by Brett King
Put all this together and the future is super exciting—but super disruptive for those that avoid rapid transformation.
The Bank 4.0 roadmap
The chart opposite represents the milestones we’ve seen in the Bank 4.0 transition thus far, and the likely milestones we’ll see over the next decade as we move towards embedded, ubiquitous banking.
At the core of the Bank 4.0 world will be a simple, dramatic change. More people will be getting access to a basic banking service or value store through their mobile phone than through a branch. By 2025, most people will think of some device-based value store as their bank account, rather than a physical artifact—such as a chequebook or debit card—they had delivered by a bank.
More critically, the foundational elements of the Bank 1.0 world will rapidly start to decline in importance of delivery. Branches, agents and brokers based on information asymmetry will give way to contextual, behavioural offerings tailored to your personal world in a way that the traditional financial institution could never deliver via a face-to-face experience. Many will deny this shift up until the very moment they realize it’s too late.
Conclusion
Blockbuster, Borders, Kodak, and their ilk have taught us one thing about the scale of disruption that we’re seeing in financial services. Simply, that no industry is immune, and no one admits they are being disrupted until they have to file for chapter 11.
It will be the same in the Bank 4.0 space. For many CEOs and board members they’ll be hoping that they can retire before the organisation has to go through these radical changes. But putting these decisions off only guarantees that the disruption will be more impactful when it hits.
At the core of Bank 4.0 is a redefining of how financial services fits into the lives of the consumers, businesses and organisations that use those services. Technology is inevitably redefining that and in doing so is not just reducing friction and making delivery more seamless, it’s finding ways to reframe financial services.
When we look at major technology leaps that changed entire industries, entire economies and the way society works, the biggest innovations occurred through first-principles thinking and design. The printing press moving from handwritten copies to mass production; horses and steam-driven locomotives restricted to designated tracks, to automobiles that didn’t require jobbers to come and collect the waste deposits left by those horses on city streets; factories that moved from handcrafted items with limited scale, to production lines that could daily churn out products by the thousands.
SpaceX, which in just 14 years reduced the cost to orbit Earth by 95 percent compared to other commercial rocket manufactures, and NASA’s own efforts over 50 long years of gradual iteration and development of the same technology. An iPhone that bankrupted Nokia’s and Motorola’s phone division and set the benchmark for every smartphone made after it—and which materially changed the way we behaved and reset the industry so that Apple dominated for nearly a decade after this flagship device.
First-principles thinking not only creates rapid innovation, but also rewrites the rules governing the industry’s economics and market dynamics. It changes the baseline of how society operates around the core utility they’ve innovated on. Right now we see strong evidence that the likes of Alipay, Tencent WeChat, M-Pesa, the challenger banks of the world and others are all using elements of first-principles thinking to start from scratch and deliver banking more efficiently at scale.
Let me ask you this simple question: consider everything we’ve discussed, technologies like AI, voice-smart assistants, digital onboarding, robo-processes and investment, behavioural experience design, and the like. If you were starting from scratch today building a bank from the ground up, would you really require customers to visit a building, sign a piece of paper, wait to get delivered their plastic debit card or chequebook to get a bank account? Or would you build it differently?
We already know the answer. No challenger bank in the world is building branches. No tech giant requires a wet signature on an application form to lend you money or help you save. The answer is clear—you’d definitely build it differently. So why are you still doing it the Bank 1.0 way for a basic account offering?
The focus now is on surfacing core banking utility in real-time, not putting products on new channels. Bank platforms of the next 10 years will be differentiated through innovative use of technology, experience design, leveraging off network effect and creative ways to tap into customer behaviour.
Bank 4.0 is a fundamental paradigm shift in delivering banking services, embedded into the lives of customers when and where they need those same services. Bank 4.0 is about the emergence of banking that is everywhere through ubiquitous technology capabilities. Advice at scale through AI; revenue and relationship based on instant service capability; bank accounts that help you save and don’t reward you for spending; Millennials that reject credit, and seek simply an answer to their problem or question.
Money that isn’t paper-based. Revenue that isn’t paper-based. Relationships that are not people-based. Banking everywhere, but never at a bank.
The biggest “bank” in the world at the end of next decade will be phenomenal at technology delivery. The functions of the business will be built around delivery, and not products—those business units will be utility- or experience-based. The biggest banks and financial institutions will have phenomenal reach and scale, rapidly based on either being embedded in a technology you use everyday or in networks that enable network effect.
By the end of the next decade the largest “bank” in the world will have close to three billion customers in 100 countries, and be worth almost one trillion dollars. I’m making a bet that “bank” will be Ant Financial and in 2025 it will already have surpassed ICBC, the largest bank in the world today, in respect to customer numbers, assets, deposits and market capitalization. By 2025 you won’t be competing against other banks, you’ll be competing against technology players like Ant Financial and Amazon. If you’re still competing as a bank, it will be like taking on these guys blindfolded.
