Guest Blog: Tom Groenfeldt Asks If Banks Can Achieve Significant Innovation

In this, the second in a series written especially for the Articulate blog, Tom Groenfeldt examines innovation in banking and finds it lacking. Read the first here.

Can Banks and FinTech Firms Move Beyond Co-Dependency to Significant Innovation?

In a Harvard Business Review article “Growth Outside the Core”, Chris Zook and James Allen examined the way Nike had entered a succession of new markets, from jogging to volleyball to tennis to basketball to soccer and then golf, which they said “ranks as one of the most brutal and demanding markets in the sports business.” Four years after it entered the business in 1995, “Nike had scored priceless marketing victories—not once, but three times running. First, the British Open champ wore Nike’s golf shoes in 1999. Next, Tiger Woods switched from Titleist golf balls, the leading brand, to Nike golf balls in 2000. And, finally, David Duval won his first major tournament just after switching to Nike golf clubs in 2001.”

The company developed a highly disciplined approach to entering adjacent sports markets. Once it has some success it expands its geographic reach as well, leaving a once strong competitor like Reebok in the dust. The authors said they “identified six types of adjacency, ranging from adjacent links in the value chain to adjacent customers to adjacent geographies.”

In a HBR Harvard Management Update, Lauren Keller Johnson looks at some adjacency failures, including a couple in financial services. One example is American Express which expanded by acquiring brokerage firms, including Shaerson Loeb Rhode and E.F. Hutton. “Profitability dwindled and its stock price sank more than 50% from 1987 to 1991,” says Johnson. In their piece, Zook and Allen show how Amex learned a lesson in effective adjacency and has used detailed data to expand its cards business from a simple charge card to a family of cards with a variety of terms and interest rates. Now, it also offers financing services for merchants based on their receivables, something PayPal, Square and now Amazon offer, as well.

The familiar KISS warning — Keep It Simple, Stupid — applies to entering adjacent markets. The HBR article quotes Peter Burt, former chairman of HBOS in the UK: “The most important screen for new adjacencies is to limit the number of new variables we are managing to a small number: one.” Similarly, Lloyds took small steps to test a new market idea. “Before Lloyds Bank leapt into adding new products to its branch-bank network, it tested one new product at one branch. When the idea proved itself, the Bank rolled it out on a larger scale.”

BCG says Amazon is a prime example of finding adjacent businesses, starting as a book seller, then selling almost everything else, and then becoming a fulfillment center for others, building 80 warehouse and buying a robotics company to automate the warehouse business. Perhaps its best-known expansion is opening its data centers to provide cloud computing through Amazon Web Services, which became a $1.8 billion business by Q2 2015. Now it is building up a fleet of trucks, planes and drones — it has come a long way from a mail order book seller. For banks and FinTech firms looking for adjacent opportunities, these examples of adjacent pursuits might provide a catalyst to look beyond advice.

About Tom Groenfeldt

Tom Groenfeldt is a highly respected freelance writer based in the U.S. He writes about finance and technology for publications including, International Finance Magazine and his own blog, In 2015 The Financial Brand named Tom one of the top 25 global influencers in financial services. And he was named by Jay Palter as one of the 250 Fintech influencers you should be following in 2016, and by CDW FinTalk as a top blog.