Banking in the 21st Century (Draft, December 6th, 2011)

7/28/2019 Banking in the 21st Century (Draft, December 6th, 2011)

1/14

December 6th, 2011 Draft version 1

Bank of the 21st century

by Evert Jan van Hasselt (Dolfijn Advies)December 6th 2011

Draft version

The financial sector is in turmoil. Starting end of 2008 banks have lost control andbankers are desperately trying to stabilize the whirlpool. In 2010 things seemed to moveinto the right direction. Old habits immediately popped up again, and with the currenteuro crisis things are getting more worse than ever.

In the past few years numerous initiatives have started a quest for sustainable solutionsfor the financial sector. Interestingly these initiatives have one thing in common: they

are focusing solely on the sector itself. Getting rid of old habits and creating new ways ofbanking should clear the roads and revitalize the financial sector. Nobody seems to

consider that the source of all the trouble might be located outside the financial sectoritself.

And yet there is much evidence that the current issues in the financial sector are causedby a more broad phenomenon. Our current implementation of the whole capitalistic

system is at the end of its lifecycle. It is time to move on to a new episode in capitalism,which comprises a complete paradigm shift. By seeking solutions within the existingsystem, we are merely worsening the situation and calling upon us the next and evenmore deep crisis.

Analysis of the current state of affairsIn the past decade trust levels have dropped dramatically. Customers dont trust theirbusiness organizations anymore, citizens dont trust their governments anymore.

Companies see this happening and are desperately looking for answers. In a recent studyIBM questioned over 1,500 CEOs worldwide [IBM2010]. 88% of the CEOs stated that

Getting closer to our customer is at the top of their priority list for the coming five

years. This sounds like a logical reaction, but in fact is quite useless. When we go back intime, in 2005 we find another study by Bain & Company. They surveyed almost 1,000CEOs worldwide, providing a similar conclusion. And going further back, already in de1960s companies were trying to get closer to their customer, were trying to understand

better what their customers needed.

Over the past five decades this has triggered a whole set of development in business,

ranging from the marketing revolution, through the quality movement and businessprocess reengineering to one on one marketing. And where did this bring us? To an all

time low trust level of customers in de past decade.

The only conclusion can be that companies nowadays are not able to get closer to theircustomers. Shoshana Zuboff states that this is due to our capitalistic system[ZUBOFF2002]. The current episode in capitalism has created companies which structureprevents them from getting closer to their customer.


2/14



Does this mean that we should get rid of capitalism? No! Capitalism is an extremely

strong system, mainly because it reinvents itself from time to time through so calledrevolutions in capitalism. Zuboff suggests that this happens when three forces gettogether:

1. New Markets, new needs, which cannot be fulfilled within the current system2. New Technologies, enabling fulfillment of those needs3. New Enterprise Logic, glueing together companies and people providing ways to

fulfill the new needs

The rise and fall of Managerial CapitalismThe last time such a revolution occurred, was in 1913. In those days there was a strongdesire for luxury goods. But luxury goods were expensive and as a consequence only

available for the wealthy.

Henry Ford identified this new need, in his case a desire for obtaining cars. At that timeautomobiles were extremely expensive. They were manufactured in small workshops.They were tailor made and the customer would enter the workshop almost on a dailybasis to make sure that the car was built exactly the way they wanted it.

Henry Ford saw a large middle class population who were not able to pay for thisexpensive process, but who wanted a car. And Ford decided to find ways to make carsavailable for the great mass. Using the new technology of that time (which had comefrom the industrial revolution) Ford developed a new Enterprise Logic: the idea of highvolume, low cost per unit production. Mass production.

What made it possible for him to create this new way of production, was the exclusion of

the customer from the process. The customer was taken out of the process and placed atthe end of the assembly line, left with only one choice: Yes I do buy, or no I wont buy.Only by doing so Ford was able to standardize, which was needed to a high volume ofsimilar goods.

