PraiseforBank4.0“From Bank 2.0 to 4.0, Brett has not only been tremendously accurate inpredictingwheretheballisgoinginthefutureofmoney,but,moreimportantly,he’sbeenactivelyshapinghowitwillget there.Here’sa tip:don’tbetagainsthim.”

—AlexSionCo-founderofMovenand

GeneralManager,MobileChannel,JPMorganChase

“Brett King has done it again with his latest volume.Bank 4.0 pushes us todeconstruct themousetrapwecallabank,wipethedigitalslateclean,andre-imaginebankingfortheyear2050byfocusingonfirstprinciplesandcustomerneeds. Drawing on examples from the developing world, King paints acompellingvisionforhowdigitally-nativebankingcanbeawinningstrategy—andaninclusiveone.”

—JenniferTescherPresident&CEO,theCenterforFinancialServicesInnovation

“In Bank 4.0, Brett does it again and moves our thinking along in financialservices fromrethinking thebankmodelasdiscussed inhispreviousbooks topointing to how to build the new model using first principles thinking. It’sanother ground-breaking book and brings together not only his own thoughts,but the thinkingofmanyofuswhoare trying tocreate thenextgenerationoffinanceusingtechnology,orFinTechifyouprefer.Anyoneinvolvedinfinance,technology,money and bankingwho doesn’t pick up this book ismissing thekeytotheirfutureand,asaresult,mightnothaveone.”

—ChrisSkinnerBestsellingAuthorofDigitalHumanandChairmanofTheFinancialServicesClub

“Brett’s best yet! While one may not agree with all his assertions, thefundamentalinsights—thatbankingneedstobereimaginedfromfirstprinciples,that it must be embedded into daily lives, that data, AI and voice are gamechangers in this regard—cannotbearguedagainst.Bank4.0 is a tourde forcethat opens your eyes to what already exists, and your mind to the imminentpossibilities.Amustread.”

—PiyushGuptaGroupChiefExecutiveOfficer,DBSBank

“Asthebankingindustrycontinuestodisruptatanever-acceleratingpace, thisunputdownablebookpaintsa future that isbothexcitingand inspiring.This isBrett, theKingof futurism, at his compellingbest!Speakingas abanker, youmustreadBank4.0.”

—SuvoSakarSeniorEVPandGroupHeadofRetailBanking

andWealthManagement,EmiratesNBD

“BankingisbeingdisruptedonaglobalbasisandBrett’sbookhelpstonavigatethroughtheserapidtransformations.Amustreadintheneweraofbanking.”

—ValentinStalfCEOandco-founderofN26

“Yet again, Brett King brings together some of the most knowledgeable andexperienced figures in global FinTech for this authoritative guide to the verylatestmegatrends.”

—AnneBodenCEOandfounder,StarlingBank

“‘I don’t think anyone else on the planet has Brett’s ability to piece togetherwhat is happening around the globe and forecast the future of banking. Athoroughlyresearched,data-drivenanalysisfromsomeonewhohas‘walkedthewalk’.”

—AnthonyThompsonFounder&formerchairmanAtomBankandMetroBank,

co-authorofNoSmallChange

“TwoyearsagoonstageinBeirut,IcalledBrettKing‘theKingofBan-King’and I stand by every word. This book continues his canon on the subject ofwherebanking isgoingnext.EverybodyinaFinTechcompanyshouldread it,everybody in traditional banking HAS to read it or they will be without abusinessinfiveyears.”

—MontyMunfordFounderofMob76,SXSWemceeandPublicSpeaker,

writingforTheEconomist,BBC,ForbesandFastCompany

“Theorganizationswedeveloppartnershipswithknowthatourcustomersareinthe driver’s seat. We’re innovating for them and that’s non-negotiable. BrettKingandMovenunderstoodthatfromdayone,andBank4.0ishismanifesto.”

—RizwanKhalfanEVP,ChiefDigitalandPaymentsOfficer,TDBankGroup

BANK4.0

©2018BrettKing

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ToKatie,withwhomIamquantumentangled,andmyDad,whoseenergyandrolemodelallowedmethefreedomtogowellbeyondmylimitations.

ContentsPrefaceAcknowledgements

PARTONE:Bank2050

Chapter1:GettingBacktoFirstPrinciplesFirstprinciplesdesignthinkingApplyingfirstprinciplestobankingAbankthatisalwayswithyouIsittoolateforthebanks?

Feature:AntFinancial—TheFirstFinancialFirmfortheDigitalAgebyChrisSkinnerTheAlibabastoriesAntFinancial:BuildingabetterChina

Chapter2:TheRegulator’sDilemmabyBrettKingandJoAnnBarefootTheriskofregulationthatinhibitsinnovationAflawedapproachtofinancialcrimeandKYCThefutureformandfunctionofregulationElementsofreform

Feature:HowTechnologyReframesIdentitybyDavidBirch

PARTTWO:Bankingre-imaginedforareal-timeworld

Chapter3:EmbeddedBankingFrictionisn’tvaluableinthenewworldNewexperiencesdon’tstartinthebranchAdvice,whenandwhereyouneeditMixedrealityanditsimpactonbanking

Feature:ContextualEngagementandMoneyMomentsbyDuenaBlomstromArebankingchatbotsthefuture?

Chapter4:FromProductsandChannelstoExperiences

Thenew“network”and“distribution”paradigmsBye-byeproducts,helloexperiencesTheBank4.0organisationchartlooksverydifferentOnboardingandrelationshipsellinginthenewworld

Feature:FutureVision:YourPersonalVoice-BasedAIBankerbyBrianRoemmele

Chapter5:DLT,Blockchain,Alt-CurrenciesandDistributedEcosystemsEmergingdigitalcurrenciesBitcoinandcryptocurrenciesonasurgeThestructuralimplicationsofDLT

PARTTHREE:WhyFinTechcompaniesareprovingbanksaren’tnecessary

Chapter6:FinTechandTechFin:FriendorFoe?“Forme?Twoservers”WherethenewplayersaredominatingPartner,acquireormimic?KillingFinTechpartnerships—thebarrierstocooperationIfyoucan’tbeatthem,jointhem

Feature:WhyBanksShouldCareAboutFinTechbySpirosMargaris

Feature:TheSpeedAdvantagebyMichaelJordan

Chapter7:TheRoleofAIinBankingDeeplearning:HowcomputersmimicthehumanbrainRobo-advisors,robo-everythingAbankaccountthatissmarterthanyourbankWhereautomationwillstrikefirstRedefiningtheroleofhumansinbanking

Chapter8:TheUniversalExperienceTheexpectationsofthePost-MillennialconsumerThenewbrokersandintermediariesUbiquitousbanking

Feature:GoingBeyondDigitalBankingbyJimMarousGoingbeyonddigitalbankingbasicsAmazonmodelprovidesaguideforbanking

Feature:DigitisetoLead:TransformingEmiratesNBDbySuvoSarkar

PARTFOUR:Whichbankssurvive,whichdon’t

Chapter9:AdaptorDieKeysurvivaltechniquesSurvivalstartsatthetop

Chapter10:Conclusion:TheRoadmaptoBank4.0Technologyfirst,bankingsecondExperiencenotproductsTheBank4.0roadmapConclusion

GlossaryAboutBrettKing

Preface

Bank 2.0 was written in 2009 when mobile had just started to become asignificant part of retail banking, and just after the internet had surpassed allother banking channels for day-to-day access. Bitcoin had just launched.Betterment, Simple and Moven were yet to be announced, in fact, FinTechoverall was not yet even a term for most of us. Bank 2.0 was a simpleexplorationofthefactthatcustomerbehaviourwasrapidlyevolvingasaresultof technology, and thiswas creating an imperative for changewithin bankingwhichwasundeniable.

By2012mobilewasthenextbigthing.Itwasontracktosurpassinternet,andtherewasnolongeranargumentaboutwhetherornotbanksshouldhaveamobile application.The importance of day-to-day use of technology to accessbankingwas clear, butmost bankswere still in the evolutionarymode,wheremobilewasconsideredsimplya subsetof internetbankingand the technologyteamwerestillbeggingtheexecutivefloorforadequatefunding.Thatwasbynomeansaneasybattle.Bank3.0was the further realisation that you couldbe abank based exclusively on emerging technology. As I wrote in Bank 3.0:“Bankingisnolongersomewhereyougo,butsomethingyoudo.”Bankingwasmovingoutofthephysicalrealmintothedigital.

Thatwasmorethansixyearsago.That’salongtimebetweendrinks,aswesayinAustralia.Thereasonfor thedelayinmewritingaBank4.0visionwassimple—the future of where banking would go after the wholemulti-channelrealisation wasn’t yet clear. It took some incredible changes in financialinclusionandtechnologyadoptionviaunconventional,non-bankplayersformeto realise that there was a systemic shift in financial access that wouldundermine traditional bank models over the coming decade or two. Theunexpectedelementofthiswasthatthefutureofbankingwas,infact,emergingoutofdevelopingeconomies,andnottheestablishedincumbentbankingsphere.

Overthelast40yearswehavemovedfromthebranchastheonlychannelavailable for access to banking services, to multi-channel capability and thenomni-channel, and finally to digital omni-channel for customers exclusivelyaccessing banking via digital. The problem formost bankswas that wewere

simplyaddingtechnologyontopoftheold,traditionalbankingmodel.Wecantellthisprimarilybecausetheproductsandprocesseswereessentiallyidentical,justretrofittedfordigital.Theapplicationformshadjustchangedfromthepaperforms in the branch to electronic application forms online. We still shippedplastic cards, we still sent paper to customers in the mail, we still usedsignatures, we still maintained you needed a human for complex bankingproblems.

In markets like China, India, Kenya and elsewhere, however, non-conventionalplayerswereattackingpayments,basicsavings,micro-lendingandother capabilities in ways that were nothing like howwe banked through thebranchtraditionally.Bybuildingupnewcustomerscenariosonmobilewithoutan existing bank product as a reference point, we started to see new types ofbanking experiences that were influenced more by technology and behaviourthantheprocessesorpoliciesbornfrombranchdistribution.Thisevolutionwasled by technology players like m-Pesa, Ant Financial’s AliPay, Tencent’sWeChat,PayTMandmanymore.ThiscombinedwithnewFinTechoperatorsintheestablishedeconomies likeAcorns,Digit,Robinhoodandotherswhowerecreatingbehaviouralmodels for savingsand investing.Therewasa realisationthatifyoutookthecoreutilityandpurposeoffinancialservices,butoptimisedthedesignofthatforthemobileworld,thatyou’dgetsolutionsthatwouldscalebetterthanretrofittingbranchbanking,andthatwouldintegrateintocustomer’slivesmorenaturally.

If we observe the trend over the last 25-plus years since the commercialinternet arrived, we can see that there’s an overwhelming drift towards low-friction, low-latency engagement. Like every other service platform today,bankingisbeingplacedintoaworldthatexpectsreal-time,instantgratification.Banking,however,isnoteasilyretrofittedintoareal-timeworldifyou’reusedto static processes thatwerebasedon a paper application formandhardwiredcomplianceprocesses.Comparedwithmanyotherindustries,bankinghasbeenslowertoadaptwhenitcomestotherevenueaspectsofe-commerce.

When technology-first players emerged inmarketswhere therewere largeunbankedpopulationsthathadnevervisitedabankbranch,therewasnoneedtoreplicatebranch-basedthinking,therewasjusttheneedtofacilitateaccesstothecoreutilityofthebank.This,combinedwiththedesignpossibilitiesaffordedbytechnologies like mobile, allowed for some spectacular rethinking of howbanking could be better embedded in our world. It turned out that these newapproachesofferedmuchbettermargin,bettercustomersatisfaction,engenderedtrustthatwasjustasgoodastheold-worldincumbents,andbusinessesthatheldfarmoredynamicscalingpotential.

Thiswaswhenitbecamecleartomethatthetrajectorywasshiftingandthatwe were seeing an emerging template for the future of banking, one thatwouldn’t includemost of the bankswe know today.Why? Because if you’reretrofitting thebranchandhumanon todigital, you’regoing tomiss theboat.Bankingisbeingredesignedtofitinaworldwheretechnologyispervasiveandubiquitous; the only way you stay relevant in this world is by creatingexperiencespurpose-builtforthatworld.Iteratingonthebranchisn’tgoingtobeenough.

IhopeyouenjoyBank4.0.

BrettKingFounderofMovenHostofBreakingBanksRadio

Acknowledgements

Aswithanybooklikethis,ittakesatribe.Thistimearoundwasmuchtougherto get the book done because Moven has been growing significantly and itrequiredmorefocus.SothefirstpeopleI’dliketothankaretheteamatMoven—specifically my executive team, including our new CEO Marek Forsyiak,Richard Radice, Kumar Ampani, Andrew Clark, Denny Brandt, RyanWalter,andourteamsdottedaroundtheworldinNewYork,Philly,TokyoandSydney.Weworkhard,butwehaveamissionwe shareandwehaveplentyof laughsalongtheway.

Secondly,theteamatMarshallCavendish,whoremainedextremelypatientasIrolledpasteachconsecutivedeadlinewithconstantapologiesforthedelays,includingMelvin,Janine,Norjan,MeiandMikeandourpartnersfortranslationinmarketslikeChina,especiallyDaisy.

Thirdly, the team at Breaking Banks and Provoke Media that kept thepressure off by helping me get the radio show out each week, including JPNicols, Jason Henrichs, Simon Spencer, Liesbeth Severiens and RachelMorrissey.

The contributors for this book were also phenomenal. Anytime I get tocollaboratewithmyFinTechMafiapalsChrisSkinner,DaveBirch,JimMarous,DuenaBlomstromandothers,youknowit’sgoing tobesomethingspecial forreaders.TotheteamatRipple,JoAnnBarefoot,SuvoatEmiratesNBD,BrianRoemmele,MichaelJordan,SpirosMargaris,andJohnChaplin—thankyou.

Iwouldberemisstonotthankthecoffeeshopsthatonceagaincontributedtothistome.

Lastly,Icouldn’thavedonethiswithouttheconstantsupportofasmallteamwhokeepmesanedaily.JayKempandTanjaMarkovicatProvokeManagementspeaker bureau, and my social media team. To my dad, who despite dailychallengeswithhishealthremainsmygreatestfan,andmygreatestmentor.

Mostofall,mypartnerinlife,KatieSchultz,whoinspiresme,drivesmetonewheightsandputsupwithmycrazyscheduleandglobaltravels.Her,Charli,Matt,Hannah andMr. T are a constant delight andmakeme one very happyauthor.

Part01Bank2050

1➡GettingBacktoFirstPrinciples

2➡TheRegulator’sDilemma

1 GettingBacktoFirstPrinciples

Everybodyhasaplanuntiltheygetpunchedinthemouth.—MikeTyson

Bankingisn’trocketscience,butasitturnsout,rocketscienceisagreatanalogyforthefuturestateofbanking.Puttingmenonthemoonis,todate,perhapsthegreatestendeavourmankindhascommittedto.Itinspiredgenerationsand,untilwesuccessfullyputbootson thesurfaceofMars,will likelyremain thesinglemostsignificant technologicalandscientificachievementof the last100years.Gettingmen to themoonrequiredmassiveexpenditure, incredibleadvances inengineering,afairbitofgoodoldfashionluckandthe“rightstuff”.

Before theUScouldgetNeilArmstrongall thewayup to themoon, theyneededtherightstuffinadifferentarea—infiguringoutthescience.

AttheendofWorldWarIItherewasaveryseriousplanthatwouldsetthefoundationfortheentireSpaceRaceandColdWar.ItwastheraceforthebestGermanscientists,engineersandtechniciansof thedisintegratingNaziregime.The predecessor to the CIA, the United States’ OSS (Office of StrategicServices),wereinstrumentalinbringingmorethan1,500Germanscientistsandengineers back to America at the conclusion of World War II. The highlysecretive operation responsible for this mass defection was codenamed“Overcast”(latertoberenamedOperation“Paperclip”).TheprimarypurposeofthisoperationwasdenyingaccesstothebestandbrightestNaziscientiststoboththe Russians and the British, who were both allies of the US at this time.“Paperclip”wasbasedonahighlysecretivedocumentknownwithinOSScirclesas“TheBlackList”,andtherewasonesinglenamethatwasrightatthetopofthatlist:WernhervonBraun.

In the final stagesofWorldWar II,vonBrauncouldsee that theGermanswereultimatelygoingtolosethewar,andsoin1945heassembledhiskeystaffandaskedthemthequestion:whoshouldtheysurrenderto?TheRussians,wellknownfortheircrueltytoGermanprisonersofwar,weretoomuchofarisk—they could just as easily kill von Braun’s team as utilize them. Safely

surrenderingtotheUSbecamethefocusforvonBraun’sowncovertplanningintheclosingdaysofWorldWarII.ThequestionhefacedwashowtosurrenderwithouttheremnantsoftheNaziregimegettingtippedoffandputtinganendtohisscheme.

ForthisvonBraunhadto,twice,manipulatehissuperiors,forgepaperwork,travel incognito and disguise himself as an SS officer to create a very smallwindow of opportunity for surrender. Convincing his superior that he and histeamneededtodivertfromBerlintoAustria,sothattheV-2rocketteamwasnotat risk by invading Soviet forces, von Braun engineered an opportunity tosurrender himself and his brother to the Americans. In the end,Magnus vonBraunjustwalkeduptoanAmericanprivatefromthe44thInfantryDivisiononthe streets of Austria and presented himself as the brother of the head ofGermany’smostelitesecretweaponsprogram1.

Suddenly a young German came to members of Anti-Tank Company, 324th Infantry andannouncedthattheinventorofthedeadlyV-2rocketbombwasafewhundredyardsaway—andwanted to come through the lines and surrender. The youngGerman’s namewasMagnus vonBraun, and he claimed that his brotherWernher was the inventor of the V-2 bomb. Pfc FredSchneikert,Sheboygan,Wis.,aninterpreter,listenedtothetaleandsaidjustwhattherestoftheinfantrymenwerethinking:“Ithinkyou’renuts,”hetoldvonBraun,“butwe’llinvestigate.”

—TheBattleHistoryofthe44thInfantryDivision:“MissionAccomplished”

Private FirstClass Fred Schneikert likely presided over the single greatestintelligencecoupofWorldWarII,savemaybeforthecaptureofU-570anditsEnigmaciphermachine.

TounderstandvonBraunandhiswillingnesstoworkonaWWIIweaponofmass destruction like theV-2 rocket (which is estimated to have killed 2,754civiliansinLondon,withanother6,523injured2),itneedstobeunderstoodthathesimplysawtheNaziballisticmissileprogramasameans toanend. InvonBraun’s mind, the V2 was simply a prototype of rockets that would one daycarrymenintospace—thatwashisendgame.

Figure1:VonBraun’svisionformannedspacetravel(Credit:NASA).

Theimagesandengineeringprinciplesofspacecraftwehavefromthe1950swe owe largely to von Braun’s designs. The three-stage design of modernrockets,thechosenpropellantsandfuel,therecoveryshipsystemforreturningcapsules, the initial NASA designs for space stations andMars programs, allcamefromvonBraun’searlymusingsandengineeringdrawings.Sixteenyearsafter von Braun’s surrender to Allied forces, President John F. Kennedy JrannouncedthatbytheendofthedecadetheUSwouldputamanonthemoon.ItwouldbeinarocketbuiltbyWernhervonBraun.

TheSaturnVwasanastoundingpieceofengineering.Today,itremainsthelargest and most complex vehicle ever built. A total of 13 Saturn Vs werelaunchedbetween1967and1973carryingtheApolloandSkylabmissions.TheSaturnVfirststagecarried203,400gallons(770,000litres)ofkerosenefueland

318,000gallons(1.2millionlitres)ofliquidoxygenneededforcombustion.Atlift-off, the stage’s five F-1 rocket engines produced an incredible 7.5millionpounds of thrust, or about 25 times that of anAirbusA380’s four engines attake-off. In today’s money, each Apollo launch and flight cost around $1.2billiondollars.

However, despite the incredible advances of von Braun’s program in the1950s and 1960s,manned spaceflight hasn’t progressed significantly since. Infact,onecouldargue that theUS’capabilities in thisareahavebeendecliningeversinceApollo.On20thJuly1969,theAmericanslandedNeilArmstrongandBuzzAldrinon the lunar surface,butafterDecember1972no furthermannedmissionswerelaunched.Inthe1980stheUShadthespaceshuttleandcouldgettolow-earthorbit,buttodaytheyarerentingseatsonRussianSoyuzvehiclestogetNASAastronautstotheInternationalSpaceStation.

FirstprinciplesdesignthinkingWhile the cost of launching commercial payloads into spacehasdecreasedbysome50–60percentsincetheApollodays,thecoretechnologybehindthespaceindustryhas simplygone throughmultiplederivative iterationsofvonBraun’sinitialV-2work.The rocketdesign,productionprocess, andmechanicsall areessentiallybasedontheworkofNASAintheApolloera,whichitselfwasbasedontheV-2design.Thisprocessofiterativedesign,orengineering,isknowntoengineersas“designbyanalogy”3.

Designbyanalogyworksonthephilosophythatasengineeringcapabilitiesandknowledgeimprove,engineersfindbetterwaystoiterateonabasedesign,perhaps finding technical solutions to previous limitations. But design byanalogycreateslimitationsinengineeringthinking,becauseyou’restartingwithatemplate—theworkisderivative.Tocreatesomethingtrulyrevolutionaryyouhavetobepreparedtostartfromscratch.

EnterElonMusk.LikevonBraun,Muskhasanunyieldingvisionforspacetravel.Musk isn’t interested in just returning to theMoon though, he has hissights set on Mars. For Musk, this is about nothing short of the survival ofhumanity.IndiscussinghisobsessionwithMars,Muskreferstothefactthatonat least five occasions the Earth has faced an extinction level event, and thatwe’re due for another one at any moment. We’ve had dinosaur-killer scaleasteroidssailpastEarthonnearcollisioncoursesonmultipleoccasionsinrecentyears, too. Thus, Musk argues, we must build the “insurance policy” of off-worldcolonies.

After his successful exit from PayPal, Musk created three major new

businesses:Tesla,SpaceXandSolarCity4. Instrumental inMusk’sapproach toeach of these businesseswas his belief in the engineering and design conceptcalled first principles. Unlike design-by-analogy or derivative design, firstprinciples take problems back to the constitute components, right back to thephysicsofthedesign—whatthedesignwasintendedtodo.Agreatexampleoffirstprinciplesdesignisthemotorvehicle.AtthetimethatCarlBenzinventedthefirsttwo-seaterlightweightgasolinecarin1885,everyoneelsewastryingtooptimize carriage design for use with horses. Benz took the fundamentals oftransport and applied the capabilities of the combustion engine to createsomethingnew.

Ithinkit’simportanttoreasonfromfirstprinciplesratherthanbyanalogy.Thenormalwayweconduct our lives iswe reason by analogy. [With analogy]we are doing this because it’s likesomethingelsethatwasdone,oritislikewhatotherpeoplearedoing.[Withfirstprinciples]youboilthingsdowntothemostfundamentaltruths…andthenreasonupfromthere.

—ElonMusk,YouTubevideo,FirstPrinciples5

TogettoMars,Muskhasreckonedthatweneedtoreducethecosttoorbitby a factor of 10. A tall order for NASA, a seemingly impossible task for asoftware engineer who had never built a rocket before. As noted in Musk’srecentbiography(Vance,2015),Muskhastheuniqueabilitytolearnnewskillstoanextremelyhighlevelofproficiencyinveryshorttimeframes.Thus,whenitcametorocketdesign,hesimplytaughthimself—notjusttheengineeringofpressure vessels, rocket engine chambers and avionics, but the physics behindeveryaspectof rocketry—andeven thechemistry involved.Musk reasoned, ifhewas to start from scratchbasedupon the computing capability, engineeringtechniques, materials sciences and improved physics understanding we havetoday,wouldwebuildrocketsthesamewaywehadforthelast50years?Theanswerwasclearlyno.

