Banks under e-pressure

November 21st, 2014, by

Back in the early 1980s we witnessed the launch of the first e-payments systems by French banks in Biarritz. A similar project was launched in Japan and a year or so later Berlin also launched their pilot service. In Biarritz the whole town received smartcards and all the shops were given devices to handle e-cash. Over the next 30 years very little happened – nowhere did banks build on this initiative to take a leadership role in e-payments.

In 2007 the good old smartcard became a smartphone, but even then the banks didn’t react. Others, however, saw the opportunity and very rapidly e-payment started to become a big business. However this time the payments were controlled through apps offered by online providers and digital merchants. The banks sprang belatedly into action and over the last two years most now have e-payment systems in place.

As mentioned, the smartcard became the smartphone, and obviously the underlying infrastructure can now handle the processing of these transactions much better. But it is interesting to note that, otherwise, although they were on the old analogue infrastructure, the services launched in the early 1980s were in essence not all that different from the current e-payment systems.

While the payment market still stays firmly in the hands of the banks the newcomers are not sitting still either. And they are certainly making inroads. For them every percentage point of growth means new business, and 1% of the payment business would immediately make you a very large financial player indeed. Companies such as PayPal, Google, Apple, Facebook and many of the large national telcos know this and are working hard to increase their share of the market. Others that are very active in this market include Western Union, Global Collect, Sage, Square and Adyen.

These new players are great innovators, with new services and upgrades following each other up at frequencies that banks can only dream of. The new players are more flexible and agile and can move into niches, such as person-to-person banking (P2P) and cross-border e-commerce activities, which are often ignored by the major banks. They are also able to be far more customer-oriented in their services towards the merchants – and they are less greedy with their margins.

Once these players have created a beachhead in the e-payment market they can also move into other financial services, such as point-of-sale lending and financial planning, and they are tapping into interchange and transaction fees.  All of the new players built their systems and services along ‘big data’ and so they have an excellent – hopefully permission based – ‘digital trail’ of their customers that they can use to offer them new services.

Apart from this digital trail they also have tools embedded in their services that increase their ability to automate services, and they can use that to offer automated bill payments, managing monthly income and expenses, and even savings and investments. Obviously banks can do this too, but they are in general much slower to launch such services in the market and to do so they will have to cut across the silos within their organisations.

Because of their innovations and customer service many customers love these new digital providers – often in stark contrast to the customer relationship between banks and their customers. And the digital companies will, of course, use that advantage to win more and more customers.

Obviously the banks will maintain their dominant position in the market for a very long time, and perhaps the best thing for customers is that the banks are now being forced to be more customer-focused, offer more services and innovations that customers want, and in general offer a more genuine customer service. I am, however, still waiting for that employee to open the door for me at my bank branch, like they advertise in their TV ads.

Having said that….when was the last time I actually walked into that branch? Hmmmm.

Paul Budde

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Staying focused on the NBN outcomes and bypassing political roadblocks

November 20th, 2014, by

There are many conflicting elements in today’s complex society, and linked to these is a more or less 50/50 split of people with opinions moving towards a more inclusive, caring, sharing and equal society and a similar number more interested in a libertarian approach, with as little as possible influence of governments and regulators and more emphasis on competition and market-led developments.

Both of these approaches contain valuable elements, and for most of the last 70 years we have been able to balance the issues in relatively constructive ways. Unfortunately, slowly starting in the 1980s (greed is good) but in particular over the last five years or so there has been an increase in polarisation, with little room for balancing – more like ‘my way or the highway’. Obviously, as can be seen in countries such as the USA and Australia, but also to a lesser extent in several of the European countries, this is not a constructive way to guide societies through these turbulent times.

I hope that eventually common sense will prevail and we will return to a situation with less confrontation and more cooperation. If we continue on the current part we end up with plutocracies with all the economic and political power in the hands of a few very rich people. The beauty of our system is that both sides have good ideas and a combined effort leads to improvements in all aspects of our society.

These same broad conflicts and tensions are also evident in Australian telecommunication policies. But here too I am hopeful that common sense will eventually prevail and that developments along the lines of what in essence is – or at least should be – bipartisan support will bring the two sides together. We have been advocating common sense issues such as competition, structural separation, open networks, social and economic business and sector transformation, FttH, flatter democracies through digital developments, and, because they are in the common interest of the country, these developments will inevitably happen.

Many of the issues we have been discussing, such as smart grids, e-health, e-education, e-government, smart cities, smart transport, are in the national and international interest, and the ICT industry has a critical role to play here. I would venture to say that the industry has a social and economic responsibility in this respect because of our insight into, and knowledge of, what these ICT tools can do for our society; and I strongly believe that the industry has a responsibility to take a leadership role in this.

That being the case – and given the, in principle, apolitical nature of the ICT industry – it might in some instances simply be better to ignore the current barriers and start planning as if they don’t exist.

