Bank 4.0: Banking Everywhere, Never at a Bank

by Brett King

Finally, here are the top 10 messages that Jack gives people for business: On chasing dreams: dream big, really big Remember: the bigger the problem, the greater the opportunity Today is tough, but the day after tomorrow is beautiful Focus on the customer and the rest will follow Learn from competitors, but never copy them It’s more important to be best than first Find opportunity in crisis Use your competitors’ strength against them Don’t dwell on mistakes The team should work for the goal, not for the boss

Another move occurred in 2014, when China’s regulators offered private companies the opportunity to apply for banking licenses, resulting in Ant Financial launching a bank in 2015 called MyBank.

At its launch Eric Jing, MyBank’s executive chairman, said that their mission is “answering to the needs of those who have limited access to financial services in China” and “is here to give affordable loans for small and micro enterprises”.

A bank developing its core banking system internally is not unique in China, but Ant Financial went one step further by deciding to sell the cloud-based solution to other banks in China. The breadth of the solution is extensive, including risk management, lending, deposits, mobile apps, infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), know-your-customer (KYC) and more.

One of the big things about Ant Financial is its principles and mission, which is all about using technology to improve society and the economy.

A key backdrop to the Zhima Credit score, creditworthiness, microloans and inclusiveness is Ant Financial’s continual real-time analytics and risk management. This enables the company to deliver its “3, 1, 0 strategy”: it takes three minutes to apply for a loan; one second to transfer the funds to the applicant’s account; and there is zero manual intervention in the whole process.

This is bringing a convergence between creditworthiness and wealth to help people from all walks of life to realise their dreams. Creditworthiness is linked not only to wealth, but also to the operation and governance of society. It is closely related to everyone’s daily life. This is why the usage of technology to extend credit to everyone creates a more inclusive economy and a more equal society. Ant Financial believe that, in the near future, it is likely that cameras in restaurants, subways and airports will automatically identify your credit status. People will be able to go out without a mobile phone, cash or even an identity card. They can go anywhere using only their face as their authentication system. From your face the cloud, and the big data of creditworthiness behind it, will become everyone’s passport in society. The trustworthy will be welcomed everywhere, while the untrustworthy will be rebuffed at every step.

This is another key tenet of Ant Financial’s vision, in using creditworthiness to improve social governance and make integrity a highly valued attribute of society.

Statistics on Ant Credit Pay show that the proportion of people born in the 1990s who repay their debt on time is 99 percent. A society that values and upholds integrity is taking shape.

Their strategy is based upon finding companies in other countries who offer an e-wallet payments service, and then to invest in those firms and share their technologies with them. Eventually, it is likely that Alipay and Ant Financial’s base technologies would be powering the core infrastructure of e-wallets globally—a sort of globally aggregated wallet service.

This is a fast-moving company that is expanding non-stop in its mission to be the dominant global mobile wallet.

And their business model is fundamentally based upon deep user understanding, not cross-selling.

If there’s one area that is going to need a total, first principles rethink, it is regulation.

What’s needed is digitally-native regulation.

Regulators face this risk too, holding to traditions built on long histories of painfully-learned lessons. The regulators’ challenge is compounded by the risky and constrained frameworks in which they operate. Even more so than banks, regulators are simply not built for rapid change.

In fact, the most likely thing to go wrong in the Bank 4.0 model is that we will regulate it badly, or that we fail to future proof the sector so our institutions remain globally competitive.

With few exceptions, regulators are not innovators, and respond to innovation as a risk to the market—a virus that must be killed off by the regulatory immune response.

if Bitcoin achieves a high enough level of utility and becomes a stable form of value exchange, it could actually be more effective for cross-border commerce than even the most popular forms of fiat currency. As the world moves towards globalised online commerce, there’s really no advantage in a geographical-based currency on the IP-layer, and as such a popular digital cryptocurrency could easily start to compete with traditional fiat currencies based purely on utility.

The reality is that Bitcoin has a design problem that prevents it from being the first truly digital, global currency—and that is the current trend of hoarding Bitcoin3 and speculating around its possible future value.

Artificial intelligence, the blockchain and the need for smart contracts will lead to IP-optimised value exchange systems that circumvent currency controls by necessity. If a regulator inhibits cryptocurrency models or blockchain deployment, by necessity their economies will start to slow.

A regulator that outlaws ICOs would be heavily limiting its options at the market level for participation in the future of financial services,

Banks find themselves today being the unwitting police force for a global anti-money laundering machine that is amazingly ineffectual.

The United Nations reports that financial crime today amounts to two to five percent of global GDP—as much as US$2 trillion annually—and that current AML efforts catch less than one percent of current illicit financial flows

According to a recent University of Chicago report, in their “generous” assessment they estimated that only 0.2% of money that is laundered is successfully seized. That means for every dollar caught by AML regulation today, $499 is still successfully laundered. We’re spending globally $50–100 billion each year for a 0.2% success rate in AML.

when we combine lower incentives or tendency to drive, the increasingly ubiquitous nature of shared transportation services like Uber, and the medium-term impact of autonomous or self-driving cars, one thing is abundantly clear: fewer drivers means fewer driving licenses, means fewer identity qualifications, and this means greater financial exclusion based on current KYC rules in markets like the United States15.

You can either lower identity requirements or create new identity structures to support inclusion, but you can’t create IDV requirements that need driver’s licenses and passports for a population that doesn’t drive and doesn’t travel and expects financial inclusion through branches. That model is a recipe for financial exclusion as the 25 percent of US households that are underbanked already know.

