Bank 4.0 Page 4

  We have very rarely seen incumbent players abandon their reliance on application form-based credit scoring or reference checks to determine someone’s suitability for a loan or credit card. Yet we see startups like Sesame Credit (Ant Financial), Lenddo and Vouch experiment with social-based scoring, and LendUp creating loans that boost credit scores for consumers instead of simply rejecting them.

  When it comes to money itself, you can’t effectively argue that Bitcoin isn’t a first principles approach to the problems of currency, identity and the challenges of cross-border digital transfers. When you look at the money transfers themselves, you don’t see players like SWIFT, Western Union or others using first principles or adapting blockchain (yet) to solve the problem, but you do see M-Pesa, Abra, Ripple and others solving money movement issues with great aplomb.

  Distributed ledger technology like the blockchain clearly has the potential to be a first principles platform for a range of things, the most illustrative example being the creation of the DAO or decentralized autonomous organisation. It was the first AI-based company that allowed participants to invest Ether crypto-currency into Ethereum/Blockchain startups managed purely on a code and consensus basis. Technically the DAO was a stateless, crypto-currency based, investor-directed venture capital fund, with no risk or compliance officers, no management, and no traditional company structure. You can’t argue that this isn’t a first principles approach to VC investment.

  When you look for first principles approaches to banking you can find plenty of examples, just not amongst incumbent banks. That is the threat.

  Is it too late for the banks?

  Elon Musk’s SpaceX isn’t the only company in the world to make rockets today, but it does have the cheapest kilogram-to-orbit platform. Tesla isn’t the only electric vehicle in the world, but it is the most widely known and sold, and has reframed the motor vehicle industry with the likes of Volvo and others responding in kind because of Tesla’s success. Apple’s iPhone isn’t the only smartphone on the planet, but it did completely redefine what we considered a phone and personal computing device. Daimler and Benz aren’t the only automobile manufacturers in the world, but you don’t see horses on our streets today because of their first principles approach to transportation.

  Ant Financial, Tencent, Safaricom and thousands of FinTech startups are redefining what it means to bank today. Redefining how people use a bank account, or more accurately a value store that is embedded in their phone.

  Bank 4.0, however, will be about more than new value stores, payment and credit utility. Bank 4.0 is going to be embedded in cars that can pay in a drive-through without the need for plastic, or autonomous vehicles that generate their own income and pay their own road tolls. Bank 4.0 is going to be embedded in voice-based smart assistants like Alexa and Siri, available at your command to pay, book, transact, enquire, save or invest. It is going to be embedded in mixed-reality smart glasses that can tell you, just by looking at something—like a new television or a new car—whether you can afford it. Bank 4.0 is about the ability to access the utility of banking wherever and whenever you need a money solution, in real-time, tailored to your unique behaviours.

  The emergence of Bank 4.0 means that either your bank is embedded in the world of your customers, or it isn’t. It means that your bank adapts to this connected world, removing friction and enabling utility, or it becomes a victim of that change. The bankers of tomorrow are not bankers at all—the bankers of tomorrow are technologists who enable banking experiences your customers will use across the digital landscape. The bankers of today, the bank artifacts of today, the bank products of today, are all on borrowed time.

  Is it too late for the banks? In one sense, yes. This transformation into the semantic, augmented world is happening because of a whole range of technology changes outside of banking, and the constant demand by consumers for the next big thing. The only way banks could hope for first principles NOT to undermine their businesses, is if they could successfully stop all adoption of new technologies like smartphones and voice-based AI. That is patently impossible. Markets that are successful in slowing down the adoption of things like mobile payments become outliers and simply look out of date in a transformed world.

