Bank 4.0: Banking Everywhere, Never at a Bank

by Brett King

Designing these systems, these machine-based interactions, understanding customer behaviour and creating new experiences based on emerging technology are going to be critical creative skills for the financial institutions of the future.

Harvard Business Review recently did some solid research25 on this and showed that over the last 50 years personality traits such as curiosity, extraversion, and emotional stability have become more and more critical, twice as important as intelligence or IQ.

What are the management skills that you’ll need in the AI age to survive? HBR mapped out four key skills in agile leadership that are very different from those we used to hire for in banking:

If a bank is not led by technologists with deep technology experience, then there will be resistance to the effects of artificial intelligence and technology more generally, and this will negatively impact your ability to build mission-critical future capabilities.

The fact is, historically we simply don’t maintain this idealistic single-bank loyalty, like a 50-year marriage, with our money. We are in open banking relationships all the time.

Just like it would be counter-intuitive for a millennial to reach for an encyclopedia, to call up Domino’s on a landline to order a pizza, or go to a travel agent’s office to book a flight, it is also increasingly counter-intuitive for these consumers to “go to the bank”. Research shows that millennials on a day-to-day basis are almost myopically focused on digital. They would never think of using phone banking to check their balance, they can’t work out cheques and they wonder why anyone would ever send you one in the post. They live in a world where they expect banking to work in a frictionless, real-time manner. Insist on getting a millennial into a branch to open up a new credit card facility, and it’s statistically likely that you’ll simply never hear from them again—they’ve already selected an alternative they’ve found online. If they are a post-financial crisis millennial, they’re going to be paranoid about taking on unnecessary credit anyway. More on that in a moment.

Online account opening is the norm and preferred by millennials (61 percent), whereas on average about one-third of non-millennials prefer to open an account online (28 percent), versus face to face. For investment accounts, online is even more prevalent. They still occasionally visit a branch, but for the average millennial that’s less than one visit a year today, and most of the time that’s because the bank couldn’t get it done any other way.

It is pretty clear that if you are a bank targeting millennials, your primary interface day to day for nurturing that relationship is your mobile app, and you had better offer streamlined account opening online and via mobile, without the requirement for a face-to-face visit to the branch or a signature card. If you can’t, you have definitely already lost business—whether you assert that you still have millennial customers using your branch today or not. Statistically, there is no other conclusion to reach. There are definitely millennials who came to your webpage, saw they’d have to visit a branch to open an account, and simply moved on when it came to deciding which bank they’d choose. For post-millennials, the problem will be even more acute. Generation Z are growing up in a mobile, ubiquitous technology world. Not just internet access through a computer, but they will grow up with computers you talk to; supercomputers you carry in your pocket, gaming consoles, digital video cameras and the nexus of much of their social interactions; computers that recognise them by their face and voice; computers that predict their needs and behaviours, that monitor their health, and that are even a daily companion.

If you’ve grown up in a world where everyone goes to the branch to do banking, if you’ve done that your entire life, if you’ve built your business around that behaviour, you’re unlikely to embrace a change or threat to the culture rapidly and easily

Today, it’s increasingly rare to be paid in cash,

Parents are paying their kids via Venmo because that’s what their friends use, and they just ask their parents if they can pay them into their Venmo account. My 17-year-old daughter didn’t want to think about a driving license after she was old enough to become a student learner driver; she initially thought she’d be fine with an Uber account the rest of her life, until she moved to a location without Uber.

The global financial crisis of 2007–2008, the massive credit card debts of the 1990s, the looming student loan crisis in the US, the increasingly partisan and antagonistic nature of politics, reverberating echo chambers in social media, and so forth, is leading to a broad distrust of institutions like government and big banks for Generations Y and Z. In the US less than a third of millennials own a credit card today (the lowest levels of their age group in the last 40 years since credit cards launched), while their predecessors used them at twice that rate5. This is based on survey data over the last seven years, so don’t tell me it’s an anomalous stat. As millennials get older they’re clearly not as keen on taking on debt as previous generations were. Traditional credit card rewards programs aren’t stimulating the use of credit either. The total rewards paid by the top six US card issuers doubled from $11 billion to $23 billion between 2010 and 2016, in a clear attempt to attract more young people to use credit cards6, and yet millennials remain obstinately unmoved. It is clear to economists who study payment patterns that millennials are gravitating toward payment methods that skirt both cash and credit. Why carry cash when you can whip out a debit card for the smallest transaction—a sandwich or a bottle of soda—or use an app like Venmo or an online payment service like PayPal? All of those typically draw funds directly from a bank account. —“How Millennials Became Spook...

