n Part-1 we discussed how the simple business models of disruptors give them a cost advantage. But they are also winning with new revenue models. For traditional service providers such as banks to regain an edge, there needs to be dramatic performance improvement in both costs and revenue.
Margin has suffered from disruption with competitors caught in a cycle of discounting. It does not have to be the case. You can increase margin in a disrupted market. But to do so, you must add value.
“Intermediaries that derive value from their position on the value chain will struggle to be profitable”
The service sector has earned more from their position in the value chain than for the service offered. Yes it enabled higher margin business, but it also opened the door to disruptors.
Strong growth in the banking sector has come from being intermediaries controlling the conversation between investors and borrowers. Now technology allows parties to bypass the bank. Customers can now seek value propositions when previously they had no choice. This is changing the market for banks.
That value can be as simple as convenience. Alipay told customers, that they would pay them interest if they left their money in Alipay rather than transferring to a bank account. 12 months later they had $100b from lazy customers not pressing the transfer button.
Refocus on Service Value
We are talking about traditional pricing models of value based pricing vs cost based pricing. By controlling a position in the value chain, service providers adopted cost based pricing. Why worry about value when the customer has little choice.
Now providers are paying the price as cost based pricing is susceptible to a price war. This is why banks are seeing collapsing margins from disruption, Where as value based pricing would be immune to disruption.
“Value based pricing vs cost based pricing”
Cost based pricing has also gained the unwanted attention of Governments and regulators. Price set by control of the value chain is seen as monopolistic. This created distrust and put pressure on Governments to increase regulation and competition.
To drive margin, service providers have to urgently refocus on service value and value based pricing. This is the only way to break the cycle of cost cutting and price discounting. It is the only way banks can turn around margins.
New Revenue Streams
By focusing on adding value will changes how you look at the customer. At the moment providers are looking at how to convince the customer on why they should use their products and services. Instead they should be understanding the problem the customer has and providing a solution for the problem.
“Stop selling products and start solving customer problems”
Banks are rejecting loan applicants because the applicant does not meet the criteria for the loans they are offering. What banks are not doing is looking at how fit products to better fit customers circumstances. If they did this, they could create new revenue streams and open new markets with less competition. For example providing loan products for the growing self employed population of the Gig-economy.
“One company recently provided a loan suite for self employed drivers to buy a car based on revenue streams from Uber work.”
What has this got to do with re-engineering risk, compliance, finance and strategy
To move from an intermediary model to a value based model is a significant change in direction. The problem is that service providers have 15 years of compliance baggage locking them into the intermediary business model.
To suggest radical surgery on risk, compliance and finance to change business models would condemn the hardiest business leader to sleepless nights. The key is to shrink and simplify compliance. To stream line processes and make the business agile. By having leaner processes allows an evolutionary changes of the business model with lower risk.
Re-engineering risk, compliance and finance is not just about cutting costs, but allowing the business to adapt its business model to new revenue streams and increased margin. To restructure the business to better service the customer. Where the customer deals with the provider because they want to, not because they have to.