Bank 4.0

by Brett King

  It is clear to economists who study payment patterns that Millennials are gravitating toward payment methods that skirt both cash and credit. Why carry cash when you can whip out a debit card for the smallest transaction—a sandwich or a bottle of soda—or use an app like Venmo or an online payment service like PayPal? All of those typically draw funds directly from a bank account.

  —“How Millennials Became Spooked by Credit Cards”, The New York Times/DealBook, 14 August 2017

  This is part of a broader behavioural shift in payments. The reality is that if you’re tapping your phone to pay, you’re going to be less and less likely to prioritise a credit card over a debit card as a payment vehicle. The improved utility of mobile payments themselves is tending toward more focus on your balance in your spending account, and that is creating greater awareness for what you can afford. Millennials and Gen-Z, being more focussed on the tech, are simply adjusting their behaviour faster than their forebears. Thus we see a direct correlation between technology use and acceptance of these older paradigms, like credit cards and revolving debt. It turns out a device that allowed you to “impulse purchase” in the moment because you only felt the impact when you got a statement at the end of the month, doesn’t fit with today’s real-time world.

  Banking products and systems are very slow to change, even when faced with these behavioural shifts. However, if you look at the history, you can see banking evolution as a step-change in respect to access, behaviour and preferences.

  Figure 2: The evolution of banking systems as it pertains to access and bank–customer relationships.

  In the evolution from community banking to universal banking, the objective was to create the same stickiness that used to come from geography, through choice and access. A bank that allowed you global access to its platform was only necessary as we started to travel the globe more. A bank that promoted credit cards, personal loans, mortgages, fixed deposits and so forth, was only possible as the middle-class grew. The underlying assumption was that you would have some form of loyalty to your primary financial institution. That you’d only ever really need one bank relationship—anything else was either overkill or disloyal to the bank that gave you your first passbook when you were 10 years old on that field trip.

  In the 1980s and ’90s, being the primary financial institution was the goal of every major banking brand in the world, and universal banking was the way each bank thought they’d achieve this. However, if you weren’t my primary financial institution, your goal was to try and capture as much of my business via specialising on specific products—a credit card, car loan or investment account, perhaps. As the internet has grown, we’ve seen an explosion of choice from all sorts of mainstream and alternative financial services providers. The need to develop alternative acquisition approaches led banks to establish partnerships with car dealers to sell you a lease or car financing, to establish relationships with retail merchants to offer discounts or in-store financing deals, and with property developers to offer mortgages. As time went on, the likelihood of your bank being the sole or primary financial institution diminished as bank products and services were no longer limited to that single bank brand that inhabited your town.

  The emerging generation of customers, however, will have a much different expectation of the so-called “bank”. If they have a problem or need a money solution or advice, they’ll ask their technology layer for a solution. In the short-term they’ll use their mobile phone to search on questions like “how do I buy a car” or “how can I afford to buy a home”. In parallel they’ll ask their peers and their parents. Some of that will result in reinforcing traditional banking behaviour, but as they become more independent and as bank utility becomes more ubiquitous, it will simply be a case of “ask and ye shall receive!” Even more importantly, in the medium-term you won’t have to ask, because by the time we’re wearing augmented reality glasses, the tech will learn our behaviour, our needs, and start to actively anticipate solutions. If anything, we’ll be looking for a primary financial manager on our technology layer rather than a primary financial institution7.

  The customers of tomorrow will expect that when it comes to money, payments, credit access, etc, that it just works. Zero friction will be the rule, not the exception. In this new world, if you ask me to sign a piece of paper or visit a building to get access to a service, a post-Millennial consumer won’t think you are crazy… they simply won’t understand what you are talking about. The cognitive dissonance will be acute. It would be like asking them to check their encyclopedia for the latest price of Bitcoin.

  Rebundling experiences

  The first phase of FinTech was an unbundling of financial services. Whether in investment services, day-to-day banking, student loans, in-store credit, and pretty much every other area of retail banking you can think of, there has been a plethora of startups who have claimed they’re going to eat the bank industries’ lunch. Goldman Sachs’ “Future of Finance” report says it’s plausible that up to 20 percent of industry revenues could be captured by external entrants (translation: FinTechs and Tech players).

  Figure 3: The great unbundling, as told by Bradley Leimer (image credit: American Banker).

  However, unbundling and non-traditional competitors aren’t exactly new. Banks like HSBC, Citigroup and others have carved off their securities division, mortgage business and credit card functions into separate operations for years.

  The marketplace lenders, for example, are offering an alternative for small business owners who otherwise must wait three to four weeks or more to get a bank loan (if they can get one at all). By looking at different data points and evaluating a business’ financials in a more systematic way, marketplace lenders can get the same thing done in hours or days. That efficiency does make a difference. Think about a restaurateur who needs to quickly replace a broken stove, or someone who needs to finance a couple of trucks to expand their business. It may not be the best deal for them, but speed counts.

