Banks without a digital core will fail

Building on the discussion of data being key to disruption, I often use the phrase ‘digital core’ in this context.  Therefore, I was intrigued when someone asked for a definition of a ‘digital core’ and one of the replies was there isn’t a core anymore. 

I wondered what they meant and, in explanation, they referred to the idea of a central point of systems – a mainframe – is no longer the way the markets operate.  Systems should instead be spread across server farms in the cloud so there is no single point of failure.  I totally agree, and therefore felt it worth a little more explanation of digital core as so many misinterpret what this means.

First, I have defined my terms several times before:

But it does no harm to reiterate some points, such as this one.

So a digital core is, in essence, the removal of all bank data into a single structured system in the cloud.  The data is cleansed, integrated and provides a single, consistent view of the customer as a result. 

That’s a big ask, and most banks tell me it’s not achievable.  Silo structures and line of business empires protect data sharing and lock client information in their product focused empires; creating a single, cleansed store of cloud-based data is too insecure, creating the opportunity for any cyberattacker to bring down the bank; a single data store would not be good for risk management purposes; etc, etc.

I understand all these concerns, but don’t agree with them.

The product-focused empires are the problem.  You cannot have customer-centric operations if your organisation is product aligned.

Cyberattackers also find it far easier to steal from fragmented systems than one that can track digital entries in real-time across the enterprise.

Equally, banks are pretty darn poor at risk management in their fragmented, product-focused structures, as evidenced by two meetings with my bank recently.  The first meeting is with my business relationship manager, who tells me all the ins and outs of the banks’ SME operations.  I then, for the first time in living memory, allowed my new personal relationship manager to visit.  He had printed and read very carefully all my information and wanted to complete an up-to-date fact find for KYC and sales purposes.  That was fine.

Halfway through the conversation he asks: “what do you do for a living?”  I said that I thought he would know as I talk to my relationship manager often.  “Oh”, he says, “that doesn’t show on our records.  Who did you talk to?”  I explained that it was Paul, my SME manager, as I have my business account with the bank.  “Oh”, he says, “I didn’t know that”.

This is fairly typical of all banks I talk to – their corporate, commercial and retail bank systems are separated and never the twain meet – but it’s not the way a digital bank would work.

A digital bank with a digital core would immediately create the inter-relationship profiles of the digital footprints of all individuals who touch the bank.  That is the way you can drive contextual relationships and offers to those who touch the bank.  It is also the only way you can drive a consistent, augmented and informed approach to clients who touch the bank.

Equally, a digital bank has a single digital core of data in the cloud that can then be accessed by any form.  The digital core is independent of the processors, and hence you can take out a server or a system at any point and replace it with a new processor, because you have no reliance on the engines.  Your reliance is on the data being clean and consistent.

For me, it is a critical factor in developing the digital bank and yet whenever I get into a conversation about this with a bank, I’m told it’s too difficult.

It may be too difficult but I suspect that if banks don’t bite this bullet, the fintech specialists who do get the data structures right will eat their lunch,

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Data personalisation strikes to the heart of bank disruption

I’ve heard a lot of talk this morning about Big Data at a conference here in Barcelona, and had a realisation half way through.  The conversation was all about the move from mass markets and customer segmentation to the market of one and peer-to-peer personalisation.  In other words the deep data mining demanded by Don Peppers and Martha Rogers in 1:1 marketing in the 1990s is finally here.  It took twenty years, but here it is.  Yet this is the heart of the debate about digital disruption, fintech startups and bank responses. 

The reason why banks are being accused of being old and stale and slow, is that they are finding it very hard to adapt from product selling to mass markets through traditional media engaged via channels to offering contextual services to individuals via social media that provides digital access.  This is all part of the evolution, or revolution if you prefer, of banking and the heart of this is that the fintech startups are focusing upon putting control in the hands of one.

For example, at a recent US conference, there was a lot of talk about Venmo.  Venmo is a social payments app that acts as both a way of ensuring bills are paid between mates and also being a social share.  We all go out at the weekend and Dave pays so Chris, John and Erin send money via Venmo a few minutes/hours later.  The next time we go into Venmo, where’s Brett’s payment?  Hmmmm …

What’s Big Data got to do with that?

Not a lot.

What’s that got to do with the new market of one?

A lot.

The market of one is all about making the individual the centre of control and supporting them in controlling their lives.  The market of one can only be served by apps that leverage data and personalise it.  So Venmo’s secret is not deep data mining but allowing deep data sharing.

It’s also interesting that Venmo came through Braintree into PayPal, and PayPal now have one of the hottest apps out there.  For example, Venmo processed $141 in payments in 2013 increasing four0-fold to $700 million last year.  Could PayPal have created Venmo?  Not really.  PayPal are already being called an incumbent legacy, as they’re over a decade old.  Ten year old firms find it hard to stay fresh, as even Facebook demonstrated.  That’s why the new tech firms are acquiring and investing fast to keep up.  It is why Braintree acquired Venmo and PayPal acquired Braintree in a similar way to Facebook acquiring WhatsApp and Instagram. 

PayPal would not be able to create Venmo anyway as Venmo came out of an idea of two mates in their 20s who owed each other money after a long weekend.  A bit like Facebook, Tinder, Snapchat and more, these apps come from people seeing context and then looking at how to use new tools from Big Data through Cloud to Apps to provide real-time sharing and sourcing of needs.

And this is where we do see the banks struggle, as they cannot create these new apps as they don’t have the structure, capability or organisation to do so.  But what they can do is seed fund these apps, buy their companies, partner with the founders and more.  And that’s what Jamie Dimon is alluding to in his shareholder’s note, and it’s what banks need to wake up to in the new landscape.

The new landscape demands that banks work 1:1 with relevance to the individual’s needs.  If the bank cannot deliver this through their archaic systems and structures, then they have to rebuild the bank through working with the new systems and structures. 

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What keeps Jamie Dimon awake at night? (clue: Fintech)

I’ve written a lot about incumbents versus startups lately and noted with interest that Jamie Dimon’s annual letter to JPMorgan shareholders picks up on this theme (not as a direct result I’m sure?).  He talks about “hundreds of startups with a lot of brains and money working on various alternatives to traditional banking” and that “the ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting.”

These are the ones of concern?

Yes, because “they are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks.”

Interesting.  Why does it take banks weeks?  He doesn’t say.  The answer is because banks are laden with sedentary processes built in the last century for the physical distribution of paper in a localised network called the branch.  The branch was filled with human automatons who could manage transactions but not assess risk.  Risk is a Head Office function managed by specialists, who are trusted not to lend to idiots (hence the reason why we avoided a credit crisis!).  The hand off of fact-finding papers by automatons to enable specialists to work out whether the applicant was an idiot or not would take weeks.  Now, self-service forms online have replaced the automatons and automated systems have replaced the specialists.  That’s why the new P2P providers can replace banks with instantaneous decision-making services at a fraction of the cost.  After all, a server for $1,000 is far cheaper than a specialist Head Office credit risk manager costing tens of $1,000s.

As I blogged a while ago, this is the reason why banks should fear the replacement startup companies more than the wrapper services.  It is also why Jamie Dimon not only underscores that the banks is “going to work hard to make our services as seamless and competitive as theirs” but, in a step further towards bank as value systems integrator, he states that JPMorgan “also are completely comfortable with partnering where it makes sense.”

Will JPMorgan integrate Lending Club and Prosper into their credit risk operations and structures, and what does this to do margin, process and operations?  Good question and one that JPMorgan along with other banks are all trying to assess, as they have to face it: the day of stand-alone vertically integrated banking is over.

That’s demonstrated well in the payments world, that also gets a note in the letter.

“You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us — and we are quite good at it, but there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and ‘pain points’ for customers.”

Learning is a good thing to focus upon, and JPM along with their counterparties are doing just that.  It is why UBS, BBVA, NYSE, Intesa, Barclays and several other banks are investing in cryptocurrency startups and supporting new payments models.  The thing is that they cannot do this effectively if banks are hamstrung by heritage.  As Dimon states:  “some payments systems, particularly the ACH system controlled by NACHA, cannot function in real time and, worse, are continuously misused by free riders on the system.”

Free riders? Who could they be?  “PayPal and PayPal look-alikes”?

So what are you going to do about JD?

Well, I answered that a while ago  but, in case you missed, it JPMorgan has been hiring a whole host of Silicon Valley talent.  They have to do this to compete with the new startups, free riders: wrappers, replacers and reformers.  As Jamie Dimon puts it:  “We move $10 trillion a day.  We’re one of the largest payments systems in the world. We’re going to have competition from Google and Facebook and somebody else … when I go to Silicon Valley… they all want to eat our lunch.”

