Bank 4.0 Page 11

  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.

  Incumbents are admittedly iterating on the friction, but have to butt up against compliance, legal and risk departments constantly trying to retain as much of the friction as possible. It takes a really strong CEO and executive team to reform that systemic thinking.

  Writing this may shock many of you, but the reality is that FinTech’s can’t realistically go far enough to beat the banks entirely. They can’t do this because the real winners of the bank account battle will be those that own the technology layers you’ll use everyday—voice, AR, AI-agents and smart assistants, the day-to-day commerce and messaging platforms, because that is where banking will reside. As written in Chapter 1, banks will never own this layer either. Thus, when it comes to the future of banking, both challenger banks and conventional banks may miss out—namely because the bank account of tomorrow is primarily an activated, cloud-based value store that reacts through technology where you are using your money. It’s not an app, a website or a branch. Having said that, a frictionless value store that is already digitally enabled will be able to transition to this new state significantly faster than one restricted to sale in a physical building requiring a signature on a paper form.

  The key problem with designing better banking really begins with how incredibly difficult bankers find it to think outside of the branch.

  New experiences don’t start in the branch

  When banks launched the first automated teller machines7 in the 1960s and 70s they were an attempt at just that, automating the function of the in-branch teller that could help you with a cash withdrawal. When the internet came along, unlike most retail businesses, banking didn’t start with building e-commerce applications; it started with transactional functions straight out of the branch. When banks did introduce e-commerce, they simply took application forms from the branch and put them online.

  When banks built early versions of “internet banking” they just tried to do simple transactions—stuff they would normally ask the tellers at the branch to do. When Wells Fargo launched “on-line” banking in 1995, all you could do was get an account balance8. After that banks just put virtual bank statements online. Later banks added transfers between accounts. Every step of the way banks added more and more of the stuff a teller did and simply put it online. In fact, for most banks you had to visit the branch even to “register” for online banking.

  Figure 3: Early bank homepages (Credit Wells Fargo, Bank of America).

  When mobile came along, banks simply took what they had built for internet banking and tried to shrink it down to fit on a smaller screen.

  Figure 4: When Citi launched mobile in April 2007, you could view 150 transactions in app and could search for branch and ATM locations (Credit: Citibank).

  There’s virtually no innovative thinking here. From a design perspective, banks did have to learn new tools like interaction design and usability testing, but they weren’t designing new systems on top of mobile or the web, they were iterating on the old. Whether web or mobile, the thinking was still very much based on the branch and this is perhaps the hardest thing to displace from a design perspective.

  Figure 5: The CEO of Bank of New Zealand claimed in February of 2017 that the biggest BNZ branch was the website.

  Our busiest branch in 2014 is the 7:01 from Reading to Paddington—over 167,000 of our customers use our Mobile Banking app between 7am and 8am on their commute to work every day. Over 2.1 million customers use our mobile app every week.

  —Ross McEwan, CEO of RBS 2014

  Design by analogy is hard-coded into most banks DNA. When the Apple rumour mill started to suggest Apple might launch an NFC-enabled iPhone, rather than try to build completely new thinking around payments, the main payment rail providers, Mastercard and Visa, forced Apple to simply add mock plastic cards inside the phone. While tokenization was added for additional security, it was more iteration on the old system, no first principles thinking in sight.

  There are a number of reasons for this. Firstly, legacy systems have evolved to encode branch operations on mainframe systems, and when you have to adapt legacy systems to the new digital layer, it is easier to just enable a digital version of the branch product and process rather than start from scratch with something new. Secondly, regulation inhibits innovation, often by enforcing branch-based product structures and processes. Indeed, the greatest challenge many face around mobile today is getting permission from the regulator to allow someone to sign-up for a new product or service without a signature. When at Moven we tried to innovate around savings APR9 in the US, we were hemmed in by regulations that required our savings rate to be published in the customer disclosures and be consistent from one customer to the next, rather than a savings rate that could be dynamic based on our credscore™ algorithm.

  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.

  As discussed in Chapter 1, while first principles thinking is evident in technology and FinTech, it’s rarely evident in incumbents because of this branch-first mindset. The real innovation of embedded banking, however, will not be limited to channels or products, but be focused on advice.

  Advice, when and where you need it

  For a long time, bankers have held the belief that advice from a human is what would continue to differentiate the branch experience from technologies like web and mobile, especially in the areas of investment or what bankers like to call “complex products”. That core belief is being tested today as more and more robo-advisor and chat-bot style advisory capabilities become embedded in day-to-day banking experiences. The reality is, however, the advice you’re likely to get from your bank through technologies like voice and AI in the future will be very different from the advice you get today.

