“Financial services has been impacted by many of the same trends that tore down the old music industry and rebuilt a new one in its place.”
My CD collection used to be my pride and joy. I used to measure the value of paychecks in terms of how many CDs they could purchase. I vividly remember the electric excitement when my father, also an audiophile, first purchased a full rack audio system complete with dual tape deck, record player, cd-player, equalizer and power amplifier. Recently, my mom, who is in the process of clearing out their house, asked me if they should just throw out their CDs. On one hand, that seemed to be a very practical solution. On the other hand, it brought up the emotions raised by the music collection built over decades and representing the collective works of many artists.
In the US, CD sales peaked around 1999 and 2000, with nearly a billion each year, and then dropping thereafter. Prince was remarkably prescient when he sang about partying like it’s 1999 and ‘two-thousand zero zero, party over it’s out of time!’ Last year, CD sales were around 50 million, or 5% of what they were at the peak. The music industry has been disrupted by new technologies (internet, file sharing), changing content (music videos, mashups, sampling), changing distribution (record stores, subscription clubs, online store, streaming), and changing consumers.
Financial services has been impacted by many of the same trends that tore down the old music industry and rebuilt a new one in its place. As commerce moved online, financial services such as payments and lending needed to follow suit. As goods and services were deconstructed and delivered on-demand or as-a-service, subscription management and ID/fraud management needed to address new needs. As businesses and consumers saw their assets become global and virtual, banking and investing needed to evolve for the new world.
We are still in the thick of transformation across industries, geographies and functions. Some market needs remain constant, while many will be completely transformed. Many of our cherished beliefs will be tossed like Milli Vanilli CDs into the dustbin of history. That is why we are seeing unprecedented activity in terms of changes to commercial models, value chains and M&A activity.
From the commercial model perspective, payments and banking software providers used to fight vigorously every 5-7 years when RFPs were sent out to find the best solution. Increased market competition and greater customer choice made ‘best-in-class’ change much faster than every 5 years. I personally used to send out and respond to RFPs nearly 20 years ago, and now the process feels like I’m listening to an 8-track tape. These processes resulted in bulky relationships with limited flexibility, often with both sides feeling let down by the experience in the end.
From the value chain perspective, companies and organizations bring many things to a product or service, such as capital, technologies, people, processes and other assets such as distribution or brand. Recognizing that I’m painting with a very broad brush, large company strengths lay in capital and processes, while smaller companies often excel with technologies and people. In the past, large companies could rely upon their distribution and brand as key differentiators as well, but the digitization of the economy and changing consumers has leveled the playing field in those areas. Changing dynamics in the value chain could erase old choke points or create new ones. For example, easy digital access to recorded music obliterated the need for brick and mortar specialty record stores, but it also increased the importance of touring and live music for artists, creating opportunities for companies like LiveNation. What will be the new choke points and bottlenecks in tomorrow’s financial services industry?
The dynamic market has opened up greater risks and opportunities- often a trigger for M&A - causing companies to make more Money Moves than Cardi B. We are seeing new entrants, be it from Asian companies seeking to expand in the West, or vice-versa, large technology companies seeing opportunity in financial services, or from Unicorns, flush with new capital. There have been several large acquisitions within the past 6 months, which increases pressure in terms of capabilities, pricing, and relationships or distribution. These acquisitions have happened across sectors and geographies, leading to a bit of an arms race amongst companies.
“Changing dynamics in the value chain could erase old choke points or create new ones. For example, easy digital access to recorded music obliterated the need for brick and mortar specialty record stores, but it also increased the importance of touring and live music for artists, creating opportunities for companies like LiveNation.”
The common equation for M&A is ‘1+1=3’. In other words, the combination of companies is greater than the sum of its parts. Unfortunately, many times the ‘3’ often works for yesterday or today, but not tomorrow. Given the current dynamism in our industry, the strategic reasons for doing a deal can be greater than the financial reasons. In certain sectors, such as payments and core banking software providers, M&A activity is focused on building scale and gaining access to customer relationships. In other sectors, like payment networks, M&A activity is enabling access to new technologies to offer existing customers.
The fact that these trends are so important today and will have dramatic impacts for the future is why ‘Commercial Models, Value Chains, M&A Activity’ is one of the key stories for Money20/20 this year. With implications for companies large and small, around the world, there will be much discussion, debate and learning about these topics. Much like, whether or not my parents should keep any of their CDs or not, the answers won’t be straightforward and there isn’t a ‘one-size-fits-all solution. Once we figure this out, then I’ll be able to go to the basement and figure out how to monetize my parents’ amazing LP collection, but that’s an article for another day.