g., reskilling) has never been greater as processes and people struggle to adhere to emerging digital regulations, integrate and leverage technology, and deliver against product or innovation life cycles that are measured in weeks or months—not years. Furthermore, the time and expense to provision traditional business system functions (e.g., LOS, POS, risk management) are lethargic relics of IT adhering to waterfall prescriptions of define, develop, test, and implement.
To adapt the number of innovations and value propositions arriving daily, organizational leaders must selectively decide which of the digital progressions mitigates the financial customers “pains,” while concentrating limited resources on the “gains” for their firm and investors. The premise of this business transformation using predefined drivers delivers against measures that can be utilized to adjust the digital roadmaps, partnership propositions and innovational layers. In the end, financial innovation is about managing the triple constraints of people, process, and partners (including technology vendors) tightly coupled with the organization’s ability to adapt.
“The benefits of the services being made available through cloud providers (e.g., Azure, AWS, etc.) allow firms the ability to take advantage of the scaling/tools that typically only the largest IT budgets could have provided in the past,” says Kunjar Bhaduri, CIO of Wipro Opus. “As firms like Wipro provide value-added services through these cloud offerings, clients can begin to weave together services for greater value that meets specific client needs. The services (i.e., applications, APIs, etc.) begin to break firms away from the monolithic structure that can be limiting for businesses when looking to take advantage of the newest offerings or market opportunities as decoupling permits.”
People and Process Foundational Layers
The skills necessary to execute the innovation agenda has been made easier using aaS offerings. As an example, the time needed to provision new customer services in one finance organization was reduced from months to days using aaS solutions as compared to internal staff defining, developing, testing and implementing the internalized lifecycle. The people skills coupled with existing adoptable processes and technology (i.e., managing the triple constraint) provided managers with compartmentalized building blocks that are rapidly deployed.
Unlike traditional HIPPO (i.e., highest paid person in the office) impacts on decisioning and operational improvements, the expansion of granular, functionally contained aaS offerings have launched innovation advancements that no longer rely on a single person, vendor, or unicorn contribution. Today, organizational leaders can iteratively test aaS components using stacks of containers (think interconnected Rubrics cubes) all linked by the enabling realities of big data, algorithmic processing, and intelligent hardware. These entrants are then able to factually obtain potential market size, customers, and profitability without the traditional capital investments required before 2017.
Conversely, the longtail times once required to obtain the critical mass of skill sets coupled with the transformation of processes to secure functionality and market response are significantly reduced when adopting a building block mindset and aaS offerings. With the maturing of aaS, those features once included as “afterthoughts” are now built-in—continuous monitoring of security, robust encryption, and configurable privacy functionality. Today, organizations are rising to utilize the varied offerings delivered by forward thinking partners and providing the flexibility to rapidly adapt to consumers as a very granular level of implementation.
“As companies begin this integration process it allows them to follow a more ‘agile’ approach to building products and services,” Bhaduri says. “The end of each sprint allows us to look back on what worked, what did not, and re-evaluate our strategy moving forward. Businesses must be nimble so they can pivot in weeks instead of in months. With the right use of core cloud services, layers of innovation can be replaced more easily than before if the integration points are maintained (e.g., JSON, XML, gRPC, security) or would require minimal changes. At Wipro, we embrace this approach so that we can keep pace with, or move ahead of, the changing landscape. Until very recently, due to legacy systems and regulatory requirements, the mortgage processing industry had remained tightly coupled to hundreds of documents that require massive amounts of manual processing, data entry, ingestion and review that led to a high cost of doing business and protracted delivery times.”
Partners and Their Implementation Vision
A critical challenge for BMFS leaders given the explosion of aaS offerings, the vendor specific terminology and the granularity of solutions, is where do you begin? The digital strategy defined and iterated is predicated on the data—its governance, its quality, and its curation. Additionally, the use of industry knowledge and expertise becomes a building block axiom that drives automation, leveraging of AI with human skills and ensuing that security and privacy lead delivery to customer trust.
With selection of partners to assist with the creation of the digital roadmaps, BMFS organizations must also chose partners who are able to leverage the internal maturity and delivery capabilities against the stated end state or vision. Conversely, partners need to evolve step stage to ensure they do not outdistance the personnel and processes using non-sustainable, advanced solutions, which in the end may be rejected by the enterprise and their customers.
For BMFS leaders, this balancing act of accepting aaS and creating innovative market offerings must be continuously assessed to ensure innovative relevance. A partner who is focused on a lift-and-shift may be a good fit early on, but with digital business transformation being iterative that one-and-done mindset may not fit within a few months’ timeframe. Therefore, partner selection as a cycle of digital maturity cannot be left to chance—as BMFS organizations cannot afford the lost time of shedding partners within a yearly operating cycle.
“When it comes to evaluating the use of aaS solutions, there are multiple value propositions and those should be evaluated based on what any company wants to achieve in terms of goals,” Bhaduri says. “For example, if a client is trying to achieve higher through-put, the workflow needs to be understood to find critical paths that need performance improvements. Once it is understood, a provider can then break down those goals to find the solutions that work best. Given the depth of our industry experience and the amount of data we have gathered, in the future Wipro Opus would be well positioned to offer actionable insights to our clients that would allow them to make intelligent business decisions.”
“We are All Technology Companies Who Practice Finance…”
What is now happening is a bifurcation within BMFS cultures—those who practice innovation and those who seek to understand the idioms. Additionally, non-traditional competitors are versed in technology and offer BMFS as part of the “extension” to their innovative customer solutions.
In April, Jamie Dimon, Chairman and CEO of JPMorgan Chase wrote, “As the importance of cloud, AI [artificial intelligence] and digital platforms grows, (this) competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.”
Underscoring this diminishing role is the amount of data controlled by financial institutions regarding customer finances. Data which is the very fuel of all BMFS transactions is now under 40% within the confines of corporate data centers and their financial products and services—in 2008 it was nearly 80%. Factor in the reality that every 2.5 years the amount of data created doubles all prior recorded history (today measured in multipliers of 1021), then you can appreciate the diminishing role traditional BMFS practices and provisioning solutions represent.
This decade will represent a comprehensive shift for BMFS institutions. If we extend out the historical institutional losses (against the 20+ year trend) that started with 5,000 FDIC brands beginning in 2021 to the end of the decade, there may be only 2,500 “traditional” U.S. registered banks by 2030. What will these Fourth Industrial Revolution “pains” and “gains” do for or to your institution? What happens when M&A activity is not about buying traditional competitors, but the very partners that deliver value to your customers? Cross-industry M&A actions are inevitable—after all it is all about the digital demands. Yet, M&A is only one tool of the many innovational practices that all begin with digital and aaS.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
