bank and credit union innovation

Can Banks and Credit Unions Become Tech Companies?

I’ve thought more and more about this question in the past few months: can traditional financial institutions (retail banks and credit unions, specifically) become (or, at minimum, act like) technology companies?

Critique to this article might very well be, “who cares whether traditional FIs can be classified as technology companies.” Admittedly, the debate is predicated on an entirely semantic argument, but the question goes much deeper than a superficial definition. Regardless, I’m going to give it a shot.

We first have to come up with a definition of a technology company – no small feat – and determine whether or not banks and credit unions could ever fulfill that definition. Once you’ve finished reading my take on this question, comment and let us know where you stand.

The Definition of a Technology Company

Unsurprisingly, the definition of a technology company is a bit of an enigma. In a recent Inc.com article, four respected technology executives, analysts, and venture capitalists gave their takes:

“You are a technology company if you are in the business of selling technology–if you make money by selling applied scientific knowledge that solves a concrete problem.”

Alex Payne, Co-Founder, Simple

“It’s generally a company whose primary business is selling tech or tech services. A more nuanced definition is a company with tech or tech services as a key part of its business. It’s a hard question.”

Todd Berkowitz, VP of Research, Gartner

“A tech company uses technology to create an unfair advantage in terms of product uniqueness or scale or improved margins. Ask the question: Could this company exist without technology? If the answer is no, it has to be a tech company.”

Greg Bettinelli, Partner, Upfront Ventures

“I think there’s a false dichotomy in the idea that a company either is or is not a tech company. I think it’s possible for a company to be a hybrid if tech is giving it an edge over incumbents.”

Hayley Barna, Venture Partner, First Round Capital

Each response to the question of what defines a technology company never fully answers the question. Payne’s response aligns more with a way of approaching problems using a scientific approach – a common theme amongst companies who proclaim they are technology companies. Berkowitz’ more nuanced definition is an interesting thought but is difficult to rationalize if “technology” is not equated to “software” in the context of his definition.

The point is that nearly every definition of a “technology company” is deficient in some way.

Let’s try a different approach where we dig deeper into leading technology companies instead of superficially trying to define them. I’d equate this approach to answering the question of “Who is John Smith” not by superficially replying “he is a 5’11” male who works at ABC corp…” but rather by saying “John Smith is a father of two who enjoys spending time with his family while balancing work and life without sacrificing what is most important to him”. It’s a very different way of approaching the same problem, whereby the essence of John Smith is more descriptive than how he appears.

Instead of trying to apply a simple definition to a clearly more complicated classification, let’s look at the common characteristics of companies we tend to mostly agree are “technology companies”. Perhaps we can create a definition driven around the essence of what makes a technology company successful.

Apple

Apple is one of the most likely candidates for the company that is front-of-mind when you hear “technology company”. What defines Apple is their ability to innovate and challenge the status quo. This innovation is their competitive advantage. Whether they are designing the iPhone or challenging the music industry with iTunes, Apple has shown time and time again that they can effectively change the course of industries.

Creating a bigger iPhone is not innovation – innovation is taking phone, email, messaging, calculators, alarm clocks and dozens of other applications and technologies and putting it in the palm of your hand with a “smart” phone. Whether it be the personal computer, smart phone, wearables or a variety of other ventures Apple invests in, their innovation – not their products – is what makes them so successful.

Alphabet (Google)

Google has become a generic trademark for search engines. How often do you say “I’m going to search for something online using a search engine?” Never. You say “I’ll Google it”.

It’s no secret that Google is much more than just a search engine. Back in October of 2015, Larry Page and Sergey Brin reorganized Google into Alphabet. This holding company structure better enables each business line to grow independently. From the “traditional” Google products and services to YouTube to Google X, Nest, and the other subsidiaries of Alphabet, the freedom to grow and innovate each business line independently is critical to Alphabet’s master plan.

At the heart of all each product and service is innovation. Susan Wjocicki, current CEO of YouTube and 16th Google employee, penned a great article several years back (pre-Alphabet) titled ”The Eight Pillars of Innovation”. She discusses the various ways Google (now Alphabet) continues to be an innovative company despite its sprawling operations that span tens of thousands of employees, multiple continents, and an ever increasing number of products and services. In hindsight, Susan’s article could certainly have foreshadowed the impending reorganization.

Microsoft

Bill Gates is arguably one of the top business people of the 20th century. It takes quite a leader to put “a computer on every desk and in every home. He has certainly contributed to making that goal a reality when he first started Microsoft back in April of 1975.

Considering that the large “computers” of 1975 were primarily used by larger companies, the thought that he could put one on a desk in every home is arguably crazy. It takes an innovative genius to be able to drive a vision that could have been considered science fiction at the time. While the mid-2000s might have taken away some of Microsoft’s “innovation points”, the rise of Satya Nadella to the CEO position after Balmer’s departure is bringing innovation back to the forefront of Microsoft’s business model. Azure, HoloLens, opening up Microsoft’s development tools, and a variety of other new products, services, and ventures has placed Microsoft back into the conversation of leading innovative companies.

Innovation is what got them to where they were; Nadella is betting on it to bring them back to the top of the technology world.

What Does This Have to Do with Financial Institutions?

Are you noticing the not-so-subtle theme? Every leading technology company is defined not by their software but by their innovation. We can’t deny that these original technology companies didn’t develop great software and technology, but the innovation that drove the technology is what defined them. It’s no surprise that Walter Isaacson fantastic book, “The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution” emphasizes the roles of Steve Jobs, Larry Page, and Bill Gates (Apple, Google (Alphabet), and Microsoft) in making the modern, digital world.

Let’s establish the unstated though, hopefully, obvious point I am trying to make: a “technology company” is defined through its innovation and not by its products and services. The products and services (read technology) are there to simply support their innovative endeavors.

So how does this apply to banks and credit unions?

The most innovative advances in banking and finance are being developed by companies that are not traditional financial institutions. Companies like Square, Sofi, LendingClub, and Stripe are challenging services that have traditionally been provided by banks and credit unions.

Why are they successful? Because they are challenging the way that things have always been done. In my work helping financial institutions design and implement data strategies, I get to interview dozens of staff from the CEO to the customer and member-facing staff. I cringe when I ask why a current tool is used or process still exists and the response I get is “because we’ve always done it this way”.

The intersection of business and technology has blurred the line of the archaic definition of a technology company. To answer the question asked in the first paragraph, “can banks and credit unions become technology companies?” My answer is a resounding yes.

The answer is yes but not by the definition of what investors will use to classify tech companies on the stock market. I answer yes based on the definition that leading technology companies are as successful as they are because of their innovation and not their technology. By my definition, companies like Tesla, Bayer, and Marriott are also technology companies (see this list here for others that would certainly satisfy this definition).

Be Steve Jobs and challenge the status quo. Be Bill Gates and realize a vision so grand that people think you are crazy. Be Sergey Brin and Larry Page and revolutionize the world.

Traditional financial institutions can compete with financial technology startups by being as innovative as they are. The software and technology is but a byproduct of their innovation; embrace an innovative culture within your bank or credit union and you too can change the industry.


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Posted in Banks, Credit Unions, Leadership.

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