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Financial Institutions Aren’t Prepared for the Digital Revolution

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I recently did an interview with my American friend Jim Marous over on The Financial Brand.

It’s a good interview so I thought I would post my answers here. Feel free to comment!

Your newest book, Digital Human, is obviously an outgrowth from your two previous books, ValueWeb and Digital Bank. What is the biggest message around this book as it relates to all industries? Are we already at the Digital Human stage or is it a stage in process?

Well the previous two books, which I consider to be siblings of this one, were focused primarily on banking and finance. Digital Bank’s main tagline would be that banks were built in the industrial revolution for the physical distribution of paper as value in a network focused upon buildings and humans and today, the challenge is to transform that business into a digital distribution of data as value in a network focused upon software and servers. The book then gives practical tips into how to od that. ValueWeb was more focused upon the transformational technologies of mobile networking and distributed ledgers which, combined, were bringing an internal of value to everyone where we could exchange value fast and for almost free. Digital Human builds upon these ideas but takes a wider view of the things happening globally. Thanks to the success of Digital Bank and ValueWeb for example, I’ve been lucky enough to travel planet Earth for the past four years, learning history and cultures from the Americas to Africa and Asia. In these learnings, I realised that in many developed economies, we implemented infrastructure in the last century that is now creaking at the seams. Meanwhile, countries like China and India are leapfrogging the world and particularly the financial world, developing new ideas and innovations unseen anywhere else. So, the biggest message of the new book is that digital is clearly not business as usual, faster and cheaper with technology, but a massive revolution of everything we do. It is changing the way we talk, trade and transact and changing the way we make business, make relationships and make love. It is a massively transformational moment in the history of humankind and, as I mark it, the fourth revolution of humankind.

What do you mean by a fourth revolution of humankind?

Well, as mentioned, I’ve travelled the world and discovered the cradle of humankind in South Africa that charted the first revolution of humankind: becoming human. I’ve been to most of the Middle East, from Beirut to Riyadh, and discovered the fertile crescent of civilisations where we became civilised 10,000 years ago thanks to framing. I live in a museum that charts the history of the British Navy, and discovered the power of steam that created steam ships and steam trains and powered the industrial revolution where we became commercial and global. And now wed are in the fourth revolution, the digital revolution where, for the first time in history, every human on earth can connect in real-time with every other human on earth through the digital network. This is a fundamental shift in humanity, and the way in which humanity thinks and behaves.

For example, in the first revolution of becoming human, homo sapiens ended up dominating Earth thanks to our ability to talk. Our larynx developed and enabled us to create shared beliefs and live harmoniously in groups of 100s, unlike Neanderthals and other forms of human. In the second revolution, becoming civilised, we invented money due to the fact that only 1 in 5 humans were now engaged in producing food through farming, so 4 out of 5 humans needed something else to do. Money made us civilised. In the third revolution, we invented banks to enable cross-border trade between countries as we became industrial and global. Banks were invented as stores of value, licenced by governments, who could issue paper and could be trusted thanks to their licence. Now, in this fundamental fourth shift of human thinking, what are we creating? Data as currency. We still need banks to store data and we still need to believe that money has value, but the money that has value in this global, digital age is data.

How does digitalization impact financial services and why does the advancement of digitalization appear to be moving so slow in the banking industry?

As you might realise, the ever-increasing march of digitalisation is affecting financial services for sure. In the last ten years, cloud and data analytics is shaking up the back office; APIs and plug-and-play software like Stripe is shaking up the middle office; and mobile device and smart things using apps are shaking up the front office. That’s a whole lot of shaking going on and banks have historically been able to resist this change because they’ve controlled the whole value chain of money. But they don’t control this anymore. Today, banks are living in a marketplace of a 1000 FinTech start-ups doing on thing brilliantly well. That might be analytics of customers’ digital financial behaviours; easily deployed software that automates a function like a trade; or a fantastic customers experience using an app that allows my television and car to download and refuel without my involvement. This marketplace of apps, APIs and analytics is what banks have to adapt to interface and integrate with. In other words, the old bank controlling the value chain and doing 1000 things averagely is replaced by the new bank curating the value chain from 1000 companies doing one thing brilliantly well. That’s a massive cultural change – moving from a control freak to a curator – but it is inevitable and irresistible and if a bank tries to avoid embracing this open sourced structure by staying closed, then they will be just that. Closed.