Things just got real—if you’re not running fast and changing everything from the ground up, you’re probably got a tough few years ahead.
For me, this makes banking exciting, cool, dynamic and interesting. If you’re a risk adverse banker that sees this level of change as a fundamental threat, you should start looking for another job. Maybe go work for Kodak or Blockbuster…
Thanks for reading, and thanks for being a part of the dialog. I hope you are ready for what comes next, because it’s coming whether you’re ready or not.
Welcome to the future—welcome to Bank 4.0.
Endnotes
1Electronic Recording Machine for Accounting (BofA and MIT 1953).
Glossary
ACH: Automated Clearing House.
Adoption Rate: How quickly it takes new technologies to be adopted by the public at large.
AML: Anti-Money Laundering—the efforts through legislation, regulation and through systems to track, identify and stop the laundering of illicit funds into the mainstream banking system.
Android: An open mobile phone platform developed by Google and, later, the Open Handset Alliance. It consists of the operating system (on which everything runs), the middleware (allowing applications to talk to a network and to one another), and the applications (the actual programs that the phones will run).
AOs: Algorithmic Operations.
API: Application Program Interface. App: Short for application—a program or piece of software, especially as downloaded by a user to a mobile device.
App Phone: A phone that provides open application support not limited to the phone handset, manufacturer’s operating system and applications; most common instances are the iPhone, Droid and NexusOne.
Augmented Reality (AR): The overlaying of digital data on the real world.
Avatar: A computer user’s representation of himself/herself, or alter ego, for use on computer systems.
B2B: Business-to-Business—as in intraorganisational communication, collaboration and commerce; normally electronic, and usually using websites and/or web services.
Basel II and III: The second and third of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.
Big Data: Data sets the sizes of which are beyond the ability of commonly used software tools to capture, manage, and process within a tolerable elapsed time. Big data sizes are a constantly moving target, and as of 2012, range from a few dozen terabytes to many petabytes of data in a single data set.
Bitcoin: A type of P2P digital currency.
Blog: A contraction of the term “web log”—a type of website usually maintained by an individual with regular entries of commentary, descriptions of events, or other material such as graphics or video.
BPO: Business Process Outsourcing—the practice of outsourcing some or all of the business’s back-office processes to an external company or service provider; common with call centres and IT support.
BPR: Business Process Re-engineering—re-engineering business processes to either reduce costs or improve the flow of a process for customers.
CapEx: Capital Expense.
CES: Consumer Electronics Show.
Churn: This refers to customers moving from a service provider within one specific product category to another, based on price, value or some other factor.
CLID: Caller Line Identification—a system that identifies a customer based on the phone number they use to call a service provider.
Cloud computing: An emerging computing technology that uses the internet and central remote servers to maintain data and applications; players include DropBox, YouSendIt and Flickr.
CPM: Cost per impression; in online advertising, it relates to cost per (thousand) impressions.
CRM: Customer Relationship Management; sometimes Credit Risk Management.
Cross-Selling: A method of targeting and selling new products to an existing customer.
Crowdsourcing: Tapping into the collective intelligence of the public at large to complete business-related tasks that a company would normally either perform itself or outsource to a third-party provider. It enables managers to expand the size of their talent pool while also gaining deeper insight into what customers really want.
CSR: Customer Service Representative—staff who work within the call centre to assist customers with enquiries.
CTI: Computer-Telephony Integration/Interface—a system that integrates telephone systems with computer networks.
CTR: Click-Through Rate.
Digital Natives: Y-Gen and younger users of technology.
DM: Direct Mail.
Durbin Amendment: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which reduced fee income for banks of credit and debit card swipes at the point of sale in the US.
ECN: Electronic Communications Network—an electronic network that facilitates trading between stock or commodities exchanges.
EMV: An international standard for smart credit cards that have a built-in CPU chip. Used with brand names such as Chip and PIN and IC Credit, the smartcard provides greater safety than a magnetic stripe because it can support sophisticated security methods and make decisions on its own.
ETFs: Exchange-Traded Funds.
FAQ: Frequently Asked Questions—questions asked frequently by customers and put on the company’s website to expedite answers.
FMCG: Fast-Moving Consumer Goods—products that are sold quickly at relatively low costs.
Geolocation: The technique of identifying the geographical location of a person or device by means of digital information processed via the internet.
Gilder’s Law: Proposed by George Gilder, this law states that bandwidth grows at least three times faster than computer power.
GPR prepaid cards: General Purpose Reloadable prepaid cards.
