Bank 4.0 Read online

  •“How am I going to pay when I’m in another country?”

  •“How do I make more money to pay my bills?”

  Whenever we talk about what a bank does for us, or what we need from our bank, we generally don’t describe channels, bank departments or products—we describe utility and functionality. Banks have tried very, very hard to train us to think in terms of products, and to some extent they have been successful.

  Since the emergence of banking during the 14th century, as banks we’ve taken that core utility and we’ve added structure. Initially this structure was about network—where you could bank. Banks then added structure around the business of banking, trust and identity—who could bank, what was a bank and how you had to bank. Today you could argue that these structures have been reducing risk to both banks and consumers, rather than reducing risk or complexity around utility. Today, as users of banking, we must fight through more friction than ever before just to get to that underlying utility.

  Technology now affords us the ability to radically eliminate that friction and create banking embedded in the world around us, delivering banking when and where we need it the most. My good friend Chris Skinner calls this “Semantic Banking”.

  The semantic web today is all around us. It is immersive, ubiquitous, informed and contextual. The semantic bank will have these features, too. It will prompt us with the things we need, and warn us against doing things that will damage our financial health. It will be personalized, proactive, predictive, cognitive and contextual. We will never need to call the bank, as the semantic bank is always with us, non-stop and in real-time. As a result, nearly every bank function we think about today—paying, checking, reconciling, searching—go away as the semantic bank and web do all of this for us. We just live our lives, with our embedded financial advisor and the core utility of banking as an extension to our digital lives.

  —Chris Skinner, author of ValueWeb

  In a world where banking can be delivered in real time, based on predictive algorithms and surfaced using voice-user interfaces like Alexa and Siri, in a mixed-reality head-up-display like Magic Leap or HoloLens, in an autonomous car or home, or just in increasingly smarter watches and phones that you carry everywhere, banking simply becomes both embedded and ubiquitous. But let’s be clear—it is not the bank products of today that will ultimately become embedded in this smart world. Only the purest form of banking utility.

  When it comes to this new augmented world, banks are significantly disadvantaged over the real owners of utility, and they must constantly jostle for a seat at the new table. The utility today isn’t via a branch or an ATM, but the smartphone, the IP layer, data, interfaces and AI.

  In this emerging world of instant payment utility, for example, the artifacts and products we associate with payments today—hard currency, cheque books10, debit and credit cards, wire transfers, etc—will simply disappear. Ultimately, they represent only structural friction in enabling payment utility. A good illustration of this is the capability we see emerging in the likes of Amazon Echo11 or Google Home, where you can now conduct simple commerce and transactions by using you voice. As smart assistants like this get smarter, we’re going to delegate more and more of our day-to-day transactional and commerce behaviour to an AI-based agent12:

  “Alexa, pay my telephone bill.”

  “Siri, transfer $100 to my daughter’s allowance account.”

  “Cortana, can I afford to go out for dinner tonight?”

  “Alexa, reorder me a pair of Bresciani socks.”13

  In this AI and agency-imbued world, utility is the core—products become invisible as they are transformed into everyday, technology-embedded experiences.

  In a world where you delegate Amazon Alexa to make a payment on your behalf, triggered by your voice, does the airline miles program you have linked to your credit card make any difference which payment method you choose? I’d argue, absolutely not. Once you have configured Alexa with your preferred payment method, the improved utility will simply demand more and more transactions go through that account—you won’t stop a voice transaction to get your physical card out and read 16 digits to Alexa. The promise of rewards simply won’t be enough to disrupt that core payment utility.

  Amazon, Apple, Facebook, Alibaba and others, own those layers of technology that deliver experiences and utility today. Banks are already being forced to submit to app store rules just to be a part of their ecosystem. If you’re a bank that does a deal with Uber or Amazon to provide some sort of bank utility to an Uber driver or an Amazon small business, you have the advantage of access and scale, but you no longer “own the customer”. It’s no longer about having a building on the High Street or a piece of paper you can sign, it’s about the most efficient delivery of banking to the customer in real-time.