In 2010 NASA was paying roughly $380 million per launch. SpaceXcurrentlyadvertisesa$65millionlaunchcostfortheFalcon9,and$90millionfortheFalconHeavy.SpaceX’scurrentcostperkilogramofcargotolow-earthorbit of $1,100 iswell below the$14,000–39,000perkilogram launchcost ofUnitedLaunchAlliance, the lowestpriceddirectcompetitor forSpaceX in theUnitedStates.

ThelastmajormannedspaceprogramoftheUS,thespaceshuttleprogram,averagedacost-per-kilo toorbitof$18,000.Now thatSpaceXhas figuredouthow to land their first stage vehicles back on land and on their oceangoingdrones6,suchasJUSTREADTHEINSTRUCTIONSandVANDENBERGOFCOURSEISTILLLOVEYOU7,thereusabilityfactorwillreducetheircostper

kilotoorbitoftheirFalconHeavylaunchvehicledowntoaround$400overthenextfewyears.Thismeans thatSpaceXwillhavereduced thecost toorbitbymore than 90 percent in the 14 short years of their commercial operations.NASA’s nearest competitor to the Falcon Heavy will be the Space LaunchSystem,withapayloadcapacityof70metrictons,andanexpectedlaunchcostof$1billionperlaunch.TheFalconHeavyat64metrictonsand$90millionperlaunchrepresentsonetenthofthecost,beforereusability.

Figure2:PartofthesecrettolowercostisadvancementsSpaceXhasmadeinintegratedmanufacturing.

Agreaterthan90percentcosttoorbitreduction,reusabilitywithrocketsthatland themselves, and a fuel source that is easily manufactured and stored onMars.

Welcometotherevolutionarybenefitsoffirstprinciplesdesignthinking.

ThefirstprinciplesiPhoneMusk isn’t theonlyone tobelieve in thephilosophyof firstprinciplesdesign.Steve Jobswas a believer in getting back to basics for redesigningwell-wornconcepts.InsteadofiteratingonthefamousMotorolaflipphone,theBlackberry,ortheNokia“Banana”phone,Jobsstartedfromscratchinreimaginingaphone,browserandiPodcombinedintoapersonal“smart”device.

There’sthegreatstoryabouthowStevecarriedablockofwoodaroundtheofficewhiletheteamwascreatingtheiPhone.Hewantedtoremindeveryonearoundhimthatthingsshouldbesimple.Jobsunderstoodthattechnologyisonlyaspowerfulastheabilityforrealpeopletouseit.Andit’s

simple, usable functionality—not ridiculous over engineering—that makes for technologicalpower.

—BillWise,MediaBank,quotedinBusinessInsider,12thOctober2011

Now in fairness, Jobsmayhavegot the “blockofwood”prototyping ideafromJeffHawkins,theleadinventorofthePalmPilot.ThestorygoesthatwhenhefirstimaginedthePalmPilot,hecarriedblocksofwoodtheapproximatesizeof the device he would later build around with him everyday. WheneverHawkins saw a need for the device in his daily routine, he would tap on it,scribblingon theblockofwood,or inhisnotebook,simulatingorprototypinghowthedevicemightbeusedtosolvethatproblem,whetheritwasacalendarentry,jottingdownsomenotesorswappingcontactdetailswithacolleague.

Figure3:TheiPhoneisagreatexampleoffirstprinciplesproductdesign.

Jobs and Jony Ive,Apple’s chief design officer, didn’t try to iterate on anexistingdevicedesignandimproveonit;theystartedfromscratch.It’swhytheiPhoneendedupwitharevolutionarytouchscreendesign,aluminiumhousing,no keyboard and an app ecosystem. Do you remember the debate when theiPhonelaunchedoverthevalueoftheBlackberryRIMkeyboardversusApple’slower accuracy touch screen keyboard? Many commentators were sure theBlackberrykeyboardwouldwinout.Butitdidn’t.

Why am I focusing on this?Ask yourself a couple of simple questions. If

youwerestartingfromscratchtoday,buildingabanking,monetaryandfinancialsystemfortheworld,abankingsystemforasinglecountryorgeographyorjustdesigningabankaccountfromscratch,wouldyoubuilditthesamewayithasevolvedtoday?Wouldyoustartwithphysicalbankbranches,insistonphysicalcurrency on paper or polymers, “wet” signatures on application forms,passbooks,plasticcards,chequebooks,andtheneedtorockupwith17differentpiecesofpaperandthreeformsofIDforamortgageapplication?

No,I’msorry—that’sjustplaincrazytalk.Ifyouwerestartingfromscratchwith all the technologies and capabilities we have today, you would designsomethingvery,verydifferentinrespecttohowbankingwouldfitintopeople’slives. Let us then apply first principles to banking and see if there are anyexamplesofthistypeofthinkingemergingtoday.Areweseeingsystemsemergethatarefundamentallydifferent?

ApplyingfirstprinciplestobankingThebankingsystemwehave today isadirectdescendentof thebankingfromthe Middle Ages. The Medici family in Florence, Italy, arguably created theformalstructureofthebankthatwestillretaintoday,aftermanydevelopments.Thepapercurrencywehavetodayisaniterationoncoinsusedbeforethefirstcentury.Today’spaymentsnetworksareiterationsonthe12thcenturyEuropeannetworkoftheKnightsTemplar,whousedtosecurelymovemoneyaroundforbanks, royalty andwealthy aristocrats of the period. The debit cardswe havetodayareiterationsonthebankpassbookthatyoumighthaveownedifyouhadhadabankaccountintheyear1850.ApplePayisitselfaniterationonthedebitcard—effectivelyatokenizedversionoftheplasticartifactreproducedinsideaniPhone. And bank branches?Well, they haven’t materially changed since theoldestbankintheworld,MonteDeiPaschideSienna,openedtheirdoorstothepublic750yearsago.

Whenwebandmobile camealong,we simply tookproducts andconceptsfromthebranch-basedsystemofdistributionanditeratedthemtofitontothosenew channels. Instead of asking the questionwhether we need an applicationformintheonlineprocessatall,wejustbuiltwebpagestoduplicatetheprocesswe had in the branch8. Formany banks and regulators today, they are still somarriedtothisprocessofasignatureonapieceofpaperandofmitigatingrisktothebankthroughalegalphysicalpaperrecord,thatinmanypartsoftheworldyoustillcan’topenabankaccountonlineoronyourphone—andthat’saquarterofacenturyafterthecommercialinternetwaslaunched.

Thinkabouttheabsurdityofthatsituationforamoment.We’retiedtousing

1.

2.3.

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a first century artifact, namely a “wet signature” to uniquely and securelyidentifyanindividualforthepurposeofopeningabankaccount.Butsignaturesaren’t secure, they aren’t regularly verified, they aren’t really unique, they areeasily compromised, easily copied, and in the case of an identity thief usingstolenorfabricatedidentitydocuments,asignatureprovidedmightnotbearanyresemblance to theauthenticaccountowner’sactualsignature—aslongas it isthe first signature that particular bank gets, then they have to presume thesignaturematchestheowneroftheaccount.

Don’tevengetmestartedonbranches9.Hence thebigquestion. Ifyoustarted fromscratch today,designinganew

banking system,wouldanyof the structuresweareused to seeing survive? Ifnot, likeElonMusk’s approach to SpaceX rockets or Steve Jobs’ approach tosmartphones, the only way we’re going to get exponential progress and realefficienciesisthroughafirstprinciplesrethinkofthebankingsystem.

So,whatwoulda“firstprinciples”bankorbankaccountlookliketoday?

Infirstprinciples,utilityiskingLet’s strip it down to the constitute physics, asMusk suggested.What does abankdo thatnootherorganisationcando,orat leastdoconsistentlywell?Orwhatdowerelyonbanks toprovide thatwould remain ina re-imagined, firstprinciplesversionofbanking?

Iwould suggestbankshave traditionallyprovided threecorekeypiecesofutility:

Avaluestore—Theabilitytostoremoneysafely(investmentsfallintothiscategory)Moneymovement—TheabilitytomoveyourmoneysafelyAccesstocredit—Theabilitytoloanmoneywhenyouneedit

Ifyoudescribetheessenceofwhatyouwantfromyourbankasacustomer(and it doesn’t matter whether that is as a retail consumer or as a businessowner),ultimatelyyoudon’tstartoffwithsayingIneed“productA”or“productB”.Ultimately,youcomeupwithstufflike:

“Ineedtokeepmymoneysafe.”“Ineedtosendmoneyfast.”“Ineedtosavemoneyfor[insertneed/dream/wishhere].”“Ineedmyemployertobeabletopayme.”“Ican’taffordtobuythisthingandIneedsomeshort-termcredit.”

•••••

“Ineedtobeabletopaymystaff.”“Iwanttobuyahome.”“Ineedtopaythisbill.”“HowamIgoingtopaywhenI’minanothercountry?”“HowdoImakemoremoneytopaymybills?”

Wheneverwetalkaboutwhatabankdoesforus,orwhatweneedfromourbank,wegenerallydon’tdescribechannels,bankdepartmentsorproducts—wedescribeutilityandfunctionality.Bankshavetriedvery,veryhardtotrainustothinkintermsofproducts,andtosomeextenttheyhavebeensuccessful.

Since the emergence of banking during the 14th century, as banks we’vetaken that core utility and we’ve added structure. Initially this structure wasaboutnetwork—whereyoucouldbank.Banks thenaddedstructurearound thebusinessofbanking, trustandidentity—whocouldbank,whatwasabankandhow you had to bank. Today you could argue that these structures have beenreducing risk to both banks and consumers, rather than reducing risk orcomplexity around utility. Today, as users of banking, we must fight throughmorefrictionthaneverbeforejusttogettothatunderlyingutility.

Technologynowaffordsustheabilitytoradicallyeliminatethatfrictionandcreatebankingembedded intheworldaroundus,deliveringbankingwhenandwhereweneed it themost.MygoodfriendChrisSkinnercalls this“SemanticBanking”.

Thesemanticweb today isall aroundus. It is immersive,ubiquitous, informedandcontextual.Thesemanticbankwillhavethesefeatures, too.Itwillpromptuswiththethingsweneed,andwarn us against doing things that will damage our financial health. It will be personalized,proactive, predictive, cognitive and contextual. We will never need to call the bank, as thesemantic bank is always with us, non-stop and in real-time. As a result, nearly every bankfunction we think about today—paying, checking, reconciling, searching—go away as thesemanticbankandwebdoallofthisforus.Wejustliveourlives,withourembeddedfinancialadvisorandthecoreutilityofbankingasanextensiontoourdigitallives.

—ChrisSkinner,authorofValueWeb

Inaworldwherebankingcanbedeliveredinrealtime,basedonpredictivealgorithms and surfaced using voice-user interfaces like Alexa and Siri, in amixed-realityhead-up-displaylikeMagicLeaporHoloLens,inanautonomouscarorhome,or just in increasinglysmarterwatchesandphonesthatyoucarryeverywhere,bankingsimplybecomesbothembeddedandubiquitous.But let’sbe clear—it is not the bank products of today that will ultimately becomeembeddedinthissmartworld.Onlythepurestformofbankingutility.

When it comes to this new augmented world, banks are significantlydisadvantagedovertherealownersofutility,andtheymustconstantlyjostlefor

aseatat thenewtable.Theutilitytodayisn’tviaabranchoranATM,butthesmartphone,theIPlayer,data,interfacesandAI.

In thisemergingworldof instantpaymentutility, forexample, theartifactsandproductsweassociatewithpaymentstoday—hardcurrency,chequebooks10,debit and credit cards, wire transfers, etc—will simply disappear. Ultimately,they represent only structural friction in enabling payment utility. A goodillustration of this is the capability we see emerging in the likes of AmazonEcho11 or Google Home, where you can now conduct simple commerce andtransactionsbyusingyouvoice.Assmartassistantslikethisgetsmarter,we’regoingtodelegatemoreandmoreofourday-to-daytransactionalandcommercebehaviourtoanAI-basedagent12:

“Alexa,paymytelephonebill.”“Siri,transfer$100tomydaughter’sallowanceaccount.”“Cortana,canIaffordtogooutfordinnertonight?”“Alexa,reordermeapairofBrescianisocks.”13In thisAI and agency-imbuedworld, utility is the core—products become

invisible as they are transformed into everyday, technology-embeddedexperiences.

InaworldwhereyoudelegateAmazonAlexa tomakeapaymentonyourbehalf,triggeredbyyourvoice,doestheairlinemilesprogramyouhavelinkedtoyourcreditcardmakeanydifferencewhichpaymentmethodyouchoose?I’dargue, absolutely not. Once you have configured Alexa with your preferredpayment method, the improved utility will simply demand more and moretransactionsgothroughthataccount—youwon’tstopavoicetransactiontogetyour physical card out and read 16 digits to Alexa. The promise of rewardssimplywon’tbeenoughtodisruptthatcorepaymentutility.

Amazon, Apple, Facebook, Alibaba and others, own those layers oftechnology that deliver experiences and utility today.Banks are already beingforcedtosubmittoappstorerulesjusttobeapartoftheirecosystem.Ifyou’reabankthatdoesadealwithUberorAmazontoprovidesomesortofbankutilityto an Uber driver or an Amazon small business, you have the advantage ofaccess and scale, but you no longer “own the customer”. It’s no longer abouthavingabuildingontheHighStreetorapieceofpaperyoucansign,it’saboutthemostefficientdeliveryofbankingtothecustomerinreal-time.

We’vebeenhearingaboutthethreatofthe“Facebookofbanking”,the“Uberofbanking”,or the“Amazonofbanking” formanyyearsnow,but ifyoustepback from thehype,we’vealready seen the emergenceofnew first principlescompetitors.

AbankthatisalwayswithyouInahostofcountriesaroundtheworldyoucaninstantlysign-upforabankormobile money account on your phone in minutes. In countries like China,Kenya, Canada, US, UK, Australia, Thailand, Singapore, Hong Kong andthroughoutEuropeyoucanpaybysimplytappingyourphoneorscanningabarcode.Youcansendmoneytofriendsviatheinternetinstantlyinmorethan190countries today14.You can pay bills in real-time and increasingly just let yourphoneorbankaccount lookafter thosepayments foryou.Real firstprinciplesthinking in banking isn’t happening in established, developed economies. Therealactionisinemergingmarketsordevelopingcountrieswherelegacyispoor.

In2005ifyoulivedinKenyatherewasa70percentchanceyoudidn’thavea bank account, nor could you storemoney safely and it’s unlikely youweresaving, unless it was under yourmattress. Today, if you’re an adult living inKenyathere’sanear100percentlikelihoodthatyouhaveusedamobilemoneyaccount(storedinyourphoneSIM),andthatyoucantransfermoneyinstantlytoanyotheradultinKenya.Today,datashowsthatKenyanstrusttheirphonemorethantheytrustcashintermsofsafetyandutility,withpeoplesewingsimcardsinto their clothes or hiding them in their shoes so they canmore safely carrytheirmoneywiththem.ThisisallpossiblebecauseofamobilemoneyservicecalledM-Pesa,createdbythetelecommunicationsoperatorSafaricom.Todayatleast 40 percent of Kenya’s GDP runs across the rails of theirmobilemoneyservicecalledM-Pesa15.

We’recurrentlysittingatabout22millioncustomersoutofatotalmobilecustomerbaseofabout26million. Now, if you take the population of Kenya as being 45million, half of whom areadults,youcanseewe’recapturingprettymucheveryadult inthecountry.Wearetransmittingtheequivalentof40percentof thecountry’sGDP through thesystemandatpeakwe’redoingabout600transactionspersecond,whichisfasterandmorevoluminousthananyotherbankingsystem.

—BobCollymore,CEOofSafaricom/M-Pesa16

The road to 100 percent financial inclusion via mobile wasn’t without itschallenges. InDecember of 2008, itwas reported inKenya’sTheStar17, that aprobe instigated by the finance ministry was actually as a result of pressurecomingfromthemajorbanksinKenya.Bythisstageitwasalreadytoolateforthebanks.By2008,M-Pesawasalready in thepocketsofmoreKenyans thanthose that already had a conventional bank account. The impactM-Pesa wasalready having on financial inclusion in Kenya meant the regulator simplywasn’tgoingtoshutitdowntocurryfavourwiththeincumbentbanks.Financialinclusionwasabolderidealthanincumbentprotection.

Today there are more than 200,000 M-Pesa agents or distributors spreadacrossKenya.Morethaneverybankbranch,ATM,currencyexchangeproviderorotherfinancialproviders.ThoseM-Pesaagentsareattheheartoftheabilitytoget cash in andoutof thenetwork,butbeingapart of thatnetworkallowsthemtoacceptmobilepaymentsforgoodsandservicesalso.ItisnotunusualtofindM-PesaagentswhohavetrebledtheirbusinesssincetakingonM-Pesa,orthosethatsee60–70percentof in-storepaymentsbeingmadeviaaphone.Onaverage, the central bank estimates that the averageKenyan saves 20 percentmoretodaythanthedayspriortomobilemoney.

Figure4:M-Pesaisafirstprinciplesapproachtofinancialinclusion.

Kenyaisn’ttheonlyonetohavefoundthemobiletobetransformationalforfinancial access. Today there aremore than 20 countries18 in theworldwheremore people have a value-store or account on their mobile phone than via atraditionalbank.Insub-SaharanAfrica,apopulationofcloseto1billionpeopleisamongsttheleastbankedpopulationintheworld,withlessthan25percentofthemhavingatraditionalbankaccount.However,todaymorethan30percentofthemalreadyhaveamobilemoneyaccount,andthatisgrowingyear-on-yearbydouble digits. If you wanted to bank these individuals in the traditional way,you’dneedtoget themtoabankbranchandthey’dneeda traditionalformofidentity.ResearchbyStandardBankin2015showedthat70percentoftheseso-called “unbanked” people would have to spend more than an entire month’ssalaryjustontransportationtophysicallygettoabranch.Branch-basedbankingwasactuallyguaranteeingfinancialexclusionfortheseindividuals.

The introductionofmobilemoneyaccountshasalsohadaprofoundeffect

on the banking system. The big banks that once plotted to kill M-Pesa havefoundincredibleopportunitiesforexpandingtheirhorizons.

WhenItookthisjobtwoyearsagomyvisionwasthatwewerenotdeliveringtheexperiencethecustomerswereaskingusto,wewerestuckinthetraditionalmodeofaskingcustomerstocometothebranch.Iwantedanaccountwhereyoucanuseyourmobiledevicetogetourservices.Sowhenwestarted [workingwithM-Pesa]wehada target to reach2.5millioncustomers inoneyear, but then in just one yearwe had already reached 7.5million customers.Wehad kind ofbroken all the goals thatwe set up for ourselves…our credit products have alreadydone $180millionsofar.

—JoshuaOigara,CEOofKenyaCommercialBank19

KenyaCommercialBank quadrupled their customer base from just over 2million customers to more than 8 million customers in just two years bydeployingabasicsavingsandcreditfunctionontopoftheM-Pesarails.A124-year-oldbankthattook122yearstoreachitsfirst2millioncustomers,andjusttwo years to reach the next six million. That’s all thanks to mobile. AnotherKenyanbank,CBA,hadequallyas impressive results,going from just tensofthousandsofcustomerstomorethan12milliontoday,thankstotheirM-Shwarisavingsproductthat theylaunchedontopoftheM-Pesarails.PreM-Pesajust27percent of theKenyanpopulationwasbanked; today almost every adult inKenyahasamobilemoneyaccount.Thatisarevolutionarytransformation.

While M-Pesa’s effect on financial inclusion has been nothing short ofphenomenal, the really big numbers aren’t happening in Africa, they’rehappening in China. The transaction volume of Chinese mobile paymentsreached10Trillion20Chineseyuan(US$1.45trillion)in201521,andtheyreached112trillionyuan(US$17trillion)in2017.Incomparison,theequivalentfigureformobilepaymentsintheUnitedStatesstoodatameagerUS$8.71billionin201522 andUS$120 billion in 2017, less than 0.1 percent of China’s traction.EventhoughtheUSisexpectedtoapproach$300billiononmobilepaymentsin2021, they’re still not evenwithin shouting distance ofChina in terms of percapitavolume,transactionvolumeormobilepaymentsadoptionrates.In2018,China’smobilepaymentsactivitywillovertakeglobalplasticpayments—that’sthescalewe’re talkingabout.Thatmeteoricgrowthisdowntoseveralfactors,but most notably because China is today dominated by non-bank paymentscapability on mobile that has massive, massive scale due to non-bankecosystems.

Bytheendof2015morethan350millionChinesewereregularlyusingtheirmobile phones to purchase goods and services that exceeded 750 million in2017. Alipay is handling a huge portion of that traffic,making it theworld’slargest payments network by a wide margin, butWeChat Pay exceeded both

Mastercard and Visa in transaction volume in 2017 as well. To help youunderstandhowmuchlargerAlipayisthanconventionalpaymentsnetworks,in2015 Visa reportedly peaked at 9,000 transactions per second across theirnetwork,whileAlipaydelivered87,000transactionspersecondatpeak—almosttentimesthatofVisa.Alipayisnowavailablein89countriesacrosstheglobe,and JackMa is expanding that rapidly. On 11 November 2017 alone, Alipaysettled RMB 159.9 billion (USD $25.3 billion) of gross merchandise volume(GMV)throughitsnetwork—84percentofthatviamobilehandsets.

Given thatPayPal,ApplePay,AndroidPayandSamsungPayhitUSD$9billion inmobile payments volume for the same year, the US is significantlybehind China. Visa’s market cap today is $260 billion. In comparison AntFinancial (Alipay’s parent company) looks like a huge buy opportunity rightnow, with a valuation at their last investment round of approximately $150billion23. The mobile payments market in China is growing at 40–60 percentyear-on-year and Ant Financial (Alipay) and Tencent (WeChat/WePay) claimmore than 92 percent of that volume today24. Yes, you read that correctly, 92percentofmobilepayments inChinaarehandledby two techplayers—notbyUnionPay,Mastercard,Visa,SwiftortheChinesebanks.Bytechcompanies.InQ1of2017,mobilepaymentsaccountedfor18.8trillionyuan(US$2.8trillion)in China, and they finished out the year with a staggering US$17 trillion involume.

AntFinancialhasdemonstratedbetterthananyothercompanyintheworld,withthepossibleexceptionsofStarbucks25andWeChat, theability to leveragemobilefordeposit-takingandpayments.In2017,Alipay,throughtheirYu’eBaowealthmanagementplatform,managed$226BillioninAuM(andgrowing)—allvia mobile and online channels. Alipay has no physical branches for takingdeposits. It is the largestmoneymarket fund in theworld today26 beating outJPMC’s US treasury bond market fund. Yu’e Bao has proved that the mostsuccessful channel in the world for deposit-taking is not a branch, it’s yourmobilephone.Somethingthatisonlyviableusingfirstprinciples’thinking.

Figure5:YueBaomanagesmorethanUS$226billionofdepositstoday,allthroughmobile.

ThishasspurredamobiledepositandpaymentswarintheMiddleKingdomwith Apple, Tencent, UnionPay and Baidu launching their own competinginitiatives.WeChat’s online savings fund raked in US$130million just on itsfirstdayofoperation.ThedownsideforChinesebanksisthatnowthataquarterofalldepositshaveshiftedtotechnologyplatforms,thecostofliabilitiesandtherisktodepositshasincreasedby40percent27.Competitorsbuildingnewbranchnetworksaren’tthethreat,theutilityofmobileandmessagingplatformsare.

Withthelargestmobiledepositproductintheworld,accesstomorethan80countries,investmentsinUS-basedMoneygram,Korea’sKakaoPay,PhilippinesGCash(GlobeTelecom),PaytminIndiaandothers,AntFinancialisnolongerjust an internet-based payments network inChina. Today,Ant Financial is ontracktobecomethelargestsinglefinancialinstitutionintheworld.Seriously.

Within 10 years, based on current growth,Ant Financialwill be valued atmorethanUS$500billion,andby2030itwilllikelybeapproaching$1trillioninmarketcapvalue.Thiswouldmakeitfourtimesbiggerthanthelargestbankin theworld today, ICBCofChina.Today,AntFinancial isworth roughly thesame as UBS and Goldman Sachs, two of the most well-respected bankingplayers in theworld.AntFinancialhasa firstmoveradvantageasa true first-principlesfinancial institutionbuiltupontheutilityofmobile.AntFinancial isnot a bank, it is a FinTech, or more accurately a TechFin company—atechnologycompanyfocussedonfinancialservices.

