Three Horizons Framework
for Other monetary intermediation (ISIC 6419)
The 'Other monetary intermediation' sector is highly susceptible to disruption from fintechs and larger, more innovative banks. These institutions must continuously adapt and innovate while maintaining their core business. The Three Horizons framework offers a pragmatic structure to manage this dual...
Strategic Overview
For 'Other monetary intermediation' firms (ISIC 6419), which include credit unions, building societies, and specialized lenders, effectively managing innovation is critical for long-term survival and growth. The Three Horizons Framework provides a structured approach to balance current operational stability with future growth initiatives. Horizon 1 (H1) focuses on optimizing existing core business and defending market share, addressing challenges like 'Margin Compression' (MD03) and '24/7 Operational Demands' (MD04) through efficiency gains.
Horizon 2 (H2) involves building out new growth engines, such as developing new digital products or expanding into adjacent customer segments, which is vital for addressing 'Market Obsolescence & Substitution Risk' (MD01) and 'Structural Market Saturation' (MD08). Horizon 3 (H3) explores nascent opportunities and disruptive technologies with a long-term view, ensuring the institution remains relevant in a rapidly evolving financial landscape. This framework is particularly valuable for ISIC 6419 entities that often face 'Legacy Drag' (IN02) and 'R&D Burden' (IN05) but need to innovate strategically to compete with larger banks and nimble fintechs, ensuring they do not fall behind on the 'Innovation Treadmill' (MD08).
5 strategic insights for this industry
Strategic Allocation to Combat Market Obsolescence
The framework enables 'Other monetary intermediation' firms to deliberately allocate resources (capital, talent, time) across H1 (core optimization), H2 (new growth), and H3 (future exploration). This structured approach is crucial for countering 'Market Obsolescence & Substitution Risk' (MD01) by ensuring continuous innovation and adaptation to evolving customer needs and technology.
Systematic Approach to Overcome Legacy Drag
Horizon 1 efforts can focus on modernizing core legacy systems (e.g., API enablement, cloud migration) to improve efficiency and reduce 'Increased Operational Costs' (DT07). Simultaneously, H2 and H3 initiatives can explore and integrate new technologies (e.g., AI, DLT) on a separate track, providing a clear pathway to address 'Technology Adoption & Legacy Drag' (IN02) without disrupting current operations.
Differentiated Growth in Saturated Markets
With 'Structural Market Saturation' (MD08) and 'Margin Compression' (MD03) posing significant challenges, H2 initiatives (e.g., embedded finance, personalized wealth management, fintech partnerships) offer pathways to develop differentiated products and services, attracting new customer segments or increasing wallet share from existing ones, thereby combating the 'Innovation Treadmill'.
Cultivating an Innovation-Friendly Culture
By creating distinct teams and processes for each horizon, the framework fosters a culture that values both efficiency (H1) and experimentation (H2, H3). This helps address 'Talent and Cultural Barriers to Innovation' (IN03) and 'Talent Gap in Emerging Technologies' (IN02), ensuring the organization can attract and retain diverse skill sets necessary for future growth.
Navigating Regulatory Complexity in Innovation
The Three Horizons framework allows 'Other monetary intermediation' firms to manage 'Regulatory Overload & Interpretation Risk' (DT04) by applying different regulatory scrutiny levels. H1 innovation focuses on compliance, H2 can involve regulatory sandboxes for new products, and H3 can explore nascent tech with an eye on future regulatory implications, managing 'Regulatory Compliance & Transparency' (MD05) proactively.
Prioritized actions for this industry
Establish Dedicated Innovation Hubs/Teams for H2 and H3
Separate teams with distinct mandates, budgets, and KPIs prevent H1 (core business) priorities from overshadowing H2/H3 long-term growth and exploration. This addresses 'Innovation Treadmill' (MD08) and ensures sufficient focus on future relevance.
Accelerate Digitalization and Efficiency in Horizon 1
Invest in automating back-office processes, enhancing digital self-service for core products, and upgrading legacy systems to improve operational efficiency and customer experience. This frees up resources and capital that can be reinvested into H2/H3, combating 'Margin Compression' (MD03) and 'Increased Operational Risk' (MD05).
Form Strategic Partnerships with Fintechs for Horizon 2 Growth
Collaborate or invest in fintech companies to quickly develop and launch new digital products (e.g., personalized financial wellness tools, embedded finance solutions) or access new customer segments. This mitigates the 'R&D Burden' (IN05) and reduces time-to-market compared to in-house development.
Launch 'Innovation Sandbox' for Horizon 3 Technologies
Dedicate a small, agile team to experiment with emerging technologies like distributed ledger technology (DLT) for cross-border payments, quantum computing for security, or advanced AI for predictive analytics, within a controlled environment. This allows exploration of disruptive potential without immediate regulatory or operational overhead, addressing 'Regulatory Compliance & Transparency' (MD05) in a future-oriented way.
Implement a Cross-Horizon Portfolio Review and Funding Model
Regularly review progress across all three horizons, ensuring that projects are appropriately funded, aligned with strategic goals, and that successful H2 projects are scaled, and promising H3 explorations receive further investment. This disciplined approach ensures 'Innovation Option Value' (IN03) is realized.
From quick wins to long-term transformation
- Conduct an internal audit of existing H1 processes to identify immediate automation or digitalization opportunities (e.g., paperless forms, simplified online applications).
- Form a small 'H3 exploration' team to research and present on 2-3 nascent technologies relevant to the industry within 3 months.
- Organize an internal 'innovation challenge' to source H2 ideas from employees across departments.
- Pilot a new digital product or service (H2) in partnership with a fintech or as a small in-house venture.
- Invest in API-first architecture for key legacy systems (H1) to facilitate easier integration with future H2/H3 solutions.
- Establish formal KPIs and reporting for each horizon, tracking progress and resource allocation.
- Scale successful H2 products into mainstream offerings, potentially creating new revenue streams or business units.
- Integrate proven H3 technologies into core operations, transforming business models (e.g., DLT for certain transactions).
- Develop a corporate venture capital arm or dedicated M&A strategy for H2/H3 opportunities.
- Underfunding H2 and H3, leading to 'innovation theater' without tangible results or strategic impact.
- Failing to integrate successful H2/H3 innovations back into the core business or scale them effectively.
- Organizational resistance to change, particularly from H1 teams feeling threatened by H2/H3 initiatives.
- Lack of clear governance and decision-making processes for moving projects between horizons or terminating unsuccessful ones.
- Ignoring regulatory implications until late stages of H2/H3 development, leading to costly delays or abandonment.
Measuring strategic progress
| Metric | Description | Target Benchmark |
|---|---|---|
| H1: Operational Efficiency Gains | Reduction in processing times, cost per transaction, or manual effort for core services. | 5-10% annual improvement |
| H2: Revenue from New Products/Services | Percentage of total revenue generated from offerings developed in the last 1-3 years. | 15% of total revenue within 3 years |
| H2: New Customer Acquisition/Wallet Share Increase | Growth in customer base or share of customer's financial services driven by H2 offerings. | 10% increase in target segments |
| H3: Number of Active Pilots/Strategic Learnings | Count of ongoing experiments with emerging technologies and documented insights for future strategy. | 2-3 pilots annually with clear learning outcomes |
| H1/H2/H3: Employee Innovation Engagement | Participation in innovation initiatives, idea submissions, and cross-functional project involvement. | 30% employee participation rate |
Other strategy analyses for Other monetary intermediation
Also see: Three Horizons Framework Framework