Bank 4.0

by Brett King

  Since the industrial revolution, we’ve been designing education systems and management architectures built on manufacturing processes and production lines. Command-and-control, top-down, hierarchical organisation charts are the types of terminologies that have been common in describing traditional management approaches in large organisations. Over the last 30–40 years we’ve been focussed on efficiency gains within this environment, so we’ve concentrated on process optimization and metrics. Key performance indicators (KPIs), cost account systems, process re-engineering and so forth were all about making the operational heart of the organisation as efficient as possible, and managers rose to the top of that structure when they were good at enforcing processes and eking out small efficiency gains over time. But when your processes are commanded by Artificial Intelligence much of the architecture of traditional management becomes superfluous. If you want efficiency gains you tweak the algorithm or manage the data inputs, you don’t do 360-degree performance reviews.

  Harvard Business Review recently did some solid research25 on this and showed that over the last 50 years personality traits such as curiosity, extraversion, and emotional stability have become more and more critical, twice as important as intelligence or IQ. The ability of banks and financial institutions to stay on top of technology change is already doubtful.

  The notion that there is some kind of intersection between banking and technology is a misconception. Through a process almost of osmosis, they have come to be one and the same thing… We’ve reached a point where the tech is developing much faster than peoples’ capacity to work out what to do with it.

  —Cathy Bessant, Chief Operations and Technology Officer, Bank of America

  What are the management skills that you’ll need in the AI Age to survive? HBR mapped out four key skills in agile leadership that are very different from those we used to hire for in banking:

  •Humility—Willingness to learn and to know when you don’t know what you need to move forward, reaching outside the organisation for input, trusting others to do their job, and understanding that a data scientist or ML expert might be able to make a critical contribution you can’t match. Humility isn’t something that managers of the Gordon Gekko era are used to, neither are the leaders of banks with big balance sheets. Lack of humility leads you to commit to outmoded strategies like branch-based engagement, plastic cards, paper cheques and insurance agents long after they’ve become irrelevant to your future.

  •Adaptability—Recently, Siam Commercial Bank announced a severance program for staff and managers who could not adapt to the changes the bank was planning around digital26. In an AI organisation the ability to change rapidly, undermining ideas, positions or egos held by key stakeholders will be key. Managers will need to focus on learning rather than trying to be “right”. Do you have tech advisors on your board? Do you keep a map of competitors’ initiatives and key technologies in the space in terms of adoption?

  •Vision—Vision comes to the fore in AI-powered banks because you have to fight legacy more than in most industries. Strong visionaries like Piyush at DBS, Torres and Gonzalez at BBVA, Thompson at Atom, Vichit and Arthid at Siam Commercial, Harte who lead CBA’s transformation amongst others, are examples of strong personalities and visionaries dragging their organisations through a continuous process of innovation. Their language is different and they don’t take no for an answer, and they continually learn. But think Musk, Bezos, Jack Ma for even better visionaries—their visions aren’t short-term, they think in timeframes of 50 years or more and are driven to use their organisations as platforms for long-term change. Bank CEOs bringing 30 years of retail banking experience to the team have no place in this world.

  •Engagement—Keeping teams engaged in an era of constant change where your job could be taken by an AI at any time isn’t easy. There’s also a great deal of noise, so being able to filter the noise and listen for the critical signals that focus resources around outcomes is critical. Leaders in the AI age use digital all the time to engage their teams.

  Does this mean that leadership will be radically different for banks in the near term? Yes and no. I quoted Cathy Bessant from Bank of America earlier, where she made the point that banking and technology are synonymous now. If a bank is not lead by technologists with deep technology experience, then there will be resistance to the effects of Artificial Intelligence and technology more generally, and this will negatively impact your ability to build mission-critical future capabilities.