Most of the ICT elements we are discussing make good sense and eventually the penny will drop and the barricades will disappear – often for completely unpredictable reasons such as sudden changes in politics, larger national or international events, new technologies and so on. By staying focussed on the inevitable outcomes we continue to be able to guide our society and our industries forward.

I apply this strategy in the work I do with several governments I am working with, and also within my function as a special adviser to the UN Broadband Commission. Keeping an open mind on how we actually achieve those outcomes is key. There are, of course, always political differences and I don’t mind if we get there clockwise or anti-clockwise – I am not religiously or ideologically committed in that respect. The outcomes are in the best interest of all, so on a high strategic, apolitical level they remain largely the same. If we were to stop and fight against the roadblocks we would lose focus and find ourselves exhausted and without a vision on what to do next, after the roadblocks disappear or are bypassed – it is somewhat similar to Don Quixote’s struggle against the windmills.

It is much better to stay focused on what the eventual outcomes need to be, so that once the blockades are gone, as is inevitable, we can move straight on to implementing the overarching vision aimed at social and economic developments.

Obviously if these roadblocks are increased for political or ideological reasons (more or less deliberate political sabotage) it will take much longer to reap the benefits of the eventual outcomes. But even in those circumstances the eventual positive outcome is inevitable.

Paul Budde

See also:

Australia – National Broadband Network – Developments and Analyses 2014

Australia – National Broadband Network – Wholesale and Competition

Australia – National Broadband Network – Policies and Regulations

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Xiaomi – a new business concept in smartphones

November 19th, 2014, by

I am always wary of passing on what looks like PR information, but I regularly come across what I see as genuine innovations, and in such cases I am happy to pass that information on.

I think Xiaomi fits into this category. The article below is written by Howard Yu, a Professor of Strategic Management and Innovation at the IMD business school in Switzerland.

Xiaomi, a Beijing-based mobile phone company, stunned the world last week by raising $1.5 billion in its latest investment round, pushing the company’s valuation to a staggering $40 billion. It now exceeds the combined value of Sony and Lenovo, and commands a market share larger than Samsung and Apple in China.

By eschewing the traditional way in which Chinese firms grow and by operating more like a Silicon Valley company, the four-year-old startup is now a major player in the Chinese and international telecommunications markets.

Large Chinese firms usually develop by becoming manufacturing giants at home first and then competing internationally with low-cost products later. They are able to do this because their production costs are lower since they produce such large-scale quantities. Haier, Huawei and Lenovo all went down this path in the past.

Xiaomi, interestingly, appears to break away from this pattern for several reasons.

The firm outsources all the assembly to Taiwan and doesn’t own any factories. Nor does it have battalions of software engineers. It is an asset-light company whereas mass manufacturing had been the key for the major Chinese firms before it.

Xiaomi only sells its products online, via its own website, and its phones are not available in shops or at telecom carriers. This cuts out middlemen and enables Xiaomi to pass savings on to consumers.

Its users are at the heart of its product development. Xiaomi phones come with the pre-installed MIUI operating system – an Android interface that allows hundreds of thousands of advanced users to customize it and invent new features. While Apple releases its iOS every 18 months, Xiaomi launches a new version of MIUI every week. Its fan base has translated the original version into 24 different local languages for markets outside China, all done without a dime spent on research and development.

Such a set up has allowed Xiaomi to wring out disproportional profits even when a comparable mobile phone model from Samsung would cost at least twice as much. According to the Wall Street Journal, Xiaomi’s net profit in 2013 rose 84% to 3.46 billion yuan ($566 million) from 1.88 billion yuan in 2012. Its has revenue more than doubled to 27 billion yuan in that time.

Xiaomi has risen to the top of the mobile industry in China by practicing open innovation, building a community of users, and branching out into different mobile services in a concerted effort to monetize its base of phones—not very different from the strategy of many Silicon Valley start-ups. Xiaomi—which means “little rice” in Chinese—is no longer small enough to ignore.

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Content – the next regulatory war zone

November 18th, 2014, by

At the 2014 TelSoc Charles Todd Oration the former Chair of the ACCC, Graeme Samuel, warned against the looming content monopoly …..

There is a constant risk that the exclusive tie-up of rights to content for new and emerging markets will allow the right holders to shut out competition across a wide range of services delivered over new networks.

He didn’t think that the current telcos have the right expertise to enter the content market, but said:

Telcos have the financial strength and distribution channels to create business advantages in content acquisition and aggregation.

And a final comment from Graeme on this content issue:

What remains important is access to eyeballs, and the content those eyeballs are seeking is becoming increasingly important. Despite the apparent increase in diversity that the digital age promises, there are real risks that we will end up the poorer if we don’t keep an eye on where just control lies over material we want to receive.

He also mentioned that this issue is now the focus of attention of regulators worldwide, including those in the USA. While, as you will see below, the industry structure in the USA is different, the underlying issue of content monopolisation remains the same.

My friend and colleague Gary Arlen wrote an interesting article on the developments in America and below are a few extracts from that article.