  —“The Great Rebundling of Financial Services”, BankThink (Oct 2015)8

  In an October 2015 article on the rebundling of financial services, Brad Leimer and Marc Hochstein went on to describe a world where banks could use technology to bundle more efficient services based on FinTechs, to essentially rebuild a universal banking approach based on technology platforms. LendingClub loans for debt consolidation, a Betterment account for investment, Moven for financial wellness coaching, etc. Banks like Fidor in Germany and USAA even tried this type of approach, and Starling Bank’s business model is based on it.

  Marc and Brad were right about the tech rebundling of financial services. However, it’s looking like the technology that will deliver financial services of the future won’t do so at the bank level, it will do it increasingly at the personal experience level.

  Behaviour increasingly will be centered around the technology platforms we use on a daily basis. Train your personal AI on Google and you’ll be using an Android phone, Google Home and Google Smart Glasses. Train your personal AI on Apple and it’ll be Siri, CarPlay, Home Pod and Apple TV. Amazon will be embedding Alexa in as many devices as possible, too. This is like the operating systems and personal computer platform battles of the past—PC vs Mac. Eventually these smart assistant voice technologies might even become interoperable.

  Today we have apps on our phones. We have an app for banking, an app for taxis, an app for booking movies, etc. But in the voice-based future we are accessing services or skills embedded in the platform. We don’t load up an app on our Alexa speaker at home, we just tell Alexa to enable that skill. Unlike the world of mobile app stores we live in today, once we enable that skill we are able to access the underlying features of that service without opening an app. It is like that skill becomes part of our tailored operating system for that device.

  This is where financial services bundling will start to be reframed. We might open a new account, or get access to a new credit facility, without ever knowing the bank t
hat is behind that facility, or maybe only finding out after we’ve selected the features of the facility we accepted.

  The other element that is critical here is recommendations and ratings. Today, banks have been able to avoid side-by-side comparison generally in favour of direct channel reinforcement for access. But when voice and AI become a critical part of bundled financial services experiences, that ability to answer the question, “What is the best loan for me in this situation?” would be vastly different to the way we shop for financial services today. Retail, restaurants, hotels and such have all had recommendation engines, social media and feedback systems that dramatically changes their brand’s credibility in the market. In banking, while there has been pressure applied via social media at the brand level, it’s been harder to directly apply this to specific bank locations, products and services. The next layer of technologies will increasingly do just that.

  Geolocation, context, behaviour, social feedback and sentiment, and identity indicators, are data points and technology platform capabilities that largely lie outside of the existing bank architectures. This is going to create a platform of new brokers and intermediaries that become essential in the delivery of financial services in the future.

  The new brokers and intermediaries

  Throughout this book we’ve talked about many of the new technologies and competencies that banks will need to build, but we’ve also talked about the fact that first-principles thinking and new technology layers that increasingly “own” or dominate customer access, data or experiences. To that end, I’ve tried to put together some illustrative examples of brokers and intermediaries that will over the next few years become increasingly essential to day-to-day banking interactions with customers and partners. These players are, in some instances, an evolution from existing players, like public cloud vendors (Amazon Web Services), telecoms operators and mobile phone app stores; but in other instances, they offer new capabilities that will be faster to integrate than for banks to build internally.

  In many instances, such as voice-smart assistants, in the short-term you might feel that having an AI-teller built into your app or web front-end puts you in the running. However, in the longer term, the technology layers for smart assistants will be OS-based built into your smart devices, home and car, and be much more sophisticated in terms of natural language processing and platform capability than your chatbot. If you aren’t working with these external platforms, it is increasingly likely that your homegrown capability won’t even get utilized by your customers. Of course, building voice capabilities internally today isn’t necessarily a bad thing, as it will get you ready from a data structures and API perspective for working with players like Amazon, Apple and others.

  Let’s look at some illustrative pools of capabilities being developed outside the institution today:

  Figure 4: How capability is being developed.

  Identity brokers

  As already noted, in the mobile payments arena the world is increasingly dominated by IP-based players that aren’t part of the bank-owned or grown payment networks that dominated the world of plastic. Facebook, Apple, Google, Alibaba, WeChat and others are all likely better at identifying individuals than banks are today. Governments like Canada are trialing known traveller digital identity systems on the blockchain that will one day replace passports9. As discussed in earlier chapters, rather than collecting KYC information from scratch, as banks do today, in the future they will use an identity marker like biometrics, behaviour or similar to check against databases like this to verify the customer’s identity. As Dave Birch pointed out earlier, banks may become key players in this trusted identity architecture, but that still won’t mean when you open a new account you’ll have to supply all your identity information again.

