The Burning Platform Memo - A PM's Guide To Enabling Digital Drivers In Banking
Stephen Elop | Platform Economies | What's the BM? | Product Re-bundling | Digital Banking or Fintech? | A Winning Framework
Product managers rely on cross-departmental efforts to get their job done, they exercise intrapreneurial skills to deliver products by managing different stakeholders and projects with limited resources.
Cross-departmental work means differing opinions on what products should look like, how they should be prioritized and what resources should be deployed to manage their life cycles.
This essay describes how product managers should take a comprehensive view when thinking about enabling digital drivers in banking.
Firstly, It shows how banks have been forced to introduce digital drivers by using Stephen Elop’s (former Nokia CEO) burning platform memo to frame what Moazed and Johnson call “Modern monopolies”. This lays a foundation for ideas on how platform economies have influenced customer expectations that have in-turn changed how companies do business.
Secondly, showing limitations and how little has changed over the years; it defines the banking business model through a historical account and broadens the readers view by discussing the regulatory landscape surrounding the banking industry.
Thirdly, it discusses a banking project managers dilemma and introduces a winning framework on how to better navigate and understand the role.
There’s a famous memo by Stephen Elop, former CEO of Nokia that was leaked to the media after it was issued to his staff on February 4th 2011.
What came to be known as the burning platform memo compared the task Nokia faced to the story of an oilman standing on a burning oil platform.
One article by the guardian covered the story and summarized key internal problems Elop pointed to:
The "battle of devices has become a war of ecosystems" (such as Apple's App Store and Google's Marketplace) and "ur competitors aren't taking our market share with devices; they are taking our market share with an entire ecosystem. This means we're going to have to decide how we either build, catalyse or join an ecosystem"
"we have multiple points of scorching heat that are fueling a blazing fire around us" - from Apple, Android, and from Chinese competitors that can produce a device "much faster than, as one Nokia employee said only partially in jest, 'the time that it takes us to polish a PowerPoint presentation.' They are fast, they are cheap, and they are challenging us."
"we're not fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis."
The release of the memo was the end of symbian. With no other products lined up investors quickly pulled the plug on Nokia as the company stock sank.
Stephen was taken to task by his board later that year sighting his actions to be against his fiduciary obligations.
It’s interesting that his bio on Wikipedia reads:
“He is best known for his ill-fated tenure as Nokia CEO from 2010 to 2014, which included controversies such as the "burning platform" memo and the company's partnership with Microsoft, resulting in the move to Windows Phone software exclusivity. He was criticised for some of his decisions, which resulted in the company suffering massive losses both financially and in market share. As then head of the Microsoft Devices Group, Elop was in charge of Microsoft's varied product offerings including Lumia phones, Surface Pro 3, and Xbox One.”
Stephen has reached some of the greatest career peeks that only some would dream of. Seeing guys like him make the mistakes they’ve made makes him more, human.
Platform Economies
Dismissing Nokia’s downfall as acts of bad business management is missing the point. The technology industry is notorious for rapid change introductions which reverberate across domains, expanding frontiers of what was thought possible.
There have been radical transformations in the way companies offer products over the years. A growing trend that has changed the way people interact with them and their products, creating expectations even for legacy industries such as financial services.
The "battle of devices has become a war of ecosystems" (such as Apple's App Store and Google's Marketplace) and "ur competitors aren't taking our market share with devices; they are taking our market share with an entire ecosystem. This means we're going to have to decide how we either build, catalyse or join an ecosystem" - Setephen Elop
This growing trend, a tide raising all boats, is a kind of business model where companies switch from product to software led businesses, connecting mutually dependent groups in a way that benefits all sides.
These ecosystems lock in their customers with interconnected products, creating high differentiation and high switching costs. A radical departure from traditional business operations.
Business Of Banking - A Historical Evolution
When thinking business tradition, nothing has remained as traditional as banking. Modern day banking started to develop in the 15th and 16th century in Europe. This saw banks expanding offerings such as discounted debt and promissory notes which are used extensively in business transactions in numerous countries.
The importance of banks and reliable payment infrastructure quickly became apparent during the industrial revolution. As a matter of geopolitical importance, funding was needed to expand businesses, sustain wars and governments.
By the 20th century, piggy backing of advancements in telecommunications and computing, digital payment systems would enable global retail.
The fundamentals of banking have gone unchanged at the core of things, what banks are simply saying is, “give us your money, we’ll keep it safe for you, help you send it around the world, make it grow. When you need more, we’ll borrow it to you.”
My attempt at this may be overly simplified, here is a neater one:
“Finance is part of the information industry. If the right borrowers and investors could find each other easily enough, we would not need banks. Until this happens, we need banks to allocate investment and savings across time and space and to package savings and investments in a way that facilitates transactions. This is a critical function. Financial markets help economies to grow by mobilising savings so that consumption can be higher in the future as a result of investments made today.”
Business Models
There are three common business models used by banks, these may differ depending on how each bank seeks to differentiate themselves, the market they serve and competitive advantages they seek.
