July 14, 2017

Must have been a slow news day…
The team at Precision Lender invited me on their Purposeful Banker podcast to discuss an article I wrote about creating more authentic (and customer-centric) value propositions for banks. You can listen to the interview here.

Leveraging the Value Chain, part 3
This is the last installment in a series on how banks can leverage their value chain to create new business lines and sources of revenue. We used Amazon’s purchase of Whole Foods, and its history of using the “internal customer” model to help develop new core businesses, to create the framework and then apply it to banking.

In Part 2 I discussed how a bank could act as its own first-and-best customer to support internally creating a product to sell to other banks. Today, we’ll wrap up by showing how a bank could build a non-banking product or acquire another business to help in building out a new business line.

Creating a non-banking product
The distinction for this category is clear when looking at the function of the product and the end user base. nCino, which I discussed in part 2, was clearly an enterprise-level banking software platform built by a bank and sold to other banks. However, this second approach is for banks to build a product/service that is focused more on targeting consumers and small businesses directly. It still may have something to do with financial services, but the usage is an intentional choice on the part of the users, and not a by-product of completing some banking function (like accessing a bank’s mobile application).

One example in this space is the ZRent application built by Leader Bank. As a newer bank, Leader needed a way to attract deposits to fund continued loan growth. Their approach was to build a rent collection platform for landlords and property managers. Initially, the software was offered to the landlords, who have their tenants pay rent through the system with the intention to have the deposits being held at Leader Bank.

Now, any landlord in the country can create an account and use the platform regardless of their banking relationship, while Leader collects monthly fees from the landlord for using the platform. This is very similar to Amazon’s AWS model – build technology to meet an internal need (gather deposits for Leader Bank), then sell that platform to previously non-core customers and create a new business line with a new customer profile.

Acquiring a business to help build something
We have now reached the approach that Amazon took with Whole Foods. Recall that in buying Whole Foods, Amazon now has the sales channel and end (internal) customer to pay for and justify the high fixed costs required to build out their logistics and operational expertise for groceries.

Recalling Porter’s generic value chain framework, we saw:

Inbound logistics > Operations > Outbound logistics > Marketing/Sales > Service

Can this apply to banking? I have not seen any examples of this yet (ping me if you know of something!). However, here is one way it could work…

Let’s say SmartBank has dominance in financial modeling (like Amazon has excellence in logistics), and sees a huge opportunity to improve modeling in the P&C insurance industry. However, a de novo entry into that market is difficult as it takes time to achieve the scale required to stay solvent during a catastrophe (high barriers to entry). SmartBank could acquire a P&C insurer with a huge distribution network/brokerage arm and use the revenue to fund the scaling of its insurance underwriting business. It can then sell its improved policies through other brokers.

In this example, SmartBank already has process excellence in the middle of the value chain. It simply buys the distribution channel to fund its investment required to transfer knowledge from the banking side to the insurance side, and then both improves the profitability of its new insurance company, but also sells the new policies (or models) through/to other insurance brokers.

As another example, a bank with strong Wealth/Portfolio Management expertise could buy a mutual fund wholesaler and use the distribution to achieve scale of its portfolio management capabilities for its own mutual funds as its first-and-best customers and then a sub-advisor for other funds.

While some of these ideas may seem out there, and I’m sure there are some faults in the logic, people would have thought the same thing about Amazon buying Whole Foods 5 years ago…

Given the fact that financial services can already be delivered quite scalably and doesn’t require massive logistics/distribution/warehouses, I will be the first to admit that this analogy breaks down somewhere in the realm of finance. However, the only way to learn what will and won’t work is to learn different frameworks and test, test, test.

Hopefully this three part series has provided a new way to think about your business model and how you can leverage pieces of your value chain to create new business lines. If you convert this thinking into specifics on your business and have any ideas, I’d love to hear them!