Bank 4.0

by Brett King

  BANK 2.0: The emergence of self-service banking, defined by the first attempts to provide access outside of bank working hours. Commenced with ATM machines and accelerated in 1995 with the commercial internet.

  BANK 3.0: Banking when and where you needed it as redefined by the emergence of the smartphone in 2007, and accelerated with a shift to mobile payments, P2P and challenger banks built on top of mobile; channel agnostic.

  BANK 4.0: Embedded, ubiquitous banking delivered in real-time through the technology layer. Dominated by real-time, contextual experiences, frictionless engagement and a smart, AI-based advice layer. Largely digital omni-channel with zero requirements for physical distribution.

  If we try to represent this graphically, we would show the economics of banking (primarily distribution and delivery mechanics) on one axis, versus friction (in customer experience) on the other.

  Figure 1: Embedded, ubiquitous banking must be fast, frictionless and real-time.

  To be clear, Banks 1.0, 2.0 and 3.0 all still exist today. There are banks that are still fundamentally Bank 1.0 in nature, operationally and in customer engagement. There are banks that still don’t have a mobile app and limited online capability—they would fall into the Bank 2.0 category. The majority of banks still don’t offer account opening on a mobile, and thus would barely qualify for Bank 3.0 status—sort of Bank 2.5. The number of banks who are truly omni-digital today, that are attempting to shift to Bank 4.0, number in the dozens globally, maybe. Most will never get there, including some of the challenger banks, for what it’s worth.

  The move to Bank 4.0 is punctuated by significant shifts in customer behaviour, the emergence of major non-bank competitors with scale that exceed the reach of the biggest banks in the world, and an entirely different skill set necessary for success. Financial institutions that believe they can survive this onslaught by continuing to deliver basic banking through a branch off the back of a signature card are indeed at the greatest risk of disruption. If you are a bank and want to survive this transition over the next 10 years or so, you can only do so by redefining your organisation, rebuilding your core delivery capability, evolving your team, restructuring around a completely new organisation chart and by changing faster than you would have imagined possible. If you are a bank today you are potentially Kodak, Borders, Nokia, Motorola, Tower Records, Blockbuster, JC Penneys and Sears, Digital Equipment Corporation, Polaroid, Compaq, Borland and their ilk.

  Technology-based disruption is not some anomalous thing that is selective in its focus, that might just choose to leave banking intact. Since I wrote Bank 2.0 in 2009, we’ve already faced massive changes.

  No challenger bank existed in 2009. FinTech investment in 2009 was less than US$2 billion globally, and in 2017 it exceeded US$31 billion (not counting ICOs). In 2009, peer-to-peer lending accounted for less than $1 billion globally; today it has 30 percent market share (unsecured lending) in the United States and is approaching US$1 trillion in total annual loan portfolios. In 2009, mobile payments were being debated and Apple was yet to decide their strategy; but up until October 2017 China alone did US$12 trillion in mobile payments across two non-bank networks, Tencent and Alipay. Blockchain existed as the underlying technology behind Bitcoin, but no bank was considering this technology operationally in 2009; in 2018 hundreds of banks are involved in blockchain initiatives globally. In 2009 only one bank in the world offered digital account opening (Jibun bank, Japan); in 2017 there are hundreds of banks who offer mobile-based account opening, with challenger banks being in the majority as a class. In 2009, 5,000 Bitcoins would have cost you less than $30 to buy; in the closing moments of 2017 those Bitcoins were worth US$100 million. Since 2009, total bank branch numbers in developed economies have declined by 8–22 percent, with an average decline of 1.5–2 percent per year. Since 2009 financial inclusion has boomed in India, sub-Saharan Africa, and elsewhere around the globe, with more than one billion people getting access to a simple store of value; virtually none of those individuals have entered financial services through traditional branch access.

  Little by little we are seeing fundamental changes across multiple lines of business in financial services. Access is being redefined. Economics are being rewritten. Regulation is being refamed. Day-to-day behaviour has shifted permanently away from in-branch engagement, and revenue is going the same way. The number of banks globally is shrinking as consolidation occurs, and at the same time the number of technology and FinTech players offering banking services is exploding. If these trends continue, it must result in a fundamentally different banking sector emerging out the other end. A permanent redefinition of what a bank account is, and what banking means for its customers.

  To emphasize the potential of this disruptive behaviour, let me give you some of my predictions for the 2025–2030 period:

  •By 2025, the largest deposit-taking organisations will be technology players, whether technology leaders like Alibaba, Amazon, Google, Tencent and Apple (potentially), or pure play FinTech disruptors who have simply worked out how to scale deposits more efficiently.

  •By 2025, almost three billion unbanked will have entered the financial services system over the preceding 15 years without ever having stepped foot in a branch.

  •By 2025, every day more people will transact and interact with their money on a computer, smartphone, voice and augmented reality, than those that visit the world’s collective network of branches on an annual basis.

  •By 2025, more money advice will be dispensed via artificial intelligence, algorithms and software, than the entire collective network of human advisors in financial institutions today.

