Is Your Financial Institution Creating Rot?

In its pursuit of growth, is your financial institution creating value or product rot?

Photo by Joshua Hoehne on Unsplash

Ed Zitron published a piece a couple of years ago that I only recently came across. His analysis of big tech concludes that tech companies whose current sole focus is “growth” instead of other benchmarks for measuring whether a business is good or not (that is, delivering value to its customers and shareholders) are focused only on “more” rather than revenue, valuations, market share.

At the center of everything I’ve written for the last few months (if not the last few years), sits a cancerous problem with the fabric of how capital is deployed in modern business. Public and private investors, along with the markets themselves, have become entirely decoupled from the concept of what “good” business truly is, focusing on one metric — one truly noxious metric — over all else: growth.

“Growth” in this case is not necessarily about being “bigger” or “better,” it is simply “more.” It means that the company is generating more revenue, higher valuations, gaining more market share, and then finding more ways to generate these things.

His analysis is a good framework for FIs to evaluate whether they are creating product and services that drive only “growth.” As part of the process of determining whether an FI is creating real value for customers or products/services customers actually need, they must figure out if they are measuring the right benchmarks , benchmarks that are aligned to the FI’s mission and/or strategic goals. Or are “innovation” and product strategies following the “growth crowd?”

Using Zitron’s analysis, I focus here on 3 points for evaluating product rot in banking and payments:

1. Products Decoupled From Service Destroys Both

2. Is that Fintech Good for Your FI?

3. A Good FI Or Just A Big FI?

Products Decoupled From Service Destroys Both

Zitron points out that tech companies that are focused solely on “growth” end up tanking their key products to the point where they no longer work like they used to, as customers expect them to:

The net result is a product that completely sucks. “Googling” something is now an exercise in pain, regularly leading you to generic Search Engine Optimized content that doesn’t actually answer your question. Google’s push to hyper-optimization has also led it to serve results based on what it *thinks* people mean, rather than what they actually said. It’s frustrating, upsetting and annoying.

That’s because Google has, like every major tech company, focused entirely on what will make revenues increase, even if the cost of doing so is destroying its entire legacy.

One example in banking is the movement to remove friction from customer-facing processes. Many processes, especially account opening processes, in digital banking drag around vestiges of their past lives in branches on old green screen customer service applications. On smartphones and laptops, customers had to step through an application as tedious as it was when it was on paper. Abandonment rates for new account openings were, not surprisingly, high. Other industries have made their processes so much faster, so, smartly, many FIs have attacked that friction and removed it from digital banking processes.

But in their zeal, FIs have also removed existing points of customer help or support, failed to digitize them or add in new points of help that customers would need in a digital process. In many cases, the customer is on his own to figure out how to proceed or try to explain the situation to a chatbot that cannot understand much less solve his problem. Or the customer has to call a contact center and run through the system in the hopes of eventually reaching a human who will require a complete explanation of the problem and verification of the customer’s identity and account.

In the pursuit of “digital banking,” FIs decouple the customer and the product from service. The critical paths to success are the number of account openings and customer service requests closed without human intervention. Sure, many FIs have achieved “growth” but what about other benchmarks of success? Like whether or not direct deposits are linked to those new accounts, use of a debit card associated with that account? Or whether a customer opens another account, say a car loan? Does a new customer start using payments offered through your FI? Or is your FI just another black box holding money until the customer decides what to do with it? Has your FI increased market share or only market churn?

The result of this decoupling is that bank and payment products and services offered by any financial institution tend to resemble each other - in their inability to support ordinary customers and small businesses.

Is that Fintech Good for Your FI?

From simple savings-related capabilities to new cores, fintech startups have revitalized financial services in the last 15 years. But as financial institutions continue to evaluate fintechs to integrate or partner with, their due diligence must include understanding a fintech’s true benchmark for success. Fintechs like other startups are often funded by a variety of invests including venture capital funds. Zitron discusses the underlying incentives for venture capital investment in startups:

Venture capitalists are regularly incentivized to create businesses that look valuable but aren’t necessarily of value. When I wrote about the Liches of Silicon Valley last year, I remarked upon how many valley companies experience volatile, erosive cycles of growth with the goal of being acquired or going public, burning as much venture capital as it takes to find an outcome

Venture pumps millions or billions of dollars into ideas that might sell a product or a service, but ultimately resemble things that can be sold to other companies or put on the public market for a profit higher than what was paid on a per-share basis.

Of course, FIs have long been concerned about the viability of fintechs. Bank procurement teams were and are reluctant to deal with fintechs that don’t have standard operating procedures for implementation, invoicing and payments – all the aspects of acquiring software or a service that established companies have in place. Business teams want to identify the business value a fintech will serve. IT teams will want to ensure the fintech can be securely and successfully integrated into the FI’s existing security and solution architectures and to quantify the levels of efforts to accomplish these integrations.

In addition to these concerns, senior technology and business leaders must also dig into a fintech’s business model. If VC invest in and push fintechs that “that might sell a product or a service, but ultimately resemble things that can be sold to other companies or put on the public market for a profit higher than what was paid on a per-share basis”– how does their business model align with your business model?

There are 2 aspects to this question.

1. The fintech’s own business model(s): How does it plan to generate revenue? I am reminded of the regulatory & financial problems that BaaS business models in the US have caused both US institutions and customers. See Jason Mikula’s book Banking as a Service for good description and analysis of these problems resulting from BaaS business models.

