“Economy of scale” is a popular term in software as much as banking. “Write once, sell many” has been the mantra for business application developers since Jim McCormack and Frank Dodge first started selling fixed asset depreciation routines out of their Natick garage back in 1969. (History lesson here). But the most fascinating part of Jim’s interview for me is not how he and Frank wrote the software, but how slashing their mail order price below $600 was the moment when it all started to click. (Want to make some money? Cut your prices!)
This all came back to me this afternoon reading Chris Skinner’s most recent thoughts on Financial Inclusion: A Force for Change and for Good. I’ve written about Financial Inclusion before myself, (here), and it’s clear from any analysis that the key towards successfully delivering financial products to the “unbanked”, (as with any other customer segment!), begins with lower costs. But once we’ve confirmed to ourselves that the correct banking strategy always includes lower costs, what have we learned, really, and where can we possibly go from there? The big global banks have all cornered the market on economies of scale, (haven’t they?), and who could possibly compete with that?
Turns out, everybody can.
The Economist cites several major factors that are bloodying the big money centers these days, and those factors are all among the consequences of being big:
- IT and organizational complexity (how’s that for a euphemism for cultural frictions of all sorts) that penalizes “sum of the parts” growth
- Brutal competition that only gets tougher the more of it you take on
- Increased regulatory scrutiny and higher capital standards that create a built-in burden for crossing any sort of border
All this conspires to drag down any sort of true economy to be gained by any kind of banking scale. However, the real hidden danger (also noted by The Economist) is that all the supposed efficiency savings (Citi suggests over USD $6 billion for them every year) are diluted where it counts by all the extra capital that has to be carried to achieve it.
Bad news? Well, of course, that all depends on who you are. Just as Jim M. and Frank D. accidentally discovered that cheaper products meant higher profits, any institution (or government entity, or telecoms provider for that matter) with the will to serve the billions upon billions of people yearning to enjoy the benefits of their own financial products will be stepping into what amounts to one of the very last green banking fields left on the planet. And that’s a very high-margin place to be.
But, for the larger banks still striving to streamline their operations, establish and drive an effective strategy throughout their organizations, and leverage the kinds of systems that will give them both competitive advantage as well as built-in compliance, there is at least one hot “FinTech” company with the resources to deliver. (It’s not a coincidence I’ve chosen to work for SAP).
Too big? There’s an app for that.
Not too big? Congratulations, you’re already a player, too.
Want to find out more about your opportunities? Check out the banking and financial services tracks at SAPPHIRE Now in Orlando, May 5th through 7th. From Financial Inclusion to right-sizing your institution to successfully compete, it will all be here.