  •By 2025, around a quarter of all daily e-commerce and mobile commerce will be voice or software agent driven, and those supporting voice will get a revenue bump of 25–30 percent compared to their non-voice enabled counterparts.

  •By 2025, the biggest retail banks in the world will almost all deliver the majority of their revenue via digital.

  •By 2030, a dozen countries around the world will be mostly cashless, including China’s urban population, the Nordics, Singapore and Australia.

  •By 2030, AI will have accounted for the loss of more than 30 percent of today’s jobs in banking; and while some of those jobs will be replaced with deep learning specialists, data scientists and so forth, the new jobs won’t come anywhere near replacing the numbers lost.

  Technology first, banking second

  The latest news is not only that Alipay is getting into the banking game, but Amazon is as well. At Money 20/20 in Singapore in 2018, Piyush Gupta observed that despite banks’ confidence that they have brand and network advantages over tech giants, these new players have access to billions of customers already and their acquisition cost is effectively zero. There is no bank that can claim the same today. If you are going to be a technology player, you have to start with the basic assumption that your organisation must change.

  The foundation of banking in the 1.0 era was simply being great at banking—good ROE, good credit risk policies, good distribution and network, etc. The foundation of banking in the 4.0 era is being great at technology—full stop. Being great at banking will actually be a penalty in the Bank 4.0 world, because that complacency could prevent you from changing quickly enough. In the Bank 4.0 era you can survive delivering banking services without any core banking skills (or core banking systems for that matter) beyond the distribution layer, as long as you have the appropriate investments in technology and design. Every time we’ve introduced a new technology layer into the operating environment of banking, we’ve little by little redefined banking itself.

  When the first bank mainframe ERMA1 was introduced it led to the introduction of bank account numbers for the first time. When the ATM came, it led to us shifting from passbooks to plastic cards. When internet and mobile came we had to move off batch processing to real-time, straight-through processing capabilities. When social media came it led to IP-based, person-to-person paymen
ts systems that pressured banks to change from two-to-three day processing times, to the expectation of real-time (or near real-time) capabilities. Every major new leap in technology led to permanent structural and operational changes around that new technology. There’s no relationship, product, service or process within banking that hasn’t been changed by technology over the last few decades, and now even regulation itself is being transformed by technology.

  Figure 2: Technology leaps that have progressively accentuated disruption to the traditional process and policy model.

  The key shift with Bank 4.0 is that the technology is no longer transforming elements of the bank, it is transforming the way we bank irretrievably from the past. Gupta at DBS says banking must become “invisible”, simply embedded in the world around us through technology—we agree wholeheartedly.

  Francisco González, BBVA’s executive chairman since 2000, believes that sooner or later the giants of the internet—Amazon, Facebook, Google—will be his main rivals. Because “the digital world doesn’t allow many competitors”, in 20 years the ranks of banks worldwide could be thinned from thousands to dozens, which will need scale to survive. Wariness of regulation may delay the e-behemoths, but not forever. “If you are not prepared for this precise moment, and you are not as efficient as they are, you are dead.”

  —“BBVA reinvents itself as a digital business”, The Economist, October 2017

  When BBVA identifies an opportunity for a new service or experience, they try to respond like a FinTech would. After identifying an opportunity through their quarterly “demo days”, three days later a team will have been formed to execute. Within four to six weeks a prototype has been deployed and tested on a small group of test customers: sometimes employees, sometimes willing end consumers. BBVA then aims to launch that new service or experience within a few months of the prototype or proof of concept. This sort of turnaround is unheard of at most banks, and still isn’t fast enough for González and Torres at BBVA. They are looking to compete with Amazon, Facebook and Google, after all.

  But remember at the core of this is a simple extrapolation of an overarching trend. Technology is increasingly about these things—instant gratification, ultimate personalisation, frictionless engagement and margins based on scale. The internet was the start and we took value chains and commerce processes and simplified them for the web. Mobile had smaller screens with restricted content delivery capabilities, so we need simpler applications, faster fulfilment. Voice simplifies this again—you’re not going to read out your credit card number to Alexa before it lets you buy something on Amazon. Every step of the way we’ve been removing friction, and the economics of the leading businesses has been framed by digital delivery. It is why I keep emphasizing branch economics are being undermined by simple changes like digital onboarding, and the ability to scale digital banks much faster.

  It is not that I hate branches—it is just that in the face of ever-simplifying digital delivery design paradigms, branches become increasingly inefficient at creating scale and margin.

  Technology is inevitably leading us to a time where financial services must be frictionless. The heavy lifting of KYC, IDV, compliance and risk will all just become algorithms and data collection challenges—not processes, forms and legal rules that require interpretation. It will all be code. Thus, if your business is not encoded, it’s slower. As Elon Musk said, the reason they put robots on the factory floor instead of humans is simple—humans require Tesla to slow down the production process to “human speed”.

  Bank 1.0 is human speed. Bank 4.0 is machine speed. Now: do you think you are ready as a bank to tackle this technology-first future?

