Bank 4.0 Read online

  Changes in day-to-day bank utility as a result of the underlying technology we use daily also changes the way banking effectiveness will be measured. In China where Alipay and Tencent’s WeChat dominate the payments landscape, banks there have had to rapidly retool to build their own mobile capabilities as their deposits and fees were increasingly at risk.

  Distribution of financial services in China has fundamentally changed because of TechFin. But no matter where you are based, if you don’t have a revenue or relationship strategy built on real-time delivery, you are going to be severely hampered in the near future. If you have a product or service that still requires a signature in five years, you are going to be struggling for any cross-sell and up-sell. You simply won’t be able to survive as a bank with revenue from the branch alone. No way. 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. We can already demonstrate that in China, India, Bangladesh, Kenya and elsewhere.

  Ask ICBC, the biggest incumbent bank in the world, based in China. Because of the massive dominance of Alibaba and TaoBao, they were forced to launch their own Alibaba e-commerce competitor in recent years called Rong E-Gou ( roughly translates as “buy easily”)—today, more than 10,000 merchants sell their goods and services across this platform, generating more than 1.27 trillion yuan (US$184 billion) in sales in 20167. In 2015, Rong E-Gou sold more than 100,000 iPhones, the trick being that ICBC also offered financing for these purchases online. One needs to ask, how many banks have the resources necessary to build an Amazon or Alibaba competitor in their home markets to stay connected like this to their customers?

  ICBC added business services to Rong E-Gou in 2015, and today 3,000 companies have sold US$218 billion of products, with things as varied as office supplies through to manufacturing robotics. More than a quarter of a million buyers have used the platform. In this case, ICBC is not building bank platform or channels, they are building ways to incorporate banking utility into everyday commerce. Why? Because they realize that banking is quickly becoming embedded in their competitors platforms, and customers who have a low friction choice will choose the same financial services through a platform provider rather than “go to the bank”. I really can’t imagine ICBC launching this e-commerce platform if not for the success of Tencent and Alipay these last few years. How much do you think ICBC spent on launching Rong E-Gou—$200 million, $400 million? At least. That sort of investment in retail commerce would have been considered untenable in years gone by, especially as it is not core to the banking business.

  But it was a smart move.

  Emirates NDB entered the retail e-commerce fray in May this year with the launch of SkyShopper, a platform through which merchants from around the world can offer special deals to Emirates NDB customers. 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 a survey conducted by a Beijing newspaper in March 2017, 70 percent of consumers in China’s urban centres said they would be comfortable leaving home without cash or cards today. The New York Times reported in July 2017 that there are large sections of urban China that are virtually cashless and cardless because of the huge popularity of mobile payments8. 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 Singapore had to go cashless fast, and announced a government-backed initiative to achieve that.

  Commercial banks, Mastercard, Visa and Union Pay are just not leading players in the mobile payments game in China. Why? Because plastic is not in the mobile payments game in China, neither are POS terminals or even, god forbid, ATMs. New ecosystems have taken over the economy. If you are a bank still using debit cards in China today, you’re probably scratching your head wondering how you can get people to use their plastic cards again if it’s not for online purchases. If your latest innovation is opening a bank account in a mobile app and shipping cards to your customers, you’re still behind the eight ball in China.

  This is a world where issuing plastic, or applying for plastic, is no longer of any significant value. In 2016 mobile payments overtook card payments in China. In 2018 China’s mobile payments volume will overtake the rest of the world’s credit and debit cards transactions. The decline of plastic in China is just the beginning.

  Uber made waves in the auto-financing market launching its Xchange Leasing program. At one Nissan dealership in Chicago last year, Uber Xchange accounted for 41 percent of their sales9 and contributed to a 200 percent increase in year-on-year Q1 sales figures. Didi Chuxing, Uber’s equivalent in China, launched its own leasing business in 2016 also.

  You may have heard of small business lenders in the US such as Kabbage, OnDeck Capital, or in the UK Funding Circle, but platforms like Amazon, Square and PayPal are increasingly active in the space as well. Amazon lent $1 billion last year and has lent $3 billion to more than 20,000 small businesses since launching their small business lending initiative in 2011. Alibaba also has a rapidly growing loan book, extending ¥50 billion yuan (US$7.5 billion) of loans to businesses and providing credit lines to over 100 million individuals for customers on Single’s Day alone.