AntFinancialisclearlythe800-poundUnicorninthebunch,butwhenyoulook for first principles in financial services, you see an overwhelming

representation by FinTechs, startups, tech companies and pure-plays. I guessthat’s the nature of it—for an incumbent to go back to first principles they’dhave to burn it all down and start again. Even when you look at the moreinnovativeincumbentbanksintheworld,bankslikemBank,BBVA,CapitalOneandDBS,youstillrarelyseeevidenceofevenaniPhone-type“firstprinciples”productdesign—itisstillvastlyskewedtowardsreducingfrictionforderivativeproducts; design by analogy again. Products that were essentially created fordistributionthroughphysicalbranchesaresimplybeingretrofittedontodigitalchannels.Forexample,DBS’DigibankinIndiaandAtomBankof theUKarejust digital treatments of traditional bank products and services fitted onto amobilephone—they’rederivative.Yes,theyaremobileordigitaloptimized,butthe product features and names all remain essentially the same as those youwouldhavereceivedfrombranchesinthepast.

For example, we haven’t seen incumbent banks come up with a savingscapabilitythatisn’tAPR28based,orwhereinterestisn’treceivedinanythingbutavery traditionalmanner—withonepossibleexception.Dubai-basedEmiratesNBDlaunchedasavingsproductin2016thatallowedcustomerstoberewardedbased on physical activitymeasured via awearable device that counted steps.Wellplayed,EmiratesNBD.

OtherexamplesoffirstprinciplesapproachestosavingshaveallcomefromFinTechs.DigitandAcornsaretwoexamplesofbehaviourally-basedapproachesto savings—apps thatmodify peoples day-to-day behaviour to savemore, notjustsimplyofferingahigherinterestrateforholdingyourdepositlonger.Fidorwasthefirstbankintheworldtolaunchaninterestratebasedonsocialmediainteractions29.

Wehaven’t seen the incumbent industry comeupwith credit products thataren’t based on the same models we’ve seen for hundreds of years. PayPalMafiosoMaxLevchinlaunchedAffirmin2014,whichprovidescreditbasedonbuying patterns, geo-location and behaviour. We’ve seen Grameen inBangladeshpioneermicro-creditandZopa in theUKpioneerP2P lending,butthebanksthatfollowedwerelargelyderivativeofthesepioneers.Youdon’tseebanksreinventingcreditbasedonbehaviouralmodels.

We have very rarely seen incumbent players abandon their reliance onapplication form-based credit scoring or reference checks to determinesomeone’ssuitabilityforaloanorcreditcard.YetweseestartupslikeSesameCredit(AntFinancial),LenddoandVouchexperimentwithsocial-basedscoring,and LendUp creating loans that boost credit scores for consumers instead ofsimplyrejectingthem.

Whenitcomestomoneyitself,youcan’teffectivelyarguethatBitcoinisn’t

a first principles approach to the problems of currency, identity and thechallenges of cross-border digital transfers. When you look at the moneytransfersthemselves,youdon’tseeplayerslikeSWIFT,WesternUnionorothersusingfirstprinciplesoradaptingblockchain(yet)tosolvetheproblem,butyoudo seeM-Pesa,Abra,Ripple andothers solvingmoneymovement issueswithgreataplomb.

Distributedledgertechnologyliketheblockchainclearlyhasthepotentialtobeafirstprinciplesplatformforarangeofthings,themostillustrativeexamplebeingthecreationoftheDAOordecentralizedautonomousorganisation.Itwasthe first AI-based company that allowed participants to invest Ether crypto-currency into Ethereum/Blockchain startups managed purely on a code andconsensus basis. Technically theDAOwas a stateless, crypto-currency based,investor-directed venture capital fund,with no risk or compliance officers, nomanagement, and no traditional company structure. You can’t argue that thisisn’tafirstprinciplesapproachtoVCinvestment.

Whenyoulookforfirstprinciplesapproachestobankingyoucanfindplentyofexamples,justnotamongstincumbentbanks.Thatisthethreat.

Isittoolateforthebanks?ElonMusk’sSpaceXisn’ttheonlycompanyintheworldtomakerocketstoday,but it does have the cheapest kilogram-to-orbit platform. Tesla isn’t the onlyelectricvehicleintheworld,butitisthemostwidelyknownandsold,andhasreframed the motor vehicle industry with the likes of Volvo and othersresponding in kind because of Tesla’s success. Apple’s iPhone isn’t the onlysmartphoneon theplanet,but itdidcompletelyredefinewhatweconsideredaphone and personal computing device. Daimler and Benz aren’t the onlyautomobilemanufacturers in theworld,butyoudon’tseehorsesonourstreetstodaybecauseoftheirfirstprinciplesapproachtotransportation.

Ant Financial, Tencent, Safaricom and thousands of FinTech startups areredefining what it means to bank today. Redefining how people use a bankaccount,ormoreaccuratelyavaluestorethatisembeddedintheirphone.

Bank4.0,however,willbeaboutmorethannewvaluestores,paymentandcreditutility.Bank4.0isgoingtobeembeddedincarsthatcanpayinadrive-throughwithouttheneedforplastic,orautonomousvehiclesthatgeneratetheirownincomeandpaytheirownroadtolls.Bank4.0isgoingtobeembeddedinvoice-basedsmartassistants likeAlexaandSiri,availableatyourcommandtopay,book,transact,enquire,saveorinvest.Itisgoingtobeembeddedinmixed-realitysmartglassesthatcantellyou,justbylookingatsomething—likeanew

televisionoranewcar—whetheryoucanaffordit.Bank4.0isabouttheabilityto access the utility of banking wherever and whenever you need a moneysolution,inreal-time,tailoredtoyouruniquebehaviours.

TheemergenceofBank4.0meansthateitheryourbankisembeddedintheworld of your customers, or it isn’t. It means that your bank adapts to thisconnectedworld,removingfrictionandenablingutility,or itbecomesavictimofthatchange.Thebankersoftomorrowarenotbankersatall—thebankersoftomorrowaretechnologistswhoenablebankingexperiencesyourcustomerswilluse across the digital landscape. The bankers of today, the bank artifacts oftoday,thebankproductsoftoday,areallonborrowedtime.

Is it too late for thebanks? Inone sense,yes.This transformation into thesemantic,augmentedworldishappeningbecauseofawholerangeoftechnologychangesoutsideofbanking,andtheconstantdemandbyconsumersforthenextbigthing.TheonlywaybankscouldhopeforfirstprinciplesNOTtounderminetheir businesses, is if they could successfully stop all adoption of newtechnologieslikesmartphonesandvoice-basedAI.That ispatentlyimpossible.Marketsthataresuccessfulinslowingdowntheadoptionofthingslikemobilepaymentsbecomeoutliersandsimplylookoutofdateinatransformedworld.

Case in point. Two thirds of the world’s cheques today are written in theUnitedStates,alongwiththehighestcardfraudvolumeintheworld,andasyouread earlier the volume ofmobile payments in theUS is fractional comparedwith the likes of China. This outlying behaviour is permitted by a systemsuffused with legacy, payments regulation ruled by consensus, point-of-salearchitecture that is a decade behind the rest of the world, and reluctance byincumbents to remove this embedded friction because it will weaken theiroligopolies. However, the fact remains: when it comes to mobile payments,KenyaisafarmoreadvancedeconomythantheUnitedStates.Whenitcomestofinancial inclusion,Kenyahasdonemore to improve the lotof itspopulace inthelast10yearsthantheUShasinthelast50yearsthroughlegislationliketheCommunity Reinvestment Act. Indeed, Kenya today has higher financialinclusion than the United States—a mind-blowing and clearly inconvenientstatistic.

The US banking system is a macro example of design by analogy versusdesignbyfirstprinciples,whereasChinaandKenyaarebecomingtheopposite.The more legacy behaviour and regulation your economy has supporting thefriction of the old system, the harder itwill be for your bank to be 4.0 readybecause it forces slow adaptation to new technology. It is why London andSingaporeandpushingsohardforregulatoryreforminfinancialservices—theyknow that is how the future centres of finance will be defined in 2030 and

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beyond.Ultimately,thisfightwilloccuracrosstheglobalstage,andthenewmetric

fordevelopedeconomieswon’tbe things likeGDPandeconomicgrowth,buttheabilitytoleveragenewtechnologiestobecomesmarteconomies,theabilityto enable automation, investments in smart infrastructure and the ability tocapitalizetransformation.Bankingisakeypartoftheinfrastructureoftheglobaleconomy,butifyourbankingsystemisbuiltondumbrails,youwillfindmoreandmorecompetitioncomingfromoffshore,andmoreandmoreblockchainandAI-basedattemptsatrenderingyoucompletelyirrelevant.

Ifyou’reabanksteepedintradition,runbylotsofbankers,withanoldcore,in amarketwith tons of regulation, reliant onbranch traffic for revenue then,yes, it is very likely too late.A complete transformation of a bank to being aprovider of embedded banking utility, driven by behaviour, location, sensors,machine learning and AI, needs more than an innovation department, anincubator,amobileappandaGoogleglassdemonstratorvideo.

Bank4.0isaboutthatradicaltransformationandhowthebestbanksintheworld are responding to these shifts, and how first principles competitors areforcingustothinkaboutbankingindifferentways.Bank4.0isaboutregulatorsthat are rethinking friction, licensing and regulations themselves. Bank 4.0 isaboutnewcapabilities,newjobsandskillsthatunderwritecompetenciesbankshaveneverneededuntilnow.Bank4.0isabouttheabilityofFinTechstartupstocreate transformative experiences faster and cheaper than any incumbent bankcouldeverdo.

IfyouwanttobeBank4.0ready,youneedtostripyourbankbacktofirstprinciples and rebuild. If not, it’s largely just a matter of time before yourbusinessisnolongereconomicallyviable,especiallyifyou’reabankwithunder$1 billion in assets. If this prospect scares you, I’ve successfully whet yourappetiteforwhatcomesnext.

If you’re looking for a book that describes how you take your bank fromwhere it is today into theworldof tomorrow, thenkeep reading.Thismaybeyour last chance to make the necessary changes to survive through the nextdecade.Otherwise,feelfreetocontinuetheslowdeclineintoobsolescence.

Endnotes2May1945.Source:BritishMinistryofHomeSecurityStatisticsfrom1939–1945(http://myweb.tiscali.co.uk/homefront/arp/arp4a.html).

Aswe’llfindoutlaterinthechapter,thisisthesolemechanismwe’veusedtoprogressthebanking

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systemoverthelast100years.

I’mnotcountingHyperloopandhisLAX-basedtunnelingmachine,purelybecausetheyarenotyetseparatebusinessesrunbyMusk.ElonMuskexplains“firstprinciples”https://youtu.be/NV3sBlRgzTI(Source:Innomind.org).

ASDS—AutomatedSpaceportDroneShip.SpaceXnamestheiroceandronesandlandingplatformsaftershipsinIainBank’ssciencefictionstoriesfromtheworldofthe“culture”.

InBank2.0Iwasabletofindanexampleofabankthathaddonethissojudiciouslythattheironlinecreditcardapplicationformaskedyoutostapleproofofincometotheform—anelectronicformonascreenrequiringa“stapled”proofofincome.We’llgettobrancheslater—Iassureyou.

AsonlytheUSusesthespelling“checks”,we’llusethegloballyacceptedanglicisedversioninthisbook—cheques.Moregenerallyknownalsoas“Alexa”.

Foramoredetailedanalysisofthistrend,pleaseseemyAugmented:LifeintheSmartLane.Muchofthisispossiblenow,orclosetopossible.CheckouttheAlexaadfeaturingAlecBaldwin,whereheordersBrescianisocks.

ThisisjustforPayPalcoveragealone.AliPayisalreadyin80countriesandgrowing,too.Source:TheEconomist—AnewEastAfricacampaign,9July2015.

BreakingBanksRadiointerview—aired9February2017.Source:TheStar—BigBanksinPlottoKillM-Pesa,23December2008.

Source:WorldBank—thosecountriesincludeChina,Kenya,TanzaniaandNigeriaBreakingBanksRadiointerview—aired9February2017.

Withacapital“T”.Source:iResearch—http://www.iresearchchina.com/content/details7_21238.html.

Source:CIOMagazine,“7reasonsmobilepaymentsstillaren’tmainstream”,JamesAMartin,7June2016.Asoftheir$4bncapitalraiseApril,2016.Tobefair,itcouldbearguedthattheyareworthwellinexcessof$100bntoday,basedontheircurrentrevenuesandactivity.

Source:ChinaDaily.com,3August2017;“Alipay,WeChatPayvieforcustomers”—http://www.chinadaily.com.cn/bizchina/tech/2017-08/03/content_30337784.htm.In2016Starbuckssawapproximately$8billionloadedontotheirmobilebased“cards”(Source:StarbucksInvestorcall).

“Chinesemoneymarketfundbecomestheworld’sbiggest”,FinancialTimes,26Apr2017—https://www.ft.com/content/28d4e100-2a6d-11e7-bc4b-5528796fe35c.Source:AsianBankingJournal.

AnnualPercentageRate.Incidentally,thiswouldtechnicallybeillegalinjurisdictionsliketheUStodayduetodisclosurerequirementsaroundsavingsaccountsthatrequireAPRratestobepublishedaccordingtoastrictschedule.

WhenAlipaywascreated,wehopedtocreateanequalenvironmentinChinasothateveryonecanhaveequalaccesstofinancialsupport.Wehopedtoseethateveryhonestperson,everygoodperson,even

thoughpenniless,cancreatesufficientwealthandvalueforone’shonestyandvirtues.—JackMa,ChairmanofAlibabaandAntFinancial

For20years,IhavebeenwatchingdevelopmentsinfinancialservicesinChinaclosely.My first exposure to theChinese systemwas in 1997, just before theAsianfinancialcrisis.TheBankofChinaproudlyshowedofftheirBeijingheadoffice, staffed by 300,000 people,withmost of it being to drivemoney fromcitizenstowardsgovernment-initiatedprojects.Therewerehighlevelsofsavingsandlittlecreditavailability.CustomerservicewasofzerointerestandthemajorfocuswassupportingState-OwnedEnterprises (SOEs).Back then,bank tellershadtotakeaproficiencytestinusinganAbacusbeforetheyweregivenajob.

A decade later, China had opened up to world trade and had seen aphenomenalexpansionofgrowthintheeconomy.IhadbeencaughtoutbytheemergingsocialnetworkcalledQQ,whichhadachieved300millionusers,andwas amazed at how quickly themarketwas changing.Visiting Shanghai, youcouldseethechange.Theriversidefinancialdistricthadliterallyemergedfromthegroundupinthepreviousdecade,andwasnowvyingtobeaglobalfinancialcentre.Ithadalongwaytogo,butwasgettingthere.HuJintaonotedin2006:

“From1978to2003,China’sGDPincreasedfromUS$147.3billiontooverUS$1.4 trillion, with an average annual increase rate of 9.4 percent; its totalforeign trade volumegrew fromUS$20.6 billion toUS$851.2 billion,with anaverageannualgrowthrateof16.1percent;andthepoverty-strickenpopulationintheruralareasdroppedfrom250milliontoabout29million.”

IwroteextensivelyaboutthechangesinChinain20061and,backthen,waspredicting that the biggest banks in the world within a decade would all beChinese.Today,theyare:

Table1:Top10worldbanks2017.Source:TheBankermagazine,July2017.

Today,China’sphenomenalgrowthhasstartedtoslow,governmentpoliciesto support such growth are being questioned and concerns over the wholeshadow financial system are raising global systemic worries. No matter. Thecountry is still seeing progress and QQ is nowWeChat, part of the Tencentgroup. The group operates alongside several other massive Chinese internetgiants, includingAlibaba(theAmazonofChina),Baidu(theGoogleofChina)andmore,tochallengethethinkingofall.

Insodoing, thecountryhas leapfrogged their legacycompetitors.Americastruggleswiththeconversionofmagstripepointsofsaletomigratetochip&PIN,whilstEuropetriestoworkouthowtoholdtogethertheirunioninlightofBrexit.China,bycontrast,has transformed—andspecifically transformed theirfinancial markets. Ant Financial are expected to IPO some time in the nextcoupleofyears.

However, Ant Financial goway back, beyond 2014. In fact, their humbleroots began in 2003, when Alibaba came head-to-head with a big AmericangiantwhowantedtotakerootinChina.ThatgiantwaseBay.Herebeginsastorythat should fascinate everyone, especially as Ant Financial are realising thedreamwidelydiscussed in thisbook: thecreationofa financialsystemfor thefourthageofhumanity2.

ThroughaseriesofmeetingsinJuly2017,IspenttimeinHangzhou,ChinaandLondon,talkingwithAntFinancialandAlipayexecutivesabouttheirviewsofthepast,presentandfutureofthecompany.IalsospenttimetouringChina,and talkingwith real people about their views of the company.The followingrepresentsthesummaryofthoseexperiences.

TheAlibabastoriesInorder tounderstandhowAntFinancialmade itsmark,we firstneedabriefhistory of its originswithinAlibaba. There aremanyways inwhich you cancatchupwith theAlibaba story,withPorterErisman’s book,Alibaba’sWorld,quiteaneasyread.IsawPorterpresentthisstory,fromwhenhewasinvolvedintheearlydaysofAlibaba,havinglivedinChinasince1994.

The origins of Alibaba actually date back to 1980 when an AustralianCommunist sympathiser, Ken Morley, travelled around China on a summervacation.WhenvisitingHangzhou,Kenandhisfamilywentdowntothemaintourist area, theWestLake.There theymet ayoung JackMawho,back then,wentbythenameMaYun.MaYunwas16yearsold,learningEnglish,andlikedto hang around the West Lake most days he could, in order to improve hisEnglishbytalkingwithtourists.Ken’ssonDavidwasalso16yearsold,andthetwoboysstruckupanunlikelylong-termrelationship.

Figure1:MaYunandDavidMorleyin1980.

From the chance encounter with the Morleys, Ma Yun started a pen palrelationship with David. They would exchange letters with Ma Yun, leavingevery other line free for David’s father, Ken, to make corrections to Ma’sEnglishspelling.Kendecidedtoseeifhecouldhelphisson’syoungpenpalbyinvitinghimtovisitAustraliain1985whenMaYun,nowJackMa,wasjust21yearsold.

ThiswaswhenthedoorsofChinawerestillfirmlyclosedandanindividualcouldnotgeta travelvisa.However,JackMawasdeterminedandtravelledtoBeijing to see ifhecouldgetpermission.Seven timeshewas toldno.At thattime, visaswere only issued for service, family or studying purposes, not forgeneral visits or tourism. So, JackMa almost lost all hope after his visawasrejectedseventimesinarow.KenMorleywasalsoworriedaboutthis,andevensent a telegram to theAustralianembassy inChina,hoping theycould issueavisaforJackMa.

JackMastayedinBeijingforaweek,diligentlyapplyingforthevisaeverysingleday,asthetriptothecapitalcostallthemoneyhehad.Thelasttimehesteppedintotheembassy,herantowardsthefirstvisaofficerhemetandsaid:“Ihavebeenhereforaweeksothismightbemylastchance.Iwantmyvisa,andIwanttotalktoyouseriously.”

“Whatdoyouwanttotalkabout?”saidtheclerk.“Ihavebeenrejectedforavisaseventimesduringthepastweek.Ihaveno

moneyanymoresoIhavetogobackhome.ButIneedtoknowthereasonformyrejections.”

ImpressedbyJackMa’spersistence,thevisaofficerlistenedcarefullytothestoryofhisrelationshipwiththeMorleyfamilyand,afterwards,JackMafinallygothisAustraliavisa.Thischangedhislifeand,manyyearslater,Jackrecalls:“I am very thankful for Australia for that 29 days in Newcastle [a suburb ofSydney]…when I arrived inAustralia Iwas so shocked and amazed by thewonderfulthings,thepeople,theculture,thelandscapes,theproducts…Iwas…educatedinChinathatChinawasthebestandrichestcountryintheworld…whenIarrivedinAustraliaIsawtheworldwassodifferent.”

Afterthis,everythingchangedinJackMa’sthinking,althoughhecouldnotrealise his dreams at that point. Instead, he returned to Hangzhou to teachEnglish.However,hisAustraliantripstayedwithhimand,combinethiswithavisittoAmericain1995,andhislife’spathwasclear.

Jack visited the United States in early 1995, as the first roots of searchengines and trade were emerging, and this was when Jack discovered theinternet.Hewas inspired and it changed the path of his life, creating his firstbusiness,a“YellowPages” forChina,uponhis return.Thebusiness failedbutJackwasundeterredand, in1999,Alibabawasformed.Alibaba isbaseduponAmazon,butitisdifferentbecauseitisChinese.Forexample,Amazonemergedfrom aWestern economy that had moved from mom-and-pop stores to largemalls,grocery stores andurban shoppingcentres.Asa result, the retailmodelreplicated the offers of these centralised centres and replaced them onmarginovertime.

Chinadidn’thavethatstructure.Chinainthe1990sjusthadthemom-and-popstores,andnolargeshoppingcentresandmalls.So,Alibaba’soriginalideawas to create a globalmarketplace, connecting smallChinese businesseswiththeworld’sbuyers. Itwasdescribedasbeinganonline tradeshowforChinesebusinessestodemonstratewhattheycoulddofortherestoftheworld,andJackMasold it toChinese firms thatway.Alibaba in1999wasbuildingamassiveExpoforChinesebusinesstoengagewiththeworld’smanufacturers.Thatwastheoriginal idea, and itwentwell.Sowell that JackMaandhis teamsawan

opportunitytoprovideaserviceconnectingpeople,calledTaobao.Taobaowaslaunchedin2003,andaimedtoemulatetheeBaysuccessinAmerica,but inadifferentway.Afterall,Chineseconsumersdidn’tbuycollectablesatthattime,as there reallywasn’t anythingworth collecting, or so they thought.The onlythingChinesepeoplehadthatwascollectableintheearly2000swasChairmanMao’sRedBook,andmostpeopleweretryingtogetridofthose.

This is why Taobao, which means “digging for treasure”, focussed uponconnectingsmallChinesebusinessesandsoletraders—themom-and-popstores,asthereweren’tmanybigfirms—toChinesecitizens.Itworked,butnotbeforebeing exposed and made potentially vulnerable to the entry of eBay into theChinesemarkets.

ebayisasharkintheocean.WeareacrocodileintheYangtzeRiver.

Ifwefightintheocean,wewilllose.Butifwefightintheriver,wewillwin.

—JackMa,CEO,AlibabaGroup

eBayenteredChinabybuyingheavilyintoitsChineseequivalent,EachNet.JackMaknew that eBaycould eradicateAlibaba, anddetermined that theUSauction service was not right for China. But Alibaba at the time was tinycompared to the mighty eBay, which had millions of dollars to invest in theChinese market. However, eBay was not Chinese and did not understandChinesemarkets likeJackMaandhis teamatAlibaba.Forexample,eBaycutback on features that Chinese consumers liked, such as emoticons andanimations.

Taobaorampedupthesefeaturestobeafarmoresocialcommercemodel,aswellasadding thesprinklerofbeingfree.eBaydidnotoffera freeversion tocompeteandmadeothermistakes,eventuallypullingoutofChinacompletely,havinglostmillionsofdollars.

At thispointAlibabahadwonandbegan todiversify intootherareas.Forexample,Alipaywas launched in 2004 as an escrow account service to allowconsumers to hold funds until theywere happywith the goods they received.ThiswaskeytoTaobao’sgrowth,asChinahadverypoorconsumerprotectionlaws.In2008,theylaunchedTmall,aB2CsiteforthesaleofkeybrandedgoodsandservicesasanoffshootofTaobao.

In2013,Alibaba’smoneyfundYu’eBao(“leftovertreasure”)waslaunchedand marketed to users of Alipay. They then expanded into banking in 2015,

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launchingMyBankduringthesummerand,inanaudaciousmove,openedtheirbankcapabilities tootherChinesebanks throughanopenmarketplaceof appsandAPIs.

