Bank 4.0

by Brett King

10.Your bank is open—Whether mandated via regulation or understanding that your bank is no longer an island, but a platform of services, is liberating in respect to the potential opportunities it presents. You already have thousands of APIs that allow access to data and core capabilities for external parties who want to incorporate your bank platform into their customer experiences. Whether it is someone like Uber opening bank accounts for new drivers, Amazon offering loans to small business merchants, or aggregators and platforms like Mint.

  11.You have technology competency on the board and throughout the executive team—Mobile, voice and augmented reality will all be core competencies over the next 10 years, but the banking sector is significantly behind most other industries in terms of innovative approaches (not necessarily in adoption though), so having a non-bank technology person on the board to level board expectations is really key. If your executive team on the website doesn’t include a couple of technology veterans, you aren’t a digital bank.

  12.You are branch, revenue and relationship agnostic—You are well past arguing that people love branches. You think you’ll keep them if you can continue to justify a right-sized network (much smaller numbers and square footage) based on economics, but you are already channel and revenue agnostic. Whatever channel the customer uses, you will support. If you cannot sign up a customer for a bank account in-app, you are not a digital bank. If you still require a signature for any product or service you offer your customers, you are not a digital bank—no FinTech uses signatures to onboard customers, period. If you don’t do more than 50 percent of your revenue in retail via digital, you are not a digital bank.

  13.Everyone’s job is digital—Everyone is passionate about building great experiences for customers and everyone believes that the best way to do that is digital, not “future branches” or other such silliness. If you have a senior executive that has shot down a digital initiative in favour of the status quo, you are not a digital bank. If your annual digital budget doesn’t exceed your real-estate budget, you are not a digital bank. If at least 30 percent of your staff don’t know how to do some basic sort of coding, you are not a digital bank.

  14.Technology is not a channel—In a Bank 4.0 world mobile, voice, augmented reality and internet aren’t channels, they are simply technologies embedded in a customer’s life. The problem with talking about omni-channel, opti-channel or multi-channel approaches is they are all based on the core belief that branch banking is the core banking behaviour, and other channels are “add ons” to that core distribution channel. This thinking reinforces iterations off of the branch model of banking. A Bank 4.0 CEO looks at the core utility of the bank and figures out the most seamless, frictionless way to get that capability to a customer when and where they need it. They’re not taking branch products, application forms and processes and trying to retro-fit them for mobile or web. If you think you need a plastic card to do payments, you’re not a digital bank. If you talk about your multi-channel capability, you’re not a digital bank. If you talk about the benefits of seeing a human in-branch versus a digital engagement, you’re not a digital bank.

  Everyone wants to be a digital bank; the reality is very few are. At the heart of the Bank 4.0 shift is a fundamental change that erodes the value of current distribution channels and the products we put through those channels.

  Experience not products

  What’s it going to take to survive? That’s the billion dollar question, but it starts with the obvious: to compete against technology-first players you need to evolve into a technology-first state. But technology is not the end goal—compelling embedded banking experiences are. As a platform, your bank needs to be integrated into its customer’s lives when and where they need it the most—this is where the technology is taking us. Understanding that technology means they’ll never have to “come to the bank” ever again.

  Capital One, BBVA, DBS, USAA and others have all said they want to be technology companies or leading digital banks; but if that’s the case, getting from where they are today to becoming an organisation that is experience-led and technology-first will require a substantial organisational makeover. The resources required to win in this environment have almost nothing to do with traditional banking.

  Figure 3: The foundation of a Bank 4.0-ready organisation.

  Throughout the preceding chapters we’ve discussed many aspects of the Bank 4.0 revolution—the key elements for success are summarised here:

  •Experiences, not products—The only way to win in the Bank 4.0 world is to rethink the entire product paradigm and deliver the utility of your bank platform embedded into people’s lives. The principle here is simple: technologies like mobile, voice and augmented reality are all attacking friction—the ultimate frictionless engagement in banking doesn’t look like a savings account pushed as an offer on a mobile phone, it’s simply an experience that helps you save. The same applies to every other aspect of banking. If you are trying to get someone to pay their credit card via Alexa, you’ve missed the point entirely.

  •Stop hiring bankers—We’ve said it before, and we’ll say it again, you need to attract innovative talent that understands deep technologies like voice, machine learning, blockchain, cloud integration, biometrics and experience design. Banking experience is a legacy that you don’t want in a first principles reimagining of day-to-day financial services.

  •Data is the new oil—The “bank” of the future will be driven on data, but not the transactional data or credit reference data you have today; the future is about data that provides context for delivery of bank utility, in real-time. Where, when, why, how? Data is the fuel to power artificial intelligence, advice and seamless engagement. Without an organisation-wide data strategy, you just have legacy silos that don’t know your customers.