GPRS: General Packet Radio Switching—a packet-oriented mobile data service available to users of 2G and 3G cellular communication systems in Global Systems for Mobile communications (GSM).
GSM: Global Systems for Mobile communications—the primary standard for digital mobile phones, in use by 80 percent of the global mobile market.
Haptic Touch: Technology that interfaces with the user through the sense of touch.
High-Counter: The typical teller station within a branch for conducting over-the-counter transactions.
HNWI: High-Net-Worth Individual—the most attractive client segment for retail banks; HNWIs typically invest US$150,000–US$1 million in investment type products.
IC: Integrated Circuit.
IDV: Identity Verification.
IM: Instant Messaging—a protocol for communicating between two parties using text-based chat through IP-based clients.
IN: Innovation Newspaper.
iOS: Apple’s mobile operating system for its iPhone, iPod touch, iPad, Apple TV and similar devices.
IP: Internet Protocol—the primary protocol for transmitting data or information over the internet.
ISP: Internet Service Provider—a company that provides internet access to customers.
IVR: Interactive Voice Response (systems)—the automated telephone support systems you hear when you call a 1-800 helpline or customer support number, which uses menus and responses via touch-tone and/or voice response for navigation.
IxD: Interaction Design—a customer-led design methodology for improving the interaction between customers and systems.
KPI: Key Performance Indicators—metrics (or measures) used within corporations to measure the performance of one department against another in respect of things such as revenue, sales lead conversion, costs, customer support, etc.
KYC: Know Your Customer—an internal compliance regulation to ensure accurate identification and validation of a customer and understanding of his transactional behaviour.
LAN: Local Area Network—a computer network covering a small physical area, such as a home, office, or small group of buildings.
LOLA: A Siri-like technology (see Siri below) through the internet and via voice.
Low-Counter: Typically a desk station within a branch where the relationship manager can sit with customers and potential clients and advise them on available products and services.
Lo-Fi Prototype: A simple method of prototyping products, interfaces or applications and testing with target customers or users.
LIBOR: London Interbank Offered Rate.
LinkedIn: An online social network for business professionals.
Metcalfe’s Law: Attributed to Robert Metcalfe, this law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).
MFI: Microfinance Institution—an alternate form of bank found in developing countries which provides microcredit lending.
MIRC: Magnetic Ink Character Recognition.
Mobile Money: Bank-like services delivered over a mobile device to enable payments between two parties; successful providers include M-Pesa, Edy, G-CASH, MTN Money, T-money, Suica.
Mobile Portal: A website designed specifically for mobile phone interfaces and mini-browsers.
Mobile Wallet: An electronic account, dominated in a currency, held on a mobile phone that can be used to store and transfer value.
Moore’s Law: Named after Gordon Moore, this law basically states that the number of transistors on a chip doubles every 24 months.
NFC: Near Field Communication—a short-range high-frequency wireless communication technology which enables the exchange of data between devices over about a 10-centimetre distance.
OCR: Optical Character Recognition.
OpEx: Operating Expense.
OTC: Over the Counter—refers to physical transactions or trades done on behalf of a customer by a trader or customer representative who has access to a specific closed financial system or network.
P
2P: Peer-to-Peer or Person-to-Person—a method of passing information or data via IP-based communication methods between two individuals connected to the internet via computer or mobile devices.
PayPal: A leading P2P payment provider; others include Square, i-Zettle, ClearXchange, Dwolla, PingIt, PopMoney, QuickPay, Venmo, ZashPay.
PCI compliant: Complying with Payment Card Industry data security standards.
PFM: Personal Financial Management.
Pod: Modular customer engagement station.
POS: Point of Sale—the location where a retail transaction occurs; a POS terminal refers more generally to the hardware and software used at checkout stations.
PPC: Pay-per-Click—a method of paying for appearing in search engine results by bidding and paying for specific keywords; you then pay at the successful bid rate every time a user/visitor clicks on your link.
Prosumer: A portmanteau word formed by contracting either the word “professional” or “producer” with the word “consumer”; in respect of this publication, it identifies the role of the modern consumer of content who is also a producer of content on, for example, YouTube, Facebook and Twitter.
PSTN: Public Switched Telephone Network—the traditional copper-wire and exchange based landline telephone system.
RFID: Radio Frequency Identification—a short-range radio communication methodology that uses “tags” or small integrated circuits connected to an antenna that when passed within the range of a magnetic reader is able to send a signal.
RM: Relationship Manager—a dedicated customer service manager assigned to look after specific customers, usually high-net-worth ones.
ROMI: Return on Marketing Investment.
SDK: Software Development Kit—a package provided by a mainstream software or operating system provider to the developer community to assist them with application construction.
SEO: Search Engine Optimisation—the science of optimising websites so that they appear in the top results for search engine enquiries.