  Case in point. Two thirds of the world’s cheques today are written in the United States, along with the highest card fraud volume in the world, and as you read earlier the volume of mobile payments in the US is fractional compared with the likes of China. This outlying behaviour is permitted by a system suffused with legacy, payments regulation ruled by consensus, point-of-sale architecture that is a decade behind the rest of the world, and reluctance by incumbents to remove this embedded friction because it will weaken their oligopolies. However, the fact remains: when it comes to mobile payments, Kenya is a far more advanced economy than the United States. When it comes to financial inclusion, Kenya has done more to improve the lot of its populace in the last 10 years than the US has in the last 50 years through legislation like the Community Reinvestment Act. Indeed, Kenya today has higher financial inclusion than the United States—a mind-blowing and clearly inconvenient statistic.

  The US banking system is a macro example of design by analogy versus design by first principles, whereas China and Kenya are becoming the opposite. The more legacy behaviour and regulation your economy has supporting the friction of the old system, the harder it will be for your bank to be 4.0 ready because it forces slow adaptation to new technology. It is why London and Singapore and pushing so hard for regulatory reform in financial services—they know that is how the future centres of finance will be defined in 2030 and beyond.

  Ultimately, this fight will occur across the global stage, and the new metric for developed economies won’t be things like GDP and economic growth, but the ability to leverage new technologies to become smart economies, the ability to enable automation, investments in smart infrastructure and the ability to capitalize transformation. Banking is a key part of the infrastructure of the global economy, but if your banking system is built on dumb rails, you will find more and more competition coming from offshore, and more and more blockchain and AI-based attempts at rendering you completely irrelevant.

  If you’re a bank steeped in tradition, run by lots of bankers, with an old core, in a market with tons of regulation, reliant on branch traffic for revenue then, yes, it is very likely too late. A complete transformation of a bank to being a provider of embedded banking utility, driven by behaviour, location, sensors, machine learning and AI, needs more than an innovation department, an incubator, a mobile app and a Google glass demonstrator video.

  Bank 4.0 is about that radical transformation and how the best banks in the world are responding to these shifts, and how first principles competitors are forcing us to think about banking in different ways. Bank 4.0 is about regulators that are rethinking friction, licensing and regulations themselves. Bank 4.0 is about new capabilities, new jobs and skills that underwrite competencies banks have never needed until now. Bank 4.0 is about the ability of FinTech startups to create transformative experiences faster and cheaper than any incumbent bank could ever do.

  If you want to be Bank 4.0 ready, you need to strip your bank back to first principles and rebuild. If not, it’s largely just a matter of time before your business is no longer economically viable, especially if you’re a bank with under $1 billion in assets. If this prospect scares you, I’ve successfully whet your appetite for what comes next.

  If you’re looking for a book that describes how you take your bank from where it is today into the world of tomorrow, then keep reading. This may be your last chance to make the necessary changes to survive through the next decade. Otherwise, feel free to continue the slow decline into obsolescence.

  Endnotes

  12 May 1945.

  2Source: British Ministry of Home Security Statistics from 1939–1945 (http://myweb.tiscali.co.uk/homefront/arp/arp4a.html).

  3As we’ll find out later in the chapter, this
is the sole mechanism we’ve used to progress the banking system over the last 100 years.

  4I’m not counting Hyperloop and his LAX-based tunneling machine, purely because they are not yet separate businesses run by Musk.

  5Elon Musk explains “first principles” https://youtu.be/NV3sBlRgzTI (Source: Innomind.org).

  6ASDS—Automated Spaceport Drone Ship.

  7SpaceX names their ocean drones and landing platforms after ships in Iain Bank’s science fiction stories from the world of the “culture”.

  8In Bank 2.0 I was able to find an example of a bank that had done this so judiciously that their online credit card application form asked you to staple proof of income to the form—an electronic form on a screen requiring a “stapled” proof of income.

  9We’ll get to branches later—I assure you.

  10As only the US uses the spelling “checks”, we’ll use the globally accepted anglicised version in this book—cheques.

  11More generally known also as “Alexa”.

  12For a more detailed analysis of this trend, please see my Augmented: Life in the Smart Lane.

