It was an unsurprisingly sizzling day in Singapore, but a surprisingly fiery debate was going on. Most of those sitting seemed convinced that the incumbent financial institutions’ (FIs) efforts at building digital offerings and ecosystems of their own will have little chance of success, despite all their investments and efforts.
Alipay was brought up over half a dozen times. It was postulated that the TechFin players will pose an insurmountable challenge to existing financial institutions, then posited that ecosystems will win over whatever services and products incumbents had to offer.
It was surprising, not least because of the stark differences in market opinion in the US, Europe and even within Asia. Many traditional players in the West seemed barely aware of Alibaba and Tencent’s involvement in the financial services (FS), whereas in those sitting in that room (probably a good representation of South and Southeast Asia) appeared fully convinced that they will take over. Interestingly, in a recent visit to Japan, the local FIs showed much greater interest in learning about what Amazon were up to, yet all but ignored the movements of Alibaba and Tencent.
The truth probably lies somewhere in the middle. Amongst other challenges, TechFin players will meet significant regulatory hurdles in markets with highly developed FS sectors, even as they have nearly limitless potential in markets with little existing FS infrastructure. In moves perhaps portentous of the times, JD Finance, a major TechFin player in China, renamed itself to JD Digital Technology, even as Ant Financial, the financial arm of Alibaba, remarked that they are first and foremost a technology company.
Still, incumbents should not be faulted for trying to develop their own offerings and ecosystems – this is the right path – it’s just that the Chinese tech giants have a decade’s edge. So the next question comes: how can incumbents best provide digital offerings and ecosystems of their own? For this, we’ll need to understand how internet companies came to be.
Cyber real estate
In many respects, Internet players are rather like real estate companies. The analogy seems straightforward enough for Amazon, JD.com or Alibaba/ Lazada - they take an undeveloped tract of virtual land and start building them into online department stores (Amazon and JD.com) or shopping malls (Alibaba and Ebay). Then they carve up their website into different webpages and little plots of cyber real estate, which they then auction off or charge a listing fee for.
Is this the route that today’s financial institutions should go down? For the majority, maybe not. The virtual estate of their own websites and apps are simply too valuable or too risky to auction off to others, except on a very limited basis. Just think about it: how would you react if your bank started peddling trinkets on its homepage?
Mental real estate
The analogy extends beyond e-commerce companies. Companies like Google or Facebook have built themselves up in the minds of their customers to be associated with the services they provide, which are of course searching and social networking. All brands do this – they build up their own brand image, and the relevant associations to take mindshare and establish themselves at the top of the list of candidates.
Is this the answer for the incumbents? It feels a bit closer, but the marketing funnel is one of the oldest tricks in the book, and incumbents already have well-established brands; hence why they are incumbents. For many, their primary business is reflected even in their names (XYZ bank, ABC insurance company, durable-sounding-name asset management). Again, it’s perhaps not immediately obvious how to apply how mental real estate is applicable to incumbents, outside of what they are already doing.
Habitual real estate
We are creatures of habit.
But just as the number of hours in a day is limited, the number of habits we can adopt are also constrained. This is the space that the tech giants are ultimately competing in, fighting for a share of our habitual real estate.
Financial institutions will no doubt recognise that the power of habit also scales extraordinarily well, extending easily from individuals to organisations. While the formally adopted habits of internal processes are powerful, even more influential are the shared, unwritten habits – the culture – that organisations develop over time.
On the customer side, as an increasing number of retail users get become accustomed to a new, digital product, it will penetrate the business sector. Regulations permitting, small and medium-sized businesses will start using the same products, and eventually larger businesses will follow suit. This has happened for the mobile payments market in China – in which Alipay and Tencent Pay together processed approximately USD 6 trillion in the first quarter of 2018 alone.
Generally, once we have developed a habit, we are reluctant to abandon it voluntarily, with one notable exception.
A product that alleviates a pain point can change people’s habits.
Such a product will be in demand (so long as it doesn’t create too many unbearable new pain points), and its potential will be defined by the scale of the pain point it solves.
The Facebook example
And when it comes to business valuations, habitual real estate is immensely valuable.