Ford was not taken seriously by the captains of industry of that time. His idea wasridiculous and would never work on a large scale. But in twenty years his enterprise logic

had become the predominant logic. Large companies that did not adapt, had vanished.They had lost their competitive power.

In the decades that followed the new enterprise logic matured. Driven by competition

the main element of capitalism companies found ways do do better than before. Andthey could become better by improving their efficiency. Efficiency was the promise of thenew system: Dont ask me for the color of the car, but Ill make you that black T-Ford asefficient as I can.

But now this form of capitalism which was extremely successful and provided the worldwith an unpreceded amount of wealth has reached the end of its lifecycle. Two aspects

are of importance here: The system is fully optimized. It is hardly possible to find new ways to further

optimize. But still companies are faced with pressure from the shareholders toextract more company value out of the process. The only option which is left for

those companies is to provide less customer value in a sneaky way. That is whatone can see happening now on a broader scale.

Apart from creating new wealth, the current system had done something else aswell: it has created a new customer. Nowadays customer has all those luxurygoods. He is looking for something else. He wants to become master of his owndestiny. He wants to have direct influence.


3/14



In the light of these two aspects the decrease of customer trust level is a logical

development. And therefore companies wont be able to bridge the growing gap betweenthem and their customers, unless they shift to a new form of capitalism.

Birth of a new episode in capitalismThis new form of capitalism a new episode in capitalism will arise with the

convergence of the three forces Zuboff mentioned: (1) new markets, new need, (2) newtechnology, and (3) a new enterprise logic.

New needTo articulate the new needs, it is interesting to view the happy few of our times. In thetime of Henry Ford it were the happy few who already had the opportunity to fulfill the

new need of that time, because they had the financial means to organize it. nowadaysone cannot tell anymore who is affluent and who is not by looking at type of (luxury) carthey own or the expensive clothes they wear. You cannot distinguish the happy few bythe way they look. Today the happy few can be identified by the number of people theypay to make their life easier. They create a micro climate of support to let them live theirlife exactly the way they want to live it.

That indicates what the new need is. The new need can be described as support toenable you to live your life exactly the way you want to live it. This is an individualneed. In order to fulfill these needs companies need a one on one relation with theircustomer. And that is something what nowadays companies are unable to do. Theircurrent logic is not tailored to do so, on the contrary, it was built to do exactly theopposite.

New technologySo companies need new ways to engage with their customers. And new technologydevelopments are giving a hand here.

An interesting analysis of technology development and the influence on our businesslandscape is provided by Nikolai Kondratiev and Carlota Perez [DOORN2010]. Kondratievproposed his Kondratiev waves, showing economic up and downturn in large periodes

(waves) of approximately sixty years:

Each wave is driven by the emergence of a new type of technology. As one can see we

are now in the wave driven by information technology.


4/14



Carlota Perez analyzed what happened within each wave Kondratiev proposed. She found

that each wave can be divided in two parts. In the first part of a wave the newtechnology is developed and matures. In the second part of the wave the technology isapplied, enabling wholly new ways of working. In the transition period from the first part

to the second part an economic recession occurs. Only after the new technology is usedto fuel a new way of working, the door towards new prosperity is opened.

We are currently facing such a recession. This recession did not start in 2008. It started

in 2001 with the collapse of the internet bubble. Since 2001 we failed to make thetransition to new ways of working. Instead we continued to use information technology tofuel the old system. Therefore we entered a new crisis in 2008. And still we did not learn,so in 2011 we entered yet another crisis, while the previous crisis had not yet been

solved completely. Only by starting to use information technology to shift our way ofworking on a large scale, we will be able to escape this accelerating cascade of crises.

New enterprise logicThis is where the new enterprise logic comes in. The current enterprise logic, asintroduced bij Henry Ford, has companies in the center of the commercial arena. Those

companies create products and services, pushing them outside towards customers whoare in the periphery. Companies dont know their customers. They do distinguishdifferent customer segments, on which they target their products and services. But theydont have a relationship with each individual customer.