  13Much of this is possible now, or close to possible. Check out the Alexa ad featuring Alec Baldwin, where he orders Bresciani socks.

  14This is just for PayPal coverage alone. AliPay is already in 80 countries and growing, too.

  15Source: The Economist—A new East Africa campaign, 9 July 2015.

  16Breaking Banks Radio interview—aired 9 February 2017.

  17Source: The Star—Big Banks in Plot to Kill M-Pesa, 23 December 2008.

  18Source: WorldBank—those countries include China, Kenya, Tanzania and Nigeria

  19Breaking Banks Radio interview—aired 9 February 2017.

  20With a capital “T”.

  21Source: iResearch—http://www.iresearchchina.com/content/details7_21238.html.

  22Source: CIO Magazine, “7 reasons mobile payments still aren’t mainstream”, James A Martin, 7 June 2016.

  23As of their $4bn capital raise April, 2016. To be fair, it could be argued that they are worth well in excess of $100bn today, based on their current revenues and activity.

  24Source: ChinaDaily.com, 3 August 2017; “Alipay, WeChat Pay vie for customers”—http://www.chinadaily.com.cn/bizchina/tech/2017-08/03/content_30337784.htm.

  25In 2016 Starbucks saw approximately $8 billion loaded onto their mobile based “cards” (Source: Starbucks Investor call).

  26“Chinese money market fund becomes the world’s biggest”, Financial Times, 26 Apr 2017—https://www.ft.com/content/28d4e100-2a6d-11e7-bc4b-5528796fe35c.

  27Source: Asian Banking Journal.

  28Annual Percentage Rate.

  29Incidentally, this would technically be illegal in jurisdictions like the US today due to disclosure requirements around savings accounts that require APR rates to be published according to a strict schedule.

  When Alipay was created, we hoped to create an equal environment in China so that everyone can have equal access to financial support. We hoped to see that every honest person, every good person, even though penniless, can create sufficient wealth and value for one’s honesty and virtues.

  —Jack Ma, Chairman of Alibaba and Ant Financial

  For 20 years, I have been watching developments in financial services in China closely. My first exposure to the Chinese system was in 1997, just before the Asian financial crisis. The Bank of China proudly showed off their Beijing head office, staffed by 300,000 people, with most of it being to drive money from citizens towards government-initiated projects. There were high levels of savings and little credit availability. Customer service was of zero interest and the major focus was supporting State-Owned Enterprises (SOEs). Back then, bank tellers had to take a proficiency test in using an Abacus before they were given a job.

  A decade later, China had opened up to world trade and had seen a phenomenal expansion of growth in the economy. I had been caught out by the emerging social network called QQ, which had achieved 300 million users, and was amazed at how quickly the market was changing. Visiting Shanghai, you could see the change. The riverside financial district had literally emerged from the ground up in the previous decade, and was now vying to be a global financial centre. It had a long way to go, but was getting there. Hu Jintao noted in 2006:

  “From 1978 to 2003, China’s GDP increased from US$147.3 billion to over US$1.4 trillion, with an average annual increase rate of 9.4 percent; its total foreign trade volume grew from US$20.6 billion to US$851.2 billion, with an average annual growth rate of 16.1 percent; and the poverty-stricken population in the rural areas dropped from 250 million to about 29 million.”

  I wrote extensively about the changes in China in 20061 and, back then, was predicting that the biggest banks in the world within a decade would all be Chinese. Today, they are:

  Table 1: Top 10 world banks 2017. Source: The Banker magazine, July 2017.

  Today, China’s phenomenal growth has started to slow, government policies to support such growth are being questioned and concerns over the whole shadow financial system are raising global systemic worries. No matter. The country is still seeing progress and QQ is now WeChat, part of the Tencent group. The group operates alongside several other massive Chinese internet giants, including Alibaba (the Amazon of China), Baidu (the Google of China) and more, to challenge the thinking of all.