  The Bank 4.0 “digitization” scorecard

  If you want to know how close you are to becoming a Bank 4.0 player, use the questions below to score yourself:

  1.First principles is your mantra—Your organisation doesn’t work off conventional wisdom, doesn’t iterate off the analogy of the existing banking business. Frankly, you’re prepared to burn it all to the ground and start again, because you realize the way banking works today based on a system that is 700 years old isn’t the way it’s going to work 20 years from now. You are excited to reimagine banking from scratch. Any traditional operations are there to provide enough profit or working capital to transform into a Bank 4.0 future. You are willing to sacrifice quarterly returns to support a new innovation initiative, and you’ve convinced your board to get on board. If you’ve ever pulled budget from a new digital initiative so you can make your quarterly numbers, you aren’t a digital bank. If you have ever heard someone in the executive team use the phrase “that’s not how we do banking” or similar—you aren’t a 4.0 bank.

  2.A digital CEO—Either a technology geek that has risen through the ranks to be a CEO, or a CEO that has had a “come to Jesus/FinTech” moment and has told the entire bank their mission is to be digital, and can speak with authority on technologies like AI and voice. If your CEO hasn’t given your business a mission to be a digital player, you won’t transition to Bank 4.0. Digital is not a department, channel or separate competency, it is simply the job of the bank, and the CEO is the head of digital with a great team behind him that is fully committed. You can have some specialised competencies under this, but if you have a head of digital that reports to the executive team, then you aren’t a digital bank; you are a traditional bank with some digital competency. Apple and Amazon don’t have heads of digital—Tim Cook and Jeff Bezos are the heads of digital.

  3.Legacy technology and architecture isn’t a constraint—A real-time banking core or strong middleware with the ability to create any product instance or service experience from your digital platform in real-time, and the ability to handle real-time settlements on payments across any platform, is a given. Keep in mind that Amazon, Ant Financial, Tencent and their ilk don’t need a core system to do their version of banking, so you’ll think the same way. Essentially, you are building a set of technology platform capabilities to deliver experiences when and where your customer needs them—if the current technology doesn’t allow you to do it, you’ll just work around those constraints.

  4.Clouds aren’t a coming storm—You think of cloud like you do any other piece of technology or resources available: if it helps you execute more efficiently or gives you access to better capabilities, you’ll embrace it. You don’t need to have all your technology in-house or on-premises, because an internal firewall is simply no guarantee of the best technology or best security. If you don’t currently have a significant experience delivered via the cloud, you aren’t a digital bank.

  5.Experience design is a core competency—You have a team that is constantly prototyping and revisiting every aspect of customer interaction, trying to not just optimise it but to revolutionise it. Building real-time experiences is the fastest growing budget line item in digital, save for maybe a core system replacement and real-time payments retooling; the ability to create experiences for customers rapidly, in days or weeks, is essential. If you don’t have an in-house design team, you aren’t a digital bank. If your CTO has never done a wireframe sketch on a whiteboard or piece of paper to explain where the business needs to go, you aren’t a digital bank. If your traditional marketing budget exceeds digital direct, you are definitely not a digital bank. If a product department or head can override experience design, you’re not a digital bank.

  6.Data science and machine learning are your new core—The ability to leverage off of your data, and the ability to capture more data and to crunch that through algorithms to identify new opportunities, new segments and new behaviours, has energized the business. The biggest question remains: how quickly you can operationalize this capability, not if, but when. If you don’t have a Head of Data Science or a strong budget for AI, you aren’t a digital bank. If you don’t know at least a handful of AI companies working in the space, you aren’t a digital bank.

  7.Regulations are never an excuse—To be a digital bank you will nev
er use regulation as an excuse. Here’s the test: in the last six months, you’ve gone to the regulator with a technology or experience pilot that doesn’t fit into current regulations to get approval to proceed. If you haven’t done this, you aren’t a digital bank. If your compliance team is allowed to kill new experience initiatives, new real-time capabilities or attempts at reducing friction for the customer, you aren’t a digital bank. Your compliance team thinks of themselves as consultants to help navigate the changing regulatory environment so you can get stuff done.

  8.You are partnering with, investing in, or acquiring FinTechs—The smart digital banks know the bigger they get, the harder it is to innovate purely as a function of size. So the smarter banks are finding ways to learn faster through partnerships with very agile teams that are thinking differently about the problem. If you’ve run a “hackathon” but don’t fund a FinTech startup, you aren’t a digital bank. If you have a procurement team that deluges a small 20 person startup with 80 pages of legal agreements that were adapted from your last Oracle services agreement instead of streamlining this partnership, you aren’t a digital bank.

  9.You don’t have to build it yourself—Often when it comes to new technology like mobile, voice or AI capability, you’ll have bank technology teams spend millions of dollars just to have complete control over the process and keep it all in-house. Digital banks value speed of execution over owning the tech, and so are agnostic as to whether it is developed internally or just accessed via plugging in a partner’s technology. Bank 4.0 players realise that FinTechs and their ilk are going to be faster and cheaper than building it internally nine out of 10 times, and their organisation is built to engage as such.