Kodak Moment in Financial Services

Business leaders want to avoid their Kodak moment. That is true for the executive teams of traditional financial institutions. Actually, of any established company. A Kodak moment used to signify “an occasion suitable for memorializing with a photograph“. How cute. And that is how big Kodak was. Now it means missing an industry shift in a spectacular way. Going from market leader to barely even surviving. This kind of grave failure of leadership that is not particularly good for the future of a business. As in, you lacked the skills to see it coming and now the company is gone. Or mostly, although smaller or operating in a changed environment. Kodak still exists for instance. There is a slight difference between a relative lack of vision and an obvious absence of leadership. One is lethal, the other one does not have to be.

What about banks, is it a lack of a vision or an absence of leadership?

What is the difference anyway?

It mostly has to do with its irreversibility. Lack of vision is momentarily, you just do not see the next turn. But you are not done yet. There is still time to correct the course. An absence of leadership is that you just do not have the skills, as an executive team or an organisation as a whole, to assess any turns the industry is taking at all.

No-one wants to be in that situation. Although it is painful for business executives that need to find a job after that, it is more so for shareholders. What do you think that the shareholders of Kodak or Nokia thought of the leadership teams after their respective fiascos? That is s a lot of shareholder value being destroyed in a short period of time. When you see this November 2007 cover from Forbes, you realize that the executives were not the only ones wrong. Market commentators, analysts and journalists did not see the massive shifts in the market happening. The difference being that leadership teams have fiduciary duties. They are responsible for the ongoing success of the business. And are being paid quite a lot in consequence. Forbes journalists – or Fintech Review for that matter – can write whatever they think. Mostly.

Lack of vision is one step away from that. It is more to do with not seeing where the industry is headed, but there is still time to act. It is reversible. Many old companies have had a rough patch at some point and came back stronger. Apple for example. You are just a bit too focused on your problems at hand, putting off fires, and you do not project yourself enough into the future. It can happen in times of crisis like right now. There is the temptation to focus on pressing matters because they appear more important. But whilst you do that, there might be a tectonic shift in the market you barely feel…

Are banks having their Kodak moment then?

The thing is, banks have had a lot of time to see the fintech startups emerge. Startup is clearly not the right word when Stripe is valued at $95 billion. Probably not decades. Fintech is older than the financial crisis of 2008, however the golden era has definitely been since then. Besides PayPal obviously, the reigning champion has been around since the late 90s. Still, over 10 years to see startups emerge, become absolutely huge and do nothing or very little about it.

With time, it becomes a collective lack of leadership, as in you literally fail to lead your company appropriately. In other industries, like software and technology, incumbents are much better at that game. They simply buy everything that might threaten them. Either integrate or kill it. For instance Facebook buying Instagram and WhatsApp. Banks could have done that a bit, most probably killing it given their track record. And that has always been the response: we have enough capital to buy them if we want. At some point you financially cannot any more. Because the fintech company is too expensive for banks, which is the case for most of them now. Or said company believes it is better off charting its own course. Like Starling Bank.

At what point will shareholders believe that they have not invested in the right companies? Well, one might argue that it is already reflecting in banks’ valuations…

How do you fix that?

There are many ways to do that. For instance, there is the good old SWOT: Strengths, Weaknesses, Opportunities, Threats. It might be very academic, but it is always useful from time to time to reassess the threats to your business. The thing is, when you do that exercise, it is easy to dismiss threats. To look down on startups and think that you will not be displaced. Because you have an established customer base and business model. But it is a lack of skill not to take the time to understand what they are doing. In an intellectual laziness kind of way. Like Barnes & Nobles looked at Amazon in the late 90s. They failed to see the massive changes that were happening in their own market and adjacent industries. And looked at it through their lenses “they cannot be profitable, there are not enough books to sell“.

That was indeed the right preliminary assumption. The error was to conclude that they would go bust. Instead of putting yourself in Jeff Bezos’ shoes and think that they might sell other things on this weird website called Amazon to justify the cost base.

Assessing an early-stage fintech startup like a 150-year-old bank is as bizarre. Revenue is low. Profit non-existent. The path to profitability is really unclear. Lack of experience in credit and managing risks. Without seeing that said startup is acquiring customers at double the rate that you do. Sometimes ten times faster than a traditional financial institution. Oh, actually you are even losing customers. And the cost of customer acquisition is a fraction. And the ongoing cost profile is much leaner and flexible. So on and so forth.

And the thing is, buying them, if you even can, is not a silver bullet.

Is it a big deal?

Of course, many of these fintech businesses do not have viable business models. They focus on growth at all costs so long as venture capital money is flowing. And investors are pouring cash unabatedly. That is very fair and one might argue that there are bubbles in some fintech segments. Fintech as a whole is not a bubble.

You also cannot monitor and look at them all. The problem is rather to discard all the emerging threats on the same basis. Because that could have been true 5 or 8 years ago. But not now. Which means that bank leaders have been wrong, and they might continue to be until it is too late. So, lack of vision or lack of leadership?

Everything is securities fraud as the excellent Bloomberg columnist Matt Levine would say. At some point, your professional mistakes are just too big to swallow for investors. It becomes a breach of your fiduciary duties. You are not taking care of the company. Could we have securities fraud in the case of banks? Leadership teams sued by investors for their lack of vision and or leadership? That does not sound too farfetched…