  In the Bank 4.0 world, smart people skills will be eclipsed by smart machines and soft skills like those listed above will be increasingly critical. Strong leaders are those with vision, that can adapt to rapid change constantly and don’t fear change, don’t stay invested in what they know or what they’ve built in the past, and can get others to embrace their vision. But most of all, the bank leaders of today need to know that the bank won’t stay a leader if they try and keep it all in-house. In a world where technology constantly separates the winners and losers, banks won’t be able to build it themselves fast enough and will need to be partnering constantly with those players on the leading edge of new emerging platforms.

  Endnotes

  1See https://en.wikipedia.org/wiki/Three_Laws_of_Robotics.

  2“10 Companies making big bets on AI”—US News, 19 July 2016: https://money.usnews.com/investing/slideshows/artificial-intelligence-stocks-10-companies-betting-on-ai.

  3Source: SCMP.

  4For a more extensive discussion on the impact of AI on society and jobs, please read my book Augmented: Life in the Smart Lane.

  5It should be noted neither of these are currently AGI-capable, but are foundational elements for such potential AIs.

  6See: https://www.ibm.com/developerworks/library/cc-beginner-guide-machine-learning-ai-cognitive/index.html.

  7See: http://www.bankofengland.co.uk/publications/Pages/speeches/2015/864.aspx.

  8Source: http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf.

  9Research shows that Australian Customs and Border Patrol Officers doing face-to-face verification missed one in seven fake IDs—http://theconversation.com/passport-staff-miss-one-in-seven-fake-id-checks-30606.

  10Source: China Daily (see also Washington Post, 7 January 2018—“China’s watchful eye”).

  11Source: PWC Report—“Millennials & Financial Literacy—The Struggle with Personal Finance”.

  12Source: InvestmentNews—“Wealthy millennials decline financial advisers’ services” (May 2015).

  13Schwab’s Intelligent Portfolios robo was the top performer, by a narrow margin. Its portfolio gained 11.94 percent, edging out Betterment (11.68 percent), E*Trade (11.60 percent), SigFig (11.41 percent) and Vanguard PAS (10.92 percent).

  14Source: S&P 500. However, it should be noted that inflation-adjusted returns are closer to 7 percent on an annualised basis.

  15Source: Business Insider Intelligence—“The Evolution of Robo Advising Report” (2017).

  16Check out the ad where actor Alec Baldwin orders socks on Alexa for reference purposes.

  17See: https://www.bigcommerce.com/blog/ecommerce-trends/.

  18Source: NetElixir.

  19Source: eMarketer—https://www.emarketer.com/Article/New-eMarketer-Forecast-Sees-Mobile-Driving-Retail-Ecommerce-China/1016105.

  20See “The Accelerating Disruption of China’s Economy”, Fortune, 26 June 2017 (Paul Liu, Xuemei Bennink Bai, Jason Jia, and Eva Wang).

  21Source: https://www.forbes.com/sites/tompopomaronis/2017/12/15/e-commerce-in-2018-heres-what-the-experts-are-predicting/.

  22Agency-based refers to delegating a purchase to your voice assistant or personal AI.

  23See: “Cloud are more secure than traditional IT systems – and here’s why”, TechTarget, January 2014.

  24Or 24/365, if you’re a stickler for that sort of thing.

  25See: “As AI Makes More Decisions, the Nature of Leadership Will Change”, Harvard Business Rev
iew, January 2018.

  26Source: Bangkok Post—“SCB proposes severance for non-adapters”; https://www.bangkokpost.com/business/news/1405254/scb.

  8 The Universal Experience

  We were wrong about Universal Banking. Few cost efficiencies come from merging many functions in a single bank.

  —John Reed, former Chairman and CEO of Citibank

  Your financial life is supposed to follow a fairly predictable pattern, at least in the developed world. You start off in school with a basic student deposit account, you might even visit the bank on a school field trip or excursion. Then you graduate high school and take on a part-time job. If you go off to university or college, you might take on a student loan (if you live in those primitive countries that make education a capitalist exercise) and if you don’t, you’ll likely start your first full-time job (or maybe a couple of part-time jobs). You take out a car loan to get your first car. Then you’re thinking about getting married, getting your first home, and a few years after that you’ve got credit cards, life insurance, income protection, a second mortgage for an investment property—and you’re starting to think about retirement.

