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Creative destruction in our banking industry

Globally, consumers respond to companies that meet their need for convenient services.

They vote with their feet. Those companies that don’t evolve are left behind and inevitably must retrench staff. Banks are no different and risk losing clients to their faster-moving competitors or new fintech start-ups (examples in South Africa are Discovery BankTymeBank and Bank Zero).

This is a global trend. Banks in every country in the world are closing branches and moving towards digital services to meet changing client needs. As one practical example, Brazilian banks are even launching voice recognition-based apps for clients who battle with spelling.

Countries that resist creative destruction are left behind.

Creative destruction (a term coined by the economist Joseph Schumpeter in the early 1940s) essentially refers to how an economy innovates. Every innovation has a cost, but when the benefits exceed the costs the innovation creates long-term economic prosperity.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty (first published in 2012 and written by Armenian-American economist Daron Acemoglu and British political scientist James Robinson) shows that countries that grow wealth per capita at a high rate over time (in the process reducing unemployment and creating a stable democracy) are the winners. The key factor is that they don’t allow rentiers (strong interest groups) to prevent change.

Below are two examples of the long-term impact of innovative changes that came with a price, but over time enabled industries to evolve and become more consumer-centric, competitive and therefore sustainable.

Example one: the car displaced the entire horse buggy industry over 13 years.              

The horse buggy industry was a vast and thriving industry employing thousands of workers and artisans across the US. It generated good returns for horse farmers and for those providing the capital for the service stations that offered cart making and repairs, horse feeding, and food and accommodation for travellers. But between 1900 and 1913 the motor car displaced the entire horse buggy industry. The capital invested was written off and all the jobs were lost as the specialist artisan skills became redundant. However, the motor car not only created new horizons (faster and further travel) but created many more jobs than had been lost.

Figure 1: Easter morning in 1900 on 5th Avenue in New York City – there is only one car in sight.

Source: US National Archives (the George Grantham Bain Collection)

Figure 2: Easter morning in 1913 on 5th Avenue in New York City

Source: US National Archives (the George Grantham Bain Collection)

Example two: Amazon revolutionised the retail distribution and shopping industry.

A similar wave was triggered by Amazon when they introduced the facility to have goods delivered to your doorstep within days of placing an order. This revolutionised the retail distribution and shopping industry. Although Amazon only became profitable recently, Figure 3 below shows that by 2011 the market had begun to realise that online retailing (and Amazon) was here to stay. Investors risked capital and backed Jeff Bezos from early on because they recognised that online shopping would provide consumers with more choice and convenience. 

Figure 3: The price of Amazon versus Walmart shares since 2009.

Source: Bloomberg

Amazon’s success is even more evident in Figure 4 below, which shows how the large ‘bricks and mortar’ retailers lost market capitalisation relative to Amazon.

Figure 4: Change in market cap (in billions) of large retailers over 10 years.

Source: Yahoo! Finance Data

The banking industry is going through a similar (and inevitable) change.

Fighting change brought on by innovation leads to stagnation and sacrifices long-term growth and prosperity by prioritising jobs over innovation. Managing or mitigating the losses associated with innovation however can result in long-term prosperity for society, but this requires effort, skills development, and the discomfort of change.

Who should do what to encourage long-term growth, and mitigate the short-term discomfort of change?

Over time the countries that manage change successfully became internationally more competitive, which attracts capital and creates jobs.

It follows that businesses must innovate to protect remaining jobs, create new opportunities and provide consumers with goods and services they desire. To support this, we need our government to create an environment that allows people to benefit from the process of creative destruction. They need to think of creative ways to mitigate job losses and create new types of jobs and opportunities that will foster long-term prosperity. 

Government could also stop rentiers from preventing change and work closely with the banking industry to find creative ways to minimise the negative effects of change. In 1900, the US system allowed the horse buggy industry to die and this spawned an industry that created more jobs and opportunities than were destroyed.

Calling out (understandably frustrated) workers to strike, as Sasbo (South Africa’s biggest financial union) tried to do last week, might result in a negotiated settlement with management to stem immediate retrenchments. However, the medium-term stifling of creative destruction may have a negative impact on our competitiveness, investor confidence and cause industries to lag behind our global peers. It is a balancing act but one that must be managed prudently and with the long-term view required for successful investing.

 Kokkie Kooyman is a Director and portfolio manager at Denker Capital

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Interesting views, but there is an underlying assumption that the source of creative destruction will require equal or greater labour, which is not the case in this wave of creative destruction.

Amazon’s market cap comparison to traditional retailers is not the same thing as car workers replacing horse workers. Amazon have not created jobs commensurate with those they have destroyed, they have just made shareholders as rich. That’s a big difference and why inequality is widening.

I prefer a current account or similar facility which does not require (physical) FICA verification every now and then!

When the brick and mortar branches of banks dissipate (especially in smaller, rural towns), the bank cannot expect a client now to drive 200+km to the major centres, to have your FICA done at your “nearest branch”.

FICA needs to be electronic/uploadable onto a site.

Last time I took my municipal account and a copy of it to SAPS, they certified it, I scanned and emailed it to the bank. They were happy even though the local (pathetic) branch is within 3 kms. But yes, with Big brother and all his computer systems, why still have FICA & RICA for the average (forced) law-abiding citizen?

In another article which cited the same horse buggy industry example, it was pointed out that the people in that industry were eventually able to be trained to do new jobs to cater for the replacement car industry and other new industries. The only permanent loser was the poor old horse. The jobless horse of today is only for entertainment. With the current days’ growing replacements of jobs with AI, there are many folk, mostly those in the sub-70 IQ category, that face the same fate as our jobless horse. Scary thought thinking about such a large portion of unemployed and poorly educated humans hanging around with nothing to do. The welfare burden will large.

Excellent article Kokkie,with factual perspective.
The only way for our country to remain competitive is to adapt. And fast.Unemployment is a sensitive issue in South Africa but the short term pain will have long term gain.i.e force us to re-look at our poor education system.

Comparing Amazon to Walmart is not an apples to apples comparison – a big portion of Amazon’s success is due to Amazon Web Services – the world’s biggest cloud computing operation. Here margins are proper compared to Amazon’s razor thin online shopping margins

Lessons from these changes include that:
Educated people are more adaptable; it pays individuals to be flexible and to stay up-to-date in their field. In SA we need an education revolution to equip our youngsters with the basic skills (reading ‘riting & ‘rithmetic is a good beginning). Of course, they tend to demand more autonomy, as happened in the “Arab spring” and elsewhere; it is noticeable that the ANC does not want the masses thinking and reasoning for themselves.

Innovations have unexpected consequences. E.g. one consequence of the internal combustion revolution (apart from exhaust gases, which is well known) is that, during the horsepower age, their droppings were thrown onto fields which they fertilized. Chemical fertilizers are not the same.

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