Allof thesefinancialactivities—Alipay,MyBank,Yu’eBao,openbanking—areconsolidated into thebrandAntFinancial.Antsareagoodmetaphor forthe business, as ants areweak individually but together are strong. That’s themessageAnt Financialwanted to send toChinese citizens and it seems to beworkingasAntFinancialwasworth$45billionin2015,$60billionin2016andlookslikelytotop$100billionbythetimeofitsIPOinearly2019.

Just toput this in context:whatAlibabawithTaobao,Tmall,Alipay,Yu’eBaoandmoreof itsaffiliateshaveput inplace, is likeanAmazon,Facebook,Netflix, PayPal and more, all in one ecosystem. For example, a vision forAlibabaisthat:

youcanadvertisemovieconceptsandaskcustomerstocrowdfundthemovieideastheylike,allchannelledthroughAlibabaPictures;onceamovieisfundedandgetsmade,youcanbuyticketstoseethemoviethroughTaobao;whenyouseethemovie,youmightwanttowatchthedigitalreleaseathomeonYouku,Alibaba’sversionofNetflix;ifyoulikethemoviethatmuch,youcanbuybrandedmemorabiliaonTmall;allofitispaidforandfundedthroughyourAntFinancialaccounts.

In other words, it offers a digital marketplace that manages the completeprocess of digital creation from start to finish. The banking stuff is simplyembedded in thisecosystem.Thisconcept isnicelysummarisedbyJack inhispresentation to theTaobaoannualpartnersmeeting,nicknamed“Netrepeneurs:MadeinInternet” in2017. Iattended thismeeting inHangzhou,and itwasanimmersive experience. Amixture of online teenage celebrities streaming theirideas to entrepreneurialTaobaobusinesses talking about their businessmodelsanddreams,itwasallveryChinese.

Themeetingconcludedwithan interviewwithJack,andherearemymainnotesandtakeawaysfromwhathesaid:

“Itisimpossibletodobusinesstodayofflineaseverythinghastohavesomethingonline,whichiswhyweneedmorenetrepreneurs.Thewholesupplychainwillbeimpactedbytheinternet.Italkaboutthesechallengesatmanyconferencesandpeopledon’tbelieveme,butI’musedtothis.It’slikeclimbingamountain.Whatyouseeatthefootofthehillisverydifferenttowhatyouseewhenyou’rehalfwayup.What’satthetopofthemountainarethosewho

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changetheirmindsetsand,inthenextthreedecades,theworldwillchangemorethanyoucaneverimagine.”“InthenexttenyearsallindustrieswillchangeduetoAI,bigdataandcloud.Industrieswillbeturnedontheirhead.Thismeansthat,inthefuture,therewillbeno“madein”,asin“MadeinChina”or“MadeinIndia”.Youwilljusthavedesigned,ideated,printedandmadeitintheinternet.Equally,everythingcannowbecustomized.It’sexpensivetocustomizetodaybut,ifyoucan’tdoittomorrow,yourcompanywillfail.”“Alibabadoesn’tdoe-commerce.Weonlyprovidetheplatform.So,themoresuccessourpartnershave,themoresuccessfularewe.”“Threeyearsago,webetthatcloudandbigdatawouldbekey.Mostcriticalisdataandcomputing.Weputallofourresourcesintodata,computinganddataservices.Butstillwhatwedoisjustafractionofthetotal.SoonwewillhaveIoTandallthesedeviceswillcreatedata,andthisiswhywearepanicked.Therewillbeahugeamountofdatatodealwith.”“Intheageofdata,wecannolongerhavethisideaofcontrollingeverything.Amonopolyisanideaoftheindustrialera.Wejustwanttohelppeople,notbeamonopoly.Wewanttoconnecteveryone.”“Weprovidepaymentsandlogisticsandshipping.WecandeliveranywhereinChinawithin24hours.That’stooslowforBeijingandShanghaibut,forthevillages,wewanttobuildthatinfrastructureacrossallChina.Wewillneverbealogisticscompany,however.Wepartnerwithothersforthis.So,wefocusonthethingsthatotherscannotdoorarenotwillingtodo.WefocusonthingsSMEscannotdo.Weonlywanttocompetewithcompaniesthatwon’tshareorpartnerwithothers.”“Ifyouarehavingadifficulttimeasastartup,wewerelikethat,butwehadadreamandnowwehavegotthere.Nowweareahugecompany,butifwestaythereanddon’tsharethoseriches,theneveryonewillhateus.So,wehavetomakeeveryonericher.Ifyouaretheonlyrichpersoninavillageofpaupers,thepauperswillkillyou.”“Alibabaisatoolforeveryonethatshouldbenefiteveryone,especiallyyoungpeople.RememberIwasateacher—andanycompanywilldiminishultimately.IwantpeopletosayAlibabaisgreat,notbecausewesellalotofproduct,butbecausewehelped

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youngpeopleandoursociety.”“Management.Thewordisthereforregularcompanies.AtAlibaba,wetreatitmorelikegoverninganeconomy,aswehavetomanagesomanycompanies’dependentuponusaspartners.AnySMEwithanideanowhasawaytorealizethatidea.Alibabamarketplacecanfindyoubuyersandsellers;wecanprovideyouwithcomputingthroughcloud;wecandistributeanddeliveryourproducts.By2036wewillhavebuiltaneconomythatcansupport100millionbusinessesforbillionsofusers.Wewon’townthateconomy.Wewilljustgovernit.”“Havinggreat,smartexperienceswillbethekeywordsforournextdecade.”“FinTechistheretoempowerthefinancialsector.Iwanttodothatforconsumerssotheyhaveequalaccesstofinance.Idon’twantpeopletobewaitingformoneyorforpity.Iwanttoempowerthemthroughaccessandinclusion,andgetthingstopeoplealotfasterandeasier.”“Thisyearisverydifferenttofiveyearsago.Thisyearwefocusupon‘MadeinInternet’.Yourbusinessmodelistoredefineyourconsumers,supplychainandfinancingmethodsfortheMadeinInternetage.ItellallretailersandmanufacturersandbankstodothisurgentlyasI’vebeensayingitforoveradecade.Youdon’thavesomuchtimeleft.”

1.2.3.4.5.6.7.8.9.10.

Figure2:JackMaattheM@deinInternetAlibabaeventinChina.

Finally,herearethetop10messagesthatJackgivespeopleforbusiness:Onchasingdreams:dreambig,reallybigRemember:thebiggertheproblem,thegreatertheopportunityTodayistough,butthedayaftertomorrowisbeautifulFocusonthecustomerandtherestwillfollowLearnfromcompetitors,butnevercopythemIt’smoreimportanttobebestthanfirstFindopportunityincrisisUseyourcompetitors’strengthagainstthemDon’tdwellonmistakesTheteamshouldworkforthegoal,notfortheboss

DrivingAlipay’sInnovation?When it began, as an escrow system, the exchange of informationwas baseduponfaxmessaging.FaxmessagestoandfromthebankandsellerviaAlibabaallowedTaobaoorderstobefulfilled.Rollonfiveyears,andthathadchanged.

In the summer of 2011, China’s Alipay developed a QR-code paymentsystem to support payments, and this was the revolution that turbo-charged apayments transformation in China. This is because China had few credit anddebitcardsinthehandsofthepopulation,buteveryonehadamobilephone.Atthetimeusingthephoneforpaymentswasn’teasy.Thentheroll-outoftheQR-code system changed all that. Similar to the Starbucks app that had madeStarbucks become a payments phenomenon in America, Alipay did the samething,generatingauniqueQR-codeatcheckoutthatmerchantscanscanwithabarcodereaderortheirownsmartphonecamera.Thesystemdrawsfundsfromauser’screditcardoraprepaidAlipayaccount.

This move also led to some problems though, as Jack Ma made thecontroversial decision to spin out Alipay as a separate company, withoutapproval from Yahoo or Softbank, who owned 40 percent and 30 percent ofAlibaba at the time.Themoveneeded to bemadebecause the firmcouldnotcontinuetoactasapaymentsprocessorwithouta third-partypayments licensefromthegovernment.ThislicensewouldnotbeissuedunlessAlipaywassetupasadedicatedpaymentsprocessor.ThecontroversywassettledbyagreeingthatacertainpercentageofAlipay’srevenueswouldflowbackthroughAlibaba,butitdidcauseabadtasteintheinvestor’smouths.

Figure3:Alipay’sSingles’Dayistheworld’slargestsingledayofcommerce.Visaaverages1,750tpsandscalesto24,000tps;duringSingles’DayAlipaybeatsthathandsomely,withtransactionvolumesexceeding300,000tps.

Singles’ Day is just one of several events created to promote the use ofmobilepayments inChina, finding its source in thebattlebetweenAlipayandWeChatPayovertheredenvelopedaytocelebrateChineseNewYear.

The idea began in 2014, when Tencent promoted its 400 millionWeChatusers to send eachother virtual red envelopes,whichwouldbedeposited intotheirmobilepaymentaccounts.Thegimmickbecameabighitwith40millionvirtual envelopes being exchanged, worth a record 400 million yuan ($64million). Jack Ma called it a “Pearl Harbor moment” for his company, andrampedupthegamein2015byannouncingitwouldgiveawaymorethan600millionyuan($96million)toits190millionusersas“luckymoney”giftsiftheyused its red envelope messaging system. Tencent responded within hours bysayingitwouldalsogift800millionyuan($125million)tousersofitsvirtualred envelopes service, and blocked Alipay users from their WeChat friends.Tencent’sWeChatwon that battle,with over one billion virtual red envelopessenton18February,comparedwith240millionsentthroughtheAlipayWallet

—and,ascanbeseen,therivalrybetweenthetwofirmsisintense.Meanwhile,Alipayextendeditstentaclesintootherareas,suchascreatinga

savingsfundforcustomerstostoretheirbalanceswhennotusingAlipay.CalledYu’e Bao (“leftover treasure”, as mentioned earlier), it acts as a method ofmoving prepaid funds from a balance on Alipay to an amount that can gaininterest on Yu’e Bao.Westernmedia call it a “moneymarket fund”, but AntFinancialtakeexceptiontothis,astheyseeitasjustawayofgaininginterestonunusedfunds—abehaviouralsavingsfeature.

Another move occurred in 2014, when China’s regulators offered privatecompanies the opportunity to apply for banking licenses, resulting in AntFinancial launching a bank in 2015 calledMyBank. Ant Financial hold a 30percent stake inMyBank alongside other main shareholders, including FosunIndustrial, Wanxiang Sannong, and Ningbo Jinrun—three Chineseconglomerateswith investments inagriculture, insurance,machinery,andotherindustries. The founders’ initial investment is four billion yuan (about $644million). MyBank’s most important partner is Alibaba, however, as the mainofferingofloansisbaseduponuser’stransactionhistoryinTaobaoandTmall.

MyBank focusses upon supporting small businesses on Taobao, whichsupports over five million merchants. At its launch Eric Jing, MyBank’sexecutivechairman,said that theirmission is“answering to theneedsof thosewho have limited access to financial services in China” and “is here to giveaffordableloansforsmallandmicroenterprises”.

Agoodexampleofsuchaservice isaTaobao-subscribedshopownerwhosellsbeefjerky.Eachtimetheyreceiveanorder,theycanimmediatelyturnthatorder into cash through a short-termMyBankmicroloan. This particular storeownerhashad3,795suchloansinthelastfiveyears,anaverageoftwoloansaday,with the amounts varying from three yuan (half a dollar) to 56,000 yuan(US$8,000).

ThelearningAlibabagainedthroughMyBankenabledthecompanytoopenits services to otherChinese banks to usewhen, in 2013,Alibaba verticalizedtheir cloudwith the announcementofAliCloud forFinancialServices, or theAliFinanceCloudforshort.

Thedevelopmentof theAliFinanceCloudwaspartofaperfect storm forAntFinancial.TheyhadappliedfortheirMyBanklicenseandobviouslyneededtohavea future-proofed,core-bankingsystem.Rather than look toanexternalprovider,theydecidedtodevelopitinternally.

AbankdevelopingitscorebankingsysteminternallyisnotuniqueinChina,but Ant Financial went one step further by deciding to sell the cloud-basedsolution to other banks in China. The breadth of the solution is extensive,

including riskmanagement, lending,deposits,mobileapps, infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), know-your-customer (KYC) andmore.

It isdifficult tooverstate thepotential impactofAliFinanceCloudon theChinese banking industry, or the potential implications globally.Adoption andusage of the Ali Finance Cloud in China has been swift, with around 40organisations using the service, including banks, payment providers and evenpeer-to-peer(P2P)platforms.

AntFinancial:BuildingabetterChinaOneofthebigthingsaboutAntFinancialisitsprinciplesandmission,whichisall about using technology to improve society and the economy. Here is theopeningstatementfromtheir2016SustainabilityReport.3

The evolutionary and civilized history of the human being, in the simplestway, can be seen as a progressive history where a marginal species climbedrapidly to the topof theecologicalchainbydevelopingcognition,agriculture,industry,scienceandtechnology.Atpresent,humanbeingsareinagoldenageoftheso-calledthirdindustrialrevolution.

As a tech company,whatwewant to do and are currently doing is to usetechnology to bring society back to theoriginof humanbeings: simple, equaland free. For example, our daily errands, can we handle them easily withoutqueuing,beggingpeopleorevengoingout?Thisisthesimpleprinciple.Canagrandmother and a bank president enjoy the same quality and equallyconvenientfinancialservices?Thisistheequalprinciple.Canwesaygoodbyeto complicated passwords, cash or even ID cards and passports, paying billseasilywithafaceandthecreditdatabehindit?

Technology is at theheart of this vision and,more importantly, it is at theheart of this business. For example, the company states openly thatcreditworthiness is the passport to a better society. Creditworthiness has beendifficulthistorically,asyouneedsomeformofcredithistorytoevaluatepeople;withoutdata,thatishard.

This is all changed today, thanks to the development of cloud computing,machinelearningandbigdata.Creditworthiness,whichusedtoberegardedasamoralevaluation,isnowbecomingdirectandquantitativeandcanbeanalysedaswellasutilisedinrealtime.AntFinancialthereforecreatedabrandnewcreditevaluation system called Zhima Credit, which enables more people to enjoyconvenienceinfinance,lifeandothersectors.

The Zhima Credit score is based on your financial behaviours and

trustworthinesswithmoney,andakeypartof this isensuringpeoplepayback.ZhimaCreditscoringworkswiththesupportofintelligentdecision-making,andthis is a core part ofAntFinancial’s operations based upon awell-establishedcreditworthiness evaluation and risk forecasting system that operates in real-time. As a result, farmers without bank statements can obtain loans to buyfertilizerandseedsthroughMyBank.

AntFinancialillustratesthisthroughthestoriesoftheirpartners.AkeybackdroptotheZhimaCreditscore,creditworthiness,microloansand

inclusiveness is Ant Financial’s continual real-time analytics and riskmanagement.Thisenablesthecompanytodeliverits“3,1,0strategy”:ittakesthree minutes to apply for a loan; one second to transfer the funds to theapplicant’saccount;andthereiszeromanualinterventioninthewholeprocess.

MyBankhas helpedmanyblue-collarworkers, undergraduate students andmigrantworkerstoembarkonanewlife.BytheendofApril2017,6.5millionpeoplehadborrowedover800billionyuan(US$125billion)injusttwoyears.

Thisisbringingaconvergencebetweencreditworthinessandwealthtohelppeoplefromallwalksoflifetorealisetheirdreams.Creditworthinessis linkednot only to wealth, but also to the operation and governance of society. It iscloselyrelated toeveryone’sdaily life.This iswhytheusageof technology toextendcredit to everyone creates amore inclusive economyandamore equalsociety.

Ant Financial believe that, in the near future, it is likely that cameras inrestaurants, subwaysandairportswillautomatically identifyyourcredit status.Peoplewillbeabletogooutwithoutamobilephone,cashorevenanidentitycard.Theycangoanywhereusingonlytheirfaceastheirauthenticationsystem.Fromyour face the cloud, and the big data of creditworthiness behind it,willbecome everyone’s passport in society. The trustworthy will be welcomedeverywhere,whiletheuntrustworthywillberebuffedateverystep.

That is why creditworthiness is a critical factor driving Ant Financial,Chinesesocietyandtheeconomyforward,withthecompanyregularlyactingasamediatorbetween thosewhocanbe trustedand thosewhocannot. It iswhyAntFinancial’sZhimaCreditsystemisworkingwithChina’sSupremePeople’sCourttopunishdishonestcreditbehaviours.ByJanuary2017,ZhimaCredithadassisted theSupremePeople’sCourt topunishover730,000dishonestdebtors,almost50,000ofwhomhavepaidofftheirdebt.ThisisanotherkeytenetofAntFinancial’s vision, inusing creditworthiness to improve social governance andmakeintegrityahighlyvaluedattributeofsociety.

People born in the 1990s have grown up in an environment where theconcepts and applications of creditworthiness are being popularized. For

example, one in four Chinese people born since 1990 useAnt Credit Pay forconsumption.Therefore, theyhaveaclearerunderstandingofcreditworthiness,andvalueitmorethantheoldergenerations.StatisticsonAntCreditPayshowthattheproportionofpeopleborninthe1990swhorepaytheirdebtontimeis99percent.Asocietythatvaluesandupholdsintegrityistakingshape.

WhenIattended theAlibabapartnersconference inJuly2017, theyhostedmanyoftheirmostsuccessfulTaobaobusinessesinHangzhou,China.Manyoftheseareyoungpeoplewhoarenowentrepreneurs. Intriguinglysomeof thesebusinesses arebased in ruralvillages—because theycanbe.This is amassivechangeinsocietyinChinaand,fromadigitalageplatform,theworld.Thefactis that anyone, anywhere—even in themost remote villages—can become anentrepreneuriftheyhaveaninternetconnectionand,increasingly,everyonehasthisthroughtheirmobilesmartphone.

But it’s not just commerce and society that Ant Financial focuses upon.Equally, it is worth underlining that Ant Financial is not first and foremost afinancialfirm.Theyareatechnologyfirm,focusseduponleveragetechnologiestoimprovesocietyandtheeconomy.Thisisillustratedwellbytheirservicestogovernment.

A final elementworthmentioning inAntFinancial’s strategy is building agreener planet. This is achieved through their program of gamification, called“AntForest”.

The idea of Ant Forest originates from the carbon emissions account ofAlipay,whichisbyfarthelargestplatformforpersonalcarbonaccountsintheworld. In theAlipay carbon account, users are educated in using some of thecommonglobalpracticesinenergyconservationandemissionreduction.Itisthefirstcarbonaccountusingabottom-upapproachtoreducingcarbonemissions.Specifically,AntForestencouragesuserstochoosegreenerlifestylesbytakingpublictransport,payingutilitybillsdigitallyandbookingticketsonline.Itisalsothe first in theworld that encourageshundredsofmillionsofpeople to leadalow-carbonlifevoluntarily,ratherthanforcingthisapproachtop-down.

Embeddedbanking:understandingnotsellingAntFinancial is the only companyworldwide today focusseduponbuilding aglobal financial inclusion platform. A platform that can support and connectpotentially seven-and-a-half billion people in real-time. At the very least, aplatformthatwillincludeallthosewhoarecurrentlyexcludedfromthefinancialnetwork, by offering them a connection via the mobile network and simpletechnologiesthatareinteroperablebetweenoperatorsinallcountries.

Theirstrategyisbaseduponfindingcompaniesinothercountrieswhoofferane-walletpayments service, and then to invest in those firmsandshare theirtechnologieswith them.Eventually, it is likely thatAlipayandAntFinancial’sbase technologies would be powering the core infrastructure of e-walletsglobally—asortofgloballyaggregatedwalletservice.

First,theyinvestinequivalentproductsandservicesinsimilarmarkets,suchasIndiaandThailand.That iswhyAntFinancial’s leadershipteamtalksaboutinclusiveness, as that’s a great strategy with a mobile wallet. Hence, theyinvested $680 million in India’s Paytm in September 2015, just beforedemonetisation stimulated Indians to open 200 million wallets on Paytm. InNovember2016,AntpartneredwithThailand’sAscendMoney,whichalsorunsadigitalwallet service.Under theagreement,AntFinancialwillassistAscendMoneytogrowitsonlineandofflinepaymentsandfinancialservicesecosystem.It is notable that Ascend may be based in Thailand, but also operates inIndonesia,ThePhilippines,Vietnam,MyanmarandCambodia.

InFebruary2017,theyannounceda$3billiondebtfinancingdealtoexpandtheir investmentportfolio and, interestingly,moved into theUSmarketwith abid toacquireMoneyGramfor$880million.Thiswas followedbya strategicinvestment in the Koreanmessaging service Kakao, which offers Kakao Pay;also,inMarch2017,theyincreasedtheirstakeinPaytm,sothatAntFinancialisnowthemajorityowneroftheservice.

Meantime, apart from heading for inclusiveness, Ant Financial has alsoexpandedintotheUSAandEurope.Attheendof2015,thecompanysignedadealwithWirecardtogivethemaccesstoEuropeformerchantcheckoutusingtheir wallet for Chinese tourists. This was followed with a partnership withIngenico tofurtherenhance theirEuropeanpresenceand thenadealwithFirstDatatogivethemasimilarcoverageofNorthAmerica.

ThemediapositionstheWirecard,IngenicoandFirstDatamovesasbeingapureprovisionofserviceforChinesetourists,butitisnotassimpleasthis.Thisis a fast-moving company that is expanding non-stop in itsmission to be thedominantglobalmobilewallet.

That is themissionandwasarticulatedbyAntFinancialCEOEric JingatDavos inJanuary2017,wherehestated:“Wehaveanambition tobeaglobalcompany.Myvision[is]thatwewanttoservetwobillionpeopleinthenexttenyearsbyusingtechnology,byworkingtogetherwithpartners…toservethoseunderserved.”

HowAntFinancialthinksisradicallydifferenttoUSandEuropeanFinTechfirms,becauseit isautomatingamarket thathadnothingbefore.WhenAlipaybegan,therewasnoe-commerceinChina.AlibabaandAlipaycreatedit.

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That’s a radical difference from theAmerican internet giants likeAmazonandeBay,whohadmajorbricks-and-mortarcompetitorsalsocompetingonline,and began without any payments integration. Equally, the US giants wereserving a developedmarket,where consumers had sophisticated online needs;Alibaba and Alipay were servingmarkets that were changing dynamically asChinese citizensmoved from rural, agriculturalwork to the rapidly expandingcities,wheremanufacturingofferedarapidupliftfrompovertytoriches.Infact,Amazon runs a 14-year-oldACHpayments system today, showing one of thecoredifferencesbetweenAlibabaandtheUScommercegiant.

In creating this revolution of commerce inChina, bothmanufacturing andonline,Anthasemergedas the leader, and they talkaboutempoweringdigitalFinLife globally. This is important, since it’s not a payments app or amobilewallet,butacompletesocial,commercialandfinancialsystemsinone.ImagineFacebook,AmazonandPayPalallintegratedintooneapp.That’swhatAnthasgot.

And their business model is fundamentally based upon deep userunderstanding,notcross-selling.ThisisanabbreviatedversionofadetailedcasestudyofAntFinancialinChrisSkinner’s new book, Digital Human. The full version includes five interviewscovering the past, present and future of Ant Financial, from the person whowrotethefirstcodetotheheadofstrategybuildingthecompany’sfuture.

EndnotesSeehttps://www.finextra.com/resources/feature.aspx?featureid=845.ReadmoreinChris’latestbookDigitalHuman.

ManyofthefactsandstatementsmadeinthissectiondrawonAntFinancial’s2016SustainabilityReporthttps://os.alipayobjects.com/rmsportal/omkAQCxPyHDDqtqBDnlh.pdf.

2 TheRegulator’sDilemmaByBrettKing&JoAnnBarefoot

Onecanseeanemergingrequirementforabodythatwillcarryoutthefunctionsofakindof“centralworldbank”thatregulatestheflowandsystemofmonetaryexchanges,asdothenationalcentralbanks.