  We’ve been hearing about the threat of the “Facebook of banking”, the “Uber of banking”, or the “Amazon of banking” for many years now, but if you step back from the hype, we’ve already seen the emergence of new first principles competitors.

  A bank that is always with you

  In a host of countries around the world you can instantly sign-up for a bank or mobile money account on your phone in minutes. In countries like China, Kenya, Canada, US, UK, Australia, Thailand, Singapore, Hong Kong and throughout Europe you can pay by simply tapping your phone or scanning a bar code. You can send money to friends via the internet instantly in more than 190 countries today14. You can pay bills in real-time and increasingly just let your phone or bank account look after those payments for you. Real first principles thinking in banking isn’t happening in established, developed economies. The real action is in emerging markets or developing countries where legacy is poor.

  In 2005 if you lived in Kenya there was a 70 percent chance you didn’t have a bank account, nor could you store money safely and it’s unlikely you were saving, unless it was under your mattress. Today, if you’re an adult living in Kenya there’s a near 100 percent likelihood that you have used a mobile money account (stored in your phone SIM), and that you can transfer money instantly to any other adult in Kenya. Today, data shows that Kenyans trust their phone more than they trust cash in terms of safety and utility, with people sewing sim cards into their clothes or hiding them in their shoes so they can more safely carry their money with them. This is all possible because of a mobile money service called M-Pesa, created by the telecommunications operator Safaricom. Today at least 40 percent of Kenya’s GDP runs across the rails of their mobile money service called M-Pesa15.

  We’re currently sitting at about 22 million customers out of a total mobile customer base of about 26 million. Now, if you take the population of Kenya as being 45 million, half of whom are adults, you can see we’re capturing pretty much every adult in the country. We are transmitting the equivalent of 40 percent of the country’s GDP through the system and at peak we’re doing about 600 transactions per second, which is faster and more voluminous than any other banking system.

  —Bob Collymore, CEO of Safaricom/M-Pesa16

  The road to 100 percent financial inclusion via mobile wasn’t without its challenges. In December of 2008, it was reported in Kenya’s TheStar17, that a probe instigated by the finance ministry was actually as a result of pressure coming from the major banks in Kenya. By this stage it was already too late for the banks. By 2008, M-Pesa was already in the pockets of more Kenyans than those that already had a conventional bank account. The impact M-Pesa was already having on financial inclusion in Kenya meant the regulator simply wasn’t going to shut it down to curry favour with the incumbent banks. Financial inclusion was a bolder ideal than incumbent protection.

  Today there are more than 200,000 M-Pesa agents or distributors spread across Kenya. More than every bank branch, ATM, currency exchange provider or other financial providers. Those M-Pesa agents are at the heart of the ability to get cash in and out of the network, but being a part of that network allows them to accept mobile paym
ents for goods and services also. It is not unusual to find M-Pesa agents who have trebled their business since taking on M-Pesa, or those that see 60–70 percent of in-store payments being made via a phone. On average, the central bank estimates that the average Kenyan saves 20 percent more today than the days prior to mobile money.

  Figure 4: M-Pesa is a first principles approach to financial inclusion.

  Kenya isn’t the only one to have found the mobile to be transformational for financial access. Today there are more than 20 countries18 in the world where more people have a value-store or account on their mobile phone than via a traditional bank. In sub-Saharan Africa, a population of close to 1 billion people is amongst the least banked population in the world, with less than 25 percent of them having a traditional bank account. However, today more than 30 percent of them already have a mobile money account, and that is growing year-on-year by double digits. If you wanted to bank these individuals in the traditional way, you’d need to get them to a bank branch and they’d need a traditional form of identity. Research by Standard Bank in 2015 showed that 70 percent of these so-called “unbanked” people would have to spend more than an entire month’s salary just on transportation to physically get to a branch. Branch-based banking was actually guaranteeing financial exclusion for these individuals.