So, although banks have a system designed to protect them through licences, it’s not completely protected from margin squeeze and fee contraction through new players.  And we may say that this is just something to be concerned about in the retail space, but I suspect that the likes of Jamie Dimon don’t see it that way as most of the upstarts don’t.

So, the bank of the near future will be value systems integrator of best-in-class apps, APIs and analytics that enable them to deliver the ultimate delivery of value aggregation for their clients.  If they don’t move to this model, then their failure to adapt will have been proof of being ignorant of the change that is going on around them and, as noted by Roberto Ferrari who I interviewed the other day, if leadership teams are unable to lead change then they are not a leadership team anymore.

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Why Fintech Banks Will Rule The World

Whilst debating whether new fintech startups would eat the banker’s lunch yesterday, I stumbled across a really interesting read by Philippe Gelis, co-founder and CEO of FX firm Kantox.  It was so good that I asked Philippe if I could put it on the blog and he kindly agreed.  Read and enjoy …

Why Fintech Banks Will Rule The World, by Philippe Gelis

Last week, I had the opportunity to present Kantox and my vision of Fintech in front of around 150 bank executives from Northern Europe. After my pitch, we had a Q&A round, and one more time I had proof that bankers are not expecting at all what will happen in the next 10 years.

The financial industry is one of the last large industries that have not been already really disrupted. Nevertheless, it seems that bankers do not have much of a different approach to the people who ran the press, hospitality and airline industries some years ago.

Every industry will be “uberized”, but it seems that most bankers still think it will be different in their case, probably because they consider that the heavy regulation will protect them and limit the growth of Fintech at some point. Bankers simply do not understand that tech companies are agile enough to take advantage of any piece of regulation.

They also still believe that customers still trust banks, while since the 2008 financial crisis and due to the never-ending financial scandals (Libor-gate, the FX fixing scandal, etc.) customers (both individuals and businesses) have a huge appetite for alternative finance. Banks are not seen any more as partners, but rather as pure providers only looking after their own interests and short-term profits.

It is a first step for banks to open incubators or to create VC funds to invest in start-ups, some of them Fintech, but it is definitely not enough. Most banks look to fund fintech start-ups that create products to be added on top of banks products, that will make the user experience better, but they almost never invest in products that directly compete with them, that cannibalize them.

Let me explain why I think bankers are completely wrong.

We are now experimenting with the first wave of fintech, which sees companies competing with banks on specific products:

  • Loans and credit
  • Payments
  • Foreign exchange and remittance
  • Wealth management
  • and many more

Lending Club is far and away the global flagship fintech company. The success of its IPO has been a game changer for the entire fintech sector.

So, banks are getting pressured by newcomers but –and the “but” is really important– these disrupters are relying on old-school banks for banking services and banking infrastructure (bank accounts, payments, compliance, brokerage, etc.). In other words, they are re-inventing the user experience, the user interface or the business model but not “the whole thing” (to steal a quote from Marc Andreessen). And by relying on banks to do business, fintech companies are clients and so generate revenue for the bank. Let’s say it is a co-petition (co-operative competition) model in which fintech stays at the mercy of banks, they disrupt banks on one side but they bring them business on the other side. In the end, banks still win.

It is important to note that many fintech businesses have evolved from pure “P2P models” to “marketplace models” where the liquidity can come from peers or from financial institutions.

Lending Club is known for getting up to 80% of its liquidity from financial institutions and not from peers. Here we have a clear example of banks considering it to be more efficient and therefore more profitable for them to lend money through Lending Club than through their outdated branches. Anyway, the challenge is more in having deep liquidity than in locating the liquidity.

The second wave of fintech, to come in two to five years’ time, will be “marketplace banking” (or “fintech banks”). This will be a type of bank based on five simple elements:

  1. A core banking platform built from scratch.
  2. An API layer to connect to third parties.
  3. A compliance/KYC infrastructure and processes.
  4. A banking license, to be independent from other banks and the ability to hold client funds without restrictions.
  5. A customer base/CRM, meaning that the fintech bank will have the customers, and a customer support team.

 The products directly offered by the fintech bank will be limited to “funds holding”, comprised of:

  1. Bank accounts (multi-currency).
  2. Credit and debit cards (multi-currency).
  3. eWallet (multi-currency).

All other services (investing, trading & brokerage; wealth management; loans, credit & mortgages; crowdfunding (equity and social); insurance; crypto-currencies; payments; remittances & FX; this list is not exhaustive) will be provided by third parties through the API, including old-school banks, financial institutions and fintech companies.

Slide1

Imagine that you are a client of this “marketplace bank” and that you need a loan. You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest interest rate possible.

So, through the API, the “marketplace bank” will consult all its third parties and offer you the loan that best suits you.

We can imagine both a process in which conditions offered by third parties are non-negotiable but we can also imagine a competitive bidding process to get the best offer for each client at any point in time.

I have been asked several times about this business model and I think it is a no-brainer. It is a simple mix between an access fee to the “marketplace bank” and a revenue sharing model with the third parties providing additional services.

Here we have a completely different approach regarding the relationship with incumbents. Fintech banks, thanks to their banking licence, will not rely any more on any bank to be and stay in business, and so will not be at the mercy of incumbents. What is even more powerful, through the marketplace, incumbents will become “clients” of fintech banks, so the system will be completely reversed.

We will see banks pay a commission to Fintech banks to serve their customers!

The beauty of “marketplace banking” is that it competes directly with banks on core banking services without the need to build all the products.

Now the question is, what is really needed to launch a “marketplace bank”?

Technology/API/Compliance/KYC: building the technology is a complex part but many people have the skills to do so. So it is definitely not the main barrier.

Banking license: in Europe, the budget to get a banking license is estimated at approximately €20 million, though it could cost less or more, depending on the country. But it is not only about money.

To be in business you need strong and experienced board members, without them regulators will probably not give you the green light. So this means that you need to be able to convince investors and board members to trust you based on a Powerpoint presentation and to bet big on you. I think that we need the first wave of fintech to be successful, with some exits and big returns, to have people betting a lot of money on “marketplace banking”.

As an entrepreneur you need to have demonstrated that you are able to execute and scale a fintech business to lead that kind of new venture.

Customer base/CRM: here is the most complex part. How do you attract a critical mass of customers based on a simple offering (accounts + cards + eWallet) that relies on third parties for additional services? You cannot only rely on marketing and having a cool brand to attract hundreds of thousands of new customers if you have nothing really different to offer.

You also need some kind of focus: will you target individuals or businesses? Lower end or high net worth individuals? Small, medium or large businesses? Will you focus on one single country or several ones?

As always, it is all about customers and revenues, so you need a clear sales and marketing plan to quickly scale the customer base. I have some ideas how to do it but I will keep it for another post.

I have been asked several times if the first “marketplace bank” will be launched by an old-school bank (an incumbent) or a fintech startup? I definitely think the latter. It is too disruptive and the risk of cannibalization is too high to see a bank assuming the risk.

Anyway, most bankers are not already worried enough by fintech to react to its coming second wave. I remember a pool during a fintech panel where almost 90% of people answered that a fintech bank was improbable and, if it happens, it would be build by an incumbent.  This creates a fantastic “window” for us fintech entrepreneurs, to build it, and once it’s done, it will be too late for them to react.

Fintech banks are inevitable!

This is just a blueprint. To pull it off requires a lot of hard work. But given that the elements are all already available, it’s not a question of if but when the first pure fintech banks appear. They will be lean, flexible, and unhindered with legacy systems and a bad reputation due to never-ending scandals. 

They will eat the lunch of the current bank dinosaurs and could well eventually rule the banking world. 

 

About Philippe Gelis

Philippe Gelis is co-founder and CEO of the foreign exchange marketplace, Kantox.  Philippe has led Kantox’s growth to serve over 1,500 corporate clients from over 15 countries, carrying out over $1 billion in total trades.  Kantox was founded in 2011 with the goal of bringing transparency, efficiency and fairness to the FX market for SMEs and mid-cap companies.  Philippe is a regular columnist and commentator in the financial press, and has appeared in Forbes, the Financial Times and Business Insider, among many other publications.

 

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It's about behaviours, not technology

So I visit a tradeshow last week focused upon the future of payments, and everyone is presenting their latest mobile apps and designs.  “That’s not the future of money”, I fume silently at the back.  Then we had a mention of bitcoin and my ears pricked up.  Oh, it’s a bitcoin mobile app.

Hmmmm.

I guess I get wound up about these things for no darn good reason other than my own frustrations.

You see mobile, tablet, bitcoin, contactless and all that good stuff is not really what the future is about.  The future is about humanity.  The future of payments is about designing great and engaging human experiences, enabled by technology but not focused upon the technology.