  In so doing, the country has leapfrogged their legacy competitors. America struggles with the conversion of mag stripe points of sale to migrate to chip & PIN, whilst Europe tries to work out how to hold together their union in light of Brexit. China, by contrast, has transformed—and specifically transformed their financial markets. Ant Financial are expected to IPO some time in the next couple of years.

  However, Ant Financial go way back, beyond 2014. In fact, their humble roots began in 2003, when Alibaba came head-to-head with a big American giant who wanted to take root in China. That giant was eBay. Here begins a story that should fascinate everyone, especially as Ant Financial are realising the dream widely discussed in this book: the creation of a financial system for the fourth age of humanity2.

  Through a series of meetings in July 2017, I spent time in Hangzhou, China and London, talking with Ant Financial and Alipay executives about their views of the past, present and future of the company. I also spent time touring China, and talking with real people about their views of the company. The following represents the summary of those experiences.

  The Alibaba stories

  In order to understand how Ant Financial made its mark, we first need a brief history of its origins within Alibaba. There are many ways in which you can catch up with the Alibaba story, with Porter Erisman’s book, Alibaba’s World, quite an easy read. I saw Porter present this story, from when he was involved in the early days of Alibaba, having lived in China since 1994.

  The origins of Alibaba actually date back to 1980 when an Australian Communist sympathiser, Ken Morley, travelled around China on a summer vacation. When visiting Hangzhou, Ken and his family went down to the main tourist area, the West Lake. There they met a young Jack Ma who, back then, went by the name Ma Yun. Ma Yun was 16 years old, learning English, and liked to hang around the West Lake most days he could, in order to improve his English by talking with tourists. Ken’s son David was also 16 years old, and the two boys struck up an unlikely long-term relationship.

  Figure 1: Ma Yun and David Morley in 1980.

  From the chance encounter with the Morleys, Ma Yun started a pen pal relationship with David. They would exchange letters with Ma Yun, leaving every other line free for David’s father, Ken, to make corrections to Ma’s English spelling. Ken decided to see if he could help his son’s young pen pal by inviting him to visit Australia in 1985 when Ma Yun, now Jack Ma, was just 21 years old.

  This was when the doors of China were still firmly closed and an individual could not get a travel visa. However, Jack Ma was determined and travelled to Beijing to see if he could get permission. S
even times he was told no. At that time, visas were only issued for service, family or studying purposes, not for general visits or tourism. So, Jack Ma almost lost all hope after his visa was rejected seven times in a row. Ken Morley was also worried about this, and even sent a telegram to the Australian embassy in China, hoping they could issue a visa for Jack Ma.

  Jack Ma stayed in Beijing for a week, diligently applying for the visa every single day, as the trip to the capital cost all the money he had. The last time he stepped into the embassy, he ran towards the first visa officer he met and said: “I have been here for a week so this might be my last chance. I want my visa, and I want to talk to you seriously.”

  “What do you want to talk about?” said the clerk.

  “I have been rejected for a visa seven times during the past week. I have no money anymore so I have to go back home. But I need to know the reason for my rejections.”

  Impressed by Jack Ma’s persistence, the visa officer listened carefully to the story of his relationship with the Morley family and, afterwards, Jack Ma finally got his Australia visa. This changed his life and, many years later, Jack recalls: “I am very thankful for Australia for that 29 days in Newcastle [a suburb of Sydney] … when I arrived in Australia I was so shocked and amazed by the wonderful things, the people, the culture, the landscapes, the products … I was … educated in China that China was the best and richest country in the world … when I arrived in Australia I saw the world was so different.”

  After this, everything changed in Jack Ma’s thinking, although he could not realise his dreams at that point. Instead, he returned to Hangzhou to teach English. However, his Australian trip stayed with him and, combine this with a visit to America in 1995, and his life’s path was clear.