It turns out that a device that allowed you to “impulse purchase” in the moment because you only felt the impact when you got a statement at the end of the month, doesn’t fit with today’s real-time world.

The evolution of banking systems as it pertains to access and bank–customer relationships.

Even more importantly, in the medium term you won’t have to ask, because by the time we’re wearing augmented reality glasses, the tech will learn our behaviour, our needs, and start to actively anticipate solutions. If anything, we’ll be looking for a primary financial manager on our technology layer rather than a primary financial institution

The customers of tomorrow will expect that when it comes to money, payments, credit access, etc, that it just works. Zero friction will be the rule, not the exception. In this new world, if you ask me to sign a piece of paper or visit a building to get access to a service, a post-millennial consumer won’t think you are crazy...they simply won’t understand what you are talking about. The cognitive dissonance will be acute. It would be like asking them to check their encyclopedia for the latest price of Bitcoin.

Betterment account for investment, Moven for financial wellness coaching,

Behaviour increasingly will be centred around the technology platforms we use on a daily basis. Train your personal AI on Google and you’ll be using an Android phone, Google Home and Google Smart Glasses. Train your personal AI on Apple and it’ll be Siri, CarPlay, Home Pod and Apple TV. Amazon will be embedding Alexa in as many devices as possible, too. This is like the operating system and personal computer platform battles of the past—PC versus Mac.

Today we have apps on our phones. We have an app for banking, an app for taxis, an app for booking movies, etc. But in the voice-based future we are accessing services or skills embedded in the platform. We don’t load up an app on our Alexa speaker at home, we just tell Alexa to enable that skill. Unlike the world of mobile app stores we live in today, once we enable that skill we are able to access the underlying features of that service without opening an app. It is like that skill becomes part of our tailored operating system for that device.

Today a great deal of the core architecture a challenger bank carries, like cyber security, identity verification, session management, app store and mobile-OS integration, are simply plug-in services sitting on top of Google, AWS or Microsoft Azure

Since chief executive Sundar Pichai took over the top job at Google in 2015, Alphabet has spent $30 billion on AI and related infrastructure, which includes the data centres necessary for the computing power that makes Google Assistant function as well as its cloud computing division and AI-backed consumer hardware line-up.

As the shift towards embedded banking becomes complete, the leading banks won’t be those with big distribution networks, they’ll be the banks with broad data capabilities that generate advantages in contextualisation of day-to-day banking.

Relative financial newcomers like Alipay (China), WeChat (China), Rakuten (Japan), Atom (UK), Monzo (UK), Starling (UK), Moven (US), N26 (Germany) and Revolut (UK) have joined household names like PayPal, Amazon and Google to disrupt the banking ecosystem, leveraging modern infrastructures and innovative cultures.

Today, that means that 64 percent of US households now have Amazon Prime memberships1. While most casual observers would think that the increased loyalty around Amazon Prime is about free shipping, it is really about changing consumer behaviour through reduced friction.

Looking at the original Flywheel, it is evident that all the pieces revolve around a continuous improvement of the customer experience. A strong customer experience will lead to more shoppers, which will in turn bring more sellers. More sellers will lower costs and prices through competition while bolstering selection for customers. Lower prices and more selection will bring in more customers—and the cycle repeats itself.

Figure 2: The future of marketplace banking

Rising obesity levels in the region were bringing health and fitness into focus, so we provided customers with an incentive to become more active with the launch of the Fitness Account, the first savings account linked to the Apple Watch. The account earned interest based on the number of steps the customer walked or ran every day, encouraging them to be healthier, physically and financially.

Today, 92 percent of all our transactions happen outside the branch and our branch network is transforming into a sales and advisory space.

Emirates Towers, Dubai, part of the Dubai Future Foundation’s prestigious Museum of the Future, where customers can get acquainted with futuristic beta-concepts of banking and payment solutions.

Hive, the UAE’s first FinTech accelerator program, which is run by the Dubai International Financial Centre and Accenture

The emergence of a large millennial segment and their digital affinity prompted us in 2017 to launch Liv., the UAE’s first digital lifestyle bank targeted at millenials.

Neither RedBox nor Netflix are even on the radar screen in terms of competition. —Blockbuster CEO Jim Keyes, speaking to investors in 2008

Disruption is not new. When you look back over the last couple of centuries, you see time and again evidence that incumbents underestimated the impact of change on their industry.