—Vatican’sPontificalCouncilforJusticeandPeace,paper2011

If there’s one area that is going to need a total, first principles rethink, it isregulation. Presently,we are in the vernacular of the software industry,madlyadding “patches” to the system, trying to retrofit decades-old regulations andcore systems for all these new channels, behaviours and technologies that areemerging.Butthemorewetrytoaddfixesintothesystem,themorewegetasort of conflated banking spaghetti code—a system that threatens to lose itscoherence at any time, with legacy system and platform limitations that arealreadydecadesout of date.Developed countries, in particular, have elaborateandrigidregulatorysystemsbuiltinananalogerawhereeverythingwaspaper-based, when data was scarce and computing power was also scarce andextremelyexpensive.Now,bothdataandcomputingareubiquitousandcheap,andpaperisincreasinglyviewedashard-to-removefriction.Weneedtocreateawhole newmodel for the digital age, in order both to regulate digitalmarketsandtodeploynewtechnologyintheregulatoryprocess.

What’s needed is digitally-native regulation. It should be designed fromscratch, planted beside the old system and replacing it gradually. It needs toincorporate small-scale testing. And, as discussed below, it should build on abreakthroughexperimentconducted in late2017by theUKFinancialConductAuthorityon“machine-executableregulation”—rulesissuednotaswords,butascomputercode,self-implementing.

Changewon’tbeeasy.RegulatorsfaceadiabolicalversionoftheInnovators’Dilemma made famous by Harvard University’s Clayton Christensen. In hislandmark 1997 book,1 Christensen argued that successful companies becomecaptive to legacyproductsandpractices thatareworking toowell toabandon,and so are vulnerable to displacement by superior disruptive technologies.

Regulators face this risk too, holding to traditions built on long histories ofpainfully-learnedlessons.Theregulators’challengeiscompoundedbytheriskyand constrained frameworks inwhich they operate.Evenmore so than banks,regulatorsaresimplynotbuiltforrapidchange.

One can debate howwell regulatory systems haveworked in the past, buttheyhavebeenintentionallydesignedtohavefeaturesthatmakethemill-suitedtotoday’schallenges.Financialregulatoryframeworksare,andaresupposedtobe, risk-averse, deliberate (read, slow) and clear (read, rigid). While someagencies have mandates to promote goals like competition and financialinclusion,most regulators have as their primarymission to detect and addressrisktothefinancialsystemanditscustomers.Theyarenotmeanttospearheadorpromoteparticularkindsofmarketchanges.Theyarenotmeant tospothotnewproductsandservicesthatdeservearegulatoryboostorregulatoryrelief—aprocess that could eventually put regulators, not innovators, in the lead indesigningfinancialproductsbymakingsomesaferthanotherstooffer.

Ironically, theverytraits thathavemaderegulatorseffectivehavesuddenlybecometopcontributorstonewrisks,asagulfwidensbetweenthevelocityofmarketandregulatorychange.Regulatorsmustrapidlyaddressnewtechnologiestheydon’tunderstandandwhicharerapidlyexposingcurrentregulatorymoulds.Regulators are left walking a knife-edge between neither blocking emergingbenefits nor allowing new risks to proliferate. The chance of this all goingsmoothlywithminimalfailuresis,honestly,zero.Infact,themostlikelythingtogowrongintheBank4.0modelisthatwewillregulateitbadly,orthatwefailtofutureproofthesectorsoourinstitutionsremaingloballycompetitive.

The obstacles to regulatory innovation are numerous, massive andintertwined.Theyincludestructuresanddomains(manyarebuiltonfoundationsdatingfromthe19thcenturyandevenearlier),organisationalcultures,incentivesystems,externalandinternalpolitics,skillsets,legalframeworks,cumbersomeprocedures, slow pace, constraints on communication and collaboration, pre-digital age leaders, regulatory“capture”by incumbent industries threatenedbychange,andofcourse,existinglawsandregulationsthemselves.

Theselastarenotonlydifficulttoalterbutarealsonotoriouslycomplexandintertwined.Reforminganypartofthemisliketryingtoremoveonestrandofaspiderwebwithoutmovinganythingelse.ThereisareasonwhytheUSDodd-FrankActweighedinat2,300pagesandspawnedtensofthousandsmorepagesof rules (a count that is still rising, ten years later). Regulatory change isextremely complicated. It is also hideously expensive,whichmeans that evencompanies that wish for reform often oppose actual efforts to undertake itbecauseof thecost.Theyknow that,once started, reformeffortscangoawry,

makingthingsworseratherthanbetteroryieldingonlymarginalimprovementsthatarenotworththemassivecostsofimplementingthem.

The financial crisis and the iPhone both arrived in 2007. Ever since,policymakershavebeenconsumedwithrearviewmirrormandatesarisingfromthecrisis,evenasthewholeworldhasbeenchangingaroundthem.

TheriskofregulationthatinhibitsinnovationThe current nature of innovation is very much policy and process-based.Governmentsetspolicy,whichisimplementedintolaw,orwiththecreationofnewregulatorybodiesandmodesofconduct.Rulesandstandardsarepublished,andexaminersaremobilizedtoensurecompliancewiththoserules.Breachesoftherulesaredocumentedanddealtwithandwherepoliciesorrulesarefoundtobeunworkableorfalloutoffavour,feedbacktothepolicymakersresultsinslowchangesasactsofparliamentorcongressaredraftedandexecuted,before thecyclestartsagain.

Figure1:Typicalregulatorystructureatamarketlevel.

Changes in regulation requireboth an identificationof a systemchangeoremerging market risk, and often, changes in law or operational structure to

implement.Suchchanges takeyears, in typical terms, tobeeffected.Policy isoften the purview of the current government administration, and can changewhen there is a change at the government level. These ebbs and flows workcountertothewaythemarketweseeisinnovatingtoday.Withfewexceptions,regulatorsarenotinnovators,andrespondtoinnovationasarisktothemarket—avirusthatmustbekilledoffbytheregulatoryimmuneresponse.

Herearesomeexamplesofrapidlyemergingtechnologiesthatcouldbeseenasunderminingourcurrent regulatoryenvironment,and that illustratewell therisksofrestrictingregulatoryinnovation:

Bitcoin—Alt-currency,Ponzischemebubbleormonetaryevolution?From a purely regulatory perspective how do we classify Bitcoin? Is it acurrency?Isitamarketplace,anexchange?Isitapaymentsnetwork?Isitanewassetclass?Isitatoolformoneylaundering?Isitatooltocircumventtaxationorcross-bordercurrencycontrols?Isitathreattocentralbanksandtheconceptoffiatcurrency?

DependingonwhichregulatorybodyislookingatBitcoin,ataspecificpointintimeorviaspecificactors,itcouldexhibitanyoneof,orallofthesedifferentcharacteristics. The decentralised nature of Bitcoin, a lack of a clear internaloversight (as opposed to consensus) and the appearance of anonymity,makesregulation of Bitcoin difficult. There are countries that over time have issueddecreesmakingBitcoin technically illegal, and there are further countries thathave put significant restrictions and licensing on Bitcoin exchanges, theplatforms that allow for the exchange of fiat currency into the digitalcryptocurrency.

However,evenifexchangingUSdollarsforBitcoinwasmadepermanentlyillegalintheUS,forillustrativepurposes,itwouldremainalmostimpossiblefortheUSgovernmenttoactuallystoppeopletradinginorminingnewBitcoins.Infact,theUSgovernmentwouldhavetoshutdowntheinternettomakeBitcoincompletely inaccessible, and even then people could still meet up and tradeBitcoininperson.It’showitwasdonebeforeBitcoinwaslegalinthefirstplace.

Any regulator that thinks they can successfully regulate Bitcoin almostcertainlydoesn’tunderstandthephenomenon.Youcan’tstopBitcoinanymorethanyoucanstoptheinternetfromworkingtoday2.Assuch,Bitcoinpresentsasignificant problem for governments and central banks, which tend towardscontrol.WhileBitcoinisextremelyunlikelytobringdownthebankingsystem

(assomeof thepuristscontendormaybehopefor), ifBitcoinachievesahighenough level of utility andbecomes a stable formof value exchange, it couldactually be more effective for cross-border commerce than even the mostpopular forms of fiat currency.As theworldmoves towards globalised onlinecommerce,there’sreallynoadvantageinageographical-basedcurrencyontheIP-layer, and as such a popular digital cryptocurrency could easily start tocompetewith traditional fiatcurrenciesbasedpurelyonutility. It’seasy toseewhy central banks might want to attempt to ban, or at a minimum inhibit,Bitcoin.

Thereality is thatBitcoinhasadesignproblemthatprevents it frombeingthefirsttrulydigital,globalcurrency—andthatisthecurrenttrendofhoardingBitcoin3 and speculating around its possible future value. A ton of BitcoinholderspersistinthebeliefthatBitcoin’sscarcityisonedaygoingtodrivethepriceofasingleBitcoinupto$100,000oreven$1million,andsotheyholdonto it likeGoldorAppleComputerInc.stock,waitingfor therightday tocashout.ThisbehavioursignificantlyunderminesthelikelyviabilityofBitcoinasapurecurrencyfornow,becausenoonewantstospendit.AsaresultBitcoinhasvery low utility compared with fiat currencies like US dollars. This could beperceivedasadesign flaw,butprimarily thishasemergedasan issue throughuserbehaviour.

UnlessBitcoincrashesinvalue,findssomestablelevelofvaluethatmeansit behaves more like paper money, and then people start spending it again,Bitcoin will likely act as a learning foundation for a future digital currencysomewheredownthelinethatwillbeevenmoredisruptiveandubiquitous.

Atthetimeofwritingthereareroughly4,500cryptocurrenciesandaltcoinsto choose from. If regulators attempt to outright stop BTC, ETH, XRP andothers, then theirmarkets become unattractive for investors and entrepreneursalike.

Thedevelopmentofautonomousnetworks,smartcontractsandsmartassetsand infrastructure is likely to involve the creation of new methods of valueexchangeoptimisedaroundplatforms.Forexample, theSunExchange,asolarstart-up on theAfrican continent, not only allows you to buy solar panels forlocalvillagesusingBitcoin,butthereturnthatisgeneratedoffeachkilowattofenergyproducediscapturedina‘solarcoin’.This isa templatefor thesortofoptimised value exchange systems we’re likely to see in the smart world.ArtificialIntelligence,theblockchainandtheneedforsmartcontractswillleadto IP-optimised value exchange systems that circumvent currency controls bynecessity.

Ifa regulator inhibitscryptocurrencymodelsorblockchaindeployment,by

necessitytheireconomieswillstarttoslow.

TheDecentralizedAutonomousOrganisation(DAO)andICOsThe DAO is a computer code-based venture capital investment fund ororganisation sitting on the Ethereum blockchain. With no typical corporategovernance structure, it used a cryptocurrency called Ether for its underlyingasset architecture. Technically theDAOwas anAI-based, or automated smartcontract between the communitymembers participating in the experiment, butfromaregulatoryperspectiveitwas,well,anabsolutenightmare.Itrepresentsatemplate for future business operations that will be commonplace in 10–15years,andyetcurrent regulationwouldprohibit these typesofentities inmostglobaljurisdictions.

TheDAOdoesn’thaveamanagementboard,acharterorbusiness license.Asaproxy foramoderncorporation,AI-basedornot, it is technically illegal.There are no officers of the “corporation” to hold ultimately responsible fordecisionsexecutedwithintheDAO’soperatingstructure,whichisentirelybuiltincode.Therearenoby-laws,nomanagementstructure,noemployeesandnogovernance, there’s just code that executes instructions.TherewasnoCFOorCEOwhotookfiduciarydutyon thefinancialgovernanceof thecompany.Noonewhocouldbesuedforbreachoftaxlaws.Infact,theDAOoperatedwithoutanyconventionalrevenuesourcesorincome,sotechnicallywouldnothavepaidtaxeither.

From an investment perspective, while the DAO creators or programmersdid explain that investments of Ether coins (the underlying altcoin behind theDAO) carried risk, this investment approach breached securities rules inmostdevelopedmarkets. Investors that invested in theDAOdidn’t do so through aregistered investment fund, they didn’t receive advice from an investmentadvisor, and there was no securities commission oversight in respect to theinvestment process. No risk profile questionnaires were done, no signaturesacceptingriskwerereceived.Thatdidn’tstop$150millionworthofEtherbeingdeployedwithintheDAO’sengineinthefirstweeksofoperation,andgiventheincreaseinpriceofEther,we’renowtalkingwellover$1billionofinvestmentintoday’sterms.Averysignificantinvestmentpoolindeed.

Thisinvestmentinablockchainstartupusingcryptocurrencies,wasnotthefirst such unregulated, crowdfunded coin offering—that honour goes toMastercoin in 2013. Unless you are living under a Wi-Fi barred rock today,

you’veheardthebuzzonICOsorinitialcoinofferings.EssentiallyMastercoin,theDAO,Ethereum,BlockchainCapital4andaplethoraofothershaveallraisedbillionsthroughcryptocurrencybased,over-the-countertradesorissuesofICOs.

Technically considered by law to be a securities issuance (at least in SECterms5) as of the first half of 2017we’ve been seeing about 30–40 new ICOofferings per month. Will the SEC, FSA, MAS, HKMA, ASIC and otherspermanently outlaw ICOs?Will ICO creators be fined for being in breach ofsecuritieslaw?

If regulators want to encourage capital flows and investment inentrepreneurial endeavours, shutting down ICOs wouldn’t encourage the freemovementofcapital,itwouldrestrictitforsomeofthemostinnovativestartupsintheirspace—riskstoconsumersaside.ThebiggerproblemisthatICOscouldessentiallybeissuedwithoutjurisdiction,makingenforcementastickyproblem.A startup that is incorporated in one country, operated in another,with a coinofferingtakinginvestmentfrominvestorsincryptocurrenciesallovertheworld,could simply move their cryptocoins to another jurisdiction without anyoperationalimpact.Theonlyissuewouldbecashingouttheircoins.However,ifstaff,contractorsandsuppliersarewillingtoacceptaltcoinsinsteadofcash,thiswouldbevirtuallyunstoppable.

This doesn’t mean regulators won’t try to stamp out ICOs (the SEC aremakingitverytoughtolegallyissuetokens).Itdoesmeanthatdoingsomightpresent significant challenges at law, and may make the markets wherecryptocurrency-basedofferingsareillegal,farlesscompetitiveandattractiveforstartups.Aregulatorthatwant’stoencouragerapidinnovationandinvestmentinthe emerging FinTech ecosystem would be much more likely to take a lighttouchonICOsfromaregulatoryperspectivesothatbothfundingandinnovationkeeps flowing. A regulator that outlaws ICOs would be heavily limiting itsoptionsatthemarketlevelforparticipationinthefutureoffinancialservices,asthebestinnovationsthatgetthemostICO-basedfundingwouldsimplyfleetheirjurisdiction.MoreonthisinChapter5.

TheunderlyinglegalproblemwiththeDAOasanAI-basedcompanyisthatit wasn’t a business subject to human laws in the traditional sense; it was aconstructoperatedviainstructionsinitscodebase.Whilelawishowwegetourcodesorethicsashumansandascorporations,theDAOessentiallyuseditscodeaslawfortheinternaloperationofthebusiness.Formachinescodeislaw,forushumans, law is our code.Whenwemix up these concepts, wewind upwithsituations like the DAO, which doesn’t fit any of our current definitions ofinvestment,companiesandrisk.

UltimatelyaflawintheDAOsmartcontractallowedcertainprogrammersto

siphonoffonethirdoftheDAO’svalueheld(roughly$50million).Thus,ithasbeenframedasafailurebymany,anexperimentthatcametonothing.However,we’ve learned from theDAOexperience—and it’s very likelynot the lastAI-basedcompany.

Regulatorsmightwant tostop future instancesofAI-basedcorporationsorsmartcontracts liketheDAO,orforcetheprogrammerswhowritethecodetobeheldtosecuritieslawandprovisionsforregulationofinvestmentbusinesses,butthatwouldbeamistake.It’sclearthatinthefuturewe’regoingtohavemoreandmoreAI-based execution of smart contracts, particularly as trading floorsdisappearandare replacedwithcode. In that instance,anyregulatorwhobansAI-basedplatformslikethismightfindtheirmarketwoefullyuncompetitiveinaworldwhereAIexecutionisbecomingincreasinglynormal.

WillAIstradinginthefuturehavetopassaFINRASeries7,OFQUALorSFClicensingexam?Whencodeisexecutinginvestmentdecisionsenmass,willwe still be insisting financial advisors are licensed and leaving code to runamok?Givingpreference to humansbecause they’ve sat some licensing examisn’ttheanswereither.Aswe’lllearnlater,robo-advisorsarealreadyperformingat a similar level to human advisors and will likely exceed them for generalportfoliomanagementinthenextfewyears.

AflawedapproachtofinancialcrimeandKYCAlmost30years ago6 theFinancialActionTaskForce, a body attached to theOECDandsponsoredby theG7membergovernmentsandcentralbanks from37countries,putinplace40recommendationsoncombatingmoneylaundering(andnineonterroristfinancing).Theserecommendationsarenowenshrinedinlaw inmajor financial centres around theworld.Amongst these changesweretherequirementsforbankstoreportsuspicious transactions thatcould indicatemoney laundering. The definition of these suspicious transactions were inthemselvesalittleproblematic.

Ifafinancialinstitutionsuspectsorhasreasonablegroundstosuspectthatfundsaretheproceedsofacriminalactivity,orarerelatedtoterroristfinancing,itshouldberequired,bylaw,toreportpromptlyitssuspicionstothefinancialintelligenceunit(FIU).

—Recommendation20,TheFATFRecommendations(2012)

Banks find themselves today being the unwitting police force for a globalanti-moneylaunderingmachinethatisamazinglyineffectual.

TheAML(anti-moneylaundering)lawscontainthreeelements.First,banksmust authenticate the identities of people opening accounts under complex

“Know Your Customer” or KYC rules. Then they must monitor customers’transactions tounderstandnormalpatterns, includingcashhandling,anddetectanomalies.Third,theymustinvestigateanomaliesandifnecessary,reportthembyfilingSuspiciousActivityReports,orSARs.

Despitepartial automation, theseeffortsare still configured largelyas theywere from the beginning, in an era when the best way to find and reportsuspectedmoneylaunderingwastohaveabanktelleroranalystfilloutaform.Notsurprisingly,theyarefailing.

TheUnitedNationsreportsthatfinancialcrimetodayamountstotwotofivepercent of globalGDP—asmuch asUS$2 trillion annually—and that currentAML efforts catch less than one percent of current illicit financial flows7.Unfortunately, thatmiserably ineffective result comeswith an enormous pricetagforbanks.IntheUnitedStatesalone,banksspendanestimated$50billioncollectivelyeachyearonAMLcompliancealone8.Thismeansthat tocatchallthe financial crime that happens today would require spending the annualequivalent of the GDP of the United Kingdom just on AML policing. Thecurrentmodelisnotscalable,norisiteffective.

AMLcompliancecostsarecompoundedbymassive risks forbanks—fineshave exceeded a billion dollars for a single institution.9 Fear of aggressiveenforcement encourages over-reporting of suspicious activity, which in turnmireslawenforcementinlow-valuedataandimpedesdetectionofseriouscrime.In the United States, major cities have inter-agency task forces that print outreamsofSARreportseachmonthandgatheraroundtablesladenwithstacksofpaper and yellow highlighters, searching for meaningful information. This isprobablywhythereportingissoineffective.Thehardendofenforcementcomesdowntoyellowhighlighters!

Another unintended consequence of this low-tech system is it can blockwholesectorsoftheeconomyfromfinancialaccessduetoregulatorymandatesfor “de-risking”.Customerswhose industries, locations, andcircumstances arepotentially high-risk are screened out simply because, under the currentKYCprocedures, banks find it simply too difficult, too costly, and too risky toaccuratelysortthelaw-abidingpeoplefromthebad.Thisisamajorconcernofpolicymakers in thedevelopingworld.10 In theUS ithasbeencalled the“newredlining”.

Onesideeffectofthissimpleprocesstodayhasmeantthatsomelawshaverendered entire populations of customers unsustainable. TheUS FACTA (Fairand Accurate Credit Transactions Act of 2003) policing provisions requirebanks,wherevertheyareintheworld,toreporttotheIRSwhentheyonboardaUScitizenasacustomer.Thishassimplylednumerousbanksaroundtheworld

torejectanyUScitizenevenapplyingforabankaccount11.AMLchallengeswillcontinuetomount.Evolution of the payments space means regulators will have to deal with

increasinglydiversetypesofvaluestoresandpaymentsvehicles,manyofthemthat fall outside of regulation. For example, consider Bitcoin, Ether or XRPcoins, Starbucks orXbox credits—if someone transfersmore thanUS$10,000usingthese,theycurrentlywouldn’tbereportedinaSTR12. InChinatoday,90percentofmobilepayments runacrossAlipayandTencent’sWeChatnetwork,and the trillions of annual payments flying across those networks today arevirtuallyimpossibletomonitorfromthereferencepointofatraditionalbankingsystem.

The process of reporting a US$10,000 transaction that falls outside ofpredicted patterns is woefully ineffective at finding money launderers today.What we really need is a system that monitors flows of funds, looking forpatterns where those funds converge. This requires an AI-based monitoringcapabilityataminimumonacountry-widebasis,butprobablyonaglobalbasiswith coordination between different authorities. Such a transaction flowmonitoring systemwould, on an aggregated basis, bemuchmore effective atfindingwheremoney laundering is takingplaceand the identityof theplayersinvolvedthanthecurrentreportingsystem.

New technology throws intodoubteven thecore logicofAMLregulation.The system is designed to keep criminals and terrorists out of the financialsystem, but at a time when arguably technology should be deployed insideregulators for sophisticated data analysis that could be applied to detecting,monitoringandcatchingthem,wearepolicingusingpaper-basedreportingandhuman eyeballs. According to a recent University of Chicago report, in their“generous”assessmenttheyestimatedthatonly0.2%ofmoneythatislaunderedis successfully seized. Thatmeans for every dollar caught byAML regulationtoday, $499 is still successfully laundered. We’re spending globally $50–100billion dollars each year for a 0.2% success rate in AML. That’s appallinglyineffectual. Massive regulation, billions of man hours and efforts expended,customers disrupted and accused, regulatory enforcement action take, and itsimplydoesn’twork.

The technologyalreadyexists tomakeAMLeffortseffectiveandefficient.Thesystemneedsupdatedreportingdesignsandnorms,greatersharingofsecuredata,greaterinformationsecurity,fasterandmoreaccuratepatternanalysis,andtools that removemanualworkandfreebankspecialistsand lawenforcement.Somecountries, suchasSingapore,areexploringcreatinga shareddatautilitybetween government and industry for KYC. More regulators will need to

engage.

CurrentKYClawsareapathtoexclusionButlet’sthinkaboutKYCmovingforwardforamoment.WhileUberhasbeenmakingsomebiglossesthelastfewyears,thingsseemtobeontheup13.InQ2of2017,Uber’sbookingswereup17percent,andtheywereup10percentinthequarterbefore that,withalmost$9billion in revenue.For the first20yearsofAmazon’slifeitmadealoss,soitappearsUber’sinvestorsarewillingtotradeofflossesforgrowthfornow.ButasUbergrowsitisdefinitelychangingdrivinghabits formillennials inparticular.Mydaughter,Hannah, is17nowandwhenliving inNewYork it became clear she really had no intention of getting herdriver’s license; in fact,whenI talkedaboutgettingheracar she said, “Don’tbotherDad,justgivemeanUberallowance.”

As autonomous vehicles kick in and as services like Uber abound, theexpectation is clearly thatour sonsanddaughterswillbedriving less thanwedid.AreportfromtheFrontierGroupin theUnitedStates in2016showedthesix-decade-longdrivingboomseenintheUnitedStatesisalreadyover14;basedonotherfactors,Uberwilljustacceleratethisdecline.

