#Disruption and current financial turmoil

This article has also been published at the Business Science Institute.
For further discussion please get in touch with the authors.

Introduction

Is disruption hitting the banking sector? This question has become increasingly relevant as we see turmoil in financial institutions such as Credit Suisse. With many possible triggers for the occurrence of turmoil, in this essay, we will take a closer look at one: disruption itself. By placing focus on this singular aspect, we know that this complex situation requires a more in-depth analysis exceeding the scope of this essay. However, everything eventually is initiated by taking a first step.  

Referring to our opening question of disruption in the banking industry, Bartz and Bärcher (2023) speculate how “Silicon Valley Brings Disruption to Global Finance”, in which they argue that “rising interest rates have plunged the financial markets into turbulence”. Regional U.S. Banks have already been facing bank-runs, while in Europe, most recent events show how some banks might also be on the brink. But is this the entire truth? With this essay, we set the foundation to provide more clarity and transparency, leveraging expert insights to get closer to the truth.

Foundation

Taking all turns of events into close consideration, we predominantly question two things: what role did disruption play, and could a modular architecture have prevented this turmoil in the case of Credit Suisse? 

Disruption itself. We consider disruption differently, as mentioned by Bartz and Bärcher (2023). Rather, we refer to disruption as “disruptive innovation” (Christensen, 1997). In this essay, we focus on the discourse grounded in different available viewpoints, supported by a feasible range of supporting arguments. Independent from this, we recall that “in today’s banking industry products and services are ‘good enough’ for the average consumers for which a performance surplus is created. An incumbent’s option to compete is by being fast, flexible, and responsive at a lower price” (Lettig et al., 2018, p.6). As the authors argue “modular versus interdependent architecture can provide an answer to disruption” (Lettig et al., 2018, p.3). “A traditional vertical forward integrated bank doing everything has no future because a firm cannot be excellent at everything and at the same time provide products and services to consumers at low cost while remaining agile” (Lettig et al., 2018, p. 5). New market entrants, who are viewed as being excellent at one element (i.e., standardized components with standardized interfaces) along the value chain, operate in an interconnected market and collaborate with other focused players. Consequently, “the whole becomes less efficient than the sum of its parts, and this a firm in providing one component very well being compatible through interfaces with other components from other component providers” (Lettig et al., 2018, p.5). 

In the approach of modular architecture, as stated above, products, and services have the tendency to become ‘good enough’ for consumers, and thus, disrupters with specialized strategies hold a market reputation in performing single elements of a value chain at a higher standard. Why? Modular experts not only inhere to lower cost structures and therefore do not burden interdependence overhead, but moreover build up in-depth knowledge and expertise, allowing those disruptors to be closer to their consumer’s needs. What is the consequence? An increasing number of disrupters “enter the market and commoditization occurs” (Lettig et al., 2018, p.4). Versa, incumbents, as the authors argue (Lettig et al., 2018) must find ways in identifying new performance-defining components. Why? This is the sweet spot for a performing business. “The component in the value-stack that offers the functionality consumers care most and where the most profits can be made” (Lettig et al., 2018, p.4). 

The fact that disruption forces incumbents to react to changes in competition, whether in the case of low-end or new market disruption, also implies that incumbents need to rethink their business model (Lettig et al., 2018). A question that remains unanswered is whether banks are taking the necessary steps to do this. Regarding the case of Credit Suisse, one of the areas to explore is the reason behind this failure. It is essential to identify the root cause behind the potential risk of failure for traditional banks as well as other incumbents. Hence, is there a correlation between this and disruption? With this question, we aim to open the gate for sound analyses and foster argumentative discourse. 

Possible solution approach

One approach to prevent such bank failure could be an ecosystem or platform business model strategy with modular standardized components and interfaces, as depicted in a “Showcase s24/7” (Lettig et al., 2018, p.13). There, components, possibly as Software-as-a-Service, operate as independent and decoupled business segments, based on defining core and non-core products and services. Note that decoupling here refers to the reduction of dependencies amongst products and services as well as markets. Therefore, when being hit by turmoil, only one or a few components might be affected, while others remain unaffected due to the independent nature of the platform business model or ecosystem strategy. This business model thus has the potential to mitigate and reduce risk and overall failure over time. In the case of Credit Suisse, as it seems, its pipeline business model, being defined as traditional and forward integrated, is based on an interdependent architecture. Although, we are not in the position to claim that no attempts were made for a change in the business model as such by Credit Suisse. Nonetheless, the question remains, if so, was it done coherently?  

Generally, success in any business is defined by the degree of monetization and willingness to pay by consumers. The monetization of platforms comprises four venues:   

• ‘transaction cut’ a fee is charged to component providers for facilitating transactions  
• ‘pay for access’ charging actors on the platform for lead generation, i.e., “charging the side that needs the other side more” (Lettig, et al., 2018, p. 17)  
• ‘pay for attention’ charging for matching, and  
• ‘pay for tools’ charging for upgrades or better tools  

The authors (Lettig et al., 2018) explain that “even though s24/7, in offering to various component providers, the platform must carry overhead costs, which can be absorbed through extracting value by adopting either of the four forms of monetization” (p. 17). A “platform only owns those resources that are inimitable by component providers” (p. 18). Hence, the majority of components are decoupled from the platform and thus detached from possible turmoil faced by other component providers. This corroborates the previous argument, that a platform or ecosystem could protect from turmoil and has the potential to mitigate risk. 

Future Research

With our essay, we have addressed the surface of the most recent market developments. To go beyond, aspects to be explored are 

• The understanding to which extent a platform business model or ecosystem strategy is affected in the occurrence of a loss in confidence and its correlation to market psychology 

• The different roles banks play (e.g., orchestration) and their effect on interdependencies of structures as well as a degree of risk mitigation 
• The complexity of risks (e.g., legacy structures) connected to transformation, which prevents banks from realizing new business models 

All those present interesting avenues for future research, as market psychology is a factor whose influence is not to be underestimated. 

A concluding aspect, specifically in the case of Credit Suisse, which requires additional research, is with UBS now being considered bigger than too big to fail (WirtschaftsWoche, 2023), how can this challenge be solved? Since “an organization cannot disrupt itself” (Christensen, 2013, p. 198), a yet undefined alley of solutions has to be explored. Initial thoughts comprise a transformational organizational approach which introduces an ecosystem or platform business model for Credit Suisse and/or UBS or the development of a new start-up, to reduce interdependencies and disrupt the traditional ways of banking.