  Figure 6: The typical positioning of “advice” within a bank today.

  Today if you visit a bank to get advice on buying a home, it inevitably is really about positioning which mortgage is right for you. If you visit a bank to get investing advice or talk about retirement planning, the inevitable advice is which asset class or investment product you should be investing in. If you go into a bank to get advice on just everyday banking, you’ll walk out with a bank account, not advice on using your money more effectively. The advice we get today is rarely just “advice”; it’s typically product selling or position couched as advice.

  This sort of advice is not very sticky—it doesn’t engender long-term loyalty, it is more about short-term selling for the bank. In regards to whether or not that advice is better off coming from a human in a bank versus an AI, I’m honestly doubtful that humans will remain competitive in this space for much longer. Let me illustrate.

  Information asymmetry and AI

  Advisors in investing, private banking, mortgage-lending and other disciplines in financial services have traditionally justified themselves by asserting that you need an advisor because they know more about the subject than you do.

  Asymmetric information, sometimes referred to as information failure, is present whenever one party to an economic transaction possesses greater material knowledge than the other party. This normally manifests itself when the seller of a good or service has greater knowledge than the buyer, although the opposite is possible. Almost all economic transactions involve information asymmetries.

  —Asymmetric Information, Investopedia definition

  Let’s use an emerging AI technology as an example of information asymmetry in machines.

  Emerging technology in self-driving cars include sensors such as cameras, lidar (light detection and ranging)
, point mapping, sonar, radar, lasers and so forth. A human eye can see about 250 feet (76 metres) at night assisted by headlights, but a robocar’s radar can see about 820 feet (250 metres) today, and across 360 degrees. Machines can react to a potential obstacle on a dry road in about 0.5 seconds, compared with the typical human who takes on average 1.6 seconds. Some autonomous vehicles today are capturing around 1000x more information than your visual cortex is capable of processing. All this suggests that in 10–20 years, when this technology is truly mature, no human driver will be as safe as an AI-driven automobile. Why? Information asymmetry.

  Figure 7: Autonomous vehicles will soon beat humans at driving because of information asymmetry—more data through a suite of technologies, that lead to better decision-making.

  A self-driving car can process more data much faster than a human brain. Once mature, no human will match an autonomous vehicle for safety10 alone because of this ability. Is it really that hard to imagine an algorithm in banking that might be able to recommend a mortgage product or an investment strategy better, faster and based on more data than a human advisor? 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 centres11.

  AIs that are better at budgeting than your accountant

  But the advice our AI smart assistant built into our home, car and smart devices won’t be like the advice we get from a banker today. The real benefit of a smart bank account of the future is that once we’ve established a basic set of parameters, we’ll get personalised advice that will be like having a money coach in your back pocket full-time. This won’t be product advice like “buy this mortgage versus that mortgage”. It will be simple stuff like “Hey Siri, can I afford to go out for dinner tonight?”

  Figure 8: Financial advice in the age of AIs will be much more personalised (Credit: Moven siri implementation).

  Budgeting emerged in the early 18th century as a mechanism for improving the financial stability, not of consumers, but of governments. The origins of the word “budget” lie in the French term “bougette”—a leather wallet in which documents or money could be kept. The bursting of the South Sea Bubble in 1720 wrecked the British economy’s balance sheet and led to the imprisonment of the Chancellor in the Tower of London. Toward the end of the same century, in 1799, Pitt the Younger introduced income tax as a way of helping fund war. These became the drivers for a commonsense annual process for managing inflows and outflows from the British treasury.

  In the early 1900s personal budgeting was all the rage, with ready-made budget ledger pages being available for households and newspapers like The Evening World of New York running a thrift campaign in 1916, encouraging using envelops for budgeting.

  There’s only one problem today: with 70 percent of US households12 and 65 percent of British households13 being unable to absorb a small financial shock of one sort or another, clearly budgeting has failed the vast majority of our society.

  This is where AI is likely to make a massive change in the way we think about our connection with money: a bank account will shift from being a value store with payments utility to being something we’re much more reliant on.

  Budgeting today requires the right tools, but more importantly, like making a New Year’s resolution to go to the gym and get healthier, it requires a ton of personal discipline. 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.

  The reason our smart bank account, or AI smart assistant that is linked to our smart bank account, will be great at advice is that it will stop us from making stupid decisions that today our bank allows us to do.

  Think of how banks promote debit cards and credit cards today. Cash back, airline miles, discounts on shopping, are all used as methods of stimulating card usage in banking, but they inevitably lead to increases in spending (by design), which lead to debt15. But imagine an AI with smart banking that you’ve tasked with helping curb your spending.

