In our first instalment in the series, we introduced the first two phases of Grant Thornton’s Strategic Lever model (below), which outlined the importance of reducing complexity (Focus) before building outwards by leveraging existing organisational strengths.
Grant Thornton’s Strategic Lever Model
In this article, we explore the final two phases of the model and examine the current approaches taken in the market to Bridge Capability Gaps and Differentiate propositions.
Mid-size banks and building societies (see above) remain the specific area of focus. However, we will also examine market-leading examples from challenger brands.
Phase 3: Bridge Capability Gaps
Having focused their operation and built upon their strengths, the next phase of the Strategic Lever model requires organisations to assess their own areas of weakness against target customer requirements and trends. If these weaknesses present a barrier to new customer adoption or existing customer demand then the firm should seek to bridge the capability gap by investing in the right technology, processes and people.
If the firms have followed the strategic roadmap through Phases 1 and 2, profits/surpluses from these activities may be reinvested in the Phase 3 business case.
If these mid-size players have bypassed these initial phases in the search of a more revolutionary means of growth, at the very least an assessment of core strengths and areas of focus should be conducted in order to avoid building complexity into the proposition and sinking considerable cost into subsequent change programmes.
Historically, innovation within financial services centred on products, distribution channels and brand, with firms primarily adopting a ‘follower’ approach to Bridge Capability Gaps – following market trends and competitor strategy without necessarily focusing on the development of their own differentiated proposition.
However, there are signs that a combination of new entrants and recent industry regulation (PSD2 & Open Banking) are accelerating industry innovation, particularly in the digital space.
Monzo & Starling Bank, for example, have bridged industry-wide capability gaps through their app APIs and corresponding FinTech partnership strategy which is designed to centralise and cater for a diverse range of financial needs, creating links between a variety of useful products/services (creating Customer Constellations). These businesses are built upon focused customer-orientated business models which have innate strengths of low organisational complexity and a brand that is unblemished by the financial crisis.
Another example includes Fidorbank’s and Revolut’s partnership arrangement with the FinTech firm, CurrencyCloud. The arrangement suited both parties; the challengers provided the customers whilst CurrencyCloud provided the customer service capability through their payment service engine. Bridging this capability gap has enabled these challengers to meet the requirements of their target customer base.
The challenger brands are certainly at the forefront of integrating FinTech firms within their own value chain to improve overall customer experience and engagement. A similar approach could present a low cost opportunity for mid-size banks and building societies to bridge their own capability gaps by adopting a collaborative approach with these technology-focused organisations.
There is the potential, however, for these firms to be exposed to a new breed of ‘digital risk’. For instance, outages from partner software upgrades could lead to detriment for both brands. If mid-size banks and building societies choose to bridge their capability gaps through FinTech partnerships, a structured and rigorous approach to controls and testing is of paramount importance.
Furthermore, by allowing another party into the value chain, these banks and building societies effectively cede a proportion of the value (or at the very least, data) generated from each customer.
This must be weighed against the reduced capital risk, as partnerships require relatively low investments, particularly when compared to the cost of building the technology capability in-house.
Therefore, mid-size firm needs to weigh the pros and cons of developing their own capability vs. using that developed by specialist firms in the market in order that their strategy is specific to them and not a ‘copy cat’.
There are a number of players in the market considering a more radical approach to bridging capability gaps via consolidation.
CYBGs successful £1.7BN bid for Virgin Money is indicative of this strategy. In recognising the complimentary elements of their respective offerings, the marrying of the two propositions creates potential for greater scale (potentially the 6th largest UK bank) and market presence, providing, of course, that integration is not too much of a distraction and can be undertaken effectively.
The success of such initiatives, however, hinges on the ‘strategic and cultural fit’ and the ability of the buying firm to seamlessly integrate a new partner or acquired firm. Failure to do so may result in a series of issues which negatively impact the potential growth opportunity.
In order to avoid the pitfalls of full integration, some firms choose to tie themselves loosely together in a ‘federated’ model. Whilst this may reduce potential synergies, it is a much easier means of gaining volume and allows the future option to sell the entity and capitalise on attractive market valuation down the line.
Indeed, the obvious concern with any inorganic growth strategy is that firms see this as an easy expansion option, increasing volume dramatically through one transaction. However, making these decisions without first getting your own house in order (i.e. ignoring Phases 1 & 2 of the Strategic Lever model) could increase the risk of integration even further.
Phase 4: Differentiation
Innovation in banking products themselves has been incremental, at best. There are, however, significant opportunities particularly with respect to new routes to market and increasing engagement across the customer universe (see here) that can truly differentiate a mid-size bank or building society proposition.
Of the challenger generation, Metro Bank have one of the most differentiated models – their ‘store’ model is all the more noticeable as the big banks embark on branch closure programmes. Like Handelsbanken, this may be a throwback to branch banking of the past.
It remains unclear as to whether Metro Bank can retain this distinction in the eyes of their customers, particularly if their website or mobile app is becoming their customers’ favoured means of accessing the bank. Indeed, with competitors driving better customer experience and loyalty through digital journeys, Metro Bank risk finding themselves in the worst of both worlds – with a higher cost to service and lower customer engagement.
There has also been an increasing presence of digital-only banks in the market with the likes of Starling Bank, Monzo and Atom. Each of these firms is differentiating themselves by having a fully online proposition that seeks to provide all the required banking functionality at the touch of a button.
This modernised approach to banking could lead to sustainable competitive advantage as it creates an opportunity for the brands to create an affinity with previously under-served customers. A positive side effect for mid-size banks seeking to explore a digital-only bank would be the additional level of scalability for these players which can be achieved once brand loyalty has been established.
The competition for customer affection (and, therefore, brand affinity) amongst financial institutions has never been greater. Demonstrating that the mid-size banks and building societies are outside of the ‘establishment’ appears to be key.
Nationwide’s latest campaign, focusing on their track record of supporting local community progress over time, is a good example of a building society differentiating themselves from their big high street banking counterparts through purposeful messaging designed to elicit trust in the brand. Key to this strategy, however, is ensuring that promises are authentic and match reality.
Revolut also exemplifies this concept but in a different way. The bank sets expectations high, identifying themselves as ‘your digital banking alternative’. They achieve this across the end to end customer journey; from the simple online account set-up through to the in-app servicing and additional product options, they meet the expectations that they have set. This, combined with their compelling product offering, has led to a significant word-of-mouth following which further makes the customer feel part of a unique club and subsequently drives brand loyalty.
If mid-size firms want to truly differentiate their brand, they must make sure that their actions and words are authentic, bold and are, more importantly, aligned.
Throughout this two-part series, we have aimed to show the benefits and drawbacks of achieving competitive advantage through evolutionary and revolutionary change.
Our basic premise has been that mid-size firms often do not have the inclination or deep pockets required to jump to Phase 3 and buy in capability. Taking an evolutionary approach allows these firms to get their own house in order before developing new capabilities, thereby de-risking major change programmes and limiting/avoiding sunk costs. Whilst revolution often appears a compelling strategy due to its speed of volume acquisition, it can often lead to greater sunk costs as organisations build (legacy) complexity into their new business models.
With challengers hot on their heels and the big five banks sitting comfortably ahead, the need for mid-size banks and building societies to seek competitive advantage through transformational change has never been greater.
This can only be achieved by a rigorous and thorough strategic development and planning process which our Strategic Lever model helps to facilitate.