Bank 4.0

Banking Everywhere, Never at a Bank

Brett King

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119506522
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Banken & Bankwesen

Winner ofbest book by a foreign author (2019) at the Business Book of the Year Award organised by PwC Russia

The future of banking is already here — are you ready?

Bank 4.0 explores the radical transformation already taking place in banking, and follows it to its logical conclusion. What will banking look like in 30 years? 50 years? The world's best banks have been forced to adapt to changing consumer behaviors; regulators are rethinking friction, licensing and regulation; Fintech start-ups and tech giants are redefining how banking fits in the daily life of consumers. To survive, banks are having to develop new capabilities, new jobs and new skills. The future of banking is not just about new thinking around value stores, payment and credit utility — it's embedded in voice-based smart assistants like Alexa and Siri and soon smart glasses which will guide you on daily spending and money decisions. The coming Bank 4.0 era is one where either your bank is embedded in your world via tech, or it no longer exists.

In this final volume in Brett King's BANK series, we explore the future of banks amidst the evolution of technology and discover a revolution already at work. From re-engineered banking systems, to selfie-pay and self-driving cars, Bank 4.0 proves that we're not on Wall Street anymore. Bank 4.0 will help you:

• Understand the historical precedents that flag a fundamental rethinking in banking
• Discover low-friction, technology experiences that undermine the products we sell today
• Think through the evolution of identity, value and assets as cash and cards become obsolete
• Learn how Fintech and tech "disruptors" are using behaviour, psychology and technology to reshape the economics of banking
• Examine the ways in which blockchain, A.I., augmented reality and other leading-edge tech are the real building blocks of the future of banking systems

If you look at individual technologies or startups disrupting the space, you might miss the biggest signposts to the future and you might also miss that most of we've learned about banking the last 700 years just isn't useful.

When the biggest bank in the world isn't any of the names you'd expect, when branch networks are a burden not an asset, and when advice is the domain of Artificial Intelligence, we may very well have to start from scratch. Bank 4.0 takes you to a world where banking will be instant, smart and ubiquitous, and where you'll have to adapt faster than ever before just to survive. Welcome to the future.

Part 03
Why FinTech companies are proving banks aren’t necessary

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1. 6 FinTech and TechFin: Friend or Foe?
2. 7 The Role of AI in Banking
3. 8 The Universal Experience

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6
FinTech and TechFin: Friend or Foe?

As […] technologies develop and season, they’re going to create a totally different way of doing banking and financial services. Now we will see the possibility—not necessarily the probability—of what we call a “Kodak moment”, where increasingly banks become irrelevant to their customers.
—Antony Jenkins, Former CEO of Barclays,
founder of FinTech startup 10x Future Technologies

If you go to Google and type in FinTech, among the top automated search terms that appear are “FinTech killing banks”, “FinTech disrupting banks”, “will FinTech replace banks”. If you follow through on such searches you’ll find pages and pages of news stories from the major financial news outlets, along with blogs, press releases and so forth proclaiming that, yes, FinTech will kill banks. But then you’ll equally find a plethora of articles showing that it’s all much ado about nothing and banks are not only up to the challenge, but will outlive the “fad” of FinTech. Some will argue this is a zero-sum game, that it will all work out with FinTechs and banks living in some sort of technological harmony once the dust settles. The truth is somewhat more complex.

Will FinTech (or TechFin) kill banks? Most certainly some banks, but not all. Will banks (or regulators for that matter) kill some FinTechs? Absolutely, but again, the FinTechs that succeed will become an established part of the future of financial services and, as Antony Jenkins forecasted above, FinTechs and TechFins are materially changing what financial services itself means.

Investment levels show that the FinTech “fad” is far from over: it’s either still getting started or we’re right in the thick of it. Strong investment of US$8.7 billion in Q4/17 propelled global FinTech funding to over the $31 billion mark for 2017, sustaining the same high level of investment seen in 2016¹. This brings the total global investment in the FinTech sector over the past three years to US$122 billion². The number of VC transactions exceeded 1,000 for the fourth consecutive year in 2017. This is part of a wider trend of increased VC investment in technology firms; in fact, 2017 marked the highest spend in venture capital since the dot-com boom. A total of $84 billion was invested in over 8,000 technology companies and startups last year³, with FinTech taking more than a third of that investment. Rather than this being a bubble like the dot-com boom, there are now numerous FinTech startups that are large, high-value brands with established and profitable customer bases. Many of these startups are at least as big as their equivalent competitors who are listed, public companies. Like Uber, many of these companies have elected to remain privately owned for now.