  “Alexa, order me a new XBox One X for Christmas.”

  [In Alexa’s best HAL impression]: “I can’t do that Dave. You’re already well over your suggested spending limits for the month. You can override my advice and continue the purchase, but if you do, you won’t be able to afford the holiday you’re planning for the new year.”

  If you are banker, you might be disappointed learning that personal AIs will discourage you from spending or using a credit card; but consider the fact that a behavioural-based AI money coach will promote much stickier behaviour for day-to-day banking relationships than your advisor in a bank branch would ever do. Credit card rewards won’t be enough to get you to change your linked account for Apple Pay/Siri, Tmall Genie16 or Alexa voice-based transactions.

  Today Starbucks17, Dominos Pizza, Tescos, Expedia, Amazon and a host of other retailers are enabling voice-ordering capability. Some estimates reckon that by 2025 we’ll be doing around 50 percent of our e-commerce transactions based on voice18, which would be about the same rate at which the world adapted to e-commerce after the commercial launch of the web in the mid 90s. It is logical we’ll wrap advice into this ecosystem in real-time, adapting to our behaviour. But it is mixed reality that’s really going to change the context of bank accounts over the next decade, and where we have to think beyond channels and products.

  Mixed reality and its impact on banking

  In September 2017, Apple launched their new iPhone X, beginning its decade-long Augmented Reality or AR strategy.

  I think it is profound. I am so excited about it, I just want to yell out and scream… Can we do everything we want to do now? No. The technology’s not complete yet. But that’s the beauty to a certain degree. [Augmented Reality] has a runway. And it’s an incredible runway. It’s time to put the seatbelt on and go. When people begin to see what’s possible, it’s going to get them very excited—like we are, like we’ve been.

  Tim Cook, Apple CEO, Bloomberg Businessweek, 15 June 2017

  Apple is betting that consumer technology experiences become more and more integrated into our life, and they’re betting that both voice and Augmented Reality will be big, big parts of that. Just as we all carry around smartphones today, commentators like Robert Scoble and Shel Israel predict that in 10 years we will be donning smart glasses in the same way that the iPhone took off in 2007–1019.

  Figure 9: Apple’s Augmented Reality Patent for smart glass application (Source: USPTO).

  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. You won’t choose a traditional credit card or mortgage through your head-up display or using voice, but you will use these tools to assist you in determining if you can afford to buy a home, or how much you can spend out shopping, or if there’s a better approach. The tech will help you buy the home, not a mortgage.

  The key problem for banks is that based on our history around technology adoption, we will simply view voice and augmented reality glasses as a new channel to push branch-style engagement and products, and if we do, we will fail miserably. Let me illustrate. Capital One was the first bank to take to market their Alexa voice capability in the United States, and while it has since added more conversational money moments, their first attempt looked just like design iteration.

  The first skills on Alexa that CapOne launched includ
ed: “Alexa, ask Capital One when is my credit card payment due?” and “Alexa, ask Capital One to pay my credit card bill.”

  That is design by analogy thinking, and it won’t be enough to make the transition into the Bank 4.0 world.

  Endnotes

  1Commentary on bKash inclusion: “More than Tk1,000cr transacted on mobile phones daily”. Dhaka Tribune, 25 July 2017—http://www.dhakatribune.com/business/banks/2017/07/25/daily-mfs-transactions-cross-tk1000cr-mark/.

  2Source: PWC Report—Disrupting Cash, Accelerating electronic payments in India (Oct 2015) (https://www.pwc.in/assets/pdfs/publications/2015/disrupting-cash-accelerating-electronic-payments-in-india.pdf).

  3January 2018, 280 million users: https://blog.paytm.com/looking-back-at-2017-top-10-interesting-facts-from-paytm-7bc59e08683f.

  4“Uber is trying to lure new drivers by offering bank accounts”, Quartz online magazine, Ian Kar, Nov 2015: https://qz.com/533492/exclusive-heres-how-uber-is-planning-using-banking-to-keep-drivers-from-leaving/.

  5NPR story: “Is it time to write off checks?” 2016 shows 66 percent decline in check use between 2000–2014—http://www.npr.org/2016/03/03/468890515/is-it-time-to-write-off-checks.

  6See “Banking needs an Amazon Prime mentality”, by Jim Marous, The Financial Brand: https://thefinancialbrand.com/66545/amazon-prime-digital-banking-loyalty-experience-strategy/.

  7Barclays is credited with the first use of a “cash machine” at their Enfield Town branch in North London on 27 June 1967.