  This is the dream customer profile of the Universal Banker. Get them while they’re young, and then every single banking product you ever need will be provided by the bank you grew up with in your home town. You’ll constantly be cross-sold and up-sold to, and because you “trust” the bank that gave you your first bank account, you’ll simply use them as a one-stop shop for every banking product you’ll ever need. They were there when you opened your first account, and hopefully by the time your kids need a bank you’ll march them into a branch to keep the bank in the family.

  Except, it just doesn’t work like that anymore. The average consumer in the US, UK and Australia has a relationship with between four and seven different financial institutions1, for the average business it’s at least two, and sometimes upward of five or six, different institutions. More than half of investors have multiple brokerage and investment accounts also. The fact is, historically we simply don’t maintain this idealistic single-bank loyalty, like a 50-year marriage, with our money. We are in open banking relationships all the time.

  The expectations of the Post-Millennial consumer

  Generation Y (Millennials) is the first digitally native generation born into a world of technology. They grew up in a world where if you needed to know in which city Abraham Lincoln was born, who built the pyramids (Aliens?) or when the next solar eclipse might occur, instead of picking up an Encyclopedia Britannica at the local library, you’d simply ask “the Google”. More than that, as they started working and became consumers, they had access to a world of instant gratification and e-commerce that was unimaginable to their forebears. They could order pizza online, book movie tickets, airline tickets, hotels and, more importantly, they could find out what their peers thought of various restaurants, service providers and the like. Network effect and social media amplified this trend with the latest, coolest service, getting faster and faster traction as they shared with their friends their latest discovery.

  Just like it would be counter-intuitive for a Millennial to reach for an encyclopedia, to call up Dominos on a landline to order a pizza, or go to a travel agent’s office to book a flight, it is also increasingly counter-intuitive for these consumers to “go to the bank”. Research shows that Millennials on a day-to-day basis are almost myopically focused on digital. They would never think of using phone banking to check their balance, they can’t work out cheques and they wonder why anyone would ever send you one in the post. They live in a world where they expect banking to work in a frictionless, real-time manner.

  Insist on getting a Millennial into a branch to open up a new credit card facility, and it’s statistically likely that you’ll simply never hear from them again—they’ve already selected an alternative they’ve found online. If they are a post-financial crisis Millennial, they’re going to be paranoid about taking on unnecessary credit anyway. More on that in a moment.

  Having said that, depending on which market you are in, strong digital usage by Millennials does translate across the board to overall better engagement with your bank as a brand, including the occasional branch visit. Research by Jim Marous and the “Digital Banking Report”2 shows that US Millennials are accessing their bank via mobile 8.5 times per month on average, compared with just 3.1 times per month for non-Millennials. They’re also four times more likely to connect with the bank via email than non-Millennials (4.6 times per month versus 0.9 times). Online account opening is the norm and preferred by Millennials (61 percent), whereas on average about one-third of non-Millennials prefer to open an account online (28 percent), versus face-to-face. For investment accounts, online is even more prevalent. They still occasionally visit a branch, but for the average Millennial that’s less than one visit a year today, and most of the time that’s because the bank couldn’t get it done any other way.

  Interestingly, the research showed that 10 percent of Millennials are now using a digital-only bank as their primary relationship, and 15 percent of high-net worth individuals are also using pure-play digital offerings.

  Indeed, the US Federal Reserve released a study in 2016 showing mobile was the primary channel of choice for Millennials 67 percent of the time. In the United Kingdom, mobile banking use increased 356 percent from 2012–173, with Millennials twice as likely to use mobile banking as their predecessors. UK Challenger and specialist banks saw a 56 percent growth in gross lending in 2016, increasing their market share by 2.9 percent, according to the Council of Mortgage Lenders there. Virgin Money, an online-only bank, is now the eighth-largest lender in the country, above the Yorkshire Building Society and Clydesdale Bank, both long-established institutions.