Such a relatioinship with an individual customer is vital for fulfilling the new individualneed. Therefore we will move into a Copernican inversion: the customer becomes thecenter of the commercial arena, with his individual needs. Companies will move into the

periphery, operating in flexible networks in order to fulfill each individual customer need.Companies have to cooperate, since a typical customer need will not be fully covered bythe offering of a single company.

This new way of creating customer value sounds very expensive when observing it withthe old paradigm in mind. But so did the idea of Henry Ford to build a car for middle class

customers when observing it with the paradigm of his timeframe. Ford found ways toincrease productivity with an order of magnitude. That productivity increase opened theway to providing the new need of that time.

A similar productivity leap is what we have to find solutions for. Major components that

will facilitate such a productivity leap are: Co-creation

The customer is involved in the value creation process. This has two advantages.


5/14



Firstly the customer will do part of the work, which of course lowers the costs for

companies. Secondly the fact that the customer is involved from the beginning,will increase the change on first time right. This will decrease costs for rework.

CommunitiesTwo know more than one. This mechanisme is expanded exponentially incommunities. Numerous studies show that communities are capable of

unpreceded knowledge production. Communities open up our collectiveintelligence.

Common IT-infrastructureNowadays companies have their own IT-infrastructure. These will be replaced by ashared IT-infrastructure for all companies and customers in the network. This willgreatly facilitate the cooperation needed.

We will discuss each of these components in the latter of this article. But first we willinvestigate the new organizational structure.

New organizationA traditional organization looks like this:

Each organization targets a specific market. An organizational structure is created with

managers and departments. The first department performs market analysis, obtaininginformation what the market wants. The second department translates this into productand service designs. The third department realizes these designs into actual products andservices which fit the average customer. The average customer doesnt exist, so a sales

force is needed to convince as many customers as possible that the product of service isexactly what they need.


6/14



When we want to address individual customer needs instead, well need a different

structure. Specifically the new position of the customer attracts attention:

The customer becomes part of the community creating value. Several service providerscontribute to a joint solution which fits an individual customer need. In the ideal situationthe customer is controlling the value creation process, because the customer has thebest overview of the environment where the solution is needed. Quite often however thecustomer is not able to do so. The old paradigm says: give it to us, well do it for you.

The new paradigms finds ways to enable customers to direct the value creation towards asolution that exactly fits their needs.

Therefore a coach is added. This coach is not a single person, but a combination ofpeople and technology. One could call it a coaching function. Especially the technologypart is interesting because that helps driving costs down by increasing overallproductivity. An simple example of such technology coaching is what happens when

purchasing a new television. One will typically move to a website where one can comparedifferent models. Such sites provide detailed reference data. They also provide rating ofthe different models by other users. In that way technology helps in deciding what

television to purchase.

This new network organization becomes the new type of organization providing value toindividuals. Competition the core component of capitalism occurs between those

networks. Individuals will turn to the network that provides the best support for anacceptable price. So I stead of efficiency now the coaching function will become thepredominant element in competition, since this coaching function is the maindiscriminator in determining the right type of support.

Essential in this new model is the fact that the customer will pay the network after thesupport is provided and the network will pay the individual service providers as a result.

This means that service providers will get payed only after the combined solution isdelivered. As a consequence service providers are dependent on the performance of theirfellow service providers. This notion will enhance cooperation between all actors in thevalue creation process.

The journey of a customer in controlWhen a customer is in control of the process of fulfilling his own needs, he typically

follows the following steps:


7/14



In this customer journey the following happens: Self

First the customer starts looking for information by himself. The internet, books,magazines provide useful information to sketch out the first path towards thesolution.

CommunityIn the next steps the customer will approach his community. Family, friends,colleagues, all of them are potential sources of additional information. Usuallythese first two steps already provide enough information to determine a first basicroute towards the solution.

Advisors/coachesQuite often the customer will reach a point where the first two steps proveinsufficient to complete the path towards the optimal solution. At that stage the

customer will approach experts, who have studied the matter concerned. Theexperts will approach the customer as an advisor, assessing what the customeralready has determined and what is needed to complete the path. This approachensures a solution that optimally fits the needs of the customer.