Commercial “retail-funded”
Commercial “wholesale-funded”
The difference being the funding mix. Wholesale-funded banks have a higher share of interbank liabilities (where one bank holds funds on behalf of another bank in an arrangement that requires both banks to hold a due to account for the other) and a higher share of wholesale debt, with the balance being a lower reliance on customer deposits.
Capital markets-oriented - Banks who hold half of their assets in the form of tradable securities and are predominately funded in wholesale markets.
Fin-tech Platforms: Product Re-bundling
"we're not fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis."
In the banking business, financial technology is a gateway. It is seen as a support function solving customer financial needs.
Software companies entering the financial technology space start out with focused and simple elements of banking. Banks do the opposite without suitable business models hoping to transform themselves by aggressively incorporating digital driver initiatives.
These new entrants succeed by offering better customer propositions to that of incumbents. They identify pockets of demand, unbundle legacy products, innovate and rebundle them with other industry partner offerings at a fraction of a cost.
These adaptive models are aimed at where banks are most exposed, leading to steady losses in banking and payment revenues.
Regulation: Slow down, Speedhumps Ahead!
Fin-tech teams afford to do this because of their digitally native DNA making for smaller teams, high scalability and flexible operations that are often not regulated.
Banks on the other can not afford this luxury. As payment systems they are crucial social infrastructure, meaning they take on a public nature needing for certain requirements to be met:
They should be managed efficiently by a sound business model.
Operators of a payments system should strictly manage risk in order to minimize effects when defaults happen.
Banks are sometimes managed by private companies and are known as private payment systems. Others are managed by central banks and are known as central bank payment systems.
In some countries, private and central bank payment systems share the same roles and co-exist. They in some cases cover more than one country and currency and can even be interlinked.
Because central banks look to help shape economic policy, enforce laws and keep consumers safe, this is why until the last few years, the industry has seen very little innovation.
One report reads:
“We regulate finance over and above the way we regulate other industries because finance exhibits market failures that can have devastating consequences”
Banks may find this frustrating but regulation may arguably be one of their strongest lines of defense againts new entrants. Fin-techs who eventually require banking features partner or eventually sell their businesses to banks to survive competition.
Digital Banking OR Fintech? A Product Managers Dilemma
There is a kind of identity crisis for a PM who seeks to enable digital drivers in banking. The reality is banks are not software native companies, neither do they enjoy the flexibility of fin-tech firms.
Is there really a difference between a product manager at a bank, a traditional software or fintech company?
In the traditional sense a product manager responsible for three metrics:
The business (Risk, Compliance, Legal, Credit Operations, Partnerships, Business and Financial Operations)
The Technology Stack – User experience and Project Management
The team.
The role becomes even more critical and gets stickier with each external service provider and stakeholder. A PM tries to encourage cross-departmental collaboration and steer all these conflicting parties in the right direction.
A Winning Framework For Product Managers
Banks who seek to implement digital drivers are at risk of unknowingly creating an internal identity crisis within their departments, especially for digital managers when there is a disconnect between the core business model and the product philosophy shared by the management team.
Management Structure & Product Philosophy
Product managers should be familiar with the product philosophy of the organization in order to determine the best direction for digital initiatives.
For example, a product pitch that lands on the COO’s table is more likely to be viewed from a sales lens. If it lands on the CFO’s office, it is likely to be weighed from a cost and revenue lens. A CTO is likely to be more technically focused, viewing products from an engineering and operational perspective.
Business Dynamics
A PM is not guaranteed success and support when developing and launching new digitally native products in an existing or new market.
Business fundamentals still kick in. PM’s need to appreciate the extent to which the core business model influences their success.
For example a bank operating under a Commercial “wholesale-funded” model whose PM is introducing “new” POS (point-of-sale) devices to a market, needs to bear in mind that the business model places a higher reliance on services to larger customers - corporate clients and mid-sized companies.
Disconnect
A Point of Sale device acts as a gateway, enabling merchants (who may be corporate clients and mid-sized companies) to route money to their business accounts.
Consumers on the other hand, who are customers to these corporate clients, may not care how a card transaction works at a POS device. What matters is how much they will be charged.
In a world where consumers are more cautious about their spending, transaction costs become of high importance. This then dictates innovations around turnaround times on card issuance, pricing, reversals and account creations - the whole customer experience!
The issuing bank, by demand is now required to adopt a hybrid model where emphasis is on a more Commercial “retail-funded” model that values volumes of consumer transactions that create value for merchants who then make business deposits that the business offers services to.
Anchor
What this means for PM’s is developing new products is not enough!
By understanding the hierarchical structure of the organization and the associated dynamics, product managers can create digital strategies that are in line with the overall goals and strategies of the organization.
PM’s need a comprehensive approach that renovates business models by influencing and aligning management teams around the long-term vision of their products.
Further reading:
Banking Hub - Defining the future of retail banking business models: On how the typical retail banking business model is under pressure to transform itself into a more specialized one.
Fintech News - A beginners guide to what makes a good product manager
Accenture - On the future of business banking and how to rethink business models
How internal politics affect product management. In International Conference on Information Systems.
Internal product management: How the management structure affects product strategy. In International Conference on Information Systems
Product philosophy for digital banking. In International Conference on Information Systems