  •Legacy isn’t an excuse—Legacy core system architecture can never be an excuse for not executing a compelling experience with a customer. If your systems enforce a process that originated in the branch and has been gradually adapted to digital, then you won’t get to Bank 4.0 status. You need to have a team that will aggressively adopt middleware, cloud and FinTech solutions to plug the gaps wherever they appear. Progressively over time you’ll build a new stack that relies only on the core for general ledger-type operations, and more and more delivery capability will shift to middle and engagement layers. Agility is at the core of Bank 4.0 architecture.

  •AI, of course—A central shift to where the bank fits in the world will be the reshaping of “advice”. Today we rely on humans face-to-face to advise clients and customers, but in the future advice that translates to a real-time experience will be increasingly AI-driven. As machines learn about your behaviour, risk and the best tools to solve your problems, these will respond to changing conditions as they occur. AI will be at the core of a paradigm shift in banking advice, delivered contextually through the technology layer.

  •Don’t try this at home—Key to agility is recognizing that if you try to replicate what a FinTech has already done you’ll burn a couple of years—and 10 times more in costs—than if you simply licensed the technology that an external team has already developed. As more and more tech gets plugged in, banks and FinTechs will become very adept at deploying new capabilities very quickly through APIs and common cloud layers. Don’t forget the core reason behind this is not just that these partnerships will be faster and cheaper than traditional in-house efforts, but that FinTechs will be more likely to use first-principles thinking and to take an approach that is counter-intuitive for banks iterating on branch models.

  •Open the kimono, don’t block the blockchain—Despite the current furore over Facebook data sharing and Equifax data breaches, the reality is that the world runs increasingly on data. The objective here is not to stop data sharing, but to bring a system of auditability and permissions to sharing data effectively and securely. This is where open banking, data privacy regulations, blockchain and the role of the new data gatekeepers are critical in navig
ating the next few years. If you want to be able to ask Siri whether you can afford to go out for dinner tonight, or ask Alexa if you can afford that new flat-panel video wall that Marty McFly would be proud of—as a consumer you will need to give access to the data that drives that contextual advice, and you’re going to want more than the hope that Apple and Amazon deal with that data appropriately. In this world where responsiveness to data is 80 percent of your customer relationships, if you aren’t plugged in to a data cooperative that enables safe collaboration, then you are a data island that is increasingly irrelevant. Banks today are data islands. Tomorrow’s Bank 4.0 won’t even do identity collection as they do today; they’ll simply verify your identity against a known profile available on a blockchain. Otherwise they’ll be disadvantaged.

  Look back through this list of core competencies and you’ll see almost nothing that would be seen as typical banking capabilities. That’s because I already assume as an incumbent bank you know how to do “bank”—but you have a massive leap to be able to compete with Amazon, Alipay and the top challenger banks like N26, Monzo, Tandem, WeBank, Simple, Moven and others. These organisations aren’t investing in becoming banks like those of the Bank 1.0, 2.0 or 3.0 era—they’re investing in technology that transforms what we call banking into something new. We can’t expect this innovation to plateau over the next few years—if anything, innovation will heat up.

  Remember that there are only two innovation paths available to financial services: either iterate on the branch model of banking or revolutionize through first principles thinking. The revolution in banking isn’t happening via redesigning the branch or simply retrofitting products we used to sell in the branch to new channels like voice; it is happening in radically evolving engagement, distribution and relevance. Amazon and Alibaba have vastly superior data with which to understand the relationship of consumers to their money; their acquisition cost is much closer to zero than a bank will ever be; and despite assurances of the leading banks of their continued relevance as government-licensed institutions, the ability to connect with a customer in 2025 won’t be based on a charter—it will be based on data.

  Organisational impact

  The org chart is changing too. Organisation of the bank will centre around four key competencies:

  1.Customer experience or delivery execution

  2.Business operations

  3.Technology operations

  4.Banking competency

  Figure 4: The Bank 4.0 organisation focuses on frictionless, agile delivery for revenue and relationships.

  In the Bank 4.0 organisation, banking is not the defining characteristic of the organisation function, unusually enough. The only way the core utility of the bank gets delivered is through execution capability. Revenue and relationship are driven by the ability to reduce that core utility down to the simplest, most frictionless experiences possible. Wet signatures, compliance processes, and product features have given way to code. Credit risk processes have given way to behavioural data. Channels have given way to triggers, context and behaviour, too.

  The biggest impact to the organisation chart is clearly what is missing. Missing are the product departments that have long been the basis for budget battles and defining product structures. Mortgage, credit card and CASA facilities are all gone, the products associated with those departments transformed into experiences that are significantly more compelling and actionable, without adapting a paper application form from a branch into a digital application. If your organisation chart is dominated by product teams fighting for budget, how are you going to become experience first based? You can’t. Remember some of the key illustrations in Chapter 4. Credit card use cases can be much more effectively instantiated through technology in real-time, without plastic—for example, getting cash to buy groceries when you’re in Whole Foods and realize your salary hasn’t hit your account; or wanting to buy that new iPhone but you can’t afford it without credit. The answer isn’t applying for a card, it’s applying for credit—an experience that by its nature will redefine the way we organise the business.

