The Black Swan Opportunity for Innovation
It’s officially been a(nother) black swan week and will likely be even more of them to follow. If you’re not familiar, the term “black swan” is defined by Investopedia as an “unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.” It appears we’ve experienced not one but several Black Swan events over the past week -- a bevy of Black Swan events, if you will. (Bevy is the technical term for a group of swans FYI so don’t be caught saying it is a flock of swans).
Between the WHO declaring coronavirus COVID-19 a pandemic, the biggest market drop since 1987, and the oil crisis shocking markets last week; and now 3 million new unemployment claims and the U.S. having more COVID-19 cases than any country in the world, we are now operating deeply in black swan territory.
Let’s not forget about the other ramifications we’re experiencing, like schools closing down physical access and moving classes to virtual classrooms. Volatility is up. Customers are (rightfully) concerned and are conditioned to have automatic and immediate responses to the economic implications of everything happening right now — which can be a good thing.
We run a consortium of banks known as the Alloy Labs Alliance and we have a pretty good inside track on the pulse of banking and on what a lot of financial services are thinking. That isn’t a pitch, just setting the tone that this is not just one person or one company’s opinion.
One prevailing theme is the full value of investing in innovation really comes into focus around an organization’s ability to deliver when things get...chaotic. Global pandemic wasn’t one of the use cases our banks used to calculate the ROI of upgraded online account opening, issuing all workers tablets or the move to the cloud. Cross-functional team work, collaboration tools and agile planning are the physical embodiments of cultural shifts leading banks were taking to become more adaptive.
Global pandemic wasn’t one of the use cases our banks used to calculate the ROI of upgraded online account opening, issuing all workers tablets or the move to the cloud.
New Realities Expose New Needs
The flip side of that coin is taking center stage right now. We are hearing about the massive pain these organizations are feeling right now as a result of delayed projects that should have been started or completed already. We’ve heard everything from “if only we’d moved to the cloud as we had been planning, supporting work from home initiatives for a majority of our workforce would have been much easier” to “right now, we’re finding out we can’t have that many VPNs rolling in” or “wish we had worked more on online account opening or auto-enrollment into electronic access and alerts.”
The circumstances we’re experiencing perfectly highlights why innovation is an important theme. It also unveils the erroneous thinking that digital transformation is as simple as putting digital lipstick on the analog pig. It’s not just about creating a “prettier” user experience and calling it a day. The knee jerk reaction, given the current state of affairs, is to retrench to the new reality of social distancing, social closures, and a largely remote workforce without thinking about the fundamental changes we might need to make for the long term. Now is really the time to take notes on what processes, technologies, and people skills need to be updated — or recreated on a clean slate — to be future-ready.
Three Lessons From Agile Fintechs
As an angel investor, I’ve made several bets on this trend in financial services over the last decade. One of these bets is on Blueleaf, an analytics and automation engine for financial advisors (disclosure if that wasn’t obvious I’m an investor). There were a number of philosophical attributes in the Blueleaf model that I believe are critical as the financial service industry works through our response to the current crisis and longer term implications.
The first attribute is technology should simplify your business, not complicate it. The Lean Startup movement addresses the cost of carrying unused features in your code base. How often do we stop and think about our business from first principles and ask: what is the cost of carrying that process, product or interaction. One example is access to information. Customers must be able to self-serve as much as possible. It isn’t enough to publish the information (which most financial institutions don’t do); this requires intuitive design and new tools.
If I’m theoretically in the middle of buying a new house (OK, maybe not so theoretical), I want to know the status of my mortgage because the closing date is rapidly approaching. I should be able to see the status of my mortgage online, the items outstanding, and a list of actions I can take in the middle of the night, when I’m worried about this, rather than having to wait until morning to speak to a person that can translate the 50 pages of paperwork that arrived by snail mail yesterday. In the wealth management world, logging into my account is a sea of red the implications of which might be intuitive to my advisor but are not to me. Sitting down with me once a quarter or answering a quick phone is sustainable in a stable market but not today.
The second important attribute builds on the first: technology improves personalized service, not competes with it. Financial services, and banks especially, prides itself on relationships. There is a big difference between personable and personalized. I appreciate when I need to visit a branch (more often than I would like) and I am greeted by a friendly face. That person asking me if I’d be interested in a private client relationship for the 50th time is not appreciated. This is an area where banks can learn from startups like Blueleaf.
When the markets experience their biggest drop since 1987, I do not want to wait for the quarterly phone call from my advisor to hear him say “Hey, we should sit down and talk about performance in your portfolio.” Guess who cares about his portfolio performance right now and needs advice and communications to be personalized? I don't want a newsletter in the abstract telling me that the markets are down. I can see that with my own two eyes. I want to know what that means for me. Specifically. Right now. There are some online banking providers that are catching onto this and allowing customers to define what they see when first logging into their account. Ultimately this should be dynamic. We’ve seen examples with some of the banks we work with customizing how landlords see their rental deposit activity or consumers checking to ensure social security arrived.
This leads to the third important attribute: automation. Automation is empowering. It doesn't replace human interaction. Rather, it removes the commodity parts of interactions, freeing up humans to focus on the things only humans can do. This brings us back to the intersection of this theme of personalization and automation. Users should be able to control what, when, and how things are communicated. Most importantly, services and communications should be tailored to me. I don't want generic newsletters or communiqués; I want alerts based on triggers I set. I want to be notified in the manner I have chosen when balances or transfers hit above or below a threshold I’ve set or when a banking transaction is complete.
Many banks have done a great job of enabling alerts for payments due (future-looking) or payments made (past-looking), but struggle to integrate those actions with things that take place in the present. I'm still mystified that my credit card company will a) send me a notice that my payment is coming due, and b) send me a notification when the payment is completed, but cannot c) do a simple balance check in between those two activities so it can let me know “Hey, an unscheduled payment went through since we sent you a notification about the upcoming payment due. You may want to make sure that your balance isn’t off by a couple of dollars before the upcoming auto-payment goes through.”
Don't Stop Innovating
This all boils down to one simple but significant point: now is not the time to lay off the innovation efforts. Banks are going to be under profit pressure and a zero interest rate environment for some time. Startups are simultaneously hardening their systems for the first time and figuring out their profit model. Financial advisors are struggling to keep up with the demand as people are worried about retirement, where they stand financially, and what moves they should make. Now is the time to sharpen the pencil and map out your investment strategy for future innovations. Why? Because this is the new normal.
The next disruption probably won't be another pandemic, but the rules will be the same. Continuous change is inevitable; those with a strong innovation muscle, a solid foundation, and the ability to adapt on the fly will be the ones that flourish. Startups have some of these survival instincts programmed into their DNA. They have learned how to adapt along the way, find a way to meet a market need, find a way to get paid and raise additional capital and use that capital to scale fast enough so that they don’t go out of business. These are slam dunk skills that will absolutely insulate these companies from some of the impacts that lesser-prepared organizations may fall victim to.
Banks, too, have their own unique qualities that strengthen them in markets like today’s. They do a phenomenal job of making sure they don't take on too much risk or move too quickly to the point that they're destabilized when conditions change rapidly. The optimal fortitude comes from a healthy mix between the two. We need to start looking at ways we can merge the sound, stable practices of banks with the ability to thrive in a fast-moving, dynamic environment in which fintechs succeed.