Who is well placed to support financial inclusion and access over the next couple of decades? Frankly, it isn’t the banks. The largest holders of broad identity data sets today are Facebook, Apple, Tencent, Amazon, Alibaba/Alipay, Uber, Snapchat and other platforms with massive scale. Those platforms not only have basic identity data, but they often have quite sophisticated behavioural data sets along with biometric data like facial recognition, etc. It is likely that Facebook18 today has better identity information than the majority of retail banks in the world. Oh, and they are all on the cloud.

Regulators that insist that face-to-face verification is required using a driver’s license or passport, along with a physical signature, are not securing banking for consumers, they are part of the problem.

The only way for regulators to guarantee incumbents stay competitive is to remove both the face-to-face and cloud platform constraints. By 2025, we could see most banks outsourcing identity to identity brokers like Facebook or the Aadhaar card. It simply doesn’t make sense for banks to be collectors and holders of identity data in the future. It’s far more likely banks will interface with identity services and just pass enough information across to verify the identity of the new customer is accurate. Not to mention that technology like software-based facial recognition is 15–20 times more accurate at identifying a customer than a typical face-to-face interaction19. A fact that would indicate face-to-face account opening is no longer safe—it’s probably statistically the single riskiest thing a bank could do in this day and age.

By restricting the use of cloud as a platform for regulated entities, regulators are actually ensuring that their banks won’t be able to sustain competitive platforms against emerging FinTechs and technology leaders.

Restricting the cloud today will increase the gap between the most progressive financial markets and your own.

Today, lenders can use new kinds of data and machine learning to fine tune risk evaluation models that were developed in an era when, again, data and computing power were both scarce. Combined with the mobile phone, which is bringing financial access to billions of people never served by brick and mortar branches, this data revolution is the most democratising force in the history of finance.

Private companies that don’t adapt rapidly to new technology will be replaced by ones that do, ones with better utility. In the regulatory realm, however, institutions are created by sovereign governments. Despite some likely restructuring, most are here to stay. To avert the regulatory disasters described above, these organisations will have to change. The journey to a 21st century financial regulatory system will be long and hard.

Most current regulatory bodies will need rethinking regarding missions, scope and protocols. They will need to change training and to recruit new skills, especially in data science.

The skill set required by the regulator of 2030 is not one of policymaking and examiner-based compliance; it is almost entirely technology supervision based and the ability to respond and correct the market in a very dynamic, real-time capability.

There is no doubt at all that the future of banking is entangled with the future of identity. Digital identity is a key resource in the new economy and banks, just like other organisations, will need to develop digital identity strategies.

Facebook has no statutory obligation to remedy such problems1. Banks, on the other hand, are regulated financial institutions—were they to provide identity services—and would be obligated via regulation to ensure your identity was protected.

This seems to me a very appropriate distribution of responsibilities. When the internet dating site gets hacked, as they inevitably do, all the criminals will obtain is a meaningless token: they have no idea who it belongs to, and Barclays won’t tell them.

rather than try to keep people out of the system, we could do everything possible to get everybody into the system. Why? Well, because when people are excluded from the system you have absolutely no idea what they’re doing.

Digital identity should be central to bank and regulatory strategy moving forward. Without it, you’re not just a number, you are nobody in the digital world.

[The United States] have probably the most antiquated payment system in the whole world.

The primary challenge for banks is that once money goes into the WeChat or Alipay ecosystem, it rarely leaves—and banks have zero visibility of it once that happens. The battle for mobile payments appears over in China. Soon the battle for deposits will be also.

By issuing their own debit card, Uber instantly became one of the largest acquirers of new SME bank accounts in the USA, but that wasn’t their goal—they just wanted to accelerate the growth of their business, which banks were slowing down.

Alibaba and Amazon have increasingly started to offer business banking services to entrepreneurs on their platform. Whether that is a store front through their platform, small business loans, foreign exchange, capital management, taxation and other operational elements, increasingly these platforms will enable business users to do more of their banking and finance integrated into their platforms. They want businesses running all of their operations on their platform and not needing to go to a bank branch for functions they can provide.

Behaviour is switching to mobile and digital payments globally, and will be almost exclusively digital by 2030. Voice-based commerce and mixed reality technologies will speed up the shift away from physical artifacts.

At the core of the difference between challenger/FinTech banks and incumbents is their mission: challenger/FinTechs want to radically simplify the banking experience, but incumbents seem much more intent on wanting you to choose their bank products over their competitors. Friction is the antithesis of the design premise for FinTech banks. Every FinTech is trying to take friction out of the experience, making it faster, easier and sexier6

Lastly, legacy systems, rails and regulation mean legacy customer behaviour, and the ability to change that behaviour, such as the use of cheques in the United States, is often just as difficult. It is why markets like Africa and China are getting much faster rates of mobile payments adoption than the US—they generally don’t have to move people off legacy behaviour.

Self-driving cars could eliminate 3,000 deaths per day, more than 95 percent of which occur due to human error. This will eventually lead to human drivers being considered too lethal for many environments—like city centres

In the United States, only eight percent of the population exhibit the ability to be that disciplined14. Which, for the same reason as dieting fails, means that 92 percent of us will never be able to budget effectively even with a digital tool. Fitbit style bands, calorie and step counters, and a quantified self approach to fitness, on the other hand, have generally had greater statistical success in improving health. The same will undoubtedly be true of AIs that aid us in gaming our financial behaviour. Whether that is via raising awareness, limiting our spending or simply increasing moments we think about saving.

What this means for banking is that the two most influential future channels for day-to-day banking use are both designed to be real time and experiential in nature, not transactional or product-based in nature.