That sounds a bit wacky: how can you design a great human experience with a technology if you’re not focused upon the technology, but that’s the point.  It was illustrated well by one speaker who said that their rollout of contactless mobile was a waste of money.  No-one used it.

Reason: it was not easier than using a contactless card, so they used the card instead.  Customers could not see the added benefit of touching a payment point with their mobile versus with a card. 

In fact, we have seen a lot of rollouts of a lot of technology in banking and I’m not so sure that many think it through.  This is the point of my presentations, which is not to devalue mobile and bitcoin developments as these are fundamental and important, but to change the focus from these current forms of technology across to what these form factors represent and where they might be going next.

The core of these form factors is that one works for an engaging human experience, whilst the other does not.  Mobile smartphones represent the final, intuitive outcome of years of technology.  Going back to the original Univac computers and their brethren in the 1950s, technology form factors have moved from mainframe to PC to mobile and, in that process, from very difficult to very easy to use.  That is why you don’t need a manual to use a smartphone.

Bitcoin is unfortunately stuck in the challenging mode today.  Give it a few years and it will be as intuitive to use as a smartphone, and then it will be pervasive and persuasive.  But it won’t take off with the general mass of the populous in its current form.

Which brings me back to the form factors of consumer behaviour in the future.  Today it is smartphone and apps.  Tomorrow it will be chips in everything and a connected economy through the internet of things.

So how will consumer behaviours change when anything can make a payment from a shoe to a wall to wig to a car? What designs would your bank rollout if you could engage a human experience anywhere with anything? And will you be talking about a payment in the future or an exchange of value? That final question is a really fundamental one as we focus today on mobile payments but tomorrow we should consider connected value, as that’s what Bitcoin really represents.

A virtual store that represents a unitised amount for the digital exchange of value.

Not the easiest thing to say but, what I mean by value exchange, is that if we were designing systems for tomorrow that focused upon the connected economy where value can be exchanged in many form factors – money, bitcoins, World of Warcraft gold, a share of an iTune, a gift of an amazon book, an idea – then you would change your whole mind-set of bank thinking.

We would not think about payments and devices at all, but the behaviours of humans who are enabled by the digital world to have the connection with anything to exchange anything that represents a value to the receiver.

Is anyone even thinking this way?

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It's about behaviours, not technology

So I visit a tradeshow last week focused upon the future of payments, and everyone is presenting their latest mobile apps and designs.  “That’s not the future of money”, I fume silently at the back.  Then we had a mention of bitcoin and my ears pricked up.  Oh, it’s a bitcoin mobile app.

Hmmmm.

I guess I get wound up about these things for no darn good reason other than my own frustrations.

You see mobile, tablet, bitcoin, contactless and all that good stuff is not really what the future is about.  The future is about humanity.  The future of payments is about designing great and engaging human experiences, enabled by technology but not focused upon the technology.

That sounds a bit wacky: how can you design a great human experience with a technology if you’re not focused upon the technology, but that’s the point.  It was illustrated well by one speaker who said that their rollout of contactless mobile was a waste of money.  No-one used it.

Reason: it was not easier than using a contactless card, so they used the card instead.  Customers could not see the added benefit of touching a payment point with their mobile versus with a card. 

In fact, we have seen a lot of rollouts of a lot of technology in banking and I’m not so sure that many think it through.  This is the point of my presentations, which is not to devalue mobile and bitcoin developments as these are fundamental and important, but to change the focus from these current forms of technology across to what these form factors represent and where they might be going next.

The core of these form factors is that one works for an engaging human experience, whilst the other does not.  Mobile smartphones represent the final, intuitive outcome of years of technology.  Going back to the original Univac computers and their brethren in the 1950s, technology form factors have moved from mainframe to PC to mobile and, in that process, from very difficult to very easy to use.  That is why you don’t need a manual to use a smartphone.

Bitcoin is unfortunately stuck in the challenging mode today.  Give it a few years and it will be as intuitive to use as a smartphone, and then it will be pervasive and persuasive.  But it won’t take off with the general mass of the populous in its current form.

Which brings me back to the form factors of consumer behaviour in the future.  Today it is smartphone and apps.  Tomorrow it will be chips in everything and a connected economy through the internet of things.

So how will consumer behaviours change when anything can make a payment from a shoe to a wall to wig to a car? What designs would your bank rollout if you could engage a human experience anywhere with anything? And will you be talking about a payment in the future or an exchange of value? That final question is a really fundamental one as we focus today on mobile payments but tomorrow we should consider connected value, as that’s what Bitcoin really represents.

A virtual store that represents a unitised amount for the digital exchange of value.

Not the easiest thing to say but, what I mean by value exchange, is that if we were designing systems for tomorrow that focused upon the connected economy where value can be exchanged in many form factors – money, bitcoins, World of Warcraft gold, a share of an iTune, a gift of an amazon book, an idea – then you would change your whole mind-set of bank thinking.

We would not think about payments and devices at all, but the behaviours of humans who are enabled by the digital world to have the connection with anything to exchange anything that represents a value to the receiver.

Is anyone even thinking this way?

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Are we going through a Kodak/Nokia moment in banking?

A brainstorming session with a group of banks raised this question: are we going through a Kodak moment in banking?  Are we seeing a Nokia change?  Will banks miss the tipping point and die from the reformation of the internet, or will we respond and change in time?

As it’s Friday the Thirteenth, it’s a good time to discuss this question.

Friday 13th

We all know the Kodak and Nokia stories of moving from Hero to Zero (for those that don’t, the stories are repeated in depth at the end of this blog with Kodak first and then Nokia).

So here are a few things we know:

  • We have seen other industries decimated by digital – books, music, photography – and know that the same is happening to banking
  • We know that the greatest asset to a bank is data but banks do not leverage their data assets: according to Forrester, only 3% of data is tagged and less than 0.5% analysed
  • We know that banks are structured inefficiently in product silos that lack customer focus
  • We know that we have legacy systems that are inefficient and need refreshment
  • We know that cryptocurrencies are redefining the digitisation of money and currency
  • We know that 1,000’s of companies are launching new innovative models of managing money and value
  • We know that billions of dollars is being ploughed into these new companies to force change in the banking system

We know we have to change.

OK, so we know a lot and it is clear that this could be a Kodak or Nokia moment.  Kodak invented the digital camera but thought film was still the future.  How wrong were they?  Nokia owned the mobile market but let Apple turn it into a cheap computer and steal their business.  Why didn’t Nokia do something sooner?  And banks are possibly going through the same.  Or are they?

I qualify the change in banking, as most people talk about banking as a protected industry unlike any other.  The regulatory, compliance, audit and governance requirements, combined with capital reserves that are massively onerous, mean that few can get into the banking game.

This has certainly proven true over the past 25 years.  During the past quarter century, everyone forecast that banks were dead and would be disintermediated.  Hasn’t happened.  It’s why there are only a few big banks in most countries, and little competition.

However, bearing in mind the list of challenges we face above, is that a good reason to sit back and be complacent today?  And what about all of these new fintech start-ups, will they change the business?

Most bankers are talk to today say yes.  Or at least most bankers who understand the fintech change in our world, of which there are some.  These bankers believe that cryptocurrencies are designed to wipe out the banks middle office processing structures; that P2P wipes out their credit product offers and more; and that the front-end relationship is being taken over by Apple Pay.  These bankers believe Apple Pay will wipe out Visa and MasterCard over the next decade; that Bitcoin will replace SWIFT; and that they have to enable peer-to-peer connectivity for value exchange rather than act as the control freaks the banks have been for the past quarter century.

The trouble is that most of the bankers are not sitting in a decision making capacity.  They are executors and implementers of digital strategies, and struggle to get their voices heard in the upper echelons of management. 

The decision making executive team is more usually comprised of diligent banking people who have spent years dealing with regulations and compliance.  They are the ones who believe that is the barrier to entry, and that they only need to change due to regulatory or competitive forces.  They see digital as channel to market, and crypocurrencies as a game.  They have little interest in listening to the digital crowd who, more often than not, are seen as geeks and nerds in the banking cellars.

More on this tomorrow, but the question is: who is right?  Are the digital bankers screaming and shouting that we are going through a banking Kodak moment; or are their senior management right in saying we only need to change at the speed of the fastest competitor?

I know who my vote goes with, but then I’m sitting in the cellar of a bank right now as I write this …

 

How Kodak Failed from Forbes January 2012, written by Chunka Mui, coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups

There are few corporate blunders as staggering as Kodak’s missed opportunities in digital photography, a technology that it invented. This strategic failure was the direct cause of Kodak’s decades-long decline as digital photography destroyed its film-based business model.

