"Back to basics" is a phrase that seems to be coming up in banking quite a bit. It refers to the strategy of eliminating activity that isn’t "core", of concentrating investments on those customer segments which are most profitable, and looking to grow the business organically.
I’m always so surprised at the reliance people place on "back to basics" whenever the going gets a bit difficult. They do so based on the inherently flawed assumption that what worked in the past will continue to work in the future. The historical time scales of banks – decades with only gradual changes – make it seem as if this a workable strategy. When turn your head backwards and see the same thing as when you look forward, it is easy to imagine that nothing is very different.
The basis of competition is changing, though.
When you ask bank vendors – whom are interesting as barometers of what is actually happening, because they only pick up the most coarse-grained signals about what is really going on - what they believe our top challenges are, they invariably answer with at least the following:
Look at all three. The first and second are signs that customers are less willing to pay for the capabilities we are giving them since what they have is good enough. And as we give them more capabilities in an attempt to increase margins, they are fleeing instead from the higher price.
The third – cost reduction – is a reaction to the other two. Failing to get the rewards from developing new things, there is little to do but get rid of as much cost as possible. Reducing costs equals, essentially, "back to basics". Reducing costs is an acceptance that what you are doing has become a commodity and the basis of competition is price.
The emergence of "back to basics" is a sign that an institution has conceded (even if it doesn’t realise it) its core businesses to emergent competitors who will likely have superior cost advantages. These are competitors who do good enough excellently.
What is needed is the ability for an institution to do something pretty rare: take on good enough with good enough of its own, and to do so on a level cost-based playing field.
Back to basics, if you want to execute it right, means starting again. It implies investing in something that exists outside the value and cost systems of the parent institution and letting it get on with dealing with the highly optimised good enough competitor.
Now here’s the rub. How many executives do you know that would choose to invest in a business over which they will have limited direct control and which will – eventually – be going after their most important customers?
I know of practically none. Executives are not in the business of getting rid of their jobs.
That’s why, in my view at least, back to basics (when run by the main business) is a bankrupt strategy, doomed over the long term to reducing value rather than creating it.
But don’t just believe me. Look at the many examples across the industry: back to basics in online payments, because no one has come up with a compelling way to go after the customers using PayPal. Back to basics on savings accounts because "good enough" worked excellently for ING Direct. Back to basics on mobile banking because, actually, most people are very happy with their call centre.
So instead of Back to basics, I’d be trying back to the beginning and a bit of patience instead. Though I accept, of course, that for some institutions there may not be sufficient runway left in the main businesses to allow much of the latter.