Ultimately this means that whether or not you truly believe FinTechs will kill banks is largely irrelevant. The investment flooding into emerging technology players is already changing financial services demonstrably, and these startups are changing financial services at a much faster rate than banks are able to respond to. As these new entrants continue to get greater and greater access to funding, this makes future disruption even more likely⁴.

Let’s make the argument even simpler. If Ant Financial and Alibaba, LuFax, Simple, Square, TransferWise, Betterment, Stripe, Venmo, Xero, SoFi, Credit Karma, Coinbase and others didn’t exist, would banks be investing in technology at the same rate that they are today? Or would the status quo have continued to reinforce a slower rate of change? Ultimately the new benchmarks in economic performance, leveraging of social media and network effect, customer acquisition across digital channels, cross-sell and upsell strategies tied to behavioural models, and so forth, are inexorably linked to key FinTech players who have change the game and moved the goalposts.

For example: if you were Jack Ma starting up in financial services, would you begin by building bank branches or appointing agents and advisors to build your business? Or would you use first principles thinking to outline more aggressive growth methods in the digital age? I’ll let Jack Ma answer that question:

I made a bet [with the CEO of Walmart]: in 10 years we’ll be bigger than Walmart, based on the sales. Because if you want to have 10,000 new customers, you have to build a new warehouse and this and that. For me?...Two servers.

—Jack Ma, Founder of Alibaba,
speaking at the 2015 World Economic Forum

Figure 1: Jack Ma speaking at the 2015 World Economic Forum
(Image credit: WEF).

Jack Ma has been very clear that as the founder of the largest FinTech startup in the world, there’s no advantage in the digital age to building physical infrastructure to grow a brand. If you want to grow fast—it has to be digitally enabled.

“For me? Two servers”

The future of financial services is clearly about financial services experiences embedded in technologies that are ubiquitous. Technologies that allow rapid scaling. Technologies that solve the big problems of financial inclusion, fraud and identity theft, friction, and so forth. FinTechs are consistently first to market with experiences on the technology platforms that account for the vast majority of daily access to financial services. In China, Alipay and WeChat were first to market, and dominated. In the US PayPal, Venmo and Square pre-dated the likes of Zelle by years. The first banks to launch digital onboarding were neo or challenger banks. As a result, when these players get scale, they end up forcing incumbents to mimic the experience that customers now know is possible⁵.

Every FinTech in the world has the same basic mission. Kill not the banks, agents, brokers and insurers of the world, but kill the friction associated with financial services today. They do that willingly and it is at the very core of their mission. For banks, they often have to battle legacy system constraints, compliance-based apathy and resistance, lack of executive support, and the fear of cannibalisation of their existing “channels” before they can even start transformative projects. What this means is that FinTech’s are consistently more efficient at deploying investment capital for the purpose of removing friction when compared with incumbents.

Thus, it is inevitable that the fastest-growing financial services organisations we see around the world today are not banks, but the FinTech, technology and challenger bank startups. Does this mean we won’t need banks in the future? You don’t have to channel Bill Gates today to know that in much of the world people are using FinTech’s every day to do stuff that only banks used to do. In fact, in 20 markets surveyed by EY last year, consumer adoption of FinTech was on average 33 percent, with China as high as 69 percent of the internet-enabled population.

I’m not arguing that every bank will disappear. However, the standards by which banks are held to is no longer their own—it’s more than likely that the day-to-day banking experiences you enjoy in 2025 will have been most heavily influenced by technology startups than by incumbent banks who have innovated. FinTechs and TechFins are shaping the landscape that is to come. Not regulators, not banks.

Norman Chan, the head of the Hong Kong Monetary Authority, cited this exact problem when announcing a seven point plan for Hong Kong to compete globally on a regulatory basis. In his speech given at the annual HK Institute of Bankers conference, Chan said incumbent banks have been unable to innovate quickly enough, so for Hong Kong to maintain its leadership as an International Financial Centre the HKMA has turned to FinTechs. Let that sink in—Hong Kong is pegging their future as a leading financial centre on encouraging innovation from FinTechs, not relying on incumbent institutions. The lack of innovation by incumbent players has now become a market threat.

Digital only banks have seen greater take up outside Hong Kong. For example, UK regulators have encouraged the development of challenger banks as a way of bolstering competition in the sector. Meanwhile, incumbent banks in Hong Kong have been much slower to close physical branches than rivals because of the high profitability of in...