A new book by Vince Barabba, a former Kodak executive, offers insight on the choices that set Kodak on the path to bankruptcy.  Barabba’s book, “The Decision Loom: A Design for Interactive Decision-Making in Organizations,” also offers sage advice for how other organizations grappling with disruptive technologies might avoid their own Kodak moments.

Steve Sasson, the Kodak engineer who invented the first digital camera in 1975, characterized the initial corporate response to his invention this way: But it was filmless photography, so management’s reaction was, ‘that’s cute—but don’t tell anyone about it.’

Kodak management’s inability to see digital photography as a disruptive technology, even as its researchers extended the boundaries of the technology, would continue for decades. As late as 2007, a Kodak marketing video felt the need to trumpet that “Kodak is back “ and that Kodak “wasn’t going to play grab ass anymore” with digital.

To understand how Kodak could stay in denial for so long, let me go back to a story that Vince Barabba recounts from 1981, when he was Kodak’s head of market intelligence. Around the time that Sony SNE +1.13% introduced the first electronic camera, one of Kodak’s largest retailer photo finishers asked him whether they should be concerned about digital photography. With the support of Kodak’s CEO, Barabba conducted a very extensive research effort that looked at the core technologies and likely adoption curves around silver halide film versus digital photography.

The results of the study produced both “bad” and “good” news. The “bad” news was that digital photography had the potential capability to replace Kodak’s established film based business. The “good” news was that it would take some time for that to occur and that Kodak had roughly ten years to prepare for the transition.

The study’s projections were based on numerous factors, including: the cost of digital photography equipment; the quality of images and prints; and the interoperability of various components, such as cameras, displays, and printers. All pointed to the conclusion that adoption of digital photography would be minimal and non-threatening for a time. History proved the study’s conclusions to be remarkably accurate, both in the short and long term.

The problem is that, during its 10-year window of opportunity, Kodak did little to prepare for the later disruption. In fact, Kodak made exactly the mistake that George Eastman, its founder, avoided twice before, when he gave up a profitable dry-plate business to move to film and when he invested in color film even though it was demonstrably inferior to black and white film (which Kodak dominated).

Barabba left Kodak in 1985 but remained close to its senior management. Thus he got a close look at the fact that, rather than prepare for the time when digital photography would replace film, as Eastman had with prior disruptive technologies, Kodak choose to use digital to improve the quality of film.

This strategy continued even though, in 1986, Kodak’s research labs developed the first mega-pixel camera, one of the milestones that Barabba’s study had forecasted as a tipping point in terms of the viability of standalone digital photography.

The choice to use digital as a prop for the film business culminated in the 1996 introduction of the Advantix Preview film and camera system, which Kodak spent more than $500M to develop and launch. One of the key features of the Advantix system was that it allowed users to preview their shots and indicate how many prints they wanted. The Advantix Preview could do that because it was a digital camera. Yet it still used film and emphasized print because Kodak was in the photo film, chemical and paper business. Advantix flopped. Why buy a digital camera and still pay for film and prints? Kodak wrote off almost the entire cost of development.

As Paul Carroll and I describe in “Billion-Dollar Lessons: What You Can Learn From The Most Inexcusable Business Failures of the Last 25 Years,” Kodak also suffered several other significant, self-inflicted wounds in those pivotal years:

In 1988, Kodak bought Sterling Drug for $5.1B, deciding that it was really a chemical business, with a part of that business being a photography company. Kodak soon learned that chemically treated photo paper isn’t really all that similar to hormonal agents and cardiovascular drugs, and it sold Sterling in pieces, for about half of the original purchase price.

In 1989, the Kodak board of directors had a chance to take make a course change when Colby Chandler, the CEO, retired. The choices came down to Phil Samper and Kay R. Whitmore. Whitmore represented the traditional film business, where he had moved up the rank for three decades. Samper had a deep appreciation for digital technology. The board chose Whitmore. As the New York Times reported at the time: Mr. Whitmore said he would make sure Kodak stayed closer to its core businesses in film and photographic chemicals.

Samper resigned and would demonstrate his grasp of the digital world in later roles as president of Sun Microsystems and then CEO of Cray Research. Whitmore lasted a little more than three years, before the board fired him in 1993.

For more than another decade, a series of new Kodak CEOs would bemoan his predecessor’s failure to transform the organization to digital, declare his own intention to do so, and proceed to fail at the transition, as well. George Fisher, who was lured from his position as CEO of Motorola to succeed Whitmore in 1993, captured the core issue when he told the New York Times that Kodak “regarded digital photography as the enemy, an evil juggernaut that would kill the chemical-based film and paper business that fueled Kodak’s sales and profits for decades”.

Fisher oversaw the flop of Advantix and was gone by 1999. As the 2007 Kodak video acknowledges, the story did not change for another decade. Kodak now has a market value of $140m and teeters on bankruptcy. Its prospects seem reduced to suing  and others for infringing on patents that it was never able to turn into winning products.

Addressing strategic decision-making quandaries such as those faced by Kodak is one of the prime questions addressed in Vince Barabba’s book, “The Decision Loom.” Kodak management not only presided over the creation technological breakthroughs but was also presented with an accurate market assessment about the risks and opportunities of such capabilities. Yet Kodak failed in making the right strategic choices.

This isn’t an academic question for Vince Barabba but rather the culmination of his life’s work. He has spent much of his career delivering market intelligence to senior management. In addition to his experiences at Kodak, his career includes being director of the U.S. Census Bureau (twice), head of market research at Xerox, head of strategy at General Motors (during some of its best recent years), and inclusion in the market research hall of fame.

The Decision Loom” explores how to ensure that management uses market intelligence properly. The book encapsulates Barabba’s prescription of how senior management might turn all the data, information and knowledge that market researchers deliver to them into the wisdom to make the right decisions. It is a prescription well worth considering.

Barabba argues that four interrelated capabilities are necessary to enable effective enterprise-wide decision-making—none of which were particularly well-represented during pivotal decisions at Kodak:

1.  Having an enterprise mindset that is open to change. Unless those at the top are sufficiently open and willing to consider all options, the decision-making process soon gets distorted. Unlike its founder, George Eastman, who twice adopted disruptive photographic technology, Kodak’s management in the 80’s and 90’s were unwilling to consider digital as a replacement for film. This limited them to a fundamentally flawed path.

2. Thinking and acting holistically. Separating out and then optimizing different functions usually reduces the effectiveness of the whole. In Kodak’s case, management did a reasonable job of understanding how the parts of the enterprise (including its photo finishing partners) interacted within the framework of the existing technology. There was, however, little appreciation for the effort being conducted in the Kodak Research Labs with digital technology.

3. Being able to adapt the business design to changing conditions. Barabba offers three different business designs along a mechanistic to organismic continuum—make-and-sell, sense-and-respond and anticipate-and-lead. The right design depends on the predictability of the market. Kodak’s unwillingness to change its large and highly efficient ability to make-and-sell film in the face of developing digital technologies lost it the chance to adopt an anticipate-and-lead design that could have secured the it a leading position in digital image processing.

4. Making decisions interactively using a variety of methods. This refers to the ability to incorporate a range of sophisticated decision support tools when tackling complex business problems. Kodak had a very effect decision support process in place but failed to use that information effectively.

While “The Decision Loom” goes a long way to explaining Kodak’s slow reaction to digital photography, its real value is as a guidepost for today’s managers dealing with ever-more disruptive changes. Given that there are few industries not grappling with disruptive change, it is a valuable book for any senior (or aspiring) manager to read.

——

Chunka Mui is the coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups. Follow him at Facebook, Twitter @chunkamui or at Google+.

 

Nokia saw the future, but couldn’t build it by Vlad Savov for The VergeSeptember 2014
Everything that Apple and Google are today, Nokia wanted to become 

There was once a time when my search for a new phone would start (and likely finish) with a visit to Nokia.com. The Finnish company had the widest choice, the best designs, and the most respected brand around the world, so it was pretty hard to pick a bad phone from its catalog. Try doing the same thing today, however, and you’ll find every link on the Nokia homepage pointing to Microsoft’s Mobile Devices division — the new incarnation of the Nokia most of us knew and loved. It’s a vastly different mobile world we’re living in now, but what’s most striking about it is that Nokia saw it all coming.

The best phone in the world today is dressed from head to toe in aluminum and has an outstanding camera that protrudes from its body. So did the Nokia N8 in 2010. The iPhone that’s collecting all the plaudits and sales now is basically the fulfilment of a vision Nokia had half a decade ago: combine the best camera with the best build materials and let others try to match you. The only thing Nokia didn’t do right with that phone was its software. The N8 design was ready to go in early 2010, when it would have been among the first with 720p video recording, but repeated delays of the new Symbian version pushed its release to September. The hardware was getting kneecapped by the software, which a Nokia employee told me at the time was being developed in separate silos that wouldn’t be integrated into a single operating system until the final weeks before launch.