  Data brokers

  You probably think that Google, Facebook and Apple have the most data on you, right10? Well, if you live in the US or Europe, those organisations are probably not even in the top 10 of companies that have data on you, or data that helps us understand who you are and what you do. A 2014 Federal Trade Commission (FTC) report11 describes an industry that collects data from many sources without consumers knowing; that is multi-layered and intertwined; and that stores billions of data points covering nearly every US consumer. In the EU, while the General Data Protection Regulation (GDPR) regulates how companies use, protect and utilize EU citizen’s data, this doesn’t provide banks with an informational advantage over other organisations. In fact, with open banking regulations, increasingly non-bank technology providers will have greater access to your banking data.

  But here’s what data brokers know. Your data profile is going to be increasingly critical to organisations that are technology led. Ultimately, this means that if you are in the banking experience business you’re going to have to be working with data brokers that help you understand when and where a customer is going to need the utility of your bank. The data you have in the bank is no longer enough to make that connection; and the data you do have is technically owned by the customer—and they will use it to access services outside your institution.

  Cloud-based service layers

  Today a great deal of the core architecture a challenger bank carries, like cyber-security, identity verification, session management, app store and mobile-OS integration, are simply plug-in services sitting on top of Google, Amazon Web Services (AWS) or Microsoft Azure12. For many banks, private clouds are a sort of enhanced data warehouse. For challenger banks, we see the cloud as a veritable shopping cart of services we can bring to bear without having to build them ourselves. In addition, cloud services like AWS today regularly outperform banks’ own internet security stack by a factor of five to ten. Amazon is getting pummeled by DDOS attacks, hacking, spoofs, and every type of security threat you could imagine, tens of thousands of times per day. Downtime of AWS-based apps is increasingly rare, as their systems become tougher and tougher.

  In the cyber security world, this is often spoken of in terms of a type of immune system response. As you solve more and more attacks, your architecture becomes more resilient. In the case of AWS, they simply get more attacks than any bank in the world, so therefore they’ve had to make their systems stronger and smarter. I bet you 10 Bitcoin that if you put your bank head-to-head against AWS on cyber security, they’d beat you like The Rock at a WWE wrestling match13.

  The point is, for a challenger bank, the decision to go cloud is a no-brainer. It gives you a whole suite of services you can spin up fast, has military-grade security capabilities and you can turn on processors and storage space like a light bulb when you need to rapidly scale. You don’t need to buy more hardware continuously.

  Technology aggregators

  Whether aggregation specifically in the financial services space, or aggregation of other services, increasingly technology-based aggregators will play a critical role as a new generation of gatekeepers. In China, Alipay and WeChat have effectively become payments aggregators and this has become a significant issue for banks in China, and increasingly around the world14. Smartphone operating systems and app stores are natural technology aggregators today, as are voice platforms like Alexa. In 2015, JPMorgan Chase, Bank of America (BofA) and Wells Fargo precipitated a battle between the big banks and popular personal financial management and aggregation services like Intuit/Mint, Geezeo, MX/Money Desktop, Yodlee and others. BofA, Wells and JPMorgan Chase argued the reason for slowing data responses to requests from these sites were security related. However, since then customer demand for these services has only accelerated, resulting in more and more data sharing agreements between banks and aggregators.

  The reality is that there is a first-mover advantage here, where banks with preferential data sharing agreements will get better leverage off aggregation platforms.

  Data residency jurisdictions

  Let’s say you are starting a challenger bank in Vietnam or Panama and you want to use the cloud to do that. You go to Mastercard and
Visa and get a BIN so you can issue cards. You go to the regulator and get a FinTech banking charter and you’re ready to go. There’s only one issue: Amazon doesn’t have a local instance (availability zone, or AZ, in their lingo) in country. So you’ll have to use AWS servers in Singapore or Google cloud in Brazil. Technically this isn’t an issue at all. Latency is fast enough that the lag between a transaction at the POS in Vietnam and posting it on the cloud server in Singapore happens essentially in real-time.

  The problem is that your customer data isn’t stored in Vietnam. Now as Amazon adds AZs around the world this may become less of a problem, but Amazon sees their cloud business like they do their retail business. They use regional hubs combined with local distribution. There is no reason to expect they may ever have instances in Vietnam. Thus, you have Vietnamese customers with their data held offshore in Singapore. It is almost certain that the central bank in Vietnam won’t be too hot on this idea.

  Customer access layers

  In 1990 every channel a customer used to get access to banking was bank-owned; today the majority of day-to-day banking access is through non bank-owned and bank-controlled channels. This means as a bank you need a long-term strategy of specifically engaging with the vast array of technology platforms that have better access to your customers day-to-day than you do.