TransactionsOnce the path towards the solution is completely determined, it should beexecuted. Transactions must be carried out. That will eventually fulfill the need of

the customer.

Business Model of the 21st Century

The described customer journey forms the foundation of the business model of a networkorganization which operates according to the new enterprise logic:

The major value proposition provided by the network organization to the customer is allthe necessary support in order to enable the customer to optimally walk his journey:


8/14



SelfThe network supplies access to all relevant information, through knowledge bases,links to external information sources, etc.

CommunityThe network supplies an online community which extends the customers personalcommunity. Because this online community typically contains fellow customers

with similar needs, this forms a valuable addition to the personal community. Inpotential this online community can be worldwide.

Advisors/coachesThe network provides access to relevant experts, who are able to coach thecustomer to the optimal path towards his solution.

TransactionThe network provides access to service providers who are able to carry out theneeded transactions.

The old paradigm would attract advisors/coaches and service providers as employees ofthe company. The new paradigm would regards these experts as partners in the networkand approaches them as secondary set of customers. The value proposition of the

network for this segment of customers is a market. Because the primary customers aresupported in their quest for a solution to their needs and thereby accompanied towardstransactions, automatically a market of potential customers is formed for the secondaryset of customers.

IndependenceThis approach of all actors involved as customers of the network ensures fullindependence of all participants in the process.

The primary customer is fully independent in how he approaches the quest towardsfulfillment of his needs. The network provides all types of building blocks and support,the customer decides which parts to use.

The secondary customer (service provider and/or advisor/coach) is independent too. Hedecides which service to provide. If a primary customer requests a service that falls

outside his professional views, the secondary customer is free to decide whether or notto provide this service. However, denial of specific support typically wont happen veryoften. Probably primary customers will already have found way to other service providerswho are willing to provide that type of service, potentially within another competing

network organization.

This approach ensures a mature relation between primary customers and serviceproviders. Optimal use is made of both the quality of the primary customer and theservice provider in finding solutions to customers needs.


9/14



Drivers of the new enterprise logic

There are three distinct drivers enabling the new enterprise logic:

Co-creation Communities Common IT-infrastructure

The following paragraphs describe these drivers in more detail.

Co-creation

Co-creation is an often misused word. In those cases companies state they are in a co-creation relationship with their customers. What they mean is that they are closelycooperating with their customers in a one-on-one way. And that is not what real co-creation is about.

When customers and companies engage in a real co-creation effort, usually they dontexperience it as cooperating. Each actor is doing his own part of the job, independent ofthe other actors. They are using a joint platform for co-creation, which ensures that the

individual activities together make up for the joint value creation. Lets view a fewexamples:

Lego created an application on their website, which allows customers to create their ownLego designs. Subsequently they can upload their design and order it in a physical form.Lego selects the needed Lego pieces, an assembly manual is generated and a tailor madebox is shipped to the customer. Here the customer and Lego are cooperating with

eachother while not experiencing it that way. Both the customer and the Lego employee

assembling the box are doing their own thing. Legos IT-infrastructure including itswebsite is glueing both actions together, allowing value being created for the customer.

Nike joined forces with Apple in creating Nike+. Nike provides a sensor which can beinserted in specifically designed Nike+ running shoes. A receiver is added which can beconnected to an iPod or iPhone. The combination records the efforts while running. Aftera workout the customer can upload the running data onto the Nike+ website. There thecustomer can view his running progression over time. But also he can share his ownrunning data within a community of runners. Runners living in the same neighborhoodcan share information about places which are great for running. People worldwide can

share tips in great running music. In this way Nike provides a platform where customerscan share a running experience.


10/14



When looking at these examples the following things can be noticed:

Customers and companies are cooperating without experiencing it as workingtogether

They are supported by a jointly used IT-infrastructure. This is called anengagement platform

The cooperating process is driven by an experience. If the Lego customer wouldnot experience the fun of creating his own design, he wouldnt join in. If therunners using Nike+ would not experience the fun of joining forces with other

runners worldwide, the community could never be a success.