“It’s big!” He says with a smile. “But it’s also beautiful and very thin this time.”

No, those aren’t the words of Apple’s Phil Schiller describing the iPhone 6 Plus; they are the proclamations of Anssi Vanjoki while presenting the Nokia E7 at Nokia World 2010. The E7’s 4-inch screen was considered large for its time, but Nokia knew where our preferences were heading. Watch the rest of its presentation from that September 2010 gathering and you’ll also hear of personalized location-based services not unlike Google Now. “And it is a space that we intend to own,” said Executive VP Niklas Savander at the time. As wildly optimistic as that may sound in hindsight, it was a justifiable ambition for a company that was the leader in mobile mapping and navigation services, even if its software left something to be desired.

NOKIA’S BIGGEST FAILURE WAS AN UNWILLINGNESS TO EMBRACE DRASTIC CHANGE

Nokia’s biggest failure was an unwillingness to embrace drastic change. The company sowed the seeds for its self-destruction when it made “the familiarity of the new” the tagline for its big Symbian upgrade those many years ago. It feared alienating current users by changing too much, so it ended up with a compromised mess of an operating system that wasn’t fit for the future. Even as it was making one mistake, however, Nokia was keenly aware of the threat of another.

Jumping to Android was widely advocated as a quick shortcut to making Nokia’s software competitive, but Anssi Vanjoki dismissed that idea as a short-term solution that was no better than “peeing in your pants for warmth in the winter.” I was among those who thought him wrong, but the recent financial struggles of HTC, Motorola, and Sony have shown him to be more prophetic than paranoid. Nobody outside of Google, Samsung, and Microsoft (by virtue of patent royalty payments) is making real money off the sales of Android phones. 

THE NOKIA N9 WAS A REVELATION, BUT MEEGO WAS NEVER GIVEN A SECOND CHANCE

Eventually, Nokia’s hand was forced into making a switch and it chose Microsoft’s Windows Phone as the platform to build its future on. That construction project is still going on, though it no longer carries the Nokia name. Before Windows Phone, we got a glimpse of what might have been with the introduction of the Nokia N9. It ran the open-source MeeGo OS that Nokia was developing as a successor to Symbian, and it infused a breath of fresh air into both hardware and software design for phones.

The N9’s unibody was so desirable to look at and delightful to the touch that it spawned a family of Windows Phone progeny that continues today with the Lumia 730. The multitasking overview and switcher of the N9 has also been widely emulated in devices of all creeds and operating systems, and so has its double-tap-to-wake functionality. That phone was, and remains, a revelation. Still, MeeGo development wasn’t proceeding as quickly as new Nokia boss Stephen Elop had wished, and there was no app ecosystem to speak of, so the N9 and its kind were banished in favor of the more pragmatic Microsoft-led approach.

Nokia’s 2007 vision of the future was remarkably similar to Apple’s.

The list of things Nokia saw coming but failed to adapt to is regrettably long. Another instance where Anssi Vanjoki seemed to exaggerate was when he predicted that DSLRs would be replaced by cameraphones. I mocked his outlandish claim then, but to look at the new iPhones, the Panasonic CM1, and Nokia’s own Lumia 1020, there are now certainly enough excellent options to make at least a few people drop the bulky dedicated camera. Nokia is, of course, not unique in its anticipation of future trends, but it has been better at it than its epic fall from dominance would suggest. Like Palm with webOS, Intel with Mobile Internet Devices, and even Xerox with the graphical user interface, Nokia has repeatedly demonstrated that being first to a good idea is no guarantee of commercial success.

BEING FIRST IS NO GUARANTEE OF SUCCESS

Before the iPhone had apps and Android got Maps, Nokia phones had both. Today there isn’t a flagship smartphone without either a metal or faux metal finish. If only Nokia’s software were as good as its foresight and hardware, my visits to its homepage would still be producing the same frisson of excitement that they once did. Instead, I’m left staring vacantly at the four squares of the Nokia apocalypse that join up to form the Microsoft logo.

 

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Are we going through a Kodak/Nokia moment in banking?

A brainstorming session with a group of banks raised this question: are we going through a Kodak moment in banking?  Are we seeing a Nokia change?  Will banks miss the tipping point and die from the reformation of the internet, or will we respond and change in time?

As it’s Friday the Thirteenth, it’s a good time to discuss this question.

Friday 13th

We all know the Kodak and Nokia stories of moving from Hero to Zero (for those that don’t, the stories are repeated in depth at the end of this blog with Kodak first and then Nokia).

So here are a few things we know:

  • We have seen other industries decimated by digital – books, music, photography – and know that the same is happening to banking
  • We know that the greatest asset to a bank is data but banks do not leverage their data assets: according to Forrester, only 3% of data is tagged and less than 0.5% analysed
  • We know that banks are structured inefficiently in product silos that lack customer focus
  • We know that we have legacy systems that are inefficient and need refreshment
  • We know that cryptocurrencies are redefining the digitisation of money and currency
  • We know that 1,000’s of companies are launching new innovative models of managing money and value
  • We know that billions of dollars is being ploughed into these new companies to force change in the banking system

We know we have to change.

OK, so we know a lot and it is clear that this could be a Kodak or Nokia moment.  Kodak invented the digital camera but thought film was still the future.  How wrong were they?  Nokia owned the mobile market but let Apple turn it into a cheap computer and steal their business.  Why didn’t Nokia do something sooner?  And banks are possibly going through the same.  Or are they?

I qualify the change in banking, as most people talk about banking as a protected industry unlike any other.  The regulatory, compliance, audit and governance requirements, combined with capital reserves that are massively onerous, mean that few can get into the banking game.

This has certainly proven true over the past 25 years.  During the past quarter century, everyone forecast that banks were dead and would be disintermediated.  Hasn’t happened.  It’s why there are only a few big banks in most countries, and little competition.

However, bearing in mind the list of challenges we face above, is that a good reason to sit back and be complacent today?  And what about all of these new fintech start-ups, will they change the business?

Most bankers are talk to today say yes.  Or at least most bankers who understand the fintech change in our world, of which there are some.  These bankers believe that cryptocurrencies are designed to wipe out the banks middle office processing structures; that P2P wipes out their credit product offers and more; and that the front-end relationship is being taken over by Apple Pay.  These bankers believe Apple Pay will wipe out Visa and MasterCard over the next decade; that Bitcoin will replace SWIFT; and that they have to enable peer-to-peer connectivity for value exchange rather than act as the control freaks the banks have been for the past quarter century.

The trouble is that most of the bankers are not sitting in a decision making capacity.  They are executors and implementers of digital strategies, and struggle to get their voices heard in the upper echelons of management. 

The decision making executive team is more usually comprised of diligent banking people who have spent years dealing with regulations and compliance.  They are the ones who believe that is the barrier to entry, and that they only need to change due to regulatory or competitive forces.  They see digital as channel to market, and crypocurrencies as a game.  They have little interest in listening to the digital crowd who, more often than not, are seen as geeks and nerds in the banking cellars.

More on this tomorrow, but the question is: who is right?  Are the digital bankers screaming and shouting that we are going through a banking Kodak moment; or are their senior management right in saying we only need to change at the speed of the fastest competitor?

I know who my vote goes with, but then I’m sitting in the cellar of a bank right now as I write this …

 

How Kodak Failed from Forbes January 2012, written by Chunka Mui, coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups

There are few corporate blunders as staggering as Kodak’s missed opportunities in digital photography, a technology that it invented. This strategic failure was the direct cause of Kodak’s decades-long decline as digital photography destroyed its film-based business model.

A new book by Vince Barabba, a former Kodak executive, offers insight on the choices that set Kodak on the path to bankruptcy.  Barabba’s book, “The Decision Loom: A Design for Interactive Decision-Making in Organizations,” also offers sage advice for how other organizations grappling with disruptive technologies might avoid their own Kodak moments.

Steve Sasson, the Kodak engineer who invented the first digital camera in 1975, characterized the initial corporate response to his invention this way: But it was filmless photography, so management’s reaction was, ‘that’s cute—but don’t tell anyone about it.’

Kodak management’s inability to see digital photography as a disruptive technology, even as its researchers extended the boundaries of the technology, would continue for decades. As late as 2007, a Kodak marketing video felt the need to trumpet that “Kodak is back “ and that Kodak “wasn’t going to play grab ass anymore” with digital.

To understand how Kodak could stay in denial for so long, let me go back to a story that Vince Barabba recounts from 1981, when he was Kodak’s head of market intelligence. Around the time that Sony SNE +1.13% introduced the first electronic camera, one of Kodak’s largest retailer photo finishers asked him whether they should be concerned about digital photography. With the support of Kodak’s CEO, Barabba conducted a very extensive research effort that looked at the core technologies and likely adoption curves around silver halide film versus digital photography.