Where do you see the biggest impact on digitalization in financial services? Is this in the entire concept of inclusion? Can you explain this impact?

I think the biggest change is coming from Africa, Asia and the southern Americas. The reason I say this is that what we have in Europe and America is a legacy economy. Most of our infrastructures were implemented in the last century before Mark Zuckerberg was born. That’s why when we talk about open finance, what we really mean is boring old finance being affected by technology, so it is cheaper and faster, more efficient and more effective. But we still mean business-as-usual. When I look at other economies – China, India, Kenya, Brazil – I see a massive sea change in thinking. Sure, there is business-as-usual, but there’s an awful lot of new, digital business that is unusual. I’ll give you one example. In 2017, Americans spent $5 trillion on plastic cards whilst only 1 in 20 used mobile wallets like Apple Pay or Android Pay; Chinese citizens spend $15.5 trillion on mobile wallets like WeChat Pay and Alipay and don’t really use plastic because it’s so last century and they never had any anyway. This is what I mean by massive change coming from new markets.

In fact, my favourite example is in India where the biggest mobile wallet is PayTM with 250 million account holders. Their ambition is to have 500 million Indians with mobile banking services by 2020. This is a company created by a man, Vijay Shekhar Sharma, who was homeless ten years ago. He has transformed from walking the streets to being the youngest billionaire in India in just ten years. That’s the real impact of digital: it gives everyone the opportunity to be an entrepreneur.

Your book discusses open platforms quite extensively. Can you provide a glimpse into the future and where you think open banking is heading? Do you see the banking ecosystem extending beyond traditional financial services?

Jim, I absolutely do. The digital revolution is just over 70 years old and is moving at a pace. We are already seeing reusable space craft and self-driving cars thanks to Elon Musk and Jeff Bezos, and the world is transforming rapidly. This is why I worry about American and European banks because they clock is at three minutes to midnight. This is the clock monitoring core systems change. Most banks have dodged the core systems change bullet because they could, but I don’t think you can hold off any longer because the next decade – the 2020s – will be a battle about data for customer insight. The next decade will see all the margins we make today disappear. All the margin on credit and payment is going to disappear. This is obvious, as the biggest beneficiaries of open platforms are going to be the platform giants: Google, Facebook, Amazon, Tencent and Alibaba. These guys are not interest in banking, payments and credit, but purely in adjacencies to their core platform structures: how do I get more people doing things on my platform? This is why Amazon and Alibaba give buyers and sellers free loans, because it gets more people buying and selling. So, if you focus upon core bank services of the past, they will not be the core bank services of the future. What will be the core bank service of the future? I believe it will be a proactive, predictive, proximate advisory service about money through analytics and collaboration. A bank will be my advisor through my devices, curating 1,000 companies doing one thing brilliantly well and delivering that to me through intimacy with my digital financial lifestyle. That means the future bank’s competitiveness is based on a single, enterprise view of my lifestyle, and bringing the best of the apps, APIs and analytics providers around the world to my lifestyle to deliver an amazing experience of predictive, proactive, proximate service. This is the only way a bank will survive in the future, especially when so many other companies will be offering my payments, foreign exchange, loans and other services for free.

Related: Technology Is Improving the World, Not Destroying It

You mention that traditional banks, as they are today, are significantly flawed. Can you expand on this a bit?

My main issue is that banks are run by bankers. I love bankers, don’t get me wrong, but they are so heavily skewed to just being led by bankers that they really don’t get digital at all. They understand risk, compliance, audit, regulations, basis point differentials and more, but they have no idea of the difference between distributed ledgers and blockchain or artificial intelligence and machine learning. Should they know the difference? My claim is yes, some of them do, as how can you be a digital bank if you’re just a bank. 94% of the leadership teams of the largest banks have never had any professional technology experience in their life. 4 out of 5 banks have no one on their leadership team who has every worked with technology professionally, or just 1 person. Bear in mind that the leadership team consists of 10 to 15 people, and that means the one person begging for change – the digital person – will usually get shouted down. That’s why banks have dodged the core systems change bullet. As I just said, the clock is at three minutes to midnight or, if you want me to elaborate, about a three-year window for all banks to change their legacy in Europe and America. Most of those systems were implemented in the 1960s to 1980s, with 43% of most big banks core systems running on COBOL. These are systems that few people can maintain, as they’re dying, and few people can use in real-time, as they’re batch overnight updates. In a real-time digital world, this is appalling. In ten years … well, what do you think? In 2028 when we have robots doing everything, artificial intelligence everywhere and machines that know more than we know, do you really think a batch, COBOL, product-focused, silo-structured core systems operation can survive? I don’t think so. That is why I say it is a three-year window, as it will take five years to implement the change.

