Bank 4.0: Banking Everywhere, Never at a Bank

by Brett King

Most of the FinTech providers working on chatbots generally cannot justify undertaking that sort of research either. Instead, they plough ahead, developing incremental AI that tends to focus on product-based and marketing-heavy advice, rather than something more valuable to the end consumer.

To become truly relevant and make an impact on behaviour, AI will have to become a day-to-day companion. It will have to be an entity that understands not only the client’s actions as inferred by location or spending patterns, but their intent, their overall emotional state and even their deepest secrets—and be able to steer their state of mind towards where they are inclined to make better financial choices, instead of solely offering dry, meaningless information.

The builders of chatbots shouldn’t be asking themselves, “How do I implement geolocation push alerts this month?” but “When and how do I use the notifications based on location, ensuring the client gets a sense of gratitude for having been notified contextually of a potential gain, instead of just annoyed if they perceive it as mindless marketing?” They should consider how to become that trusted and invaluable advisor that the consumer turns to when needing help with their money.

While being informed that by forgoing the mythical cup of coffee you’ll be a week closer to your savings goal would be potentially useful, today the bank has no idea you’re about to have that cup, or what your savings goal is. The bank simply can’t advise you in respect to spending less on a certain type of expense or for thinking of retirement by starting direct payments to a private pension plan, because it doesn’t actually know what your current situation or drivers are today.

My bet is in every bank in the developed world when measured between 1990 and today you’d see a decline of somewhere between 60 and 80 percent in respect of that single metric annually. Meaning, that if you expected to see a customer visit your branch 10 times a year back in 1990, today on average they’re visiting less than two or three times per year.

Recently, Chase required me to visit a branch in the US to do an ID check because I tried to do a wire transfer on my account for the first time in some months. These examples I’ve given are all false positives—they certainly do not represent an argument for continued viability of the branch. Why? Because as soon as a neo-bank competitor establishes a benchmark competency for these same capabilities without requiring a visit to a branch, then your bank will eventually be measured against that standard. Keep in mind that none of these examples I’ve given are required by regulation either, but they are in place because of an overly conservative internal compliance process.

Banks reliant on branches will have nowhere to go, they’ll just continue to argue branch relevance while they shrink. In the same way that retailers argued people still wanted to come to their stores, while retail stores were closing by the thousands.

In July 2017, Kakao, a Korean internet platform that has the largest messenger app in the country and runs a service like Uber called Kakao Taxi, launched their own internet-only bank—Kakao Bank. In just five days Kakao had opened more than one million accounts5, attracting over half a billion US dollars in deposits, and they claim they would have been able to open more had their technology not been overwhelmed by the demand. This is increasingly the standard the new internet banks are being held to, but Kakao, Tencent, Amazon, Uber and Alipay have advantages over digital pure play and incumbents alike. They can apply network effect from their existing platforms to functions like deposit taking and payments. It’s not just that they have access to millions of customers, but that those customers will use their networks for payments, commerce and other bank-like stuff. When those platforms start to offer banking utility, it’s an obvious evolution of their network utility.

Friction will be the biggest killer of bank revenue in the next 10 years. The lowest friction experiences will win the highest network adoption rates.

Why are banks like this looking for more commerce action? Primarily because the data and behaviour that drives use of banking services is increasingly shifting online and to mobile—and advertising on billboards, TVs and newspapers just doesn’t cut it anymore. Today, if you want to get a customer to use your banking services, increasingly it has to be wrapped around some other sort of transaction or interaction where they need credit available to complete a purchase, for example. Additionally, once a consumer is using banking embedded in another platform, banks lose visibility on what customers are doing.

In August 2017, the prime minister of Singapore said in his national address that Chinese tourists to Singapore are asking why it is so backward that they still have to use physical cash. It was then that he stated that Singapore had to go cashless fast, and announced a government-backed initiative to achieve that.

The big shift is this: in the world of banking from the 1400s to 1995, every bank transaction or product was issued through a bank-owned and operated channel—a branch, call centre, broker or ATM network. Today, non-bank channels clearly dominate day-to-day banking access and transactional activity (mobile app, web, and voice as examples). Within a decade, non-bank channels will dominate revenue also.

Digit, Acorns, Qapital, Moven and Stash are all examples of apps that stimulate savings behaviour, but don’t have a traditional savings or investment account structure—you don’t even apply for a savings account to start saving, you just apply for access to the service or app.

The future of payments is clearly based on this trend: real-time, frictionless payments from one value store to another, independent of a physical payments artifact (like a cheque or card), with the greatest network effect.