The results of the study produced both “bad” and “good” news. The “bad” news was that digital photography had the potential capability to replace Kodak’s established film based business. The “good” news was that it would take some time for that to occur and that Kodak had roughly ten years to prepare for the transition.

The study’s projections were based on numerous factors, including: the cost of digital photography equipment; the quality of images and prints; and the interoperability of various components, such as cameras, displays, and printers. All pointed to the conclusion that adoption of digital photography would be minimal and non-threatening for a time. History proved the study’s conclusions to be remarkably accurate, both in the short and long term.

The problem is that, during its 10-year window of opportunity, Kodak did little to prepare for the later disruption. In fact, Kodak made exactly the mistake that George Eastman, its founder, avoided twice before, when he gave up a profitable dry-plate business to move to film and when he invested in color film even though it was demonstrably inferior to black and white film (which Kodak dominated).

Barabba left Kodak in 1985 but remained close to its senior management. Thus he got a close look at the fact that, rather than prepare for the time when digital photography would replace film, as Eastman had with prior disruptive technologies, Kodak choose to use digital to improve the quality of film.

This strategy continued even though, in 1986, Kodak’s research labs developed the first mega-pixel camera, one of the milestones that Barabba’s study had forecasted as a tipping point in terms of the viability of standalone digital photography.

The choice to use digital as a prop for the film business culminated in the 1996 introduction of the Advantix Preview film and camera system, which Kodak spent more than $500M to develop and launch. One of the key features of the Advantix system was that it allowed users to preview their shots and indicate how many prints they wanted. The Advantix Preview could do that because it was a digital camera. Yet it still used film and emphasized print because Kodak was in the photo film, chemical and paper business. Advantix flopped. Why buy a digital camera and still pay for film and prints? Kodak wrote off almost the entire cost of development.

As Paul Carroll and I describe in “Billion-Dollar Lessons: What You Can Learn From The Most Inexcusable Business Failures of the Last 25 Years,” Kodak also suffered several other significant, self-inflicted wounds in those pivotal years:

In 1988, Kodak bought Sterling Drug for $5.1B, deciding that it was really a chemical business, with a part of that business being a photography company. Kodak soon learned that chemically treated photo paper isn’t really all that similar to hormonal agents and cardiovascular drugs, and it sold Sterling in pieces, for about half of the original purchase price.

In 1989, the Kodak board of directors had a chance to take make a course change when Colby Chandler, the CEO, retired. The choices came down to Phil Samper and Kay R. Whitmore. Whitmore represented the traditional film business, where he had moved up the rank for three decades. Samper had a deep appreciation for digital technology. The board chose Whitmore. As the New York Times reported at the time: Mr. Whitmore said he would make sure Kodak stayed closer to its core businesses in film and photographic chemicals.

Samper resigned and would demonstrate his grasp of the digital world in later roles as president of Sun Microsystems and then CEO of Cray Research. Whitmore lasted a little more than three years, before the board fired him in 1993.

For more than another decade, a series of new Kodak CEOs would bemoan his predecessor’s failure to transform the organization to digital, declare his own intention to do so, and proceed to fail at the transition, as well. George Fisher, who was lured from his position as CEO of Motorola to succeed Whitmore in 1993, captured the core issue when he told the New York Times that Kodak “regarded digital photography as the enemy, an evil juggernaut that would kill the chemical-based film and paper business that fueled Kodak’s sales and profits for decades”.

Fisher oversaw the flop of Advantix and was gone by 1999. As the 2007 Kodak video acknowledges, the story did not change for another decade. Kodak now has a market value of $140m and teeters on bankruptcy. Its prospects seem reduced to suing  and others for infringing on patents that it was never able to turn into winning products.

Addressing strategic decision-making quandaries such as those faced by Kodak is one of the prime questions addressed in Vince Barabba’s book, “The Decision Loom.” Kodak management not only presided over the creation technological breakthroughs but was also presented with an accurate market assessment about the risks and opportunities of such capabilities. Yet Kodak failed in making the right strategic choices.

This isn’t an academic question for Vince Barabba but rather the culmination of his life’s work. He has spent much of his career delivering market intelligence to senior management. In addition to his experiences at Kodak, his career includes being director of the U.S. Census Bureau (twice), head of market research at Xerox, head of strategy at General Motors (during some of its best recent years), and inclusion in the market research hall of fame.

The Decision Loom” explores how to ensure that management uses market intelligence properly. The book encapsulates Barabba’s prescription of how senior management might turn all the data, information and knowledge that market researchers deliver to them into the wisdom to make the right decisions. It is a prescription well worth considering.

Barabba argues that four interrelated capabilities are necessary to enable effective enterprise-wide decision-making—none of which were particularly well-represented during pivotal decisions at Kodak:

1.  Having an enterprise mindset that is open to change. Unless those at the top are sufficiently open and willing to consider all options, the decision-making process soon gets distorted. Unlike its founder, George Eastman, who twice adopted disruptive photographic technology, Kodak’s management in the 80’s and 90’s were unwilling to consider digital as a replacement for film. This limited them to a fundamentally flawed path.

2. Thinking and acting holistically. Separating out and then optimizing different functions usually reduces the effectiveness of the whole. In Kodak’s case, management did a reasonable job of understanding how the parts of the enterprise (including its photo finishing partners) interacted within the framework of the existing technology. There was, however, little appreciation for the effort being conducted in the Kodak Research Labs with digital technology.

3. Being able to adapt the business design to changing conditions. Barabba offers three different business designs along a mechanistic to organismic continuum—make-and-sell, sense-and-respond and anticipate-and-lead. The right design depends on the predictability of the market. Kodak’s unwillingness to change its large and highly efficient ability to make-and-sell film in the face of developing digital technologies lost it the chance to adopt an anticipate-and-lead design that could have secured the it a leading position in digital image processing.

4. Making decisions interactively using a variety of methods. This refers to the ability to incorporate a range of sophisticated decision support tools when tackling complex business problems. Kodak had a very effect decision support process in place but failed to use that information effectively.

While “The Decision Loom” goes a long way to explaining Kodak’s slow reaction to digital photography, its real value is as a guidepost for today’s managers dealing with ever-more disruptive changes. Given that there are few industries not grappling with disruptive change, it is a valuable book for any senior (or aspiring) manager to read.

——

Chunka Mui is the coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups. Follow him at Facebook, Twitter @chunkamui or at Google+.

 

Nokia saw the future, but couldn’t build it by Vlad Savov for The VergeSeptember 2014
Everything that Apple and Google are today, Nokia wanted to become 

There was once a time when my search for a new phone would start (and likely finish) with a visit to Nokia.com. The Finnish company had the widest choice, the best designs, and the most respected brand around the world, so it was pretty hard to pick a bad phone from its catalog. Try doing the same thing today, however, and you’ll find every link on the Nokia homepage pointing to Microsoft’s Mobile Devices division — the new incarnation of the Nokia most of us knew and loved. It’s a vastly different mobile world we’re living in now, but what’s most striking about it is that Nokia saw it all coming.

The best phone in the world today is dressed from head to toe in aluminum and has an outstanding camera that protrudes from its body. So did the Nokia N8 in 2010. The iPhone that’s collecting all the plaudits and sales now is basically the fulfilment of a vision Nokia had half a decade ago: combine the best camera with the best build materials and let others try to match you. The only thing Nokia didn’t do right with that phone was its software. The N8 design was ready to go in early 2010, when it would have been among the first with 720p video recording, but repeated delays of the new Symbian version pushed its release to September. The hardware was getting kneecapped by the software, which a Nokia employee told me at the time was being developed in separate silos that wouldn’t be integrated into a single operating system until the final weeks before launch.

“It’s big!” He says with a smile. “But it’s also beautiful and very thin this time.”

No, those aren’t the words of Apple’s Phil Schiller describing the iPhone 6 Plus; they are the proclamations of Anssi Vanjoki while presenting the Nokia E7 at Nokia World 2010. The E7’s 4-inch screen was considered large for its time, but Nokia knew where our preferences were heading. Watch the rest of its presentation from that September 2010 gathering and you’ll also hear of personalized location-based services not unlike Google Now. “And it is a space that we intend to own,” said Executive VP Niklas Savander at the time. As wildly optimistic as that may sound in hindsight, it was a justifiable ambition for a company that was the leader in mobile mapping and navigation services, even if its software left something to be desired.