  The introduction of mobile money accounts has also had a profound effect on the banking system. The big banks that once plotted to kill M-Pesa have found incredible opportunities for expanding their horizons.

  When I took this job two years ago my vision was that we were not delivering the experience the customers were asking us to, we were stuck in the traditional mode of asking customers to come to the branch. I wanted an account where you can use your mobile device to get our services. So when we started [working with M-Pesa] we had a target to reach 2.5 million customers in one year, but then in just one year we had already reached 7.5 million customers. We had kind of broken all the goals that we set up for ourselves…our credit products have already done $180 million so far.

  —Joshua Oigara, CEO of Kenya Commercial Bank19

  Kenya Commercial Bank quadrupled their customer base from just over 2 million customers to more than 8 million customers in just two years by deploying a basic savings and credit function on top of the M-Pesa rails. A 124-year-old bank that took 122 years to reach its first 2 million customers, and just two years to reach the next six million. That’s all thanks to mobile. Another Kenyan bank, CBA, had equally as impressive results, going from just tens of thousands of customers to more than 12 million today, thanks to their M-Shwari savings product that they launched on top of the M-Pesa rails. Pre M-Pesa just 27 percent of the Kenyan population was banked; today almost every adult in Kenya has a mobile money account. That is a revolutionary transformation.

  While M-Pesa’s effect on financial inclusion has been nothing short of phenomenal, the really big numbers aren’t happening in Africa, they’re happening in China. The transaction volume of Chinese mobile payments reached 10 Trillion20 Chinese yuan (US$1.45 trillion) in 201521, and they reached 112 trillion yuan (US$17 trillion) in 2017. In comparison, the equivalent figure for mobile payments in the United States stood at a meager US$8.71 billion in 201522 and US$120 billion in 2017, less than 0.1 percent of China’s traction. Even though the US is expected to approach $300 billion on mobile payments in 2021, they’re still not even within shouting distance of China in terms of per capita volume, transaction volume or mobile payments adoption rates. In 2018, China’s mobile payments activity will overtake global plastic payments—that’s the scale we’re talking about. That meteoric growth is down to several factors, but most notably because China is today dominated by non-bank payments capability on mobile that has massive, massive scale due to non-bank ecosystems.

  By the end of 2015 more than 350 million Chinese were regularly using their mobile phones to purchase goods and services that exceeded 750 million in 2017. Alipay is handling a huge portion of that traffic, making it the world’s largest payments network by a wide margin, but WeChat Pay exceeded both Mastercard and Visa in transaction volume in 2017 as well. To help you understand how much larger Alipay is than conventional payments networks, in 2015 Visa reportedly peaked at 9,000 transactions per second across their network, while Alipay delivered 87,000 transactions per second at peak—almost ten times that of Visa. Alipay is now available in 89 countries across the globe, and Jack Ma is expanding that rapidly. On 11 November 2017 alone, Alipay settled RMB 159.9 billion (USD $25.3 billion) of gross merchandise volume (GMV) through its network—84 percent of that via mobile handsets.

  Given that PayPal, Apple Pay, Android Pay and Samsung Pay hit USD $9 billion in mobile payments volume for the same year, the US is significantly behind China. Visa’s market cap today is $260 billion. In comparison Ant Financial (Alipay’s parent company) looks like a huge buy opportunity right now, with a valuation at their last investment round of approximately $150 billion23. The mobile payments market in China is growing at 40–60 percent year-on-year and Ant Financial (Alipay) and Tencent (WeChat/WePay) claim more than 92 percent of that volume today24. Yes, you read that correctly, 92 percent of mobile payments in China are handled by two tech players—not by UnionPay, Mastercard, Visa, Swift or the Chinese banks. By tech companies. In Q1 of 2017, mobile payments accounted for 18.8 trillion yuan (US$2.8 trillion) in China, and they finished out the year with a staggering US$17 trillion in volume.