The trend seems to be a clear indication that future payments will be simpler, more inclusive and built into the digital ecosystem as seamless and experience-optimised. The best retail experiences in the future will be walk in, grab the goods you want, and walk out. The best online retail experiences via voice or augmented reality will simply know who you are and how you pay, taking any transactional friction out completely. The fastest way to pay your friend will be to use a simple gesture to swipe money from your mobile wallet to his, or when you say “Siri, pay Mark $50”.

Design by branch analogy would still require me to apply for a credit card in advance (even if via my mobile or via Alexa), just in case I needed the money one day. First principles mean new financial service networks wouldn’t build credit scores that punish you for missing a payment on your card. First principles organisations would design systems that predict your behaviour, only encourage credit use when you really need it, and help you manage that credit line reactively, including influencing new spending decisions so you don’t compromise your ability to pay back your credit line.

Context is the new experience battlefield because it brings the utility of banking to you when and where you need it, instead of relying on the customer asking to be approved for a facility. This is the key switch that is being made—Bank 4.0 experiences will be an attack on the entire onboarding and application process banks have designed today.

List of typical bank products that could disappear.

Platform owners like Alibaba, Amazon, Apple, Google, WeChat and Facebook may have some considerable advantages here. It’s why there are way more mobile and augmented reality payments patents owned by technology manufacturers than banks.

BBVA will be a software company in the future. —Francisco González, Chairman and CEO BBVA, Mobile World Congress in 2015

When we think about the impact that the smartphone has already had on banking, it is clearly significant. 2015 was the first year that more people used their smartphone to bank than visited a bank branch, call centre, ATM or bank website. It took just eight years for the smartphone to become the dominant form of day-to-day banking access14.

The qualitative research I’ve carried out has come up with just a few of the jobs that will be considered critical in revenue and capability growth in financial services over the next five years or so. Data Scientist Data scientists are a new breed of analysts and data architects who have the technical skills to solve complex problems and to answer big questions. More often than not, data scientists find themselves exploring exactly what problems need to be solved, based on where the data takes them. They’re part mathematician, part computer scientist and part trend-spotter. They sit between the business and IT worlds. Machine Learning Specialist Machine learning or algorithm specialists are specialist programmers, architects and modellers that built the systems that use cutting-edge artificial intelligence. They design machine learning (ML) algorithms, source data, train, evaluate and deploy ML models, and work to develop predictive and cognitive processing capabilities. The ability to test systems quickly and deploy at scale rapidly are key. Experience Designer/Storyteller Experience designers and/or storytellers can place the bank and its utility in customers’ lives through technology in the most frictionless manner. They look at aspects of design like interaction and interface design, rapid prototyping and usability to develop highly compelling, low-friction engagement. The ability to think differently, circumvent existing processes and policies and challenge the organ...

The real challenge for banks, of course, is that if you’re a tech graduate coming out of a university looking for a job today, would you be looking to work for a startup, a tech major like Facebook, Apple or Google, or would you want to join a bank? Recruiting these skills will surely be a challenge for financial services organisations culturally, as we’ll discuss in later chapters. Technology partnerships with organisations outside the bank will become increasingly commonplace as banks realise that they no longer have the technology expertise that outside actors do, and that to build it themselves will cost much more and take much, much longer than simply partnering with a FinTech or tech firm that excels at that same competency.

The table on the next page breaks it down into potential core competencies by functional area, showing how revenue might be delivered and people and resources managed in the near term: Table 3: Corporate function versus core competencies by functional area.

This may all sound old fashioned and quaint, yet today we have a generation of younger people coming into the financial system with no real trusted confidant from which to ask financial advice.

The rise of the smartphone app has, however, started a trend that now allows for a deeper connection of personalised services with banks. The app ecosystem evolved us from the isolated ATM days and set up a foundation for the next shift, voice-controlled AI.

There are many things our true personal assistants will do; one of them will be financial advisement custom-tailored for you, based on your deep context and your goals. Your personal assistant will be a voice-first AI system that never leaves you. Over time the context it establishes will be with your clear permission and with the highest security. You will also form an alliance with your personal assistant in a way previously unseen in technology. This will allow for the rise of the new automated, personal banker powered by your personal assistant and integrated with your banks and other financial companies.

This personal assistant will know all past, current and potential future financial events down to the minutest detail.

Your AI banker won’t be selling you a mortgage, it will be helping you understand what you have to do to buy a home. This is already an improvement on a mortgage advisor who can only really suggest different types of mortgages.

In this world “advertisements” will not be aimed at you directly, but at your AI banker.