NOKIA’S BIGGEST FAILURE WAS AN UNWILLINGNESS TO EMBRACE DRASTIC CHANGE

Nokia’s biggest failure was an unwillingness to embrace drastic change. The company sowed the seeds for its self-destruction when it made “the familiarity of the new” the tagline for its big Symbian upgrade those many years ago. It feared alienating current users by changing too much, so it ended up with a compromised mess of an operating system that wasn’t fit for the future. Even as it was making one mistake, however, Nokia was keenly aware of the threat of another.

Jumping to Android was widely advocated as a quick shortcut to making Nokia’s software competitive, but Anssi Vanjoki dismissed that idea as a short-term solution that was no better than “peeing in your pants for warmth in the winter.” I was among those who thought him wrong, but the recent financial struggles of HTC, Motorola, and Sony have shown him to be more prophetic than paranoid. Nobody outside of Google, Samsung, and Microsoft (by virtue of patent royalty payments) is making real money off the sales of Android phones. 

THE NOKIA N9 WAS A REVELATION, BUT MEEGO WAS NEVER GIVEN A SECOND CHANCE

Eventually, Nokia’s hand was forced into making a switch and it chose Microsoft’s Windows Phone as the platform to build its future on. That construction project is still going on, though it no longer carries the Nokia name. Before Windows Phone, we got a glimpse of what might have been with the introduction of the Nokia N9. It ran the open-source MeeGo OS that Nokia was developing as a successor to Symbian, and it infused a breath of fresh air into both hardware and software design for phones.

The N9’s unibody was so desirable to look at and delightful to the touch that it spawned a family of Windows Phone progeny that continues today with the Lumia 730. The multitasking overview and switcher of the N9 has also been widely emulated in devices of all creeds and operating systems, and so has its double-tap-to-wake functionality. That phone was, and remains, a revelation. Still, MeeGo development wasn’t proceeding as quickly as new Nokia boss Stephen Elop had wished, and there was no app ecosystem to speak of, so the N9 and its kind were banished in favor of the more pragmatic Microsoft-led approach.

Nokia’s 2007 vision of the future was remarkably similar to Apple’s.

The list of things Nokia saw coming but failed to adapt to is regrettably long. Another instance where Anssi Vanjoki seemed to exaggerate was when he predicted that DSLRs would be replaced by cameraphones. I mocked his outlandish claim then, but to look at the new iPhones, the Panasonic CM1, and Nokia’s own Lumia 1020, there are now certainly enough excellent options to make at least a few people drop the bulky dedicated camera. Nokia is, of course, not unique in its anticipation of future trends, but it has been better at it than its epic fall from dominance would suggest. Like Palm with webOS, Intel with Mobile Internet Devices, and even Xerox with the graphical user interface, Nokia has repeatedly demonstrated that being first to a good idea is no guarantee of commercial success.

BEING FIRST IS NO GUARANTEE OF SUCCESS

Before the iPhone had apps and Android got Maps, Nokia phones had both. Today there isn’t a flagship smartphone without either a metal or faux metal finish. If only Nokia’s software were as good as its foresight and hardware, my visits to its homepage would still be producing the same frisson of excitement that they once did. Instead, I’m left staring vacantly at the four squares of the Nokia apocalypse that join up to form the Microsoft logo.

 

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Is the Fintech bubble about to burst?

I recently recorded a video for Meniga to show at their conference in London for Next Bank Europe.  We had to do this as I was in New York on the day of the conference, and the organisers wanted me to present so badly they agreed to come to my house to do record my presentation. A bit unusual but, there you go.

So, to my house.  I recently moved into a museum.  Seriously.  I spend every night in the museum (beats Ben Stiller any day). 

The museum is the Royal Historic Dockyard Museum in Chatham, Kent. This was one of the first dockyards built specifically to make warships under Henry VIII and dates back to the 16th century.

The real growth in naval warfare occurred during the 18th century however, and George III specifically invested in the Dockyard, which is why so many buildings here date from the late 1700s. 

The Dockyard built the HMS Victory (Battle of Trafalgar) and we have a lot of history here.  For example, my house dates to 1830.  In its heyday the Dockyard employed 7,000, and my grandfather worked here during the War, building ships.  Then, after the Falklands War, Margaret Thatcher made the decision to shut it down.

Now, it is a museum and one of the top attractions in Kent.  It’s also a film set, with movies like Les Miserables filming scenes here along with TV series like Call the Midwife and Mr Selfridge being regular visitors.

Here’s a film that shows you the beauty of where I live:

Chatham Historic Dockyard by Sam Biddle

And here’s the movie we made asking When will the Fintech bubble burst? (nothing beautiful about this 🙂

For those who can’t watch it, the question I asked is whether there’s a Fintech bubble and is it about to burst.  With $12.7 billion raised for over 1,000 start-ups in the past five years, there’s a huge amount of people buzzing around this market and some say a further $20 billion is going to be invested in just this year alone.

What’s going on?

Well what is happening is a re-architecting of financial services with technology.  Today, it is the integration of technology with money; the digitalisation of money; and the move from local to global exchange.  That’s what I blog about every day but my claim in the video is that this is just what we’re talking about today, and it’s a transitory moment as the picture long-term is far bigger.  It is far bigger because we are completely rethinking how we exchange value.  It is why bitcoin is a big deal, because that is the most likely form of the digitalisation of money.  It is far bigger because the old bank model of the physical distribution of paper in a physical network is turned on its head when we are moving to the digital distribution of data in a global network.

Our world has changed thanks to the internet, and the most likely outcome is a new value exchange ecosystem of value tokens, value exchanges and value stores.  I’ll blog more about that another day but, meantime, this explains why (a) there is no Fintech bubble and therefore (b) it will not burst.

There’s no Fintech bubble because we’re re-architecting our world to digitise value exchange.  This will therefore morph our world into something different and new.  It is not until the different and new is finished that any bubble will burst.  For example, it is noteworthy that we talk about the internet bubble and burst of the 1990s, and yet we should note that the internet bubble burst in 2001 and then came back because we moved from Net 1.0 to Net 2.0.  As I’m saying we have another five generations of internet to go yet, there’s no bubble here.  Just a rise and fall of innovation as we move through the internet age.

That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.

 

Postscript:

This video was filmed very quickly in under two hours for 15 minutes of edited finished product.  It was completely unscripted, although I did make a few notes to think about beforehand so, just in the interests of completeness, here are those notes:

Why there’s a bubble:

  • Money2020 predicted that venture capital deployment in FinTech will top $20 billion in 2015
  • Silicon Valley Bank state that FinTech is one of the top five investment areas today with investments in over 2,000 startups between 2009-2013 and over $10 billion invested

It’s also an area that is being changed by technology itself.

For example, investments in FinTech start-ups saw crowdfunding platforms as a key component of developing this market.

But banks have responded:

Accenture note that FinTech investments by banks would reach at least $8 billion by 2018 in New York alone, around 40% of total

Barclays has The Accelerator, SWIFT has The Start-up Challenge, Finovate highlights the hot new guys and BBVA challenge them all to show their capabilities using APIs and so on.

Many of the largest banks are creating corporate venture capital firms.

SBT Ventures — the venture capital arm of Sberbank, the largest bank in Russia — led the $8 million seed round for Moven, as part of its $100 million investment fund.

HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital.

Who are these new fintech firms?

If you look at the FinTech50 that came out at the end of January, the firms are mainly based around cryptocurrencies and mobile apps for retail banking and payments, P2P firms, wealth management, trading and even a few bank innovators like mBank in Poland.

Names you would recognise like Traxpay, Nutmeg, Crowdcube, Transferwise, Currency Cloud, Funding Circle.

And names of people you know are clever as backers like Richard Branson, Marc Andreesen, and Reid Hoffman.

These guys are in there because they see reformation.

And bitcoin, or rather cryptocurrencies, are reformational as is mobile.

Meantime, P2P replaces core banking products like loans, mortgages and insurances.

EGs Zopa, Funding Circle, House Crowd and Friendsurance.

It’s not just P2P though – as bitcoin is that – it’s replacing expensive physical infrastructure with digital infrastructure.

In code we trust.

And the banks are not ignoring this.

Just look at the size of the deals from bank funded venture capital groups and that banks like BBVA , Bank Inter and the NYSE and USAA are investing in cryptocurrency firms and buying businesses like Simple and you know there’s a big deal here.

Is it a bubble though?

This dockyard has seen plenty of bubbles, the most famous of which was perhaps the South Sea Bubble of the 18th Century.

In 1711, a war with France left Britain millions of pounds in debt and the government had its hands tied as the Bank of England was a private bank and the sole lender to the government.

As a result, a British joint-stock company was founded, the South Sea Company, as a public–private partnership to consolidate and reduce the cost of national debt.

To sweeten the deal, the government gave the company a monopoly for all trading in the South Seas along South America, an amazing gift people thought.

