Today there are more bankers convinced of the need to transform their businesses than those that are not. This is no small matter as realizing the need to change is half the battle. The other half of the battle is to find the right solutions and implement accordingly.
Scott outlines three main questions:
- What business are we in today?
- What new opportunities does the disruption open up?
- What capabilities do we need to realize these opportunities?
Here is my attempt at answering these questions for a Bank.
- What business is a Bank in today?
Taking my cue from Scott, I will avoid the obfuscating and basic answers such as “offer accounts”, “lends”, “makes payments” which are either technology based or category based. More abstractly, a bank acts as an intermediary by linking depositors and borrowers. In comes deposits, safely tucked in accounts, out comes loans safely underwritten to borrowers – or so we hope. This intermediation role creates various benefits: a) spurs economic activity and supports the community in which the bank operates, b) safeguards and protects money entrusted by customers, c) provides access and convenience to money and how it is transacted, d) builds wealth directly (lending activity needs to be profitable) and indirectly (savings, investments). Abstracting further, a bank is in the business of providing trusted services around a customer’s money. Abstracting even further, a bank is in the “TRUST” business. Do note there is a major difference between being in the money business and being in the trust business. Thinking of being in the money business forces you to think in terms of products and services around how money is stored (checking account), transferred (payments), invested (assets) or lent (loans). The outcome of such a paradigm is to sell products. Such outcome may not have been explicit when banks operated in small environments, serving defined geographies where the relationship a banker had with his community was the vector that enabled all. This outcome is explicit in modern banking however. Therein lies the conundrum and the creative/destructive tension. Banks have ended up engaging in the business of selling products that serve a function around money whereas their existential function is to extend and project TRUST. Many pundits have recently declared banks need to be less product centric and more customer centric as a result of this tension. I agree and will unequivocally and irrevocably state that a Bank needs to reclaim and redeploy TRUST. Without trust, there are no bankers. Without trust there is no bank.
- What new opportunities does the disruption open up for a Bank?
In an era where new ways to invest, underwrite risk, lend, transfer money are being rolled out, all of which necessitating less knowledge centralized in an individual’s brain (a banker) or an organization (a bank), where the way we spend our time and our money occurs less within the constraints of the physical world and more via digital means; a Bank is rapidly finding itself threatened and ultimately disintermediated as an agent handling our money. We also live a paradox where we do not “like” our Bank – we spend less and less time in contact with its employees or its branches and we profoundly dislike the excesses of some bankers and the opacity, applicability or utility of many banking products – while we “like” our new sacred cows – we spend more and more time on our beloved social media apps, marketplaces, social messaging apps, social gaming apps, business apps – yet we TRUST our Bank more than we trust our new sacred cows. Lonely is the pundit advocating we store our money with Facebook or the customer ready to do so. Banks have so far treated this phenomenon as an existential threat. I posit this phenomenon is actually an opportunity. A major opportunity.
As a result of our digital engagement we have experienced an explosion in the amount of data we generate. We are drowning in data and metadata. Our identities have multiplied to the point where our confusion about their management is only surpassed by the threats we face every day from hackers. Whereas software and hardware are the vessels, arteries and vital organs of any functioning business, data has become its lifeblood. The second coming of artificial intelligence will only further the point I want to make: Data has become an asset class and will become more and more valuable, unlocking a multitude of values we cannot begin to imagine today, for us and those we engage with.
Tying TRUST and DATA together, I come to the inevitable conclusion that today’s opportunity for a Bank is to provide TRUST services around its customers data. Data is what you do, who you are and how you evolve today. It will be what you monetize tomorrow. So far, we, the real owners of data, have been cut off from its monetization, with consent – engaging in a quid pro quo with a social network – without consent – with little control over how one’s data is used to price a loan for example.
Let’s imagine a Bank offering its clients a master account, part checking account where a client will entrust money, part data account where a client will entrust data. Let’s further imagine this Bank will monetize the data residing in the data account and – much like with different flavors of traditional bank accounts – will offer a cut off the revenue generated. Little to nothing if the customer consents to narrow use cases, narrow data sets or anonymized data. Much more if the customer consents to wide use cases, wider data sets or personalized data. Let’s further imagine this Bank will also provide services around a customer’s identity: verifying one’s identity based on the requirements of third party services, individuals or entities. Imagine that and you have imagined a Bank reinventing its core tenet, TRUST in the age of DATA and IDENTITY. In a subtle way, this reinvention is akin to a Bank finding back its original roots. Indeed, an old school banker was entrusted with his customers data when interacting with them in the community. The data resided in the banker’s head, shared only because of the trust factor. Tomorrow, the data will reside in the cloud, protected by one’s Bank, with a trust factor.
To convince you further of the validity of such a thesis, consider what the likes of Google, Amazon or Facebook are interested in? Are they rushing to obtain a bank license to handle money or are they focusing on harnessing the power of data? I will leave you to answer this question on your own and ponder the competitive pressures banks are and will face whether they choose to own and manage trusted data or not.
