Companies are urged to innovate or die, to be agile and exploratory… and at the same time to deliver consistent cash flow. Managing this dialectic is tricky to say the least.
Contrary to many Anglo-Saxon myths, it was the Portuguese who “discovered” most of the world. There is evidence the Portuguese may have sailed the Pacific coast of South America well before Columbus’ crossing in 1492. It also seems likely that the Portuguese sailed to Australia more than two centuries before James Cook.
Portuguese maritime innovation and exploration may have been enough to assure their independence in the face of much larger and aggressive neighbours like Spain and France. Eventually, however, they somehow lost the first mover advantage over the centuries.
Portugal epitomises the need to explore and some of the risks thereof.
Companies trying to innovate face many challenges. One problem is that shareholders value stability. But innovation and exploration are inherently destabilising, and since businesses have a duty to shareholders, this may slow them down. On the other hand, if businesses do not innovate, they risk getting left behind by others who are bolder.
Ferdinand Magellan made it round the world but countless, nameless sailors died at sea beforehand. Similarly, we tend to have a success bias when looking at innovation because we only hear about the successes. We don’t consider the huge numbers of innovations that fail to take hold in the marketplace.
From incumbents’ position, this is exacerbated in current market conditions by cheap funding and low yield expectations afforded by investors to start-ups that are perceived to be innovative.
From the perspective of an established bank, innovative new virtual banks are frightening less because of their agility than for their ability to attract new funding without making any profits.
Incumbents are not given this licence to innovate by investors – they are expected to maintain profit growth.
On the other hand, if you are not advancing you are falling behind. Kodak famously developed digital cameras well ahead of the market but did not know what to do with the technology; others tried stuff out, and by the time digital cameras were established, it was too late for Kodak to enter the market that wiped them out.
Execution also plays a role. Xerox PARC developed much of the basis of modern computing then let others profit from the new concepts. Commercial history is littered with innovators who were out-competed by copy cats.
Benefits of heft
A key aspect of innovation is having the resources to fail until you succeed. Start-ups get this from their patient investors. Others can get it from their own cash flow. Google for example seems to spend large amounts of money on big innovation and they can afford failures.
A current and topical case for treasurers is Facebook’s Libra. After initial excitement about the world changing implications of bitcoin, people realised that even if the blockchain is secure, its periphery may not be – guzzling more electricity than Ireland for anonymous payments is hardly very green; and ten minutes per transfer is not fast.
Plenty of start-ups with more or less funding have tried to come up with better versions, while scamsters flooded the world with initial coin offerings and other innovative ways to fleece people.
In the calm following the storm, large banks have started to get interested on their own terms. J.P. Morgan, for instance, will launch a stable coin called JPM Coin which they call “a digital coin representing a fiat currency”.
Facebook launched Libra as a blockchain-based stable coin underpinned by fiat reserves, proclaiming its mission “is to enable a simple global currency and financial infrastructure that empowers billions of people”.
Facebook, which like J.P. Morgan also has plenty of cash to innovate with, is bringing a different kind of heft to this space. Three billion users dwarf any bank’s access. This brings a degree of plausibility to Libra – merchants and service providers are much more likely to accept a stable coin with an accessible market of three billion people.
JPM Coin is targeted at corporate payments with goals like making payment netting unnecessary. Facebook Libra targets the global financial ecosystem and wants to bring in the 1.7 billion unbanked along the way. The increment in Libra is its ambition level.
I recently heard a fintech claim that “payments is a problem rooted in code”. Presumably Facebook has the coding nous to make Libra work. But I think payments is a problem rooted in trust, and trust engenders regulation. Assuming the technology works and the ecosystem is effective, Facebook still has to win regulatory approval and popular trust.
Unlike market innovations like securitisation and high frequency trading which benefit only the financial markets themselves, innovations in the payment space like Libra, may be beneficial for society and for the real economy. Libra (or something like it) could be as real an innovation as the ATM.
Some banks and some software providers seem to be working towards this kind of innovation in aid of the real economy. DBS in Singapore thankfully changed its motto from “making banking joyful” to the much more useful “making banking invisible”. Banks and ERPs are increasingly working together to make payments and collections – and eventually invoicing and reconciliation – invisible to the business. Call it “finance as a service”.
To achieve finance as a service will require heft and also a different mindset. Peter Drucker emphasised the distinction between efficiency and effectiveness: “Efficiency is doing things right; effectiveness is doing the right things.” Maybe incumbent banks are too focused on efficiency (“joyful”) and not enough on effectiveness (“invisible”).
New players without attachment to current banking practices can take a more holistic view of commerce and look at making finance invisible – ie everything after purchase order and acceptance of delivery is invisible. This kind of STP for commerce can be achieved for example with smart contracts.
Management consultants are having a field day promoting agile as their new mantra. I am a huge fan of agile, and it is certainly a much more fun way to work. But incumbents struggle with its apparent unpredictability.
Delivery risk management is traditionally based on having clarity about the destination, and a detailed map of how to get there. The Portuguese knew the overland route to Asia – it was long and expensive, and full of unpredictable “taxes” along the way. Sounds like 20th century payments!
The exploratory mindset requires a different kind of risk management – less long-range planning and more quick responses to short-term threats. It is also a mindset that accepts losses.
Doing agile right requires an exploratory mindset – both in the sense of wondering what might be out there and in the sense of managing risks in the face of uncertainty. The sense of wonder and curiosity is hard to nurture when you have hundreds of years of experience that reinforce the status quo.
Treasurers are generally risk averse and change resistant, and for good reason. A treasurer’s mandate is normally to minimise financial risk so that maximum capital can be allocated to the core business. The world is changing, and treasurers who still do things on paper risk being catastrophically ineffective, not to mention inefficient, within a decade.
Adopting an exploratory mindset feels almost counter cultural to the profession’s risk aversion. Even after overcoming built in conservatism, exploration carries real risks. These risks have to be owned and accepted by and for the company as a whole.
Competition will likely force incumbents to become more efficient, but new entrants will be looking for effectiveness and potentially changing the ground rules. Treasurers may have to look outside their well-established bank relationships for their future path.
Exploration is no guarantee of success. But stagnation does guarantee irrelevance.