Look and Learn - Exploring ideas from outside the industry
Historically, financial services has produced limited indigenous innovation, with most new ideas coming from non-banking players. So, it is not surprising that banks have been proclaimed the most vulnerable to disruption from next-generation entrants and their technology-led business models. But even as they look to compete and grow in this environment, is there an opportunity to turn that challenge on its head by learning valuable lessons from outside players?
As an illustration, let's take the example of Netflix - how they redefined themselves as markets evolved and what banks and other financial services organizations can learn from their approach.
Netflix - Motion Picture
Netflix started as a subscription based DVD-by-mail service in 1997. By allowing customers to keep a DVD for as long as they wanted, without penalty, they shook up Blockbuster's monopoly on the home entertainment business. Around 2007, after the phenomenal success of their DVD-by-mail model, Netflix added a streaming delivery option.
By 2010, Netflix's streaming business started growing much faster than the DVD-by-mail business. Reading the tea leaves, in 2011, the company decided to offer standalone streaming packages and hive off the DVD business as an independent subsidiary (Qwikster) . This was met with a huge outcry from subscribers. Netflix lost ~800K of their 26 million subscriber base that year and their stock plummeted to $54 from a high of $295.
Yet, as we look at Netflix today, their customer base has grown to more than 50 million and the stock price is ruling above $400. The company has moved over 80% of their customers to the digital channel and is producing content that's winning wide recognition, forcing competitors like HBO to follow their lead.
So, what did Netflix do right?
1. Reinvent the Business Model - One of their smartest moves was to recognize the power of the internet for entertainment and an increasing customer preference for online content , apparent in the growth of their "streaming only" customer base. Netflix responded by introducing streaming only monthly services packages, and significantly raising the price of the "DVD + streaming" package to discourage the DVD delivery option. At that time, this was met with significant resistance, but Netflix stood their ground to emerge a much stronger player in the media space. This is a great example of a company that is willing to reinvent their business model and also transform their identity by going digital.
2. Control the Supply Chain - Netflix is one of the largest buyers of content rights, having spent over $3 billion in 2014. Recognizing that better margins and market positioning are achieved through content ownership, the company has turned producer of original content (as an example, the television series 'House of Cards'). This is tightening Netflix's control over the supply chain and enabling them to attract new subscribers and improve profitability.
3. Use technology to drive business - Netflix has made significant investment in a recommendation engine. Today, 75% of movie selection is based on recommendation, not search. The company has also made key investments in ensuring speedy and uninterrupted delivery of entertainment by becoming the largest public cloud user (using AWS) and leveraging DevOps across the organization.
What Financial Services Companies can take from Netflix
1. Digital Transformation will require significant shake up of business models - Currently , most banks are focusing digital investments primarily on enhancing user experience. This needs to be significantly augmented with changes to business models, processes and value chains.
Today, there are very few examples of new digital business models in financial services, besides Internet Only Bank - ING Direct, Capital One 360 and Robo Advisor, Charles Schwab's Intelligent Advisor. FIs need to create more business models that leverage the digital paradigm.
2. There's a need for setting up and nurturing new supply chains - A classic example of supply chain control in financial services is the closed loop card processing done by AMEX and the insights they bring to their merchants leveraging the same. Chase launched ChaseNet, their merchant services offering in partnership with Visa to achieve similar control of their supply chain. ChaseNet, along with Chase Paymentech, ChasePay and ChaseOffers, enabled JPMorgan Chase to post $848 billion in merchant-processing charge volume (total amount charged by Chase merchants) last year, up 81% from $469 billion in 2010.
3. Adopt evolving technology paradigms - Netflix has been a significant adopter of new computing paradigms, namely, the Recommendation Engine, Platform as a Service, Public Cloud and DevOps. This helps them meet ever evolving customer demand. Banks have similar opportunities to leverage technology to shake up business models, in the shape of Analytics, Digitization and Mobility.
Digital Transformation is forcing a new business order. Its imperative upon Financial Services companies to redefine their business model to take advantage of evolving technologies like Netflix has done.