Creative destruction in our banking industry

By Janice Roberts
Editor

Kokkie Kooyman, Director and portfolio manager, Denker Capital

By: Kokkie Kooyman, Director and portfolio manager, Denker Capital

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 Bank, TymeBank 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.

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, 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.

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) recently tried to do, might have resulted 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 as well as 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.

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