Because of their monopolistic position and strength with government backing, shares in the South Sea Company rose to ten times their initial public offering price.

Seeing the success of the first issue of shares, the South Sea Company quickly issued more.  Again, the stock was rapidly consumed as investors saw that the stock was going to the stratosphere and they wanted in.

Equally, many investors were impressed by the lavish corporate offices the Company had set up.

Soon, most of the members of the House of Commons and House of Lords had some sort of stake in the South Sea Company.  Everyone bought into the stock – the MADNESS OF CROWDS.

Then the ‘bubble’ burst because people discovered that the South Sea Company had yet to actually deliver any goods or produce from the South Seas.  The shares had been valuable on paper, but worthless in reality.

Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out.

Is that’s what going to happen to FinTech?  Like the internet boom and bust of the 1990s, or the Mortgage Securities boom and bust of the 2000s, is fintech next?  I don’t think so and here’s why.

Fundamental shift.

Banking is dead because banking banked money.  It banked physical goods and services.  We are now supporting digital exchange.

PewDiePie.

Fidor Bank who bank gold –both physical and digital (world of Warcraft)

Value exchange: Move from the physical distribution of paper in a localised network to digital distribution of data in a globalised network.  That’s what the book is all about.

The recent announcement of BBVA, NYSE and USAA investing in Coinbase articulated more of what I mean about Value Exchange. For example, BBVA Ventures Executive Director Jay Reinemann said: “at its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape.” 

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Is the Fintech bubble about to burst?

I recently recorded a video for Meniga to show at their conference in London for Next Bank Europe.  We had to do this as I was in New York on the day of the conference, and the organisers wanted me to present so badly they agreed to come to my house to do record my presentation. A bit unusual but, there you go.

So, to my house.  I recently moved into a museum.  Seriously.  I spend every night in the museum (beats Ben Stiller any day). 

The museum is the Royal Historic Dockyard Museum in Chatham, Kent. This was one of the first dockyards built specifically to make warships under Henry VIII and dates back to the 16th century.

The real growth in naval warfare occurred during the 18th century however, and George III specifically invested in the Dockyard, which is why so many buildings here date from the late 1700s. 

The Dockyard built the HMS Victory (Battle of Trafalgar) and we have a lot of history here.  For example, my house dates to 1830.  In its heyday the Dockyard employed 7,000, and my grandfather worked here during the War, building ships.  Then, after the Falklands War, Margaret Thatcher made the decision to shut it down.

Now, it is a museum and one of the top attractions in Kent.  It’s also a film set, with movies like Les Miserables filming scenes here along with TV series like Call the Midwife and Mr Selfridge being regular visitors.

Here’s a film that shows you the beauty of where I live:

Chatham Historic Dockyard by Sam Biddle

And here’s the movie we made asking When will the Fintech bubble burst? (nothing beautiful about this 🙂

For those who can’t watch it, the question I asked is whether there’s a Fintech bubble and is it about to burst.  With $12.7 billion raised for over 1,000 start-ups in the past five years, there’s a huge amount of people buzzing around this market and some say a further $20 billion is going to be invested in just this year alone.

What’s going on?

Well what is happening is a re-architecting of financial services with technology.  Today, it is the integration of technology with money; the digitalisation of money; and the move from local to global exchange.  That’s what I blog about every day but my claim in the video is that this is just what we’re talking about today, and it’s a transitory moment as the picture long-term is far bigger.  It is far bigger because we are completely rethinking how we exchange value.  It is why bitcoin is a big deal, because that is the most likely form of the digitalisation of money.  It is far bigger because the old bank model of the physical distribution of paper in a physical network is turned on its head when we are moving to the digital distribution of data in a global network.

Our world has changed thanks to the internet, and the most likely outcome is a new value exchange ecosystem of value tokens, value exchanges and value stores.  I’ll blog more about that another day but, meantime, this explains why (a) there is no Fintech bubble and therefore (b) it will not burst.

There’s no Fintech bubble because we’re re-architecting our world to digitise value exchange.  This will therefore morph our world into something different and new.  It is not until the different and new is finished that any bubble will burst.  For example, it is noteworthy that we talk about the internet bubble and burst of the 1990s, and yet we should note that the internet bubble burst in 2001 and then came back because we moved from Net 1.0 to Net 2.0.  As I’m saying we have another five generations of internet to go yet, there’s no bubble here.  Just a rise and fall of innovation as we move through the internet age.

That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.

 

Postscript:

This video was filmed very quickly in under two hours for 15 minutes of edited finished product.  It was completely unscripted, although I did make a few notes to think about beforehand so, just in the interests of completeness, here are those notes:

Why there’s a bubble:

  • Money2020 predicted that venture capital deployment in FinTech will top $20 billion in 2015
  • Silicon Valley Bank state that FinTech is one of the top five investment areas today with investments in over 2,000 startups between 2009-2013 and over $10 billion invested

It’s also an area that is being changed by technology itself.

For example, investments in FinTech start-ups saw crowdfunding platforms as a key component of developing this market.

But banks have responded:

Accenture note that FinTech investments by banks would reach at least $8 billion by 2018 in New York alone, around 40% of total

Barclays has The Accelerator, SWIFT has The Start-up Challenge, Finovate highlights the hot new guys and BBVA challenge them all to show their capabilities using APIs and so on.

Many of the largest banks are creating corporate venture capital firms.

SBT Ventures — the venture capital arm of Sberbank, the largest bank in Russia — led the $8 million seed round for Moven, as part of its $100 million investment fund.

HSBC’s fund runs at $200 million and Santander’s fintech fund has $100 million in capital.

Who are these new fintech firms?

If you look at the FinTech50 that came out at the end of January, the firms are mainly based around cryptocurrencies and mobile apps for retail banking and payments, P2P firms, wealth management, trading and even a few bank innovators like mBank in Poland.

Names you would recognise like Traxpay, Nutmeg, Crowdcube, Transferwise, Currency Cloud, Funding Circle.

And names of people you know are clever as backers like Richard Branson, Marc Andreesen, and Reid Hoffman.

These guys are in there because they see reformation.

And bitcoin, or rather cryptocurrencies, are reformational as is mobile.

Meantime, P2P replaces core banking products like loans, mortgages and insurances.

EGs Zopa, Funding Circle, House Crowd and Friendsurance.

It’s not just P2P though – as bitcoin is that – it’s replacing expensive physical infrastructure with digital infrastructure.

In code we trust.

And the banks are not ignoring this.

Just look at the size of the deals from bank funded venture capital groups and that banks like BBVA , Bank Inter and the NYSE and USAA are investing in cryptocurrency firms and buying businesses like Simple and you know there’s a big deal here.

Is it a bubble though?

This dockyard has seen plenty of bubbles, the most famous of which was perhaps the South Sea Bubble of the 18th Century.

In 1711, a war with France left Britain millions of pounds in debt and the government had its hands tied as the Bank of England was a private bank and the sole lender to the government.

As a result, a British joint-stock company was founded, the South Sea Company, as a public–private partnership to consolidate and reduce the cost of national debt.

To sweeten the deal, the government gave the company a monopoly for all trading in the South Seas along South America, an amazing gift people thought.

Because of their monopolistic position and strength with government backing, shares in the South Sea Company rose to ten times their initial public offering price.

Seeing the success of the first issue of shares, the South Sea Company quickly issued more.  Again, the stock was rapidly consumed as investors saw that the stock was going to the stratosphere and they wanted in.

Equally, many investors were impressed by the lavish corporate offices the Company had set up.

Soon, most of the members of the House of Commons and House of Lords had some sort of stake in the South Sea Company.  Everyone bought into the stock – the MADNESS OF CROWDS.

Then the ‘bubble’ burst because people discovered that the South Sea Company had yet to actually deliver any goods or produce from the South Seas.  The shares had been valuable on paper, but worthless in reality.

Hence, the herd mentality that caused this madness of crowds suddenly sobered up and everyone pulled their money out.

Is that’s what going to happen to FinTech?  Like the internet boom and bust of the 1990s, or the Mortgage Securities boom and bust of the 2000s, is fintech next?  I don’t think so and here’s why.

Fundamental shift.

Banking is dead because banking banked money.  It banked physical goods and services.  We are now supporting digital exchange.

PewDiePie.

Fidor Bank who bank gold –both physical and digital (world of Warcraft)

Value exchange: Move from the physical distribution of paper in a localised network to digital distribution of data in a globalised network.  That’s what the book is all about.

The recent announcement of BBVA, NYSE and USAA investing in Coinbase articulated more of what I mean about Value Exchange. For example, BBVA Ventures Executive Director Jay Reinemann said: “at its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape.” 

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