  The credit card department gives way to teams that can surface the utility of credit contextually where it makes the most sense. Sure, you need credit access; but no, you don’t need plastic, you don’t need to apply months or weeks in advance—you just need the core credit capability surfaced through the technology layer.

  Again, the ability to partner brings an agility that is absent in the vast majority of banks today: where new IT projects are numbered in years, not days; where procurement pushes vendors through legal hoops that would put Trump’s legal team to shame; where legacy systems, legacy process and compliance roadblocks challenge the sanity and resolve of the most ardent innovators. An agile bank needs to move much faster than the org chart of a Bank 1.0–3.0 can handle.

  The key message is that this is about competing with TechFin and FinTech players for revenue and relationships. Products don’t create relationships or trust. Your ability to deliver does.

  As customers we’ve just got used to the friction and hoops that banks put us through. As soon as Ant Financial, Tencent, Amazon and Apple started to show us a better way, the benchmark shifted. But the economics of banking fundamentally changed too, because Amazon and Alibaba can both acquire customers for dimes on the dollar, compared to the $200–350 per customer for a basic cheque account relationship in the US, for example. The BATs, FAANGs, and GAFAs all have access to hundreds of millions of customers and banking is just another service they can deliver to their already willing customer base. In this banks are at a distinct disadvantage.

  RegTech and rethinking macro-competiveness

  Whether RegTech, “SupTech” (Supervisory Tech), data residency, AML monitoring, financial crime or simply compliance with the laws of the land, the regulation of financial services is set for a seismic realignment as customer behaviour evolves. Regulators are going to have to change even faster than banks to remain relevant. We can already see the battleground forming globally around things like FinTech charters, sandboxes, blockchain and crypto, etc. If you’re in a market that is resisting these things, like in the US, you can expect two things to happen: firstly, Silicon Valley and Silicon Alley will continue to try to find workarounds that you’ll have to constantly swat out; secondly, your global financial centres will start to look like that 70s station wagon that Chevy Chase drove in National Lampoon’s Vacation.

  Let me make one prediction over the next 10 years: I predict that somewhere, a competent digital regulator will decide that there’s no reason why customers of a bank need to be residents of a specific geography, they just need to be adequately identified. Once that happens, jurisdictions and financial centres will not just compete for venture capital dollars and talent, they’ll start to attempt to be truly global centres for banking where a digital value store for a customer doesn’t need to be tied to where you live. Following that, every progressive jurisdiction in the world will realize they need to compete for open-value store, payments and credit access. Estonia already started down this route with digital citizenship, but it’ll be far easier to allow digital KYC that is borderless. It will start with data and investment—data residency will be the battlefield after venture capital investment in FinTech levels out.

  At its core, however, the key “first principles” shift is that regulated markets will be based on regulation encoded not just in law, but in computer code. That requires a complete reskilling of regulatory bodies. It also means that the ability to respond to extremely agile FinTech platforms and players means hardcoding process and policies reduces competitiveness. This in turn means that regulators increasingly will shift to supervisory technology, rather than legal frameworks that are inflexible.

  If the industry is going to be agile and adaptable, it starts with a flexible regulator.

  Deploying capital for change

  In all of this dynamic change, one thing will become increasingly clear: the ability to compete
will hinge on efficient resource allocation. When you’re an incumbent, you have to juggle servicing existing legacy customers who lag on the technology, keeping those old legacy systems running long enough to survive, and making your quarterly numbers so your stock price doesn’t tank.

  A FinTech doesn’t have to worry about those things. They choose the most digital savvy customers, they don’t have legacy processes or systems, and they have investors more concerned about their ability to scale than profitability. Look at Amazon, they didn’t really start making big profits until they’d been in business for a good 10 years. Incumbent banks can’t commit to 10 years of losses to rebuild. FinTechs just need to worry about raising the next round, and that comes down to scale and growth, not profitability.

  In respects to innovation, however, this is where FinTechs have clear economic advantages. Their smaller teams, lack of legacy, the latest technology stack and their general willingness to break with conventions mean that they can deploy capital far more efficiently to create innovative customer experiences. Large incumbent banks will never be able to get the same bang for their buck as those small, agile, first principles teams.

  Ultimately this will lead to parings of FinTech, technology players and incumbent banks. Banks who refuse to partner with these more efficient players will find it effecting their bottom line and speed to market increasingly, and this will be under the microscope of market analysts. It’s the same reason why markets will, over time, start to discount banks who are reliant on branch networks for customer access—simply because challenger banks will consistently demonstrate much cheaper acquisition costs, and thus the ability to scale and take market share in a way that can’t be defended by branch networks.

  Figure 5: The Bank 4.0 Roadmap.