  In a strategic move designed to gain access to Chinese tourists, even Marriott got into the Alipay game when they announced in August 2017 that they will accept payments from Alipay’s digital wallet across their global properties10. As did New York’s yellow taxis.

  These examples are all illustrative of banking becoming more and more embedded in non-bank networks and platforms, where many of those businesses are starting to offer financial services in context. 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.

  Bye-bye products, hello experiences

  Tencent’s WeChat, Alipay, GCash, Kakao Pay, Paytm, Venmo and M-Pesa all offer day-to-day payments capability that don’t require a plastic card to transact—they are platforms that have created differentiated payment experiences. Alibaba and Amazon offer small business loans and Uber offers car leasing to entrepreneurs on their platform that don’t require application forms, traditional credit approvals, or credit scoring. 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.

  Now bankers might argue this is semantics, that at the end of the day it’s still a bank that is holding the money. But if that was your first thought, you are missing a larger trend at play here.

  To illustrate. Think about payments evolution and where technologies like voice and augmented reality smart glasses are taking us over the next decade or two. If you live in the US or UK at the start of the 20th century, you more than likely got paid in cash, and did all your payments in cash. But 50 years later cheques were the dominant form of payment for large items, and people would even use cheques to pay for groceries. Then in the 1980s cards became increasingly popular, and were adapted to be used for online when e-commerce came along.

  Cash was instant,
but required you to carry it and to visit a bank to get more of it.

  Cheques took three to five days at a minimum, were processed through bank clearing houses, and required you to carry a paper booklet that you were suggested to “balance” regularly. Until cheques started to bounce, they had pretty high utility.

  Cards were super-convenient and once we dispensed with knuckle-busters and moved to electronic point-of-sale terminals, payments were effectively instantaneous.

  In China, India and Africa today, Alipay, M-Pesa, MTN mobile money, Paytm and WeChat Pay wallets are all instantaneous, but don’t require plastic or POS terminals, or going to a bank branch to sign-up. Venmo, PayPal, Zelle and others are the equivalent in the US. While most of these services enable you to link a debit card or bank account for top-ups, activity within these networks does not require going through your bank account.

  If you trace these developments over the last 50 years, you have an accelerating emphasis on low-friction, payments immediacy and consistent erosion of complexity. The future of payments is clear 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.

  Figure 1: Emerging payments experiences appear to be getting simpler and more inclusive over time.

  As payments have evolved the tendency is to move away from both the closed, proprietary nature of bank owned and operated payment networks and from complex slow systems towards instant or near real-time payments that sit on open networks, because network-effect allows greater payments utility.

  Cash is fast but requires going to a bank periodically to get access, while it is generally slow in a foreign geography and can’t be used online without a ton of friction—so that’s the baseline. Bank-to-bank networks in the EU and card networks are fast, but are also not inclusive generally. Cheques might appear simple to those that have used them for 40 years, but ask a young working professional to write a cheque, or try using a US bank-issued cheque outside the US or online, and you might be laughed at.

  The reality is that networks like PayPal, WeChat Pay and Alipay have greater utility within their networks than bank-to-bank transactions or cash today due simply to the scale of those networks. Yes, they are closed-loop systems in many respects, but the scale of those systems are based today on social media metrics of hundreds or millions or billions of users, so that they may as well be open. JP Morgan Chase has 80 million customers, AliPay 650 million, WeChat has one billion, Facebook two billion.

  Emerging market digital wallets are built for broad inclusiveness, low barriers to entry, and are real-time by design, because they’ve been built on the IP layer. 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 A/R 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”.

  The future of payments is unavoidably experience-rich and friction-and artifact-poor.

  Figure 2: China versus US versus Japan FinTech ecosystems (Image Credit: Life. SREDA).

  Examining savings, credit and lending, and other aspects of finance, will demonstrate the same trend. Online and mobile experience design is leading us toward rapid utility and fulfilment. The fastest, most seamless credit experience is not an application for a credit product on your phone or laptop while you’re in a store, but simply a provisioning of credit based on a preferred or enabled relationship. The product (credit card, overdraft, personal loan, line of credit, etc.) structure disappears to simply enable you to get access to the utility of extra cash when you need it the most. You don’t need the card, you just need the cash. Applying for a card is simply unnecessary friction.