  It is pretty clear that if you are a bank targeting Millennials, your primary interface day-to-day for nurturing that relationship is your mobile app, and you had better offer streamlined account opening online and via mobile, without the requirement for a face-to-face visit to the branch or a signature card. If you can’t, you have definitely already lost business—whether you assert that you still have Millennial customers using your branch today or not. Statistically, there is no other conclusion to reach. There are definitely Millennials who came to your webpage, saw they’d have to visit a branch to open an account, and simply moved on when it came to deciding which bank they’d choose.

  Figure 1: Generations by the numbers (Image credit: ThinDifference.com).

  For post Millennials, the problem will be even more acute. Generation Z are growing up in a mobile, ubiquitous technology world. Not just internet access through a computer, but they will grow up with computers you talk to; supercomputers you carry in your pocket, gaming consoles, digital video cameras and the nexus of much of their social interactions; computers that recognise them by their face and voice; computers that predict their needs and behaviours, that monitor their health, and that are even a daily companion.

  In the last 10 years, a typical response that I’ve observed might be something like “Hey, wait a second! We still have Millennials walking into our branches. You’re wrong. Once they need a mortgage or start investing, they’re going to want to talk to a human!”

  If a bank is thinking like this, they are falling back on the way they grew up banking, and are having trouble understanding a different frame of reference.

  If you’ve grown up in world where everyone goes to the branch to do banking, if you’ve done that your entire life, if you’ve built your business around that behaviour, you’re unlikely to embrace a change or threat to the culture rapidly and easily4. This cultural bias, whether in society or in the workplace, are the natural effect of systems where behaviour is reinforced, and generally take long periods of time to shift. I first have to seek to change your frame of reference, I have to get you into a mindset where you are willing to accept new behaviour, and you can identify with those exhibiting that behaviour, then you may allow yourself
to change your thinking patterns.

  Today, it’s increasingly rare to be paid in cash, unless you are waitressing in the US, or delivering food for Uber Eats or Seamless. Parents are paying their kids via Venmo because that’s what their friends use, and they just ask their parents if they can pay them into their Venmo account. My 17-year-old daughter didn’t want to think about a driving license after she was old enough to become a student learner driver; she initially thought she’d be fine with an Uber account the rest of her life, until she moved to a location without Uber. When it comes to paying an allowance into Venmo, PayTM or with WeChat, this is often due to network effect, where peer group behaviour creates a positive feedback loop that effects the community at home. “My friends all use Venmo, dad, can’t you give me the money there?” Or in the case of my 14-year-old son, up until very recently he only wanted me to pay him in iTunes credits and PayPal so he could use it online.

  Generational psychology cannot be underestimated as an influencer regarding banking institutions themselves. The market crash of 24 October 1929 caused a “run on the banks”, and still, decades later, older customers cite the need to have access to a physical bank branch as a driver for their choice of bank “just in case”. The global financial crisis of 2007–8, the massive credit card debts of the 1990s, the looming student loan crisis in the US, the increasingly partisan and antagonistic nature of politics, reverberating echo chambers in social media, and so forth, is leading to a broad distrust of institutions like government and big banks for Generations Y and Z.

  In the US less than a third of Millennials own a credit card today (the lowest levels of their age group in the last 40 years since credit cards launched), while their predecessors user them at twice that rate5. This is based on survey data over the last seven years, so don’t tell me it’s an anomalous stat. As Millennials get older they’re clearly not as keen on taking on debt as previous generations were. Traditional credit card rewards programs aren’t stimulating the use of credit either. The total rewards paid by the top six US card issuers doubled from $11 billion to $23 billion between 2010 and 2016, in a clear attempt to attract more young people to use credit cards6, and yet Millennials remain obstinately unmoved.