For those unfamiliar with the strange way regulations work in the USA – ISPs there refer to what the rest of the world calls (incumbent) telcos. By calling themselves ISPs, internet access suddenly is not a regulated telecoms service any more. In the USA there is no regulatory differentiation in that respect between internet, as in content, and internet as in broadband access. So content is intertwined with access and this combined is in a regulatory way treated as content and as such the telcos (ISPs) are ‘outside’ the telecoms law and can basically do what they want as has been shown in the case of Net Neutrality. They are allowed to provide special preferential access to content providers such as Netflix, if they are prepared to pay the incumbent a premium price. This than brings us to the issue of content monopoly, by being able to strike those deals with content providers we can easily see this market becoming dominated by new monopolies.

Also for clarification, MSOs (see below) are multi-system operators; they are the operators of multiple cable TV or direct-broadcast satellite television systems.

Here are Gary’s quotes relevant to the issues highlighted by Graeme Samuel:

FCC Chairman Tom Wheeler is seeking to put broadband/online video onto a level playing field with cable and satellite carriers, including their relationships and requirements to retransmit broadcast channels.  Fundamentally, Wheeler wants internet-delivered video to operate with the same ground-rules as cable and satellite TV, especially when it comes to access to broadcast programming. In the acronym-speak of Washington, that means OVPDs (Online Video Program Distributors – i.e. broadband carriers and internet service providers such as Verizon, Comcast, AT&T, Cox) would be treated the same as MVPDs (Multichannel Video Program Distributors aka Comcast, DirecTV, Time Warner Cable, Cox, Dish).

Wheeler’s vision could also set the stage to crack down on cable operators if they start to abandon their current tiered, linear channel structure and migrate their networks to the broadband platform, enabling more à la carte channels or shows.

Wheeler’s tone seems to be that the FCC will not look kindly if MSOs try to stymie competition by moving content to broadband.

Paul Budde

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Gewin, Gemak, Genot (the 3 Gs)

November 17th, 2014, by

In France I caught up with my long-term friend and colleague, Fred Kappetijn. You will have come across Fred’s name previously in our publications – he is a truly innovative thinker.

One of the topics we revisited was a formula he had developed back in 1984 that would assist in checking the potential for success, or failure, of innovations. Fred’s Law uses three letters (in Dutch) Gewin (what’s in it for me – let’s call this ‘gain’), Gemak (ease of use – let’s call this ‘easiness’) and Genot (delight). While the exact nature of each of these elements is very subjective, the broad reasoning behind them (the 3 Gs) remains the same.

The underlying thought is that people are not willing to quickly change behaviour when buying new technologies or new digital services for information, communication, transactions or entertainment. Experience has shown us that, in relation to electronic products and services in particular, the starting point is often negative – people don’t want to change their behaviour.

The 3 Gs are very relevant to the digital sector, as it is often extremely difficult to exactly formulate (or even know) what the exact value-added element is.

Fred’s Law around the 3 Gs reads as follows:

People are only prepared to change their behaviour if they are convinced that such a change will benefit them in terms of Gain, Easiness and/or Delight (the 3 Gs) and that the supposed added value is higher or larger than the costs involved in the time, money and effort that would need to be invested in order to change behaviour.

So there needs to be a very clear, instinctive understanding by the customer of ‘what’s in it for me’. It should lead to saving money, earning money, more effective or efficient use – or it should simply give them pleasure.

Interestingly, the barrier can be rather high, as long as the personal value of the 3 Gs is higher. For instance, look at smartphones and tablets – high (financial) barriers, but even higher 3 G results.

It is often these barriers that stop innovation, as inventors do not fully value the effect of the 3 Gs. It is sometimes also hard to predict if a new product or service will be successful unless there is a proper and full upfront analysis of the 3 G effect.

It’s clear that many businesses involved in newspapers publishing, music, photographic cameras, traditional telecoms and retail failed the 3 G test when the digital economy knocked on their doors.

If you have a good understanding of your business and your customers, and link that to the 3 Gs, it is possible to check new products and services, and new business concepts. And any new products that are developed should deliver on these three key points.

There are many examples but let us use online shopping to illustrate the issues.

Why is online shopping such a success?

  • Gain: Transparency on price and quality
  • Easiness: Shopping where and when you want and as often as you want, easy technologies and access anywhere.
  • Delight: A personal and rich shopping experience.

These are critical considerations for anybody involved in the retail sector as online shopping already is and will increasingly become a critical element in any shopping situation, especially with the increase in the use of mobile phones and tablets during physical shopping.

Analysis and incorporation of the 3 Gs will affect all aspects of retail: shop management, branding, customer and channel management, ICT, pricing, product selection and so on. At the same time, it could, and in many instances will, mean a serious reorganisation of the existing retail structures and systems that have been applied over the last 50 years.

Obviously similar analyses can be done around e-health, digital media, smart energy, smart buildings, and indeed smart cities and smart countries.

Good luck using the 3 Gs in testing your own new ideas, strategies and innovations.

Paul Budde

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