  From a first principles approach, we should see new technologies like voice-smart assistants11 and augmented reality (AR) smart glasses as ways to explore entirely new ways of leveraging bank utility on an experience basis. Innovation with a bank is often very much thinking inside the box, restricted by compliance, legal and legacy systems behaviour. Iteration on these processes and systems doesn’t produce the same innovations as someone starting without those restrictions, or setting up based on completely different assumptions.

  The end game with these technologies is contextual banking services and utility. So instead of paying your credit card with Alexa using your voice or going to a bank branch to apply for a physical credit card, we can use first principles to think very differently about credit access itself. First principles asks: if you have access to a personal AI capability while you are shopping, how would you design access to credit based on who the customer is and what they are doing?

  A first principles approach might be illustrated using grocery shopping as an example. Using first principles thinking I look to predict your need for credit (your balance of your value store is lower than usual when grocery shopping) and when you walked into the Whole Foods or Tesco, I’ll then offer you the extra cash you need to do your shopping, with a simple and transparent fee structure. Remember in the grocery store of the future there won’t be a checkout cashier, either—you just take the goods and exit, with payment occurring automatically12.

  Figure 3: Credit and payments are increasingly contextual and extremely low-friction.

  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 organizations 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.

  First principles design in credit means that a provider will likely have a much stronger relationship that encourages incredible loyalty, instead of like today, where it might lose out to another bank’s plastic card at the checkout line—because it’s integral to your life. A bank’s ability to understand my behaviour and present to me a solution of the greatest relevance, will reinforce their brand. Design by analogy might seek to present a credit card offer via your smart assistant (Alexa/Siri/Cortana) and streamline the application process. First principles design thinking means you don’t need a plastic card or application process at all.

  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.

  So here is a list of typical bank products that could disappear over the next 15–20 years as a result of friction and channel obsolescence, to be replaced by real-time, responsive experiences surfacing bank utility:

  Financial Product or Service Replacement Embedded Experience

  Credit Card Predictive and contextual credit access

  Overdraft Emergency credit access (grocery and healthcare optimized)

  Checking, Current Account or Debit Card Cloud-based personal value store linked to a mobile wallet

  Savings Account Behavioural savings tools and prompts

  Personal Loan Payment options advice in-store or contextually

  Mortgage Home purchase assistant

  Car Loan/Lease Autonomous vehicle access subscription

  Small Business Bank Account Intelligent business value store (with accounting, taxation and payments AI)

  Business Line of Credit Predic
tive cash flow analytics and smoothing

  Life Insurance Policy Longevity and after-life management

  Health Insurance Coverage Health optimisation and monitoring service

  Term Deposit, CD, Investment or High Yield Savings Account Wealth builder robo-assistant

  Mutual Fund or Investment Product Robo-advisor with net worth manager

  Foreign Exchange Service Global wallet add-in

  Table 1: List of typical bank products that could disappear.

  If you consider some of the emerging technologies that might have a marked effect on access to banking services (in the same way mobile and web have), here are some design-by-analogy versus first principles approaches to innovation in the space:

  Table 2: Design-by-analogy versus first principles approaches.

  Designing experiences in the Bank 4.0 age means that the previous product and channel structures offer almost zero benefit in this new world. In fact, they may bias you towards experiences with unnecessary friction and limit you in terms of scale.

  The trick with first principles is that you need to start from scratch. Think of how to optimally solve a problem within the bounds of the new technology—how best to buy a home, how best to buy something like groceries in a store when you don’t have enough cash, how to deal with healthcare costs in an emergency while you’re at the hospital, and simple advice like “How can I afford to buy this new dress for a friend’s wedding?” You don’t begin by thinking how you can stick an existing bank product on a new channel. That is design by branch analogy, and means by virtue of the competition that you’re slipping further behind in terms of experience competitiveness.

  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. Think about that—if patents are a measure of innovation in a technology field, then why wouldn’t banks and financial services players today own the vast majority of patents emerging in respect to payments?