Even in the absence of these external forces, the current retail banking model has limited sustainability with the gap between ROE and COE narrowing every quarter. Many people contend that retail banking, at least as it exists today, is irreparably broken. The contention is that branch-based banking is out of kilter with customer needs. So if the threat of new entrants is not sufficient to cause retail banking executives concern, there is the unyielding challenge of showing a satisfactory return by persisting with a potentially outdated business model.
Driving customer-led innovation may be a daunting challenge, particularly considering how difficult it can be to bring about such change in an organization as large as a typical bank. But there may be another option if banks 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 organizations are designed to preserve the status quo they cannot radically innovate to disrupt the industry. But a spin-off could.
A recent example is Jibun Bank, the Japanese mobile-only bank. It was created as a joint venture between Bank of Tokyo Mitsubishi (BMTJ) and KDDI, one of Japan’s leading telcos. Jibun was set up as a separate entity with its own brand, 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. To succeed BTMJ and KDDI recognized that Jibun needed to be autonomous and unencumbered by the constraints of its parents.
But does Jibun go far enough? It has been created to co-exist alongside BMTJ. Real disruption occurs when a spin-off is created to vanquish incumbents, including its own parent. For example, Christensen cites the disruption of department stores in the US. In 1962 Dayton-Hudson created a wholly-owned subsidiary that challenged the existing incumbents by pioneering the discounting model. Out of the 300+ department stores nationwide, only Dayton-Hudson made a successful transition into discount retailing and the whole company now bears the name of the disruptive subsidiary: Target, one of the world's largest retailers.
Is such a radical measure necessary for a retail bank? It is difficult to say but it might be better for a bank to eat its own lunch before someone else does.
By Marty Carroll, Principal Advisor in the UK