The other major opportunity I see for a Bank resides with the ability to orchestrate a value chain – instead of the old paradigm of owning the entire value chain. I analyzed this opportunity in previous post. The concept of Bank as a Service, Bank as a Platform, the Platformification of Banking is slowing taking hold in the ecosystem. A few startups have capitalized on this trend already, a few Tier 1 Banks have made preliminary moves. I do not pretend there will be only one new Banking reality of course and some banks will not chose the “value orchestration” path. What I am convinced of is that “value orchestration” is a major opportunity. The shear amount of data and transactions we are and will continue to generate within the context of heterogenous and diverse technology ecosystems we elect to engage with requires a new breed of Banks adept at organizing, servicing, facilitating and sharing work flows and processes across a financial services value chain.
So far we see several trends unfolding: a) the buildup of an ecosystem of fintech startups, b) the strong gravitational pull of social networks + messaging apps (soon to be joined by the full force of AI powered chatbots) exercised over our daily attention, c) a secular trend towards peer to peer relations or horizontal networks (sharing/renting economy, blockchain, cryptocurrencies…) d) the resulting arms race all banks have undertaken to digitize their customer touch points.
This arms race is the result of the mistaken assumption that retaining customer attention by owning it fully is the main way to continue delivering value creation. I am not convinced and even if I were, competing for attention against nimble upstarts, savvy tech giants or the secular horizontal network trend is a strategy I do not like the odds of – few banks will survive doing so. Rather, refocusing one’s strategy on value orchestration to facilitate and enable the seamless inclusion of financial services conversations where we spend most of our time, the new nature of the transactions occurring during these conversations and their seamless operational orchestration and provisioning seems to be a much more fertile ground to mine.
We have yet to see a Bank owning the “value orchestration” mantle. I believe that will change soon. How soon? Within less than 5 years is my bet. I am convinced this will happen because the Internet has fundamentally altered the way we can do business. Achieving near zero marginal cost of delivering any product or service will occur in every industry. I am convinced this has not happened yet because the financial services industry is unique, complex and heavily regulated.
If you think that only large banks can and will capitalize on the “value orchestration” opportunity you are wrong. In my view, although there will be few “value orchestration” or platform owners, there will be many smaller banks that federate and participate as platform partners. Further, if you think this platformification may lead to what I refer to the “dumb pipes” syndrome, you are wrong again. The age of dumb pipes is long gone, smart pipes is what you need to think through and digest – the variety of services at both end of the pipes and within the pipes themselves is underestimated by many.
A more appropriate concern is how will disruption and the resulting opportunity of “value orchestration” impact the direct relationship a Bank has with its customers? Will that relationship be maintained, shared or broken and to what extent? Could we see “Intel Inside” models emerging, capitalizing on implicit trust and technology prowess augmented by value orchestration without the necessary immediacy of a direct to consumer experience?
- What capabilities does a Bank need to realize these opportunities?
I will limit myself to a high level analysis.
First, let’s rifle through some important existing capabilities.
a) Regulated and Licensed: Although viewed as a constraint by some, I view these as assets. The trick will be to educate regulators as to the need for innovation. Different licenses will be needed, changes to existing licenses too. Different regulatory frameworks will need to be adopted.
b) Security, Cybersecurity, Authentication, Authorization, Identification: Banks invest heavily in these area. Again they shall need to add new technologies to the mix, which they are already in the process of doing. I would not be surprised to see a Bank acquiring a cybersecurity firm for example. Core competencies need to be brought in.
As for some of the new capabilities.
a) UX/UI: We are now used to sleek experiences and interfaces in our digital & data worlds. Nothing short of closing the gap and excelling is acceptable for a Bank going forward. I view this capability as core actually. I would advocate acquiring best of breed UX/UI practices, hiring leading designers. That capability, that talent needs to be acquired and treated well as it will be too time consuming to grow it internally.
b) Data Analytics: If your business is TRUST + DATA, you better be good at analyzing the latter to back up the former. Certain banks already have data science talent in house and are uniquely positioned to understand their own as well as their customers’ data. Still more needs to be done. I can see home-growing talent into specialized units, even spinning off these units to better grow them – at least one bank has done so I believe – or acquiring best of breed startups.
c) Artificial Intelligence: Arguably a wide field. There is an arms race going on. Google, Facebook, Amazon, Apple are snapping up talent in the US and I am sure European companies are doing the same in their respective countries. In a way AI and Data Analytics are intertwined, thusly AI is as important when one is dealing with data. Again, acquire!
d) Cutting edge Technology: One need not acquire all cutting edge technology capabilities (cloud, blockchain, quantum computing, AR, VR, IoT, API…), partnering will do for most, understanding, mastering and managing is a must though. To be fair, many banks have started learning and closing the gap here.
e) HR Skills: Hire, hire, hire from outside banking to acquire mindsets that live and breathe either data or complex networks… technologists, executives familiar with platform strategies, data experts, software entrepreneurs, p2p and/or network specialists, experts that understand and study the emerging properties of large systems (biologists, behavioral scientists…) . Basically, hire less bankers, more non-bankers.
If the above spurs your imagination, please share other opportunities you may find attractive, as well as capabilities I have not thought of.