What are the indicators that banking and financial services, more specifically, are about to be disrupted? 1. Power is consolidated One of the most typical elements of predicting when an industry is ripe for disruption is imbalance or dominance by a few leading players.

In the US in 1995, US majors held just 22 percent of market share by assets; today that’s closer to 70 percent2. When consolidation leads to a few players driving the industry, this leads to less likelihood of an orderly transition to new technology states.

Transforming a bank is like turning a massive freighter; startups are more like speedboats.

The argument that a potential technology major5 or FinTech “doesn’t have a banking license” is certainly not a barrier in this environment, where trust in banks is a penalty rather than an asset. The argument that a banking license is some magical standard of trust could not be further from reality today. I believe trust is essentially a function of utility. The more usable a banking service is and the more the brand demonstrates its effective utility, whether from a licensed institution or not, the more consumers will tend to trust the brand’s capabilities.

The fact is that on newer technology stacks, with more agile cloud-based architectures and an entire business built with technologists at the core, newer players are statistically less likely to have technology-driven failures at the customer layer.

This new period we are entering is not so much about production anymore—how much is produced; it is about distribution—how people get a share in [and access to] what is produced. Everything from trade policies to government projects to commercial regulations will in the future be evaluated by distribution. Politics will change, free-market beliefs will change, social structures will change. —“Where is technology taking the economy?” McKinsey Quarterly, October

If you examine it systemically, books, music, retail, taxis, airlines, hotels, etc have all moved to online distribution over the last 20 years.

The average lifespan of a company listed in the S&P500 has decreased from 67 years in the 1920s, to less than 15 years today. —Richard Foster, Special Advisor to the President on Healthcare Innovation, Yale University

Adapting to change is becoming a survival skill in this disruptive age, where technology changes are speeding up, not slowing down.

As Ron Shevlin pointed out in his excellent post “The Fast Follower Fallacy”11, if you wait to follow when faced with industry disruption, you will inevitably lose market share. He says fast-follower is just another name for “late-mover”, especially at the speed first movers are adapting to change.

Put technology people on your board

The sort of technologists you need are those that are well networked on the newer technologies, have had their own startup in the space, or that have dealt with digital transformation at an organisation like your own.

Accenture analysed the background of around 2,000 executives from 100 of the top banks by assets globally to assess what technology experience they brought to the table14. The results were appallingly dismal: Only three percent of CEOs of leading banks have professional technology experience Only six percent of board directors have professional technology experience 40 percent of banks have no board members with any professional technology experience

In less than 10 years millennials will make up 75 percent of the global workforce. They need to be informing the future priorities of your bank.

Passion projects are increasingly going to become important to the next generation. Most importantly you need a culture that says something positive. Financial inclusion, promoting renewables, promoting lower crime, greater equality—find a cause that your organisation can get behind. Profitability for shareholders isn’t going to motivate these candidates. As one commentator put it: put the “why” in work.

There are five core characteristics of Agile banks: Table 1: The core characteristics of Agile banks. Customer First Mission Broad Revenue Generation Capability Rapid Product and Distribution Prototyping and Learning Centre Opti-channel and Digital Omni-channel Agile banks don’t try to fit their existing product suite and processes to customers. They’re constantly adapting and trying new approaches to engage. Agile banks get most of their revenue, do most of their cross-sell and upsell via digital. They’ve re-architected the organisation to minimise fixed costs like branch networks, and focused on variable costs where performance-based budgeting drives outcomes. Distrubution is extremely flexible. Channel decisions take days and weeks, not months to play in terms of launching new initiatives. Test, Test, Launch, Fail, Retry. The risk adverse nature that leads to bulletproof testing of new initiatives is replaced by the concept of alpha and beta releases to customers. This is a huge one for traditional players and regulators to get over. Phygital strategies, or optimising physical and digital channels to work in concert, is pretty key for future agility. Reliance on one channel for any core activity is a constraint Agile banks don’t want—they watch customer behaviour and respond accordingly.

Banks will tell you they’re tech companies. Don’t believe them. Technologists are second class citizens in banks—if you work near the trading floor (I did), the traders are in charge. The politics in the technology team are immense and the career progression is limited. You won’t be working on innovative new technologies. Most banks are cutting costs and this means you’ll be focusing on maintaining the infrastructure. —“Banks are no place for coders”, eFinancialCareers, Richard Ling, March 2017