TheDrivingBoomofthesecondhalfofthe20thcenturycoincidedwithrapideconomic,culturaland demographic changes in the United States. Those changes largely pointed in the samedirection:towardamoreautomobile-orientedsociety.Manyofthosetrends,however,haveeitherreachedtheirnaturallimitsorhavereverseddirection…thosetrendspointtotheconclusionthatthe trajectory toward increased per capita driving that prevailed during theDriving Boom haslikelyreacheditsend.

—FrontierGroupassessmentontheFutureofDrivingintheUnitedStates

Figure2:Lessmiles,lessdrivers,lessdriver’slicensesforKYC.

Thus, when we combine lower incentives or tendency to drive, theincreasingly ubiquitous nature of shared transportation services likeUber, andthe medium-term impact of autonomous or self-driving cars, one thing isabundantly clear: less driversmeans less driving licenses,means less identityqualifications,andthismeansgreaterfinancialexclusionbasedoncurrentKYCrulesinmarketsliketheUnitedStates15.

Indevelopingeconomieslikesub-SaharanAfrica,branchingasamechanismforfinancialinclusionhasstalled.ResearchfromAccentureandStandardBankshowed that 70 percent of the currently unbanked on the African continentwouldberequiredtospendmorethananentiremonth’ssalaryjusttophysicallygettoanavailablebankbranch16.SomethingsimilarwasfoundinIndia.Initiallythe Reserve Bank required banks based in India to deploy a minimum of 25percent of new branches in rural areas to focus on unbanked customers;however,thismeasuredidn’taffectinclusionsignificantlyenoughbecauseoftheinabilityfortheunbankedtheretomeetaccountopeningidentityrequirements.ThisiswhyIndia’sinitiativetodeploytheAadhaarcardhasbeensuchaboonforfinancialinclusion—itchangedthegame.Asof15August2017,morethan1.171billionhavebeenenrolledintheAadhaarcardprogram.That’s88percentoftheIndianpopulation.

TheeffectofidentityreforminIndiaisthatthenumberofthoseincludedinthe financial system has skyrocketed. The segment of the population mostexcluded in the old banking system—lower income households andwomen—have seen100percent year-on-year growth every year since theAadhaar cardinitiativewas launched.As of 2015more than 358million Indianwomen (61percent) now have bank accounts, up from 281million (48 percent) in 2014.This is thebiggestsingle jumpfor“banked”womenamongeightSouthAsianandAfricancountries17.Youcaneitherloweridentityrequirementsorcreatenewidentity structures to support inclusion, but you can’t create IDV requirementsthatneeddriver’slicensesandpassportsforapopulationthatdoesn’tdriveanddoesn’t travelandexpectfinancialinclusionthroughbranches.Thatmodelisarecipe for financial exclusion as the 25 percent of US households that areunderbankedalreadyknow.

Fromaregulationperspective,however, thequestionshouldbeasked,whohas the best IDV capability today? Who is well placed to support financialinclusionandaccessoverthenextcoupleofdecades?Frankly,itisn’tthebanks.

The largest holders of broad identity data sets today are Facebook,Apple,Tencent, Amazon, Alibaba/Alipay, Uber, Snapchat and other platforms withmassivescale.Thoseplatformsnotonlyhavebasicidentitydata,buttheyoftenhave quite sophisticated behavioural data sets along with biometric data likefacial recognition, etc. It is likely that Facebook18 today has better identityinformationthanthemajorityofretailbanksintheworld.Oh,andtheyareallonthecloud.

As real-time delivery capability becomes essential for competitiveness, theneedtopresentatabranchtoprovideanidentitydocumentthatlargeswathesofthe population no longer use, is simply a structural impediment to inclusion.Regulators that insist that face-to-face verification is required using a driver’slicenseorpassport,alongwithaphysicalsignature,arenotsecuringbankingforconsumers,theyarepartoftheproblem.Itisaproblemthatisonlygoingtogetworse. Face-to-face verification backed by a wet signature will guaranteedisruptionfromfrictionlessFinTech’sprovidingalternatevaluestoresontopofubiquitousplatformslikethosementionedabove.

Theonlywayforregulators toguaranteeincumbentsstaycompetitiveis toremoveboththeface-to-faceandcloudplatformconstraints.By2025,wecouldsee most banks outsourcing identity to identity brokers like Facebook or theAadhaar card. It simply doesn’t make sense for banks to be collectors andholders of identity data in the future. It’s farmore likely bankswill interfacewith identity services and just pass enough information across to verify theidentity of the new customer is accurate.Not tomention that technology like

software-basedfacialrecognitionis15–20timesmoreaccurateat identifyingacustomer than a typical face-to-face interaction19. A fact that would indicateface-to-face account opening is no longer safe—it’s probably statistically thesingleriskiestthingabankcoulddointhisdayandage.

But read later thechapteronblockchain,whereIwillargue that regulatorsandbankswon’t have toworry about identity collection andKYC regulationsformuchlonger.

Headsinthecloud?Another key challenge is that regulators must join the global technologymigration to cloud computing. Until recently, examiners in the US routinelyrequiredbankstoproducethingslikephysicale-cardkeysforaccessingserverroomsandwrittenfiresuppressionplansforprotectingservers—thesehavebeenmandatory elements in IT riskmanagement. FinTechs, in contrast, don’t haveserver rooms. The data is in the cloud. When Moven first migrated ourtechnology to Canada, the Canadian regulator wanted AmazonWeb Services(AWS) to tell uswhere thephysical servers that storedanonymised, tokenisedcustomer data were housed. Needless to say AWS didn’t comply with therequest.

Regulatorshavegenerally frownedon cloud-based systemsdue to securityconcerns. Done right, however, cloud systems likeAmazonWeb Services areactuallyfarmoresecure,notless.Thisismainlybecausetheyaremucheasiertodefend.Traditionalbank ITsystemshavenumerousweak links,becauseeverypoint of access is a potential vulnerability. In banks, points of access areeverywhere—in multiple server rooms in many locations; in systems thattypicallyrunnumerouskindsofsoftware,ofteninversionsthatarenotfullyup-to-date;andintheleakypipesbetweenthesesystems,whicharefullofcracksinsecuritywheredatacanbelostorstolen.Thestealingcanbedonebyhackers,andalsobythemanybankemployeeswhomusthaveaccesssimplytomaintainitall.

Morecriticallythough,cloud-basedproviderslikeAWSorMicrosoftAzurehavegrownup inacombativesecurityenvironmentwhere theyareconstantlybeingprobedbyhackers,andtheircyber-securityteamsarethebestintheworld.Overtimethisactslikeanimmunesystem,enablingthebigcloudproviderstobuild military grade security20 of their platforms—platforms that routinelyoutperformbank-ownedITsystemsonbothsecurityandperformancecriteria.

In a cloud system the data is all online, which means it’s protected fromphysicaldisasters like fire,and itcanbesecuredefficiently.Regulatorsshould

focusonsecurityoutcomes,not forms. If thebankandregulatorsproperlyrunpenetration testing toassure that theenvironment is secure, it shouldn’tmatterhowthesecurityisbeingachieved,aslongascustomerdataremainssecure.

Regulators are increasingly open to this, but they need to make a fullconversion to permitting and even encouraging cloud-based systems.Both thebanks and their consumers will be better off for it. So will the regulatorsthemselves, who will be increasingly able to monitor banks’ complianceperformancethroughRegTechstrategiesthatanalyseeasily-gathereddata.

The trend of regulators to require on-premises solutions is effectivelybuildingstand-alone“islands”inthetechnologyarchitectureoffuturefinancialsystems. These islands prevent banks from working seamlessly with otherproviders.

We have to assume that in the future more cloud-based financial serviceproviderswillemergethannot.Infact,it’slikelythatthemajorityofexperience-basedcapabilitieswillhaveacloudelement.Byrestrictingtheuseofcloudasaplatformfor regulatedentities, regulatorsareactuallyensuring that theirbankswon’t be able to sustain competitiveplatforms against emergingFinTechs andtechnology leaders. In turn, cloud prohibitions will make a financial servicesmarketplace less effective and less competitive over all. Restricting the cloudtodaywillincreasethegapbetweenthemostprogressivefinancialmarketsandyourown.

ImprovementsincreditaccessAnotherwideninggulfbetweenold regulationandnew technology is increditrisk assessment, and therefore financial inclusion. Today, lenders can use newkindsofdataandmachinelearningtofinetuneriskevaluationmodelsthatweredeveloped inanerawhen,again,dataandcomputingpowerwerebothscarce.Combinedwiththemobilephone,whichisbringingfinancialaccesstobillionsofpeopleneverservedbybrickandmortarbranches,thisdatarevolutionisthemostdemocratizingforceinthehistoryoffinance.Unfortunately,publicpolicyandbias towards incumbent lending institutions threaten toblockmuchof thispotential,especiallyincountriesliketheUnitedStateswherecreditagenciesareverywellestablished.

WhileUSregulatorspermitmanykindsofdatamodelingfor riskanalysis,policymakershavecreatedaspecialriskzonearoundusingnewkindsofdataforconsumer lending. The laws that prohibit credit discrimination include theconceptofillegal“disparateimpact”,meaningnon-intentionaldiscriminationintheformofstatisticaldisparityinlendingoutcomesfor“protectedclasses”such

aswomen andminorities.Lending that shows such statistical patternsmay bechallenged as illegal unless the provider can prove a business need and candemonstratethatthisneedcannotbemetwithalessdiscriminatoryapproach.

All lendingproduces different outcomes for different groups of borrowers,andthesedisparitiesareoftenadverseforracialandethnicminoritypopulationsthathavelowerincome,wealth,jobsecurityandotherattributesthatcanimpactcreditworthiness. Long ago, regulators blessed use of certain models, despitesuchimpacts,viewingthemasstatisticallysoundandpredictive.Theseapprovedmodels generally rely heavily on use of credit scores, and so work well forconsumerswhohavegood scores.However, theycan inadvertentlyexcludeorpenalizepeoplewith “thin” credit files, no credit history, or complexhistoriesthat are hard to evaluate efficiently through available data (such as a pastfinancial setback due to a health problem).With such customers, reliance oncreditscorescanexcludepeoplewhoareactuallycreditworthyandcouldproveit,ifthelendercouldevaluatemoreinformationaboutthem.

Technologymakesthatpossible.Lenderstodaycanreadilylearnmuchmoreaboutpeoplebeyondtheircredithistoriesandscores—infact,theyroutinelydoso inareas likedetecting fraudandcomplyingwith theanti-money launderingKYC rules. In credit, most lenders are afraid to use alternative data, becauseregulators have not clarified how such practices will be evaluated fordiscriminatorydisparateimpact.

In the United States, an estimated 80–130 million Americans live at thefringesofthefinancialsystem,relyingonhigh-costservices.21Millionscouldbebroughtintoaccessingwell-pricedmainstreamcredit,ontermstheycanafford,iftheregulationcancatchupwiththetechnology.22

ThefutureformandfunctionofregulationReturning to first principles,weneed to askwhywe created regulation in thefirstplace.Atbottom,it’safunction,notaform.Inmodernfinance,though,thefunction has become encased in old and rigid structures that are increasinglymismatchedtothetask.

The oldest remaining central bank, and technically the first governmentregulatorofmoney,wasRiksbank23inSweden,whichbeganoperationsin1668.Government involvement in control of money is not a new phenomenon,however. The earliest examples of state controls over currencies go back toEgypt around 2750 BC, where the state-issued shat24 unit of currency waspegged to gold. TheBank of Englandwas established soon afterRiksbank in1694,butasamechanismtoraisemoneyforwarwithLouisXIVofFrance.

Centralbanksoriginallywere theprivatebanksof thegovernmentor royalfamilies. As such, their role in regulating the financial system effectivelyevolved over the 18th and 19th centuries. Until 1844, commercial banks inBritainwereabletoissuetheirownnotes.Afterthisdate,issuanceofnewbanknoteswasrestrictedtothecentralbank,andbackedbygold(generallyreferredto as “seigniorage”). Over time central banks came to manage the bankingmarket as a whole, including licensing of banks for commercial operations.Later,economicpolicyalsobecamethepurviewofcentralbankersandmonetaryauthorities as ameans to regulategrowth. It is fairly clear today that after theGlobal FinancialCrisis of 2007–2008, central banks can no longer effectivelyboosteconomicgrowthwithmonetarypolicyalone.

Regulationofbankscamewithcentralbankcontrolsonissuanceofnotes—onlyalicensedbankcouldissuenotesortakedeposits.Thisallchangedinthe1930s with the Great Depression, as regulation was introduced to protectconsumersmorebroadlyfromfailingbanksandstockmarkets.

Thus, regulation of institutions that take deposits or issue currency is thehistorical role of central banks, but in aworldwhere cryptocurrencies can beissuedbyacollectivegroupofprogrammers,oratechnologycompanylikeAntFinancial,Microsoft (withXBoxcredits),orStarbuckscanholdmoredeposits(readfunds)onbehalfoftheircustomersthanamodernbank—thecontrolandstructuralelementsstarttobreakdown.

Thereisaveryrealquestionofwhatvalueabankinglicenseitselfwillholdin the near future, as value stores become more fungible and as utility isincreasinglyownedbynon-bankactors.ShouldMicrosoftbe forced to issueaFDIC deposit guarantee on the funds it holds for you? ShouldAnt Financial,FacebookorAmazonbeforcedtogetabankingorpaymentslicensetobeabletomovemoneyaroundtheeconomy?

However,whatifAlipay(forexample)isissuedapaymentslicenseinChina,but half of its users are outside ofChina?ShouldAlipay be required to get apayments license in every country it operates?This iswhat current regulationwouldassume.Butwhataboutdepositsorvalueheldinitswallet—shouldAntFinancialberequiredtogetabankinglicenseineverycountrywheretheyholddeposits? I think only regulators would assume this is a reasonable ask—shareholders inAnt Financialwould argue it is not reasonable.Operationally,you could very well have laws in China that restrict a company like AntFinancialfromoperatingintheUnitedStates,oryoucouldhaveregulationsthatare in conflict.Anon-bank entity in theUK that has an e-money license or achallengerbankcharter,isstillprohibitedfromtakingdepositsfromacustomerin the US.What if they allowed a US resident to deposit cross-border using

Bitcoinand then issuedaUKdebit card to theUSresident?Thiswouldbe inbreachofUSregulations,butwouldbeverydifficulttopoliceandprevent.

The reality is as our economy becomes increasingly global, and asmoneymovementbecomeslessandlessdefinedbygeography,theroleofcentralbankstoauthorizeatechnologyactortoactasanextensiontothetraditionalbankingsystemassumesthatthetraditionalbankingsystemworksefficiently.However,in pure economic terms, the way we license banks and the waywe limit theownership of bank accountswill fail to cater for the plethora of new types ofvaluestoresandvalueexchangesystemsweseeemerginginthefutureworldoffinance.

Take for example the ability forAI-agentsor smart assistants likeSiri andAlexatoactasagentsconductingcommerceonyourbehalfinafewyearstime:“Alexa,bookmearestaurantinChinatownFridaynightforfivepeople.Makesuretheyservedimsumfordinnerandit’srated4-starsorbetter.”

In thisscenario, if the restaurant inquestionalsohasanAIagenthandlingbookings,it’sfairlycertainthatbeforelongpaymentswillbefullyautomatedbytheseagents.ThesetwoAI-agentswillnegotiatebetweeneachothertofacilitatethepayment,buttheunderlyingvaluestorewon’tmatter—anAIprobablywon’tstop because you don’t have a MasterCard linked to your Alexa account. Ifyou’re a Chinese tourist visiting Chinatown in New York City, your AI willlikelybepoweredbyaWeChatorAlipaystylevaluestoreenabledinthecloudand built into your phone; so by the time that you’ve finished yourmeal therestaurant AI would poll the tourists’ agent requesting payment, and someclearing house would facilitate a payment from Alipay to the restaurant’sCitibankbankaccountheldinNewYork.

Toextendtheanalogy:whatiftherestaurantreceivesdeliveryoffoodstuffsviaadeliveryrobotandhastopaytherobotadeliverycharge?Therobotwillhaveavaluestoretoacceptpayment;butwhichbankisgoingtoenablerobotstoopentraditionalbankaccountssotheycanbeissueda16-digitcardnumberfromtheirsocialsecuritynumber?It’sfarmorelikelythat thisvaluestorewillbemore like a storedvalueGPRprepaid cardor a so-called e-wallet (PayPal,Venmo,Alipay,WeChat,etc)constructthanatraditionalbankaccount.Whenasizeablechunkofcommerceshiftstonon-bankvaluestores,dowelicenseeveryvariety of value store and insist on a deposit guarantee? Or do we simplymonitorthatactivitytoprotectconsumers?

Whatcouldgowrong?A parade of horribles will arise out of the coming regulatory failures, in

overlappingcategories.First, over-regulation will inevitably throttle desirable and helpful

innovation. This will happen because regulators do not understand the upsidepotentialbutarebuilttoseethedownsiderisks.Innovation,especiallybysmallstartups,inherentlyinvolvesbusinessandtechnologyrisk.Someinnovatorswillfail, leaving customers stranded, including people who were storing value inuninsuredinstruments,andwilllosetheirmoney.Innovatorswillalsoexperiencesecurity breaches. Such breaches are, of course, common in today’s highly-regulatedbanksaswell,buttherewillbepublicandregulatorybacklashagainstnewer kinds of entities. In other cases, policymakers will frequently seek toblock innovation due to political pressure from incumbents seeking regulatoryprotectionfrommoreagilecompetition.

Second,under-regulationandgaps in legacy regulatorydomainswillallownewriskstoemergeandgrow.Thesewillincludelossofconsumerprivacyandcyber security, rising money laundering, bias and inaccuracy in algorithmicdecision-making,andinstabilityinthefinancialsystem.Thefact is, innovativemethods of financial service are evolving at a rate faster than regulators canadapt.Soexpectthesegapstogrow.

A third type of failure will be regulatory inconsistency producing marketdistortionsandalsosystemicuncertaintythatchillstheentryofnewcapitalintopromising fields. In most countries, multiple regulators have overlappingmandates and jurisdictions with, generally, only weak (and very slow)mechanisms for collaboration and coordination. The United States has auniquely intense version of this problem, with five national agencies directlysupervising financial institutions, another two dozen involved in financialregulatorymatters,and50statesalsooverseeingbanksandnon-bankfinancialcompanies. Despite some coordinating bodies, this splintered structure causesextensiveinconsistency,whichbreedsregulatoryuncertaintyandriskandagain,detersinnovation.

Finally,regulationswillsimplybecomeincreasinglyineffectiveinachievingtheirgoals.Regulatorsbuiltonanalogytechnologywillincreasinglylagbehindindustry (as well as criminals and terrorists) using advanced digital andcomputationalapproachesgroundedinmassivedataandAI.

Thesekindsoffailureswillcertainlythreatenthesoundnessofthefinancialsystem.Banksarefarmoreregulatedandsupervisedthannon-banks,apatternlikelytointensifyasmarketchangeaccelerates.Bankswillprobablycontinuetobe forced to carry higher regulatory costs and risks than competitors and tomaintainoldsystems,suchastokeepbranchesopen,especiallyinlower-incomeareas.Oneresultwillbelossofmarketshare.Anotherwillbelikelyfailuresof

banks that don’t adapt. All these problems will tend to spiral, as regulatorystrictures and costs continue todrive innovationoutof thebanking sector andintoless-scrutinisedspace.There,riskswillrise,undetected,sometimesleadingtocrises thatproducereactivepolicies thatmaymakemattersworselongterm(as happened in the subprime mortgage crisis, sparking popularisation of theterm “shadow banking.”) These trends could bring systemic crises in systemliquidity,capitalandpublictrust.

Don’texpect this tonegatively impactnon-bankplayersnecessarily.Whilemany banks point to “trust in banks” as a core of their ability to service themarket, the reality is players like M-Pesa, Alipay and WeChat Pay haveestablished strong trust through their utility, which is in turn amplified bynetworkeffect.

Private companies that don’t adapt rapidly to new technology will bereplaced by ones that do, ones with better utility. In the regulatory realm,however,institutionsarecreatedbysovereigngovernments.Despitesomelikelyrestructuring,most arehere to stay.Toavert the regulatorydisastersdescribedabove, these organisationswill have to change. The journey to a 21st centuryfinancialregulatorysystemwillbelongandhard.

ElementsofreformSuccesswillrequirestrategiesgroundedinfirstprinciplesofassuringfinancialsystem stability, customer fairness, and curtailing money laundering (and insome countries, fostering economic growth by promoting competition andfinancial inclusion for consumersand smallbusinesses).Beloware thecriticalelements:

RegTech and SupTech: principles-based, data-driven supervision:Policymakers will have to de-emphasize rules-based regulation and relyincreasingly on principles-based supervision married to data-intensivemonitoringagainstquantifiedmetrics.Rules-basedregulationcanworkinsomerealms, but prescriptive, procedural requirements will increasingly lag behindtech-driven change in products and practices. (In advanced economies, it cantakeseveralyearstocreateanewregulation,makingmanylikelytobeobsoleteatissuance.)

Instead, regulators must move to data-intensive, AI-driven monitoring oftransactions, business conduct, and market patterns, using “RegTech” forregulators, or supervision technology, often called “SuperTech” or “SupTech”.This will require setting quantified, measurable standards for satisfying theprinciplesembodied in thegoalsofeach regulation, ranging fromadequacyof

risk-adjusted capital and preventing insider trading to nondiscriminatorytreatmentofconsumers.

Digitally-native regulation: Reform should create new systems that aredigitally-native, notmere enhancements of old analog processes. They shoulddetermine what data and analysis are needed to achieve the goal and thendigitizetheregulatorydesigntomakeitbetter,fasterandcheaperallatonce,ashappenswithallthingsthataredigitized.Inmanyareas,thesenewapproachesshouldbeestablished inparallelwith theanalogmodeland industryshouldbeallowedtochoosebetweenthetwo,asameansofeasingtransition.

Machine-executable regulation: In November 2017, the UK FinancialConduct Authority (FCA) conducted an experiment in machine-executableregulation. Convening a collaborative hackathon with industry, they coded achangeinaregulatoryreportingmandate,appliedittoasetofdummydata,andsuccessfullyproduceda report reflecting the revised rule,machine-to-machine.The reporting change, which might have taken months or years to executethroughtraditionalmeans,wasimplementedinabouttenseconds.TheFCAhasissuedareportonthetest,requestedpublicinputonnextsteps,andreachedouttoengageregulatorsfromothercountries.Machine-executableregulationwouldnotworkforsomepurposesbutwhereitcan,itcouldsavevastamountsoftimeandmoneyforbothgovernmentandindustry.Itshouldbecentraltoregulatoryreform.

AMLnetworkmonitoring: As discussed earlier. For example, the futurewon’tbebasedonareportingmechanismthatrequiresbankstoactasavirtualpolice force for tracking down suspicious transactions and suspicious accountowners. Instead, AIs will track transactions en masse, looking for suspiciousflowsand identifying thecentresofAMLactivity thatneedpolicing response.Badactorscouldbeflagged inmuch thesamewayfakephishingwebsitesareidentifiedtoday,andbankswouldautomaticallyknownottotransactwiththoseentities.

Testbeds, sandboxesandReg-Labs:Regulatorswill need new strategiesthat can enable them to formulate and test technology-driven change beforeadoptingitsystem-wide.Similarly,industrywillneedacarefullydesignedsafespacewithinwhichtotestpromisinginnovationthatdoesnotfitsquarelywithincurrent regulatory requirements. For both, regulators should create and permittestbeds,Reg-Labs,orregulatory“sandboxes”underclear,thoughtfullimitsandatverysmallscale.

Thesearealreadyspreading,worldwide.InspiredbytheonecreatedbytheUK’sFinancialConductAuthority,more than20countrieshavecreatedorareexploringestablishmentofReg-Labs.25

Changes in missions, cultures, skills and protocols: Most currentregulatorybodieswillneedrethinkingregardingmissions,scopeandprotocols.Theywill need to change training and to recruit new skills, especially in datascience. They may need to reorganise around tech-centered issues and createnewleadershiproleslikechiefinnovationofficerorchiefdataofficer.Theywillalso have to alter cultures that are conservative and focused heavily on riskavoidance,ratherthanopentotheupsideofinnovation.Changesmaybeneededtoenhancetheirfreedomtocollaboratewithindustryandotherinterestedpartiesand in some cases to “co-create” regulations and shared databases. Otherchangeswillberequired in regulatoryprocedureprotocols that require lengthyformal periods for public comment—although constant input will be moreimportantthanever.

