Wireless Banking

 The timeframe for this case is the mid-1990s. A small division of a New York-based commercial bank has recently developed a wireless banking software. The division managers are excited about the potential of this new technology, and its impact on their business. They already have a workable beta version of the technology and are about to approach the management for a budget to develop a full-fledged version that can be deployed throughout the firm. Help them devise a business plan to leverage this new technology.

Wireless banking software seems very complex. Go ahead and clarify what it really means? What use is this new software? Why are these managers excited about it?

Candidate: Could you tell me a little more about the software? What applications can it be used for?

Interviewer: This is an application that can allow banking customers to conduct transactions and access their account information wirelessly, using cell phones.

Now you know what it does, but how large is the opportunity?

Candidate: How widely used are cell phones?

Interviewer: They are increasingly popular, especially among our clients, who tend to be urban and wealthy.

Candidate: And is this software specific to the banking industry, or can other service providers use it as well?

Interviewer: This particular application has been designed to best meet the requirements of the banking industry. It is possible that other industries could copy some of the features.

It looks like it’s only the banking industry that we’re talking about. Let’s talk about the opportunity in the industry. Does it work? How novel is this software? What market share can it get? Who are the other competitors?

Candidate: How good is this software? Does it work?

Interviewer: Extensive testing has found this product convenient and easy to use.

Candidate: At what stage is the penetration of wireless banking? Are other banks already offering wireless services?

Interviewer: Not at this time. Our client could potentially be the first to offer this service.

If nobody else is offering these services, you have to consider two options. First, what is the value of installing the software just in the client’s bank? Second, what is the value of selling the software to other banks? Which of these two options might be more profitable? Let’s explore both options.

Candidate: But a first-mover advantage might be limited, since other banks would quickly offer a similar service. Can our client build any barriers to entry?

You ask this question because if you can prevent other banks from providing the service, then this would make it a unique service, and more attractive to your client.

Candidate: Like all software products, the company could prevent other firms from outright intellectual property violation, but one cannot rule out the infiltration of clones that serve the same purpose.

The interviewer seems to be signaling that keeping the software within the client’s bank might not really release its full potential. So now let’s pursue the second option of selling this software to other banks as well.

Candidate: I think I’m ready to offer a first stab at the company’s strategy for this new application. The division seems to favor the idea of developing the product immediately and offering it to the bank’s customers. I don’t think this is the best use of the technology, because they do not have the ability to protect this innovation from being quickly copied. Any edge the bank has when it first offers this service would vanish when other banks begin to do so as well.

Interviewer:  Are there other parallel technological innovations you can think of which have met with similar challenges?

This is a difficult question – the interviewer is putting you on the spot. You have to think about an innovation that could be copied easily.

Candidate: I think ATM machines are another innovation with similar characteristics.

Interviewer: So what should our client do? Does this technology have any value to it at all?

Here’s where you put forward your recommendation: You’ve determined that the bank will not be able to keep other banks from quickly developing similar services, so it is best for them instead to go ahead and sell the software to competing bank. Banks will buy this software because it has apparent value, and it’s worth buying rather than wasting time and resources redeveloping it. This has the additional advantage of making your client’s software the template for other such systems. And your client would still have a head start.

Candidate: The technology certainly has value. I would recommend that the client deploy it within the firm, but simultaneously license the technology solution to other banks. This is where the real value lies.

The value proposition to other banks is that they would not have to invest the dollars and time in developing or procuring this solution themselves. Our client must accept that if it does not offer its solution to the competition, somebody else will, and that will place our client at a disadvantage. It is therefore best for our client to capture as much of this market as possible, perhaps by spinning off the technology using a subsidiary independent from its banking parent.

Interviewer: But our client then would not get the benefit of being the only bank to offer this service.

You’ve already thought through this argument, so go ahead and make it explicit. It’s really a choice between two positive value options – the licensing option has the higher value, compared to the internal deployment.

Candidate: This is correct. Selling the software would limit first-mover advantage. However, it is clear from the facts that this is not a defensible technological advantage. Other banks will soon copy this innovation, regardless of whether our client chooses to sell them its solution or not.

The additional profit from a few additional months of being the only bank to offer this service has to be compared with the profits to be made from selling this solution to other banks. Since wireless banking is a new way of banking, our client would have to educate customers on how to use this service. Profits in the first few months or even years would be limited. This is why the licensing option is preferable. Overall, the bank should consider the ROI (return on investment) measure, rather than absolute profits in dollars, since ROI captures both the initial investment, as well as the income that the investment generates.

Finally, since this is a virgin market, having other banks offering wireless services would grow the market for wireless banking services faster than if our client went at it on its own. Licensing the software also lessens the danger that an alternate standard platform for wireless banking will arise, which could potentially force our client to scrap the current model.

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