Bank 4.0: Banking Everywhere, Never at a Bank

by Brett King

the future of banking was, in fact, emerging out of developing economies, and not the established incumbent banking sphere.

If we observe the trend over the last 25-plus years since the commercial internet arrived, we can see that there’s an overwhelming drift towards low-friction, low-latency engagement. Like every other service platform today, banking is being placed into a world that expects real-time, instant gratification.

When technology-first players emerged in markets where there were large unbanked populations that had never visited a bank branch, there was no need to replicate branch-based thinking, there was just the need to facilitate access to the core utility of the bank. This, combined with the design possibilities afforded by technologies like mobile, allowed for some spectacular rethinking of how banking could be better embedded in our world. It turned out that these new approaches offered much better margin, better customer satisfaction, engendered trust that was just as good as the old-world incumbents, and businesses that held far more dynamic scaling potential.

Everybody has a plan until they get punched in the mouth. —Mike Tyson

But design by analogy creates limitations in engineering thinking, because you’re starting with a template—the work is derivative. To create something truly revolutionary you have to be prepared to start from scratch.

Instrumental in Musk’s approach to each of these businesses was his belief in the engineering and design concept called first principles.

first principles take problems back to the constituent components, right back to the physics of the design—what the design was intended to do.

I think it’s important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. [With analogy] we are doing this because it’s like something else that was done, or it is like what other people are doing. [With first principles] you boil things down to the most fundamental truths…and then reason up from there.

Musk has the unique ability to learn new skills to an extremely high level of proficiency in very short time frames.

SpaceX will have reduced the cost to orbit by more than 90 percent in the 14 short years of their commercial operations.

Musk isn’t the only one to believe in the philosophy of first principles design. Steve Jobs was a believer in getting back to basics for redesigning well-worn concepts.

Why am I focusing on this? Ask yourself a couple of simple questions. If you were starting from scratch today, building a banking, monetary and financial system for the world, a banking system for a single country or geography or just designing a bank account from scratch, would you build it the same way it has evolved today? Would you start with physical bank branches, insist on physical currency on paper or polymers, “wet” signatures on application forms, passbooks, plastic cards, cheque books, and the need to rock up with 17 different pieces of paper and three forms of ID for a mortgage application?

The banking system we have today is a direct descendent of banking from the Middle Ages.

in many parts of the world you still can’t open a bank account online or on your phone—and that’s a quarter of a century after the commercial internet was launched.

If not, like Elon Musk’s approach to SpaceX rockets or Steve Jobs’ approach to smartphones, the only way we’re going to get exponential progress and real efficiencies is through a first principles rethink of the banking system.

In first principles, utility is king

Let’s strip it down to the constituent physics, as Musk suggested. What does a bank do that no other organisation can do, or at least do consistently well?

I would suggest banks have traditionally provided three core pieces of utility: A value store—The ability to store money safely (investments fall into this category) Money movement—The ability to move your money safely Access to credit—The ability to loan money when you need it

Technology now affords us the ability to radically eliminate that friction and create banking embedded in the world around us, delivering banking when and where we need it the most.

We will never need to call the bank, as the semantic bank is always with us, non-stop and in real-time.

In a world where banking can be delivered in real time, based on predictive algorithms and surfaced using voice-user interfaces like Alexa and Siri, in a mixed-reality head-up display like Magic Leap or HoloLens, in an autonomous car or home, or just in increasingly smarter watches and phones that you carry everywhere, banking simply becomes both embedded and ubiquitous. But let’s be clear—it is not the bank products of today that will ultimately become embedded in this smart world. Only the purest form of banking utility.

In this emerging world of instant payment utility, for example, the artifacts and products we associate with payments today—hard currency, cheque books10, debit and credit cards, wire transfers, etc—will simply disappear. Ultimately, they represent only structural friction in enabling payment utility.

In this AI and agency-imbued world, utility is the core—products become invisible as they are transformed into everyday, technology-embedded experiences.

you won’t stop a voice transaction to get your physical card out and read 16 digits to Alexa. The promise of rewards simply won’t be enough to disrupt that core payment utility.

If you’re a bank that does a deal with Uber or Amazon to provide some sort of bank utility to an Uber driver or an Amazon small business, you have the advantage of access and scale, but you no longer “own the customer”.

We’ve been hearing about the threat of the “Facebook of banking”, the “Uber of banking”, or the “Amazon of banking” for many years now, but if you step back from the hype, we’ve already seen the emergence of new first principles competitors.

Real first principles thinking in banking isn’t happening in established, developed economies. The real action is in emerging markets or developing countries where legacy is poor.

In 2005 if you lived in Kenya there was a 70 percent chance you didn’t have a bank account,

Today, if you’re an adult living in Kenya there’s a near 100 percent likelihood that you have used a mobile money account (stored in your phone SIM), and that you can transfer money instantly to any other adult in Kenya.