Structuralmodernisationwillhavetoincludeupdatingwhichcompaniescanaccess central payments systems and how, and how this should be regulated.This will also mean thinking through the challenges of regulatingcryptocurrencies,andthenatureofbankingitself.

Regulatory agility, open platforms, and code: Regulators will have tospeed up their cycles for creating and updating regulations. Some might bestructuredtofunctionlikeGitHuboranappstore,operatingonanopenplatformthatwouldprescribestandardsandthenpermitinnovationinhowtomeetthem.Eventually,regulatorsmaypromulgatesomeregulationsintheformofcomputercode that simply plugs into industry systems and creates self-executingcompliance.Theability todeploycloud-basedsystemsintheirmarketswillbeessentialbothfornewplayers,incumbentsandtheregulatorsthemselves.

Practical implementation roadmap: If we were starting today fromscratch, few if any peoplewould design the regulatory systemswenowhave,with their pre-digital assumptions, missions, technologies and structures.However,wearenotstartingfromscratch.Whilechangecancometotheprivatesector through competition, the regulatoryworld can only change through thewillofpolicymakers.Theregulators’dilemmawillmostlikelyworkagainstthathappening—likeanimmunesystemattackingthevirusofchange.

Figure3:Regulationislargelyaboutabsorbingtech,monitoringalgosandriskmitigationinreal-time.

Itiscrucial,therefore,tocreatenotonlyavisionofpossibilities,butalsoapracticalpathwaythatcangetustherefromhere.Nosuchpathwayexistsusingtraditionalmethods for changing the government—new laws, new regulations,regulatoryreorganisation,andthelike.

Wheredoregulatorsstart?Instead,regulatorsneedtodothreeconcretethingsandstartsmall,butfast.

First, regulators must use the test-beds described above as small-scalelearning laboratorieswhere theycandevelopempiricalproof thatkeychangeswillproducebenefitandlittleriskorharm(thetestingcandeterminewhatharm-mitigationstepsshouldbebuiltin).Theempiricalproofcanhelpbuildsupport

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for needed reforms by convincing sceptics of their merits, while the testingprocessprovidestheneededinsightonhowtogoforward.

Second,regulatorsmustbuildtheseReg-Lablearningsintoanexperimental,alternative regulatory channel that works through data and AI. Again, thischannelshouldstartsmall.Furthermore,crucially,itshouldbemadeoptionalfortheindustry.

Regulated entities should be given a choice: they can remain in thetraditionalregulatoryprocesstheyhatebutknow,ortheycanelectanewdata-drivenRegTechchannel,submittointensive,realtimescrutiny,andberelievedofprocess-orientedcompliancerequirements.Thegovernment’sstancewouldbethat if the entity can prove through data that it is meeting desired outcomes,measured using transparent and empirical standards, then regulators need notcarehowtheygotthere.

Making this new channel optional would avoid the biggest obstacle toregulatoryreform,namelytheneedtoforcechangeontheentiresystematonce.Regulators todaydon’t evenknowwhat changes areneeded—thisneeds tobelearned through testing and othermeans—but evenwhen they do, the systemwill exertmassivepolitical resistance tomajorchange,due toboth fearof therisks involvedinopeningupsetrulesandfear that thereform’sbenefitswon’toutweigh the transition costs of adopting them. Removing that fear makes itpossibletospreadnewregulatorynormsgraduallythroughthefinancialsystem,learningandrefiningatsmallscalebeforescalingup.

Lastly,regulatorsmustretool—themostcriticalchangeisoneofleadershipfocussedontechnology-basedordigitally-nativesupervision,ratherthanpolicyandprocess-basedregulation.Theskillsetrequiredbytheregulatorof2030isnot one of policymaking and examiner-based compliance; it is almost entirelytechnologysupervisionbasedandtheabilitytorespondandcorrectthemarketina very dynamic, real-time capability. This evolution will happen quickly inregulatoryterms,overjust10–15years.

Thesechangeswill requirestrong leadershipandcouragebypolicymakers.Fortunately,manyleadersarealreadysteppingup.

EndnotesTheInnovator’sDilemma,byClaytonChristensen.See:https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwj9rOKe_uDVAhUMmoMKHb1-CBkQFgg0MAI&url=httppercent3Apercent2Fpercent2Fwww.claytonchristensen.compercent2Fbookspercent2Fthe-innovators-dilemmapercent2F&usg=AFQjCNHyfrCGTv2MBU9wUzlWnNrj8n2SrA.EvenincountrieslikeChinawherethe“GreatFirewall”restrictsaccess,theproliferationofVPN(virtualprivatenetworks)hasallowedcircumventingtheserestrictionsforyears.

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Bitcoinersevenhaveaslangtermforthismantraofretention,whichisHODLor“Holdonfordearlife!”

“Arecryptocurrenciesabouttogomainstream?”,TheObserver,1July2017—https://www.theguardian.com/technology/2017/jul/01/cryptocurrencies-mainstream-finance-bitcoin-ethereum.SECInvestorBulletin:InitialCoinOfferings(https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings).

Foundedin1989attheG7SummitinParis,alsoknownbyitsFrenchname,Grouped’actionfinancière(GAFI).Source:FATF/UnitedNationsOfficeonDrugsandCrime(UNODC).

https://www.unodc.org/unodc/en/money-laundering/globalization.html.HSBCwerefined$1.9billion—https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi7qbb4hOHVAhXBfyYKHa5-DcAQFggtMAE&url=httpspercent3Apercent2Fpercent2Fdealbook.nytimes.compercent2F2012percent2F12percent2F10percent2Fhsbc-said-to-near-1-9-billion-settlement-over-money-launderingpercent2Fpercent3Fmcubzpercent3D1&usg=AFQjCNGaAgOEpYZrn0Pp0WaupEedz3rwIw.

AllianceforFinancialInclusionreportonpillarsforfinancialinclusion—http://www.afi-global.org/publications/2458/The-2016-Global-Policy-Forum-GPF-Report-Building-the-Pillars-of-Sustainable-Inclusion.“OverseasAmericanscan’topenforeignbankaccountsbecauseofFACTA?Courtsaystoughluck!”,AngloInfo.com,29April2016byVirginaLaTorreJeker.

SuspiciousTransactionReport.“Ubersecond-quarterbookingsincrease,lossnarrows”,ReutersTechnologyNews,24August2017.

“ANewDirection:OurChangingRelationshipwithDrivingandtheImplicationsforAmerica’sFuture”.Lessvotingrights,too.

Source:StandardBank/AccentureResearch(2015).Source:Intermedia.

Fakeprofilesaside.ResearchshowsthatAustralianCustomsandBorderPatrolOfficersdoingface-to-faceverificationmissedoneinsevenfakeIDs—http://theconversation.com/passport-staff-miss-one-in-seven-fake-id-checks-30606.

AmazonliterallyprovidescloudservicesfortheU.S.DepartmentofDefense(seehttps://aws.amazon.com/compliance/dod/).ReportontheEconomicWellbeingofU.S.Householdsin2015,FederalReserveBoardofGovernors,May2016—https://www.federalreserve.gov/2015-report-economic-well-being-us-households-201605.pdf.

AtthiswritingtheUSConsumerFinancialProtectionBureauisevaluatingthisissueandmayundertakerulemakingorotherguidancetoaddressit.Effectivelytranslatesas“BankoftheEstatesoftheRealm”.

Iswear—I’mserious.AspenInstituteReport:https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjj1unioOHVAhVk6YMKHeOtANEQFggmMAA&url=httpspercent3Apercent2Fpercent2Fassets.aspeninstitute.orgpercent2Fcontentpercent2Fuploadspercent2F2017percent2F07percent2FModernizing-

Reglabs.pdf&usg=AFQjCNEZSooEnB6NYEFmWRbZVvyiOyNMKA.

Thereisnodoubtatallthatthefutureofbankingisentangledwiththefutureofidentity.Digital identity isakey resource in theneweconomyandbanks, justlikeotherorganisations,willneedtodevelopdigitalidentitystrategies.Butwhatshouldthesebe?And,wemightspeculate,whathappensifbanksdonotdevelopthesestrategies?

We have all read countless articles and sat through countless conferencepresentationsand seencountlessblogposts andnotedcountless tweets that allhighlight thekeyroleofdigital identity in theneweconomy.Theauthorsmaynotallbeentirelyclearonwhatadigital identityactuallyis,but theydosharethe common suspicion that unless we have some form of digital identityinfrastructure in place then the potential growth and attendant benefits of thetransition toanewonlineeconomycannotbe fully realised. Imore thansharethissuspicion.Infact,Ithinkit’saabsolutecertaintythatunlessanappropriateinfrastructurecanbeputintoplace,thenwehavenochanceofmovingforwards.

Digitalidentityis,nottoputtoofineapointonit,criticalinfrastructureforthefuture.Buthowwillitwork?Whowillbeinchargeofit?Whenitcomestothinkingaboutthissortofthing,Iadmittohavingsomeform.I’vebeenworkingin thespaceformanyyearsand indeedhavesomethingofareputationformymodestintellectualcontributionstotheevolutionofthesubject.Alongwithmycolleagues at Consult Hyperion, I developed a pretty good model of digitalidentitythathasbeentriedandtestedandfoundusefulinanumberofdifferentareas. Thismodel, the “three domain identity” (3DID), as shown in Figure 1(below), framesdigital identityas thebridgebetween themundaneandvirtualworlds and sets out a clear framework for thinking about the dynamics of thebindingswith either of them.At a high level, it’s sufficient to knowonly thatthese bindings are highly asymmetric: it is time-consuming, complicated and

expensive to bind a digital identity to something in the real world but it isinexpensive and quick to bind the digital identity to something in the virtualworld. It’s all about encryption and keys and how youmanage them (see “AModel for Digital Identity” inDigital Identity Management, edited by yourstrulybackin2007).

Figure1:The“threedomainidentity”model.

Thereareanumberofreasonsforthinkingthatwhilethereareawidevarietyof organisations that could instantiate these bindings, and indeed a number ofdifferentinstitutionalarrangementsthatcouldcomeintoexistencearoundthesebindings,it isaplausiblehypothesisthatitshouldincludebankswhocouldbevanguardprovidersofdigitalidentity.Afewyearsago,Iwroteabookaboutthis(Identity is theNewMoney, LPP: 2014) to explore some of the issues aroundidentity infrastructure,making somepositive suggestions about howwemightconstruct a better identity infrastructuremore suited to themodernworld andexplainingwhyitwasthatbanksmightbetherightorganisationstocreateandmanagethesebindings.

On thewhole, I think thatmyargumentsstillhold true. Iwas remindedofthem recently when a friend of mine had some problems with his Facebookaccount being taken over by fraudsters. He was extremely frustrated by hiseffortstocontactFacebookandhavesomethingdoneaboutit.AsIpointedoutto him, I could not see any reason why he should have expected anythingdifferent. Facebook has no statutory obligation to remedy such problems1.Banks, on the other hand, are regulated financial institutions—were they to

provide identity services—would be obligated via regulation to ensure youridentitywasprotected.Ifyourbankaccountwastakenoverbythieves,thenyoumight reasonably expect the bank to do something about it and have someprocedurestoestablishwhotherightfulownerofthebankaccountwas,restorecontroloftheaccounttothatpersonandprovideappropriatecompensationifthebankhadbehavednegligentlyinsomeway.

Ilikethisvisionofthefuture.Let’simagineanon-financialusecasetoseewhat Imean. Internetdatingsitesprovidea richandpracticalenvironment forexploringdifferent notionsof identity, so let’s use themas our example.Let’simagineIgotothedatingsiteandcreateanaccount.Aspartofthisprocessthedatingsiteaskedmetologinviamybankaccount.Atthispointitbouncesmeto my bank, where I carry out the appropriate two-factor authentication toestablish my identity to the bank’s satisfaction. The bank then returns anappropriatecryptographictokentotheinternetdatingsite,whichtellsthemthatIamover18, residentonJerseyand that Ihave fundsavailable for themtobillagainst. In thisexamplemyreal identity is safely lockedup in thebankvault,butithasbeenboundtoavirtualidentitythatIcanuseforonlineinteractions.Somy internet dating persona contains no Personally Identifiable Information(PII), but if I use that persona to get up to no good then the dating sites canprovide the token to the police, the police can see that the token comes fromBarclaysandBarclayswilltellthemthatitbelongstoDaveBirch2.Thisseemstomeaveryappropriatedistributionofresponsibilities.Whentheinternetdatingsite gets hacked, as they inevitably do, all the criminals will obtain is ameaninglesstoken:theyhavenoideawhoitbelongsto,andBarclayswon’ttellthem.

Oneofthekeyattractionsofthisarchitecture—andI’msurethatIamnottheonly person who thinks this—is that it gives an expectation of redress in theeventof inevitable failure.Thingsalwaysgowrong.What’s important iswhatthe structures,mechanisms and processes for dealingwith those failures is. Ifsomefraudsterstakeovermybankaccountandusemyidentitytocreateafakeprofileonadatingsite,thenI’dexpectthebanktohavemechanismsinplacetorevoke the tokensand informboth thedatingsiteandme that such revocationhastakenplace,withoutdisclosinganyofmypersonalidentifiableinformation.This is important, because PII is in essence a kind of toxic waste that nocompanies reallywant to dealwith unless they absolutely have to.Under thenewprovisionsoftheGeneralDataProtectionRegulation(GDPR),thepotentialfinesfordisclosingpersonally-identifiableinformation(PII)withouttheconsentof the data subject are astronomical. Hence the complete cycle needs to bethoughtthrough,becauseitwillbecrazytohaveaninfrastructurethatprotects

mypersonaldatawhenthesystemisoperatingnormallybutgivesitupwhenthesystemfails,orwhenweattemptrecoveryfromfailure.

Toseehowbanksarebeginningtotakeadvantageofthenewopportunitiesinthisspace,let’shaveaquickworldtourtoexaminewhatBarclaysaredoingintheUK,what itsme isdoing inBelgium,whatTorontoDominionaredoing inCanada andwhat theCommonwealthBankofAustralia (CBA) is up to downunder.

Barclays are one of the “identity providers” for the British government’sidentity service. Inorder touse this service to access a varietyof governmentservicesonline,youhave to first createanonline identity.Todo this,youcanchooseoneofanumberofprivatesectororganisationstovalidateyourpersonaldetails and bind them to the online identity. Barclays is one of theseorganisations.Todate,thisschemehasmetwithlimitedsuccess,sincetherearefew places to use the government identity, but Sarah Munro (Director ofInformationPropositionsatBarclays)saysthatitisamodelthatwilldevelop.

In Belgium, the itsme service3 launched in 2017 shows a very differentapproach. It’s a very interesting collaboration between the Belgian banks andBelgianmobile operators:Belfius,BNPParibas,KBC/CBC and INGworkingwithOrange,ProximusandTelenet.Tousethis,youdownloadtheitsmeappandverify your identity (which is easy inBelgium, since everyone already has aneIDcard),thenuseittolog-intoparticipatingwebsites.Tobeginwiththesesitesare(asusual!)taxfilings,butinsurancecompaniesandretailersarejoiningtheprogram. Soon, users will be able sign official documents using their mobilephones and have secure remote access to a wide variety of systems. Thecombination of the identity, the SIM and the app delivers a very secure andreliable environment. To be completely honest, I don’t understandwhy banksandmobileoperatorswerenotco-operatinginthiswayadecadeago!

TheleadingCanadianbanks(includingBMO,CIBC,RBC,NationalBank,Scotiabank and Toronto Dominion) are part of a nationwide consortium4

developing a sophisticated digital identity infrastructure to bring security andconveniencetotheirmarketplace.Asinthecaseofitsme,customerswillusetheserviceviaanapp,butintheCanadianschemethetrustedcredentialsarestoredon a shared ledger built using IBM’s blockchain service (implementingHyperledgerFabric).Theschemeusesa“tripleblinding”implementationsothatthe people relying on the trusted credentials and the people providing thesecredentialsneverseeeachothers’identity.

CBA have begun a pilot service with Airtasker to provide verificationservices.Inthegrowing“gigeconomy”itisasignificantstep,becauseprovidingidentityinfrastructuretothesemarketplacesisawayforbankstobeinvolvedin

the transactions. Airtasker is an Australian online community, similar to TaskRabbitintheUS,wherepeopleandbusinessescanoutsourcetasks(eg,buildmyIKEAfurnitureforme!).IfyouhaveanAirtaskerprofileyoucangothroughtheCBAverificationprocessand thesystemwilladdabadge toyourprofile.Thebadge tells people that CBA know who you are. It does not give away anypersonal information, itmerely tells prospective users of your skills and time.This simple expression of reputation gives comfort to these prospective usersandillustratesacentralpointaboutthecomingcollaborativeeconomy,whichisthat reputation ismuchmore important than identity (and it ismuchharder tocounterfeit). Banks ought to obtain significant advantage as infrastructureprovidershere,because thecollaborativeeconomystakeholdersdonotwant tohave to create their own identification, authentication and authorisationinfrastructures. This not a purely technological perspective. As the FinancialTimesreportedwaybackin2014,Britishbanksbelievethattheyhaveafuturerole as repositories of digital identities (Davies, S.: “Bankswant to keep yourdigitalIDintheirvaults”,FinancialTimes,2ndSeptember2014).

Ihopetheseexamplesillustratethepotentialmarketforbankservicesinthedigital identity field, but it isn’t all about profits.One of the reasonswhyweshouldwantregulatedfinancialinstitutionstoprovidethedigitalinfrastructureisbecausethatinfrastructurewillformanessentialelementofasoundstrategyforthefinancialsectorasawhole.Rightnow,wedon’twantcriminalsandterroristsobtainingbankaccounts,wedon’twantdrugdealersandcorruptpoliticians tobeabletoshufflemoneyaroundthesystem,andwedon’twantourinstitutionsto be subverted by dirty money. Therefore we let the banks have certainprivileges, but in returnwe ask them to shoulder the burden of knowing yourcustomer (KYC), anti-money laundering (AML), counterterrorist financing(CTF)andtheexclusionofpoliticallyexposedpersons(PEPs).

Incidentally, a major problem for banks is that the costs of the currentapproach are absolutely unsustainable and with new anti-money launderingregulationsontheway,theyaregoingtogetworse.Perhapsitistimeforsomethoughtexperimentsaroundalternatives,exploringwhereRegTechmightcreatenewmechanisms formonitoringmoney flows. Hencewemight reflect on anapparently radicalalternative: rather than try tokeeppeopleoutof thesystem,wecoulddoeverythingpossibletogeteverybodyintothesystem.Why?Well,becausewhenpeopleareexcludedfromthesystemyouhaveabsolutelynoideawhatthey’redoing.Thisisveryevidentinthecaseofthe“de-risking”ofmoneytransferservicesinkeyremittancecorridors.AgoodexampleistheUK–Somaliacorridor,whichwas the subject of detailed study and comment in the BritishParliament.Aspartofthede-riskingthebankswithdrewservices.Theresultwas

not,ofcourse,thatmoneystoppedflowingtoSomaliawithsomeofitendingupin questionable destinations. Instead of the money flowing through electronicchannelswherewe could at leastmonitorwhatwas going on and have somepotential to discover what the bad guys might be up to, the cash moves insuitcasesoutofStanstedAirport—andnobodyhasanyideawhatishappening,withnoopportunitytotrackormonitorcriminalbehaviour.

But.Andthisisabigbut…Thereisnoinevitabilityaboutthisbank-centricvision.Onthecontrary,itisentirelypossibletoconstructanalternativeviewthatisbasednotonbanksandbindingsand regulated financial institutions,butonbigdata,artificialintelligenceandamoreinclusiveviewoftheworld.

Let’sgobacktothatinternetdatingexample,becauseit’susefultoexplore.Igo to the internet dating site and create an identity. During this process, theinternetdatingsiteasksmetovalidatemyidentity.IgotoMicrosoft,Amazon,Facebook,AppleorGoogleandlogin,andgetbouncedbacktothedatingsitewith a cryptographic token that says that (for example) Amazon knows I amover18andresidentintheUKand,crucially,thatAmazonwillacceptliabilityto amaximum amount if either of these credentials turns out to be incorrect.Amazoncanbeprettysureaboutthesefactsbecause,apartfromanythingelse,Amazon has access to my bank account because of open banking initiatives.AmazonalsoknowseverythingIbuy,whereIamandwhenmysalarygetspaidinto theaccount.Theycangive thedatingsiteaprettyaccuratepictureofme,withoutdisclosinganyPII.Andtheycanallowthedatingsitetobillagainstthetokenifnecessary.

There is, as theWorld Economic Forum made clear, a role for regulatedfinancial institutions here (“A Blueprint for Digital Identity—the Role ofFinancial Institutions in Building Digital Identity”, World Economic Forum:Geneva, 2016). However, digital identity does not offer the right to banks toexploit it. Ifbanksdonotofferdigital identityservices thatare relevant to thepost-industrial revolution, they won’t simply miss out on the opportunity tooffset someof theircostswithsomerevenuegenerating (andgenerallyuseful)newservices.Instead,theywillcutthemselvesofffromthesourcesofdatathattheyneedtofeedtheirartificialintelligenceenginesofthefuture.Theywillnotbeabletodoriskanalysisorinformationmanagementofanyvalue,andaccessthe vast quantities of information, relationship and reputation data that areneeded to feed thevoraciousappetitesof themachine-learningbehemoths thatwill be at theheart of thenextgenerationofbanks.Digital identity shouldbecentral tobankand regulatorystrategymoving forward.Without it,you’renotjustanumber,youarenobodyinthedigitalworld.

12

34

EndnotesAlthoughrecentFacebookproblemsmayleadtowardsincreasingregulationoverdatausage.Whythepoliceareworriedaboutmydatingwebsiteisawholeotherstory.

Seehttps://www.itsme.be/en.CalledSecureKey(https://securekey.com/).

Part02Bankingre-imaginedforareal-timeworld

3➡EmbeddedBanking

4➡FromProductsandChannelstoExperiences

5➡DLT,Blockchain,Alt-Currencies,andDistributedEcosystems

3 EmbeddedBanking

Therearebetter,faster,moreconvenient,lesscostlypaymentmethodologiesinplace,butwiththosecomesthetechnology-adoptionhurdlethatalotofcompaniesjustcan’tgetover…[TheUnitedStates]haveprobablythemostantiquatedpaymentsysteminthewholeworld.Itwouldbemuchhardertogeta

mandatetoeliminatechecksfromaculturalstandpoint,butalsofromacentralbankstandpoint.—TomHunt,DirectorofTreasuryServices,AssociationforFinancialProfessionals

Formanyoftheapproximately700millionusersofWeChatPayinChina,theydon’thaveadebitcardtheyuseregularly—theirprimaryvaluestoreorpaymentvehicleiseithercashortheirphone.IncreasinglyinurbanChinaitisonlytheirphone,andevenifpeopledohaveabankaccount,they’renotusingitotherthanfortransfers,top-upsandwithdrawingcash.Theprimarychallengeforbanksisthatoncemoneygoes into theWeChatorAlipayecosystem, it rarely leaves—and banks have zero visibility of it once that happens. The battle for mobilepaymentsappearsoverinChina.Soonthebattlefordepositswillbealso.

Thisisnotjustaboutachatappthathasbeenadaptedforpayments.Wecanseethroughfirstprinciplesthatthetwo-and-a-halfbilliongreat“unbanked”willmorethanlikelynotneedso-called“real”bankaccountsinthefuture.Infact,by2030,thebankaccountitselfislikelytobejustavaluestoreonthephoneforthevastmajorityofconsumerswhohavecomeintothebankingsysteminthe21stcentury.Thefactthatyou’llhaveawalletorvaluestoreonyourphone,andthemoneymightbestoredinabankaccountsomewhere,isalmostincidental.

