Bill Parsons Mar 11, 2014

Lessons from Borders, Blockbuster and Blackberry

Nobody believed David would beat Goliath until he did. Today, with an innovative strategy, the right timing and strong execution, nearly any upstart company has the potential to be David and de-throne the giant in their market. For banks, the long-standing Goliaths of the financial world, responding to small, scrappy startups and to the needs of an increasingly tech-savvy customer base is paramount to their continued success.

The stories of famously out-innovated companies like Borders, Blockbuster and Blackberry provide insightful parallels to the banking landscape today. I believe there are four key lessons banks can learn from these comparisons if they want to win out against the same type of technological innovation that brought those three companies to their knees:

Stay On Your Toes, Or Get Knocked Out. If you are not forward-thinking about what your industry can provide for customers, someone else will be. In the mid 2000’s, Blackberry dominated the smartphone market with its efficient business-oriented phones. Apple’s app store changed the conversation, making it easy and fun for consumers to manage their entire lives from their smartphones instead of just email. All of a sudden, Blackberry’s perfectly functional smartphones were obsolete.

Mobile banking, which continues to see widespread consumer adoption and is replacing online platforms and even branches for many bank customers, could constitute a similar watershed moment for banks. Most mobile banking platforms offer adequate service: check deposits, account balances and bill payments. But third-party companies like Venmo and Simple are the truly innovative players in the mobile money management space, making comprehensive management simpler, and giving users easy-to-use, personalized, engaging service from anywhere, on any device.

Banks still have the advantage of being the place where the vast majority of Americans store money. But as the ability to manage one’s entire financial life from a mobile device quickly becomes an industry standard, banks need to embrace platforms that enable faster (safe) innovation, from both inside and outside the bank, in order to respond more quickly to rapidly changing technological advancements and consumer demands.

Keep Your Friends Close, And Your Competitors Closer. How, then, to go about this innovation? The next lesson lies in Blockbuster’s failure to execute on one possibility – buying aggressive competitors while they are still small. The video rental service had several opportunities to buy Netflix for $50 million in the early 2000s. Imagine how Blockbuster would look now if it had captured the expertise that keeps Netflix’s valuation at over $350 per share.

Paypal’s purchase of Braintree, owner of Venmo, could go down as a missed opportunity of similarly large proportions for banks. Braintree would have given banks something they have yet to develop – a convenient, popular, enjoyable peer-to-peer mobile payments service. Instead, Paypal got that experience and knowledge.

The lesson? Not everyone launching cool apps and services that attract your customers is the enemy. But don’t ignore them either! There are huge opportunities for banks to embrace third-party innovations to build more engaging and dynamic customer experiences that people love.

Invest Early in the Infrastructure for Innovation, Not Just New Services. Not all promising competitors will be open to acquisition so banks must prepare to deploy new tools on their own. But they need the proper focus and resources, something the bookseller Borders never achieved. Instead of focusing early on an online sales platform, Borders outsourced this task to Amazon and ran a huge brick-and-mortar expansion, ballooning to over 1,300 stores by 2005. By 2008, when it finally launched its own online store, its fate was already sealed.

Banks’ historically branch-focused business models make a Borders comparison particularly apt. Due to the rise of mobile banking, banks are now recognizing the importance of omnichannel solutions, which offer customers versatility and consistency across all banking platforms. But does this shift come too late? Developing engaging tools takes time, and Paypal has a ten-year head start on its digital payments platform, which is now virtually ubiquitous. That ubiquity has even helped it shift into a traditionally bank-dominated industry: small-business loans. Working Capital, PayPal’s Small and Medium Enterprises (SME) loan platform, claims to offer low interest rates and convenient, flexible repayment schedules by integrating borrowers’ existing PayPal accounts.

Wholeheartedly embracing an omnichannel strategy is one way for banks to stem additional outside encroachment. Future customers will engage with banks exclusively through mobile channels, so banks that embrace digital platforms that are engaging and powerful at all customer touchpoints will win the hearts and minds of future customers.

Your Great Strength: Know Your Weaknesses. Banks today have more diverse skillsets than Blockbuster, Borders and Blackberry did in their prime. Unfortunately, this isn’t always an advantage. Each of those doomed companies had only one or two major competitors, and each one’s inflexibility still led it from dominance to failure in less than six years.

Partnering with expert third-party companies is one way around this problem. These experts can help banks focus on the consumer experience within specific digital channels and create agile platforms that enable quick changes within the confines of regulation and compliance. Still, today’s banks often take months or years to close partnership deals and fully integrate new tools into their existing platforms. These timelines are no longer acceptable.

It might seem like an impossible task for banks to match the high user experience standards set by third-party companies given the regulatory burdens and constraints. But, there’s hope. Banks don’t have to throw out their entire infrastructure to embrace change. They can start small, focusing first on specific customer segments such as millennials, small business owners or high-net-worth individuals. They can take advantage of new, open technology platforms that enable faster innovation and access to third-party solutions in a compliant environment. These new platforms also embrace omnichannel experiences for the increasingly complicated array of digital devices that make up the total experience.

The opportunity is here. The key is to start innovating now – or risk being caught unprepared like Blackberry, Borders and Blockbuster.

Mr. Parsons is chief customer officer of Redwood City, Calif.-based Yodlee. He can be reached at bparsons@yodlee.com.

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