  Ant Financial has demonstrated better than any other company in the world, with the possible exceptions of Starbucks25 and WeChat, the ability to leverage mobile for deposit-taking and payments. In 2017, Alipay, through their Yu’e Bao wealth management platform, managed $226 Billion in AuM (and growing)—all via mobile and online channels. Alipay has no physical branches for taking deposits. It is the largest money market fund in the world today26 beating out JPMC’s US treasury bond market fund. Yu’e Bao has proved that the most successful channel in the world for deposit-taking is not a branch, it’s your mobile phone. Something that is only viable using first principles’ thinking.

  Figure 5: Yue Bao manages more than US $226 billion of deposits today, all through mobile.

  This has spurred a mobile deposit and payments war in the Middle Kingdom with Apple, Tencent, UnionPay and Baidu launching their own competing initiatives. WeChat’s online savings fund raked in US$130 million just on its first day of operation. The downside for Chinese banks is that now that a quarter of all deposits have shifted to technology platforms, the cost of liabilities and the risk to deposits has increased by 40 percent27. Competitors building new branch networks aren’t the threat, the utility of mobile and messaging platforms are.

  With the largest mobile deposit product in the world, access to more than 80 countries, investments in US-based Moneygram, Korea’s Kakao Pay, Philippines GCash (Globe Telecom), Paytm in India and others, Ant Financial is no longer just an internet-based payments network in China. Today, Ant Financial is on track to become the largest single financial institution in the world. Seriously.

  Within 10 years, based on current growth, Ant Financial will be valued at more than US$500 billion, and by 2030 it will likely be approaching $1 trillion in market cap value. This would make it four times bigger than the largest bank in the world today, ICBC of China. Today, Ant Financial is worth roughly the same as UBS and Goldman Sachs, two of the most well-respected banking players in the world. Ant Financial has a first mover advantage as a true first-principles financial institution built upon the utility of mobile. Ant Financial is not a bank, it is a FinTech, or more accurately a TechFin company—a technology company focussed on financial services.

  Ant Financial is clearly the 800-pound Unicorn in the bunch, but when you look for first principles in financial services, you see an overwhelming representation by FinTechs, startups, tech companies and pure-plays. I guess that’s the nature of it—for an incumbent to go back to first principles they’d have to burn it all down and start again.
Even when you look at the more innovative incumbent banks in the world, banks like mBank, BBVA, CapitalOne and DBS, you still rarely see evidence of even an iPhone-type “first principles” product design—it is still vastly skewed towards reducing friction for derivative products; design by analogy again. Products that were essentially created for distribution through physical branches are simply being retrofitted on to digital channels. For example, DBS’ Digibank in India and Atom Bank of the UK are just digital treatments of traditional bank products and services fitted onto a mobile phone—they’re derivative. Yes, they are mobile or digital optimized, but the product features and names all remain essentially the same as those you would have received from branches in the past.

  For example, we haven’t seen incumbent banks come up with a savings capability that isn’t APR28 based, or where interest isn’t received in anything but a very traditional manner—with one possible exception. Dubai-based Emirates NBD launched a savings product in 2016 that allowed customers to be rewarded based on physical activity measured via a wearable device that counted steps. Well played, Emirates NBD.

  Other examples of first principles approaches to savings have all come from FinTechs. Digit and Acorns are two examples of behaviourally-based approaches to savings—apps that modify peoples day-to-day behaviour to save more, not just simply offering a higher interest rate for holding your deposit longer. Fidor was the first bank in the world to launch an interest rate based on social media interactions29.

  We haven’t seen the incumbent industry come up with credit products that aren’t based on the same models we’ve seen for hundreds of years. PayPal Mafioso Max Levchin launched Affirm in 2014, which provides credit based on buying patterns, geo-location and behaviour. We’ve seen Grameen in Bangladesh pioneer micro-credit and Zopa in the UK pioneer P2P lending, but the banks that followed were largely derivative of these pioneers. You don’t see banks reinventing credit based on behavioural models.