Equally, it requires really strong leadership to make the change and, if a bank is led by bankers, they will not succeed. A digital transformation of the core structures of the bank impacts everything from system change – those 1970s engines – to cultural change – getting rid of the physical assets when they can be replaced by digital. This is tough, as this is not a project or program but a complete transformation of the bank from the top down. It cannot be delegated or side-stepped, and it cannot be given to a Chief Digital Officer or a project. It is core systems and core cultural change.

I guess as a closing thought, I’ll leave you with this one. In a recent survey by Gartner Group, they found that 76% of the leaders of the biggest banks of the world believed that digitalisation would require zero change to the banks’ business model. REALLY? What planet are they on.

As the digital marketplace becomes more automated, what impact do you see on humans and the future of work?

It is clear that humans will not be doing the work they did before. Citibank estimate a third of bank jobs will disappear in the next seven years whilst Deutsche Bank estimates half. Humans will lose their jobs and it’s not just in banking, but everywhere. I loved this stat from JPMorgan where artificial intelligence engines now manage their wholesale commercial contracts and process a workload in one second that previously took 360,000 hours of effort from their legal team. Let’s sack all the lawyers.

But what will humans do instead? Most of the jobs of the future haven’t been invented yet, and the structure of work in the future is unknown. If my kids work a three-day, four-hours per day job, that’s still work. But what will they be doing? It is clear that the jobs my kids will be doing are the jobs that machines cannot learn. So, they will be doing jobs the rely on the heart and not the head. They will be doing jobs that relate to emotions, rapport, counselling and dealing with human complexities, and not dealing in accounting, audit, reconciliations and compliance. Machines can do all that work, but could they deal my gambling addiction or my drug problem or my wife cheating on me? It is these areas where humans will flourish.

Equally, I think humans will move from numbers to ideas. Our children will be curators. The next century of the arts, of music, of imagination will be amazing. I just hope I’m around long enough to see it.

Finally, your book includes probably the most extensive review of Alibaba and Ant Financial ever done. Can you share some of the significant takeaways from what you have learned from Ant Financial that should be lessons for banks in the western world?

Sure, I picked on Alibaba, Ant Financial and Alipay as the case study in this book, mainly because they are the only company in the world with a focus upon global financial inclusion and are making it happen. In my previous books – Digital Bank and ValueWeb – there are lots of case studies. In this book, there is just one. Now I’m not doing this to promote, endorse or market Alibaba and Ant Financial, but I was intrigued to see them come of China and partner with PayTM in India, Globe Telecom in the Philippines, Ascent Money in Thailand, Kakao in South Korea and more. What was going on?

What I found is that they’re building a global platform to support two billion or more people who historically have not been able to access the financial system. They are building a new systems architecture to do this, and it’s their fifth. That is incredible for a 15-year old company, as it means they reboot the company every three or four years from scratch. Currently, in their fourth generation of architecture, they process 125,000 transactions per second on average with fraud and frisk completely managed by artificial intelligence and machine learning. In November 2017, they processed a record USD$8 billion in the first hour of Singles Day. That’s incredible. The new system will process a million transactions per second average. To put that in context, Visa processes around 2,000 transactions per second. Ant Financial’s story is a phenomenal technology endeavour and takes up a third of the new book and rightly so. After all, it is the first in-depth case study of what they’re doing in the English language.

The lessons for banks in the Western World? Well, Ant Financial’s story is all about QR codes for payments using smartphones. This is now deployed globally through local partners in developing economies and global partners like Ingenico and First Data in global economies. So, the next time you go through an airport and see the Alipay sign, think about this. What if you could us your smartphone to pay with a QR code instead of Visa or MasterCard? And what if you got 10% or more off the price of the checkout ticket by doing so? Just saying …

Right now, the book can be ordered here.

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