Why the royal commission is good news for startups

The recently concluded Royal Commission into the Banking, Superannuation and Financial Services Sector has taken a serious toll across the financial industry.

Within days of Commissioner Hayne handing down his final report, NAB lost both its chairman and chief executive, AMP reported that its full-year profit had declined by 97%, and the very future of the mortgage broking industry was thrown into question.

While the royal commission has undoubtedly done serious damage to the reputations and share prices of many of Australia’s most high-profile financial institutions, I think the whole process should give entrepreneurs a tremendous confidence boost.

One of the key takeaways of the royal commission is that many of Australia’s largest businesses continue to operate with a startling degree of arrogance and consistently take their customers — both living and dead — completely for granted.

It’s this sort of complacency that renders even the largest of companies vulnerable to disruption.

As I already alluded to, probably the starkest example of a business taking its customers for granted were the proven allegations that CommBank and others continued to charge customers fees for financial advice even after they knew that the customers had died.

The royal commission even heard of one example of a CommBank subsidiary charging a deceased client fees for services never rendered for up to a decade — even after an internal risk and compliance report alerted management to the practice.

It was an astounding revelation. However, I couldn’t help but think how vulnerable that CommBank subsidiary must have been to disruption.

Do you think its management was really obsessing over strategic threats to its business model? Do you think they were experimenting with new products and solutions designed to surprise and delight their customers?

I doubt it. I am almost certain they were very comfortably sitting back and enjoying their access to easy money.

It reminds me of the newspaper industry back in the 1980s. While I am not suggesting newspapers engaged in similarly ugly practices, newspapers were just as complacent about their strategic position.

This complacency was similarly built on easy money. Newspapers referred to it as their rivers of gold: the unending stream of classified ad revenue that poured into their newspapers every week until it suddenly stopped due to technological change.

Many Royal Commission observers were also dismayed by how arrogant people like NAB chairman Ken Henry were when giving their evidence. Henry, rather than humbly taking responsibility for his bank’s failings, used his time in the witness box to show everyone how clever he was.

Arrogance is always ugly. However, it is deeply concerning when it is being displayed by the head of a major institution. In my mind, it indicates that the company’s leadership feels invulnerable — that it doesn’t feel any need to reflect on or adapt its behaviour because it’s a $70 billion gorilla.

It also begs this question: If Ken Henry’s behaviour was emblematic of the arrogance and sense of invincibility among NAB’s senior leadership, how seriously did NAB’s board take threats of disruption to NAB’s business model?

That threat is certainly real. In the first half of last year, according to KPMG, US VCs invested a record US$14.2 billion ($20 billion) into fintech opportunities across 427 deals.

By contrast how seriously would NAB’s board — its peak decision-making body — look at proposals to innovate? Probably not very.

It’s not too hard to visualise a Ken Henry sitting in such a meeting and using a presentation on an innovation proposal as an opportunity to showcase just how cleverly he could intellectually brush off such a concept.

This arrogance so starkly uncovered by the royal commission should give renewed confidence to innovators looking to disrupt major industry players.

We have seen under oath what many of us have long suspected: that despite their deep pockets, well-established brands and entrenched distribution models, large companies are vulnerable to disruption because the benefits of incumbency also breed arrogance and complacency.

Perhaps in the long run, it’s going to be the threat of competition posed by nimbler and more customer-centric players that will do more to get the major financial institutions to smarten up their act than a royal commission.

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