It is this type of cooperation that allows for the creation of new customer value, while theneeded efforts per customer of the companies involved are lower than they used to be. It

is this type of cooperation which allows for companies to tap into the individual needs ofcustomers on a large scale.

CommunitiesThe second driver for the new enterprise logic are communities. Communities form apowerful construct that supports value creation using co-creation. In effect the Lego

example goes beyond the description provided in the previous chapter. Lego customerscan share their designs in a community of customers. Customers can use and rate eachothers designs, thereby jointly creating additional value.

The power of community becomes highly visible when used to handle knowledge.Individuals have a certain amount of knowledge. But when these individuals combinetheir knowledge in a community, the amount of knowledge explodes.

Peter Drucker once stated: The most important, and indeed the truly unique,contribution of management in the 20th century was the fifty-fold increase in the

productivity of the manual worker in manufacturing. The most important contributionmanagement needs to make in the 21st century is similarly to increase the productivity

of knowledge work and knowledge workers.[DRUCKER1999]

Communities will prove to be a major tool to achieve this goal for the coming century.

Common IT-infrastructureThe third and last driver for the new Enterprise Logic is a common IT-infrastructure. Inthe past decades IT-infrastructure was available within a single company. In the past

years we have seen the rise of technologies (i.e. Web Services) to connect IT-systems,both within a single company and between several companies. But the main focus for anIT-system is still a single company.

As we have seen in the co-creation examples, the dynamic there will only function whensupported by an IT-system that is available to all participants in the co-creation process.Such an IT-systems goes beyond the boundaries of single companies. The IT-system

should be available throughout the entire network organization for all actors (customers,coaches, service providers).

In co-creation terminology such a common IT-infrastructure is called Engagement

Platform. It fully supports the engagement of participants in the co-creation process.Each participant is provided with the necessary tools to perform his part in the co-creation process. So the IT-system provides each participant with a tailored view. In the

Lego example the customer is provided with a digital environment where he cangraphically build his own Lego design. On the other end, the Lego employee responsiblefor packaging the ordered box is provided with IT-support that will provide a packaginglist and will automatically generate a construction manual for the design the customer

created.


11/14



Co-creation will flourish by the creation of an experience for each individual actor in the

process. A major requirement for the IT-system is to provide a unique experience foreach actor, tailored to his needs during engagement. High-tech solutions like augmentedreality will allow blending technology with real life activities and thereby opening up

completely new types of experiences [PINE2011]. These experiences will fuel the co-creation process and thereby the new dynamic connected to the new enterprise logic.

Banking in the 21st century

What does this all mean for banking? The Business Model of the 21st Century providesanswers to the main issue in the financial sector: lack of trust. By creating financialservice providers according to this business model, new network organizations willoptimally tap into the individual needs of customers. That provides a sound basis for

recovery of consumer trust.

These new networks no longer start with unclear products in mind. The dynamic startswith individual needs of individual customers. The support provided will span the totallifecycle of the need.

Take for instance a mortgage. Currently a mortgage is a financial product connected tothe event of purchasing a house. The underlying need is much broader: financial supportfor the total lifecycle of living in a house. In lets say 5 years you want to renovate yourhouse and need additional money for that. In 10 years you may loose your job, whichresults in a totally different financial position. This is all part of the lifecycle of yourfinancial need for living in a house.

When this all is taken into account during the support of your financial need, a totally

different approach results. Different forms of financial support is created. Measures aretaken upfront to prevent you fro losing your house when you loose your job. All of thishappens in close cooperation with you, the customer.


12/14



Business model of a bank in the 21st century

Lets take a look at the business model of such a bank. This could typically look like this:

Customer SegmentsIn this case three customer segments are distinguished: Consumers and Businesses arethe traditional customers. New for the Bank of the 21st Century are Suppliers of financialservices.

