What CEO wants to see the company’s share price tumble by 8%, announce mass layoffs, and be forced to issue a profits warning because one of its cash cows is suddenly looking lame?
That was the task for Eelco Blok in April 2011 when the then recently-appointed CEO of Dutch telco KPN saw first hand the havoc being played out in his industry by start-ups that created a way for people to send text messages over the Internet. Three years later Facebook paid $19 billion for one of those upstarts, WhatsApp — more than the market cap of KPN.
Welcome to the new order, where even the smartest people at the top are blind-sided by seismic shifts in their sectors. If the CEOs of banks aren’t careful, the banks could be next.
“There is no more ‘business as usual’ — success requires embracing disruption,” says Deborah Hopkins, Chief Innovation Officer at Citi. That is why Citi appointed Hopkins — who has twice been named one of the most powerful businesswomen in America by Fortune magazine — not only to transform the company internally but also to head up its venture unit.
Hopkins’s challenge — and that of executives at rival institutions — is to ensure that banks are at the center of the digital economy.
Banks’ Core Businesses Have Not Really Been Hit — Yet
Until now banks could afford to ignore most start-ups. Digital-only banks like Moven, Simple and Fidor, which rushed to cater to digital natives who expect to be able to do their banking anywhere, anytime on any type of device, today pose no real threat to the major retail banks. And while start-ups are targeting faster, cheaper, better ways of banking in all its forms, zeroing in, for example, on areas that banks have willingly ceded such as loans to small and medium-sized businesses — the revenue they are stealing away from banks is today still just a drop in the bucket. For example in the UK, peer-to-peer loans have recently topped the £1 billion ($1.7 billion) mark. Impressive, but set this against the country’s £1.2 trillion in retail deposits. However, according to a 2014 report by Accenture, by 2020 more than 30% of retail banking revenues could be at risk from new competitors and new trends.
Banks’ core businesses have not really been hit — yet. But they had better pay close attention to Bitcoin, a new kind of currency and an underlying technology — the block chain — that look set to disrupt significantly financial services and multiple other industries.
That’s not all. Like other established companies, banks are facing elusive growth at a time of rapidly accelerating disruption; barriers to entry in sectors such as forex are quickly and irreversibly eroding; lines are blurring between industries; and competitors are emerging in new and unexpected places.
Part of the focus of Innotribe sessions at Sibos 2014, an annual banking conference taking place this year in Boston from September 29th to October 3rd, will be on “building bridges” between the innovators and incumbents. The goal is to prepare banks for a future centered around big data analytics, mobile and social that will require new tools and capabilities, and take into account network effects and non-linear ways of thinking, says Peter Vander Auwera, a co-founder of Innotribe, the innovation arm of SWIFT, the financial services organization that each day handles wire transfers for over 10,000 banks.
No Bank Has Yet Succeeded
More banks are setting up funds and opening accelerators. But to thrive, banks will have to learn how to integrate innovation from the outside while embracing internal transformation. They need to think more like Apple and become platforms, according to pundits like scheduled Innotribe speaker Chris Skinner, author and commentator on the financial services markets. And, according to other Innotribe speakers, they will also need to embrace diversity, social media and social activism and develop a flat and dynamic culture of collaboration and sharing.
Easier said than done. Experts such as Innotribe speaker Udayan Goyal, a founder and managing partner at Anthemis Group, say that no bank has yet succeeded in successfully transforming itself for the 21st century.
But some, like Citi, are making concerted efforts to do so. “Driving change is not easy business,” says Hopkins, who previously worked at Boeing, Lucent and General Motors. That is why she decided to build what she calls an ‘operating system for innovation’ at Citi. “I had to build it from scratch because there was no roadmap,” she says. “It is probably the most complicated thing I have ever done, but it is arguably the most exciting.”
“A system is so important because without one you can get people excited about something that falls short because the broader organization is unable to embrace it or integrate it,” Hopkins says. The system she built connects the investments in start-ups to the bank’s internal labs. The fruits of that collaboration are in turn connected to an innovation panel to ensure that technology trials have buy-in from top management.
Setting up such a system takes time due in no small part to internal resistance to change. What is needed, she says, is “not fear or denial but rather an attitude that says ‘ok, let’s figure this out.’ That is what my role is. It is exhilarating and exhausting. But when you can make it relevant and help the company gain optimism in their ability to lead it — that is when it becomes worth it.”
Thousands Of Meetings With Entrepreneurs
One of the first steps for Hopkins, as head of Citi Ventures, was to move the company’s venture arm from New York to Silicon Valley in 2010 because she felt it was important to be close to companies and entrepreneurs focused on the future. She spends time talking to tech luminaries such as Google CEO Sergey Brin and Marc Andreessen, co-founder of Valley venture capital firm Andreessen Horowitz.
The goal is “to understand what they did and how they did it and how we can embrace the strengths and help an endurable 200-year-old company almost go back to its earliest roots” and become competitive in a world that requires new ways of working.
“We have domain groups working across the organization honing our point of view on things like block chain technology and cryptocurrencies. Obviously these are powerful concepts that need to be understood,” says Hopkins.“We want to bring the outside in — to be able to identify important, promising technologies and capabilities that could have at least the potential to accelerate time to market for one of our businesses,” she says.
The company is focusing on engaging with start-ups in four areas: commerce and payments, security and enterprise IT, data and analytics, and financial services technology.
“We’ve had thousands of meetings with entrepreneurs, VCs and others to create a deep domain knowledge. Our challenge is to synthesize that insight into potential actionable concepts for business,” says Hopkins.
The key is tying the innovation coming from start-ups to the rest of the company. In addition to venture investing, Citi Ventures has set up two practice areas — Innovation Network and DesignWorks — that work in close partnership with Citi’s businesses. The Innovation Network connects Citi’s R&D labs using common practice and taxonomy. It includes an acceleration fund to back smart lab projects, some of which incorporate external start-ups’ technologies. The labs allow the bank to move into proof of concept and “engage the experimentation side of things.”
Silicon Valley Experience
Design Works partners with Citi’s internal businesses to “re-imagine new possibilities.” It recently worked on a redesign of customer experience within the global private bank.
Hopkins has hired a group to help the bank think differently, including people with expertise in design thinking. She makes a point of mentioning that all of her direct reports are women and all have Silicon Valley experience.The challenge is “how do you make [innovation] something that can be integrated into the way your company operates, creating an environment for talent that is excited about this different way of working,” says Hopkins. “I am proud of being the founder of this new operating system, proud of the talent we have assembled here. Citi has thousands of people who deeply understand banking and now we also have people specialized in design thinking, running labs and scaling promising ideas. And we have buy-in from top management.”
To gain that buy-in an innovation panel was set up comprising 10 of the company’s most senior leaders. The panel’s job is to ensure “strategic alignment, transparency and accountability throughout the organization, up to and including the CEO.”
“That is core,” says Hopkins. “I would say the support of the CEO and of an entire innovation board is key to guiding our work so that innovation becomes more and more center of the plate for the company.”
So how long will it take before the metamorphosis of Citi is noticeable to the outside world? “It won’t be some grand event,” says Hopkins. “It is going to be much more like a drum beat of new things coming from here.”