Could a mainstream retail bank disrupt banking?

In a previous post we looked at the pressing need for retail banks to embrace customer-led innovation. Whereas innovation may have been a priority in the past, the threats banks now face from outsiders means that a fundamental re-think of the business model may be in order. The telcos, supermarkets, and others are already gearing up to prise customers away from banks and capture new profit pools made possible by the Internet. Furthermore, because the Internet has democratised the ability to innovate, nimble start-ups are also looking to exploit inefficiencies in the industry. 

Even in the absence of these external forces the current retail banking model is unsustainable with the gap between return on equity and cost of equity narrowing every quarter. There are many that subscribe to the view that retail banking, at least as it exists today, is irreparably broken. The contention is that branch-based banking is as out of kilter with customer needs and behaviours as Blockbuster was just a few years ago. So if the threat of new entrants isn’t sufficient to cause you concern as a retail banking exec there is the unyielding challenge of showing a satisfactory return by persisting with an outdated business model. 

The previous post outlined a process of transformation through customer-led innovation that could help banks prepare for the future. This may be a daunting challenge particularly considering how difficult it can be to bring about such change in an organisation as large as a typical bank. But there may be another option if you ruthlessly adopt the advice of the leading thinker on disruptive innovation, Clayton Christensen. It might be best to think of this as the ‘nuclear option’.

Christensen’s view is that one of the best options may be to create an entirely new entity with support from the less nimble ‘mother ship’ but completely independent of its culture and processes. Because large, successful organisations are designed to preserve the status quo they cannot radically innovate to disrupt the industry. But a spin-off could.   

A recent example of this in banking is Jibun Bank, the Japanese mobile-only bank. It was created as a joint venture between Bank of Tokyo Mitsubishi (BMTJ), the country’s largest bank and KDDI, one of the leading telco’s. Jibun Bank was set up as an entirely separate entity with its own brand, people and technology infrastructure. In its first two years of operation it attracted more than US$1.7bn in deposits as more than one million customers opened accounts, equating to a compound annual growth rate of 958%. To succeed BTMJ and KDDI recognised that Jibun needed to be autonomous and unencumbered by the constraints of its much larger parents.

But Clayton Christensen would argue that Jibun Bank probably doesn't go far enough. It has been created to co-exist alongside BMTJ. Real disruption occurs when a spin-off is created to vanquish the incumbents, including its own parent. Christensen cites many examples with a notable one being the disruption of department stores in the US. In the 1960's there were estimated to be 300 of these and they were all much of a muchness. Dayton-Hudson was one of those and in 1962 it created a wholly-owned subsidiary that challenged the existing incumbents by pioneering the 'discounting' model. Out of the 300-odd department stores only Dayton-Hudson made a successful transition into discount retailing and the whole company now bears the name of that disruptive subsidiary: Target, one of the world's largest retailers.   

Are banks too conservative to even countenance such an idea or is such a radical measure necessary at all? It’s difficult to say but it might be better for a bank to eat its own lunch before someone else does.