Value Propositions

Core of the provided services remains lending and keeping money. This however istranslated to supporting the customer in a wholly new way. Key element is the fact thatthe customer is in control and is supported in various ways to make his own choices.

For Businesses something is added. The Bank of the 21st Century supports buildingfinancial structures for new developments. This goes beyond supplying loans. Alsosupport in finding subsidies and external loans becomes part of supplied services. And

because the Bank assumes a coaching role for Businesses, a logical additional service isto connect different Business customers with each other, opening up possibilities for newbusiness.

For suppliers of financial services the Bank of the 21st Century supplies a market. Byincorporating their services, the whole network is able to optimally adapt to customersneeds.

ChannelsThe Internet becoms the major channel through which value is provided to customers,because it provides customers optimal freedom and innovative interaction mechanisms to

determine their own path to solutions. Telephone and physical meetings remain usefull

channels.


13/14



Customer Relationships

The relationship between the Bank of the 21st Century and its customers is totallydifferent from a traditional bank. The customer now is in control. That results in co-creation, acting in communities and self service. Whenever needed old fashioned

individualized personal support is provided.

Revenue StreamsThe foundation for revenue remains at interest and fees for handling money. On top of

that a subscription fee can be calculated for so called premium functionality of thecommunity platform (basic functionality is provided for free).

For Businesses a payed business community platform can be offered. Suppliers of

financial services offering their services through the network, pay a broker fee. On top ofthat advertisement can be an additional source of income for the network.

Key ResourcesExisting facilities for handling transactions remain of importance. On top of that anengagement platform is made available to all actors in the new dynamic.

Key ActivitiesBesides traditional transaction based activities, which will be automated more and more,administration of the engagement platform becomes of high importance. Thisengagement platform becomes the major competitive asset for the new networkorganization. Advice becomes a coaching fashion and matchmaking (betweenbusinesses) is enforced.

Key PartnersAll parties fulfilling financial needs can become partners of the network. This includesinsurers, who provide a form of financial security (different from the near past, wherebanks and insurers decided to merge completely).

Additional parties of interest for Businesses are agencies supporting in finding subsidypossibilities and investors are relevant to cooperate with.

Cost StructureCosts are determined by the engagement platform and the transaction platform. On topof that there will be acquisition costs targeting new customers.


14/14



Literature for reference

[DOORN2010] Menno van Doorn, Jaap Bloem, Sander Duivestein; DONT BE EVIL Imagineering 21st Century Business: People, Planet, Profit 2.0; VINT, 2010.

[DRUKCER1999] Peter F. Drucker; Knowledge-Worker Productivity The Biggest

Challenge; California Management Review XLI:2 (Winter 1999), pag 79-94.

[IBM2010] IBM Institute for Business Value; Capitalizing on Complexity Insights fromthe Global Chief Executive Officer Study; IBM, 2010.

[LEADBEATER2009] Charles Leadbeater; We-Think Mass innovation, not mass

production; Profile Books 2009.

[PINE2011] B. Joseph Pine, Kim C. Korn; Infinite Possibility Creating Customer Valueon the Digitaf Frontier; Berrett-Koehler, 2011.

[PRAHALAD2008] C.K. Prahalad, M.S. Krishnan; The New Age of Innovation Driving

Cocreated Value Through Global Networks; McGraw-Hill, 2008.

[RAMASWAMY2010] Venkat Ramaswamy, Francis Gouillart; The Power of Co-creation Build It With Them to Boost Growth, Productivity, and Profits; Free Press, 2010.

[TAPSCOTT2010] Don Tapscott, Anthony Williams; Macrowikinomics RebootingBusiness and the World; Portfolio Hardcover, 2010.

[ZUBOFF2002] Shoshana Zuboff, James Maxmin; The Support Economy WhyCorporations Are Failing Individuals and The Next Episode of Capitalism; Viking Adult,2002.

Documents

Banking in the 21st Century (Draft, December 6th, 2011)