Today at least 40 percent of Kenya’s GDP runs across the rails of their mobile money service called M-Pesa

On average, the central bank estimates that the average Kenyan saves 20 percent more today than the days prior to mobile money.

Research by Standard Bank in 2015 showed that 70 percent of these so-called “unbanked” people would have to spend more than an entire month’s salary just on transportation to physically get to a branch. Branch-based banking was actually guaranteeing financial exclusion for these individuals.

Kenya Commercial Bank quadrupled their customer base from just over 2 million customers to more than 8 million customers in just two years by deploying a basic savings and credit function on top of the M-Pesa rails. A 124-year-old bank that took 122 years to reach its first 2 million customers, and just two years to reach the next six million.

The transaction volume of Chinese mobile payments reached 10 trillion20 Chinese yuan (US$1.45 trillion) in 201521, and they reached 112 trillion yuan (US$17 trillion) in 2017. In comparison, the equivalent figure for mobile payments in the United States stood at a meagre US$8.71 billion in 201522 and US$120 billion in 2017, less than 0.1 percent of China’s traction.

That meteoric growth is down to several factors, but most notably because China is today dominated by non-bank payments capability on mobile that has massive, massive scale due to non-bank ecosystems.

To help you understand how much larger Alipay is than conventional payments networks, in 2015 Visa reportedly peaked at 9,000 transactions per second across their network, while Alipay delivered 87,000 transactions per second at peak—almost 10 times that of Visa.

The mobile payments market in China is growing at 40–60 percent year on year and Ant Financial (Alipay) and Tencent (WeChat/WePay) claim more than 92 percent of that volume today

Alipay, through their Yu’e Bao wealth management platform, managed $226 billion in AuM (and growing)—all via mobile and online channels. Alipay has no physical branches for taking deposits.

Today, Ant Financial is on track to become the largest single financial institution in the world. Seriously. Within 10 years, based on current growth, Ant Financial will be valued at more than US$500 billion, and by 2030 it will likely be approaching $1 trillion in market cap value.

Ant Financial has a first mover advantage as a true first principles financial institution built upon the utility of mobile. Ant Financial is not a bank, it is a FinTech, or more accurately a TechFin company—a technology company focused on financial services.

Bank 4.0, however, will be about more than new value stores, payment and credit utility. Bank 4.0 is going to be embedded in cars that can pay in a drive-through without the need for plastic, or autonomous vehicles that generate their own income and pay their own road tolls. Bank 4.0 is going to be embedded in voice-based smart assistants like Alexa and Siri, available at your command to pay, book, transact, enquire, save or invest. It is going to be embedded in mixed-reality smart glasses that can tell you, just by looking at something—like a new television or a new car—whether you can afford it. Bank 4.0 is about the ability to access the utility of banking wherever and whenever you need a money solution, in real time, tailored to your unique behaviours. The emergence of Bank 4.0 means that either your bank is embedded in the world of your customers, or it isn’t. It means that your bank adapts to this connected world, removing friction and enabling utility, or it becomes a victim of that change. The bankers of tomorrow are not bankers at all—the bankers of tomorrow are technologists who enable banking experiences your customers will use across the digital landscape. The bankers of today, the bank artifacts of today, the bank products of today, are all on borrowed time.

Two-thirds of the world’s cheques today are written in the United States,

However, the fact remains: when it comes to mobile payments, Kenya is a far more advanced economy than the United States. When it comes to financial inclusion, Kenya has done more to improve the lot of its populace in the last 10 years than the US has in the last 50 years through legislation like the Community Reinvestment Act. Indeed, Kenya today has higher financial inclusion than the United States—a mind-blowing and clearly inconvenient statistic.

Ultimately, this fight will occur across the global stage, and the new metric for developed economies won’t be things like GDP and economic growth, but the ability to leverage new technologies to become smart economies, the ability to enable automation, investments in smart infrastructure and the ability to capitalise transformation.

I wrote extensively about the changes in China in 20061 and, back then, was predicting that the biggest banks in the world within a decade would all be Chinese. Today, they are:

ebay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win. —Jack Ma, CEO, Alibaba Group

In other words, it offers a digital marketplace that manages the complete process of digital creation from start to finish. The banking stuff is simply embedded in this ecosystem.

“In the next 10 years all industries will change due to AI, big data and cloud. Industries will be turned on their head. This means that, in the future, there will be no “made in”, as in “Made in China” or “Made in India”. You will just have designed, ideated, printed and made it in the internet. Equally, everything can now be customised. It’s expensive to customise today but, if you can’t do it tomorrow, your company will fail.”

“If you are having a difficult time as a startup, we were like that, but we had a dream and now we have got there. Now we are a huge company, but if we stay there and don’t share those riches, then everyone will hate us. So, we have to make everyone richer. If you are the only rich person in a village of paupers, the paupers will kill you.”

By 2036 we will have built an economy that can support 100 million businesses for billions of users. We won’t own that economy. We will just govern it.”