The deep knowledge and deep context will create a “relationship” that would rival that of a personal banker for the very wealthy. The ability to have an ongoing, perhaps life-long dialogue with our personal AI banker will create a relationship that may become the single most important business relationship we form in our lives. This relationship will weave into just about every aspect of your life. Once you have the power of a personal AI banker, there is no chance that you would want to contemplate a world without it. There’s also no reason to go to a branch to speak to a human either.

Dubai is a frontrunner in adopting the latest technology and has set a goal to become the world’s first government to execute all implementable transactions on the blockchain by 2020. The government initiatives in this direction present tremendous business opportunities for the private sector in the UAE.

One of the key points Birch makes in his review of the future of cryptocurrencies is that over time money has increased in both utility and function, and that money must become intelligent to retain utility and function in the medium term. Ultimately money is becoming a form of technology itself.

We celebrate a GDP figure of better than two percent like it’s 10 or 20 percent today. The mainstream companies that fuelled economic growth, like GE, Exxon, and the banks, are still profitable, but compared with the tech giants like FAANG (Facebook-Apple-Amazon-Netflix-Google) and BAT (Baidu-Alibaba-Tencent), they aren’t going to see results like they had in the 1980s ever again. Underpinning this are a few major macro trends:

Prior to the big correction of January 2018, the US stock market had gained $3 billion in value in 2017 and saw gains of 17 percent. But fully one-fourth of that growth came exclusively from technology stocks, namely Apple, Microsoft, Facebook, Amazon, and Alphabet (Google’s parent company)

With renewables looking to overtake fossil fuels in the 2030s in terms of total generation capacity, and with solar this year becoming the cheapest form of unsubsidised electricity generation per kWh, we are looking at a slowly collapsing commodities market.

Clearly while the stock market is growing, commodities overall (largely because of fossil-fuel commodities’ sustained slump) will not provide the growth opportunities they once did, save for perhaps rare earth metals.

Think of it like this: in the 1850s and 1860s, the growth economies were investing in electricity, railways and telegraph lines. In the early 1900s it was roads, telecoms, and factory-based assembly lines. In the 1960s it was electronics, computing and business services. Each of these competencies were the core infrastructure and talent components for industrial and GDP growth over the next 50 years—the ability to stay competitive. Economies that failed to invest in that infrastructure found themselves significantly behind the competition within just a decade or two. Developed economies were those that continually invested in the infrastructure required to make themselves more competitive.

ICOs are, like most FinTechs and technologies, an attack on friction—the friction of raising capital.

emerging blockchain technologies offer security and auditability that existing bank databases and payments networks don’t have.

Dubai’s ruler Sheikh Mohammed set 2020 as the date for all government transactions to be done on blockchain infrastructure. At the 2018 World Economic Forum, governments around the world announced that a globally recognised traveller and identity program would be implemented on blockchain, which could one day spell the end of physical passports. Brazil and Canada are also talking about national identity programs on the blockchain in line with this initative.

Blockchain applications.

If there is a database somewhere in the world that needs a distributed presence, strong auditability, and/or automated management, then it’s likely we’ll see the blockchain become the foundation of those datasets over the next couple of decades.

As we’ve already pointed out, however, Paytm, Alipay, M-Pesa and Tencent don’t have banking core systems underpinning their mobile wallets. At least not for the ledger operations—they have to store all their cash deposits they take in accordance with local regulations in an actual bank account with a partner bank, but within the closed loop system they are core-less.

Blockchain will be a necessary, core-building part of the architecture required for 21st century real-time banking experiences.

Will FinTech (or TechFin) kill banks? Most certainly some banks, but not all.

2017 marked the highest spend in venture capital since the dot-com boom. A total of $84 billion was invested in over 8,000 technology companies and startups last year3, with FinTech taking more than a third of that investment.

I made a bet [with the CEO of Walmart]: in 10 years we’ll be bigger than Walmart, based on the sales. Because if you want to have 10,000 new customers, you have to build a new warehouse and this and that. For me?...Two servers. —Jack Ma, Founder of Alibaba,

Chan said incumbent banks have been unable to innovate quickly enough, so for Hong Kong to maintain its leadership as an International Financial Centre the HKMA has turned to FinTechs. Let that sink in—Hong Kong is pegging their future as a leading financial centre on encouraging innovation from FinTechs, not relying on incumbent institutions. The lack of innovation by incumbent players has now become a market threat.

If these countries and cities want to remain as leading financial centres, stopping FinTech advances would slow innovation considerably. Why on earth would a regular protect legacy behaviour in this fast-paced environment that is transforming financial services? They would do so at their market’s peril.