2. The fintech’s investors. Does the FI evaluate the VC’s who have invested in the fintech to determine how their investment model align with the needs of the FI, the FI’s customers? Does the VC’s business model point the fintech in a direction that will solve your customers’ problems? That will generate more revenue for your FI? Or does the VC push its fintechs and other startups primarily towards “growth” for IPO or acquisition? What is the VC’s track record?

Finally, does a fintech partnership support or create products and services that generate a profit? How will you know if they are profitable? More importantly, does this partnership help your FI create new revenue streams or is it a new “twist” on an existing product? Zitron noted that not all tech companies are inn

That’s because the markets do not prioritize innovation, or sustainable growth, or stable, profitable enterprises. As a result, companies regularly do not function with the intent of making “good” businesses - they want businesses that semiotically align with what investors - private and public - believe to be “good.”

A Good FI Or Just A Big FI?

And we, societally, have turned our markets and businesses - private and public - over to arsonists. We have created conditions where we celebrate people for making “big” companies but not “good” companies.

Financial institutions are, of course, the epitome of capitalism. The point of any FI is to make money – for their shareholders and/or for their members. And, they do create value; FI products and services are essential to economic growth. Innovation and scale are essential to FIs being able to supply the products and services that power that growth. An FI that isn’t profitable isn’t viable. If an FI isn’t viable, it goes out of business. How is that good for the neighborhood? (Answer: not good at all)

Here “good” does not mean small or unprofitable. A good FI is one that does not support product rot, that does not prize “growth” over any other measurement.

Is a big, profitable FI by definition not a “good FI”? Is being a “good FI” and profitability really at odds? Does being a “good FI” contradict an FI’s goal and need to be aggressive about increasing profits?

No. An FI that has a clear sense of its mission, its self as a company will not be at odds with profitability. The FIs that struggle are those that are chasing “growth” at all costs, pursuing hype of the moment and leaving their strategic differentiation in the corner. Growth that does not lead to more market share, innovation or better services. It leads to product rot.

The question is, has your FI lost sight of that goal of being a “good FI”? While it might be printed in your annual reports, how well does that goal permeate your FI? Your organizational culture?

For example, banks have invested in BNPL to give consumers more payment choices. This increases their credit card use which is also good for the bank. But has your FI also created tools for customers who want to avoid or reduce this kind of unsecured debt? This very job - reducing debt - does not promote traditional banking profitability. And, as a long time analyst of the PFM space, I know that getting customers to use these kinds of tools in the past has been problematic to say the least.

At the same time, your FI has probably invested in generative and agentic AI tools. How are you using those tools to help customers who want to do this debt reduction job? If you are using AI technologies just to reduce headcount and not also to drive innovation, then traditional profitability is the only thing your FI is measuring. You’re not realizing value from that technology to create new services that service your customers. Pushing the BNPL capabilities further, does your FI offer capabilities that enable customers to manage all of their BNPL accounts in one place and repayments in the context of their personal financial situations?

Of course, there are FIs whose strategy is to become the biggest. That’s fine. That can be good too. Those FIs, too, should evaluate their partnerships and products to avoid rot and strategic drift..

Generating more new account openings or rolling out more “new features” or launching more fintech partnerships doesn’t necessarily translate into more market share or better innovation than your competitors – or at all. Carefully evaluating your products for rot is the only to ensure your FI is on track to be a good FI.

Takeaways

• What does growth mean to your FIs CEO, your senior executives? How is “growth” defined in your mission statement and strategic plan? Or is it undefined?

  • Does your understanding of growth align with your FI’s definition of growth?

  • Do LOB strategies and initiatives align with your FI’s definition of growth? How far apart are they?

• Update your due diligence process to include understand the business models of the fintechs you partner with and the business models of the VC that invest in those fintechs. Doing so will help you better understand your FI’s alignment or misalignment with a fintech.

• Evaluate your products and services for rot. Which products/services are broken? Which fail to provide real, measurable value for customers?

• Identify small innovations that leverage new technologies your FI has already invested in to infuse existing products and services with real value for your customers.

Who writes PivotAssets?

I’m an independent analyst, strategic advisor & consultant (& a former Gartner analyst). I’ve worked in and covered the banking industry for over 2 decades.

This newsletter is designed to challenge you & to give you a fresh perspective & analysis on the transformation that is —and isn’t happening - in the industry.

How can I help you?

Want to discuss product rot, small innovations, ghosting customers, hidden tribes and leveraging your bank’s legacy? Need help positioning your digital banking solution or fintech to meet the demands of today’s banking environment? I have my own firm PivotAssets.

I can analyze your GTM strategy or sales or VC presentation, help you prepare for your first vendor briefing or your first funding pitch meeting. I also write piece of thought leadership relevant to your business, solutions or technology. I also organize and moderate webinars series, podcast or panel.

Contact me at stessa@pivotassets.co or via LinkedIn.

I’m also available for inquiry and strategy sessions via Third Eye Advisory.

Me, Elsewhere

• Did you miss the last Fintech Book Club? Follow our LinkedIn page to make sure you’re part of the club on 11 April.

• I’m an expert advisor at Third Eye Advisory. Ready to help your company or financial institution:

  • Lead with problem solving

  • Develop Value-Driven Customer Experiences

  • Build Product Innovation & Differentiation

  • Create Strategic Intelligence for Investors.

• I spoke with Theodora Lau and Barb Maclean on their podcast One Vision about smart banking & hidden tribes.