In2000,financialinclusioninBangladeshwasjust14percent;todayalmost40 percent of the adult population is on bKash and doing their day-to-daypaymentsviamobile1, and increasinglypeople are simplygettingpaid to theirmobilephone.Whenthecentralbankputrestrictionsonmobilefinancialserviceproviders (MFS), then people inBangladesh just gotmore SIM cards so theycouldcontinuetostorecashontheirphones.

In2000,financialinclusioninKenyawas27percentandtodayalmost100percentoftheadultpopulationisusingM-Pesamobilemoneyregularly,saving20percentmorethantheydidprior toM-Pesa.In2011,Indiahad557millionunbanked,andby2015thathadhalvedto233millionduetomobileaccess2and

the new Aadhaar identity card scheme. Paytm, India’s leading mobile wallet,nowhas280millionusers3andisaimingfor500millionwithinthreeyears,andhasteamedupwithbothSoftbankfromJapanandAlipayfromChina.

More interestingly, consider the way Uber, Alibaba and Amazon areinnovatingaroundbanking.Uber launcheditsowndebitcard,not tobecomeabank, but so that they could onboard drivers faster to grow their business4.However, by embedding banking in the driver onboarding process theycircumvented the friction of having to have an unbanked driver visit a bankbranch to get a piece of plastic.Today,Uber canpay their drivers up to threetimes per day using their new “instant pay” capability,which is only possiblethrough the Uber driver debit card. By issuing their own debit card, UberinstantlybecameoneofthelargestacquirersofnewSMEbankaccountsintheUSA, but thatwasn’t their goal—they justwanted to accelerate the growth oftheirbusiness,whichbankswereslowingdown.

Alibaba and Amazon have increasingly started to offer business bankingservicestoentrepreneursontheirplatform.Whetherthatisastorefrontthroughtheir platform, small business loans, foreign exchange, capital management,taxationandotheroperationalelements,increasinglytheseplatformswillenablebusiness users to do more of their banking and finance integrated into theirplatforms.Theywantbusinessesrunningalloftheiroperationsontheirplatformandnotneedingtogotoabankbranchforfunctionstheycanprovide.

The 21st century bank account is not a physical artifact that consumers orsmallbusinesseswillneed toget fromabranch, it’s justapieceofutility thatwillbeengineeredintotheirworldthroughtechnology.Thephysicalcard,booksandstatementsofthe19thcenturybankingsystemwillberelicsofatimelongpast when it comes to banking for our children and their children. Thedevelopingworldwillgettherefirst,asalreadyemphasizedbyChrisSkinner’scoverageofAntFinancial,becausethesenewly“banked”consumersdon’thavelegacybehaviourbuiltaround traditionalbankingandcommerce.The fact thatsomepeople stillwrite cheques in theUnitedStates is not evidence that bankaccountswillsurviveintheircurrentform5,andthisisevidencedbythefactthatchequeusehasdeclinedalmost70percentintheUSsince2000alone.

Figure1:Thefallofchequesworldwide(Imagecredit:Bloomberg).

Behaviourisswitchingtomobileanddigitalpaymentsglobally,andwillbealmost exclusively digital by 2030. Voice-based commerce and mixed realitytechnologieswillspeeduptheshiftawayfromphysicalartifacts.

The nature of the bank account will have to change significantly in thisenvironmenttostayrelevant.Inthe19thand20thCenturythevalueofabankaccountwasprimarilythatit“keptyourmoneysafe”,thatyoucouldsavemoneysecurely,andyoucouldpayforstuffbasedontheauthorityofthebank—whenyouwrote a cheque people would trust it as amechanism of value exchangebecauseabankwasbehindit.Thevalueina21stcenturybankaccountwillbeinhowitprovidesutilityincontext,howitadaptstoyourfinanciallifeandyourbehaviour. The bank account is transitioning to a smartmoney artifact—bankutilityembeddedinourworldenhancedbyartificialintelligencethatrespondstoyourfinancialneedsasandwhentheypresentthemselves.

Let’s examine the principles behind a 21st century embedded, smart bankaccountandhowitwillchangethewayyoulivewithyourmoney.

Frictionisn’tvaluableinthenewworldIf you examine challenger and FinTech banks around the world, you’ll see aconsistenttheme.Seeifyoucanguesswhatthemessageis…

Simple was started out of frustration with banks. We’re positive, passionate people who areseriousaboutcreatinganexperienceforourcustomersthat’sunlikeanypersonalfinanceproductyou’veeverused.

—Simple

Get Moven with Smart Banking and take control of your finances. Whether you’re buyinggroceries,diningout,or saving for somethingonyourwish-list,Movenautomaticallyanalyzes

yourspendingandgivesyouinstantreceiptsandinsightssoyoucanspend,save&livesmarter.—Moven

Life doesn’t have boundaries, so why should your banking? We’re making banking easier,intuitiveandtherewheneveryouneedit,allonyourmobile.

—AtomBank

Monzo is a bank that makes life easier, not harder. We are building a smart bank on yoursmartphone.

—Monzo

For incumbent banks, themessage consistently promotedwhenyouvisit abankisessentially“ourbankhasthebestproduct”.

Figure2:Samplehomepagesofbanksaroundtheworld(emphasisonproduct).

At the core of the difference between challenger/FinTech banks andincumbents is theirmission:challenger/FinTechswant toradicallysimplify thebankingexperience,butincumbentsseemmuchmoreintentonwantingyoutochoosetheirbankproductsovertheircompetitors.

Friction is the antithesis of the design premise for FinTech banks. EveryFinTech is trying to takefrictionoutof theexperience,making it faster,easierandsexier6.

Incumbents are admittedly iterating on the friction, but have to butt upagainst compliance, legal and risk departments constantly trying to retain asmuchofthefrictionaspossible.IttakesareallystrongCEOandexecutiveteamtoreformthatsystemicthinking.

Writing thismayshockmanyofyou,but thereality is thatFinTech’scan’trealisticallygofarenoughtobeatthebanksentirely.Theycan’tdothisbecausetherealwinnersofthebankaccountbattlewillbethosethatownthetechnology

layersyou’lluseeveryday—voice,AR,AI-agentsandsmartassistants,theday-to-daycommerceandmessagingplatforms,because that iswherebankingwillreside.Aswritten in Chapter 1, bankswill never own this layer either. Thus,whenitcomestothefutureofbanking,bothchallengerbanksandconventionalbanksmaymissout—namelybecausethebankaccountoftomorrowisprimarilyanactivated,cloud-basedvaluestore thatreacts throughtechnologywhereyouareusingyourmoney.It’snotanapp,awebsiteorabranch.Havingsaidthat,africtionlessvaluestorethatisalreadydigitallyenabledwillbeabletotransitionto this new state significantly faster than one restricted to sale in a physicalbuildingrequiringasignatureonapaperform.

The key problem with designing better banking really begins with howincrediblydifficultbankersfindittothinkoutsideofthebranch.

Newexperiencesdon’tstartinthebranchWhenbankslaunchedthefirstautomatedtellermachines7inthe1960sand70stheywereanattemptatjustthat,automatingthefunctionofthein-branchtellerthat could help you with a cash withdrawal. When the internet came along,unlike most retail businesses, banking didn’t start with building e-commerceapplications; it started with transactional functions straight out of the branch.Whenbanksdidintroducee-commerce,theysimplytookapplicationformsfromthebranchandputthemonline.

Whenbanksbuilt earlyversionsof“internetbanking” they just tried todosimple transactions—stuff theywouldnormallyask the tellersat thebranch todo.WhenWellsFargolaunched“on-line”bankingin1995,allyoucoulddowasgetanaccountbalance8.Afterthatbanksjustputvirtualbankstatementsonline.Later banks added transfers between accounts. Every step of the way banksaddedmoreandmoreofthestuffatellerdidandsimplyputitonline.Infact,formostbanksyouhadtovisitthebranchevento“register”foronlinebanking.

Figure3:Earlybankhomepages(CreditWellsFargo,BankofAmerica).

Whenmobilecamealong,bankssimplytookwhattheyhadbuiltforinternetbankingandtriedtoshrinkitdowntofitonasmallerscreen.

Figure4:WhenCitilaunchedmobileinApril2007,youcouldview150transactionsinappandcouldsearchforbranchandATMlocations(Credit:Citibank).

There’s virtually no innovative thinking here. From a design perspective,banksdidhave to learnnew tools like interactiondesignandusability testing,buttheyweren’tdesigningnewsystemsontopofmobileortheweb,theywereiteratingon theold.Whetherwebormobile, the thinkingwas still verymuchbased on the branch and this is perhaps the hardest thing to displace from adesignperspective.

Figure5:TheCEOofBankofNewZealandclaimedinFebruaryof2017thatthebiggestBNZbranchwasthewebsite.

Our busiest branch in 2014 is the 7:01 from Reading to Paddington—over 167,000 of ourcustomersuseourMobileBankingappbetween7amand8amontheircommutetoworkeveryday.Over2.1millioncustomersuseourmobileappeveryweek.

—RossMcEwan,CEOofRBS2014

Design by analogy is hard-coded intomost banksDNA.When the Applerumour mill started to suggest Apple might launch an NFC-enabled iPhone,rather than try to build completely new thinking around payments, the mainpaymentrailproviders,MastercardandVisa,forcedAppletosimplyaddmockplastic cards inside the phone. While tokenization was added for additionalsecurity, itwasmoreiterationontheoldsystem,nofirstprinciples thinkinginsight.

Thereareanumberofreasonsforthis.Firstly,legacysystemshaveevolvedtoencodebranchoperationsonmainframesystems,andwhenyouhavetoadaptlegacysystemstothenewdigitallayer,itiseasiertojustenableadigitalversionofthebranchproductandprocessratherthanstartfromscratchwithsomethingnew.Secondly,regulation inhibits innovation,oftenbyenforcingbranch-basedproduct structures and processes. Indeed, the greatest challenge many facearoundmobiletodayisgettingpermissionfromtheregulatortoallowsomeonetosign-upforanewproductorservicewithoutasignature.WhenatMovenwetried to innovate around savings APR9 in the US, we were hemmed in byregulations that required our savings rate to be published in the customerdisclosures and be consistent from one customer to the next, rather than asavingsratethatcouldbedynamicbasedonourcredscore™algorithm.

Lastly,legacysystems,railsandregulationmeanlegacycustomerbehaviour,andtheabilitytochangethatbehaviour,suchastheuseofchequesintheUnitedStates, is often just as difficult. It is why markets like Africa and China aregetting much faster rates of mobile payments adoption than the US—theygenerallydon’thavetomovepeopleofflegacybehaviour.

As discussed in Chapter 1, while first principles thinking is evident intechnology and FinTech, it’s rarely evident in incumbents because of thisbranch-firstmindset. The real innovation of embedded banking, however,willnotbelimitedtochannelsorproducts,butbefocusedonadvice.

Advice,whenandwhereyouneeditForalongtime,bankershaveheldthebeliefthatadvicefromahumaniswhatwould continue to differentiate the branch experience from technologies like

web andmobile, especially in the areas of investment orwhat bankers like tocall“complexproducts”.Thatcorebeliefisbeingtestedtodayasmoreandmorerobo-advisorandchat-botstyleadvisorycapabilitiesbecomeembeddedinday-to-daybankingexperiences.Therealityis,however,theadviceyou’relikelytogetfromyourbankthroughtechnologieslikevoiceandAIinthefuturewillbeverydifferentfromtheadviceyougettoday.

Figure6:Thetypicalpositioningof“advice”withinabanktoday.

Today if you visit a bank to get advice on buying a home, it inevitably isreallyaboutpositioningwhichmortgageisrightforyou.Ifyouvisitabanktoget investing advice or talk about retirement planning, the inevitable advice iswhich asset class or investment product you shouldbe investing in. If yougointoabanktogetadviceonjusteverydaybanking,you’llwalkoutwithabankaccount, not adviceonusingyourmoneymore effectively.The advicewegettodayisrarelyjust“advice”;it’stypicallyproductsellingorpositioncouchedasadvice.

Thissortofadviceisnotverysticky—itdoesn’tengenderlong-termloyalty,itismoreaboutshort-termsellingforthebank.InregardstowhetherornotthatadviceisbetteroffcomingfromahumaninabankversusanAI,I’mhonestlydoubtfulthathumanswillremaincompetitiveinthisspaceformuchlonger.Letmeillustrate.

InformationasymmetryandAIAdvisorsininvesting,privatebanking,mortgage-lendingandotherdisciplinesinfinancial services have traditionally justified themselves by asserting that you

needanadvisorbecausetheyknowmoreaboutthesubjectthanyoudo.

Asymmetric information,sometimes referred toas informationfailure, ispresentwheneveronepartytoaneconomictransactionpossessesgreatermaterialknowledgethantheotherparty.Thisnormallymanifests itselfwhen the seller of a good or service has greater knowledge than thebuyer, although the opposite is possible.Almost all economic transactions involve informationasymmetries.

—AsymmetricInformation,Investopediadefinition

Let’s use an emerging AI technology as an example of informationasymmetryinmachines.

Emerging technology in self-driving cars include sensors such as cameras,lidar (light detection and ranging), point mapping, sonar, radar, lasers and soforth. A human eye can see about 250 feet (76 metres) at night assisted byheadlights,butarobocar’sradarcanseeabout820feet(250metres)today,andacross360degrees.Machinescanreacttoapotentialobstacleonadryroadinabout0.5seconds,comparedwiththetypicalhumanwhotakesonaverage1.6seconds. Some autonomous vehicles today are capturing around 1000x moreinformation thanyour visual cortex is capable of processing.All this suggeststhatin10–20years,whenthistechnologyistrulymature,nohumandriverwillbeassafeasanAI-drivenautomobile.Why?Informationasymmetry.

Figure7:Autonomousvehicleswillsoonbeathumansatdrivingbecauseofinformationasymmetry—moredatathroughasuiteoftechnologies,thatleadtobetterdecision-making.

A self-driving car can processmore datamuch faster than a human brain.Oncemature, no humanwill match an autonomous vehicle for safety10 alonebecauseofthisability.Isitreallythathardtoimagineanalgorithminbankingthatmightbeabletorecommendamortgageproductoraninvestmentstrategy

better, faster and based onmore data than a human advisor?Self-driving carscouldeliminate3,000deathsperday,morethan95percentofwhichoccurduetohumanerror.Thiswilleventuallyleadtohumandriversbeingconsideredtoolethalformanyenvironments—likecitycentres11.

AIsthatarebetteratbudgetingthanyouraccountantButtheadviceourAIsmartassistantbuiltintoourhome,carandsmartdeviceswon’tbeliketheadvicewegetfromabankertoday.Therealbenefitofasmartbank account of the future is that once we’ve established a basic set ofparameters,we’llgetpersonalisedadvicethatwillbelikehavingamoneycoachin your back pocket full-time. This won’t be product advice like “buy thismortgage versus that mortgage”. It will be simple stuff like “Hey Siri, can Iaffordtogooutfordinnertonight?”

Figure8:FinancialadviceintheageofAIswillbemuchmorepersonalised(Credit:Movensiriimplementation).

Budgetingemergedintheearly18thcenturyasamechanismforimprovingthefinancialstability,notofconsumers,butofgovernments.Theoriginsoftheword “budget” lie in the French term “bougette”—a leather wallet in whichdocuments ormoney could be kept. The bursting of the South SeaBubble in1720wreckedtheBritisheconomy’sbalancesheetandledtotheimprisonmentoftheChancellorintheTowerofLondon.Towardtheendofthesamecentury,in1799,Pitt theYoungerintroducedincometaxasawayofhelpingfundwar.These became the drivers for a commonsense annual process for managing

inflowsandoutflowsfromtheBritishtreasury.In the early 1900s personal budgeting was all the rage, with ready-made

budget ledger pages being available for households and newspapers like TheEvening World of New York running a thrift campaign in 1916, encouragingusingenvelopsforbudgeting.

There’sonlyoneproblemtoday:with70percentofUShouseholds12and65percentofBritishhouseholds13beingunabletoabsorbasmallfinancialshockofonesortoranother,clearlybudgetinghasfailedthevastmajorityofoursociety.

This iswhereAI is likely tomake amassive change in thewaywe thinkaboutourconnectionwithmoney:abankaccountwillshiftfrombeingavaluestorewithpaymentsutilitytobeingsomethingwe’remuchmorerelianton.

Budgetingtodayrequirestherighttools,butmoreimportantly,likemakingaNewYear’s resolution to go to the gym and get healthier, it requires a ton ofpersonal discipline. In the United States, only eight percent of the populationexhibittheabilitytobethatdisciplined14.Which,forthesamereasonasdietingfails,meansthat92percentofuswillneverbeabletobudgeteffectivelyevenwithadigitaltool.Fitbitstylebands,calorieandstepcounters,andaquantified-selfapproachtofitness,ontheotherhand,havegenerallyhadgreaterstatisticalsuccessinimprovinghealth.ThesamewillundoubtedlybetrueofAIsthataidus in gaming our financial behaviour. Whether that is via raising awareness,limitingourspendingorsimplyincreasingmomentswethinkaboutsaving.

Thereasonoursmartbankaccount,orAIsmartassistantthatislinkedtooursmartbankaccount,will begreat at advice is that itwill stopus frommakingstupiddecisionsthattodayourbankallowsustodo.

Thinkofhowbankspromotedebitcardsandcreditcardstoday.Cashback,airlinemiles,discountsonshopping,areallusedasmethodsofstimulatingcardusageinbanking,buttheyinevitablyleadtoincreasesinspending(bydesign),whichleadtodebt15.ButimagineanAIwithsmartbankingthatyou’vetaskedwithhelpingcurbyourspending.

“Alexa,ordermeanewXBoxOneXforChristmas.”[InAlexa’sbestHALimpression]:“Ican’tdothatDave.You’realreadywell

overyoursuggestedspendinglimitsforthemonth.Youcanoverridemyadviceandcontinuethepurchase,butifyoudo,youwon’tbeabletoaffordtheholidayyou’replanningforthenewyear.”

Ifyouarebanker,youmightbedisappointedlearningthatpersonalAIswilldiscourageyoufromspendingorusingacreditcard;butconsiderthefactthatabehavioural-based AI money coach will promote much stickier behaviour forday-to-daybankingrelationshipsthanyouradvisorinabankbranchwouldeverdo. Credit card rewards won’t be enough to get you to change your linked

accountforApplePay/Siri,TmallGenie16orAlexavoice-basedtransactions.TodayStarbucks17,DominosPizza,Tescos,Expedia,Amazonandahostof

otherretailersareenablingvoice-orderingcapability.Someestimatesreckonthatby2025we’llbedoingaround50percentofoure-commercetransactionsbasedonvoice18,whichwouldbeaboutthesamerateatwhichtheworldadaptedtoe-commerceafter thecommercial launchof theweb in themid90s. It is logicalwe’llwrap advice into this ecosystem in real-time, adapting to our behaviour.Butitismixedrealitythat’sreallygoingtochangethecontextofbankaccountsoverthenextdecade,andwherewehavetothinkbeyondchannelsandproducts.

MixedrealityanditsimpactonbankingInSeptember2017,ApplelaunchedtheirnewiPhoneX,beginningitsdecade-longAugmentedRealityorARstrategy.

I thinkit isprofound.Iamsoexcitedaboutit,I justwanttoyelloutandscream…Canwedoeverythingwewanttodonow?No.Thetechnology’snotcompleteyet.Butthat’sthebeautytoacertaindegree.[AugmentedReality]hasarunway.Andit’sanincrediblerunway.It’stimetoputthe seatbelt on and go.When people begin to seewhat’s possible, it’s going to get themveryexcited—likeweare,likewe’vebeen.

TimCook,AppleCEO,BloombergBusinessweek,15June2017

Apple is betting that consumer technology experiences become more andmoreintegratedintoourlife,andthey’rebettingthatbothvoiceandAugmentedRealitywill be big, big parts of that. Just aswe all carry around smartphonestoday,commentatorslikeRobertScobleandShelIsraelpredictthatin10yearswewill bedonning smart glasses in the sameway that the iPhone tookoff in2007–1019.

Figure9:Apple’sAugmentedRealityPatentforsmartglassapplication(Source:USPTO).

Whatthismeansforbankingisthatthetwomostinfluentialfuturechannelsforday-to-daybankingusearebothdesignedtoberealtimeandexperientialinnature, not transactional or product-based in nature. You won’t choose atraditionalcreditcardormortgagethroughyourhead-updisplayorusingvoice,butyouwillusethesetoolstoassistyouindeterminingifyoucanaffordtobuya home, or how much you can spend out shopping, or if there’s a betterapproach.Thetechwillhelpyoubuythehome,notamortgage.

Thekeyproblem forbanks is thatbasedonourhistoryaround technologyadoption, we will simply view voice and augmented reality glasses as a newchanneltopushbranch-styleengagementandproducts,andifwedo,wewillfailmiserably. Letme illustrate. CapitalOnewas the first bank to take tomarkettheirAlexavoicecapability in theUnitedStates, andwhile it has since addedmoreconversationalmoneymoments,theirfirstattemptlookedjustlikedesigniteration.

ThefirstskillsonAlexathatCapOnelaunchedincluded:“Alexa,askCapitalOnewhenismycreditcardpaymentdue?”and“Alexa,askCapitalOnetopaymycreditcardbill.”

That is design by analogy thinking, and it won’t be enough to make thetransitionintotheBank4.0world.

Endnotes

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CommentaryonbKashinclusion:“MorethanTk1,000crtransactedonmobilephonesdaily”.DhakaTribune,25July2017—http://www.dhakatribune.com/business/banks/2017/07/25/daily-mfs-transactions-cross-tk1000cr-mark/.

Source:PWCReport—DisruptingCash,AcceleratingelectronicpaymentsinIndia(Oct2015)(https://www.pwc.in/assets/pdfs/publications/2015/disrupting-cash-accelerating-electronic-payments-in-india.pdf).January2018,280millionusers:https://blog.paytm.com/looking-back-at-2017-top-10-interesting-facts-from-paytm-7bc59e08683f.

“Uberistryingtolurenewdriversbyofferingbankaccounts”,Quartzonlinemagazine,IanKar,Nov2015:https://qz.com/533492/exclusive-heres-how-uber-is-planning-using-banking-to-keep-drivers-from-leaving/.NPRstory:“Isittimetowriteoffchecks?”2016shows66percentdeclineincheckusebetween2000–2014—http://www.npr.org/2016/03/03/468890515/is-it-time-to-write-off-checks.

See“BankingneedsanAmazonPrimementality”,byJimMarous,TheFinancialBrand:https://thefinancialbrand.com/66545/amazon-prime-digital-banking-loyalty-experience-strategy/.Barclaysiscreditedwiththefirstuseofa“cashmachine”attheirEnfieldTownbranchinNorthLondonon27June1967.

Seehttps://www.wellsfargohistory.com/internet-banking/.APRorAnnualPercentageRate,isthestandardmonikerfortheinterestratepaidagainstasavingsaccountannually,orinthecaseofacreditcardtheannualratechargedforbalancecarriedonthecard.

See“Thisistheendgameforautonomouscars”byMarcHoag—https://www.linkedin.com/pulse/end-game-autonomous-cars-marc-hoag.Source:TheGuardian,StuartDredge,18March2015;“Self-drivingcarscouldleadtobanonhumandrivers”—https://www.theguardian.com/technology/2015/mar/18/elon-musk-self-driving-cars-ban-human-drivers.

Source:“ThePrecariousStateofFamilyBalanceSheets”,PewResearch,January2015—http://www.pewtrusts.org/en/research-and-analysis/reports/2015/01/the-precarious-state-of-family-balance-sheets.Source:PressRelease—https://www.moneyadviceservice.org.uk/en/corporate/press-release-65-of-consumers-are-exposed-to-unplanned-financial-shocks.

Source:UniversityofScrantonResearch,2013.Source:WallStreetJournal,ConorDougherty,Dec2010,“RewardCardsleadtoMoreSpending,Debt”.

Alibaba’svoicesystem.Source:RetailDive,StarbucksenablingorderingviavoiceinAlexa-enabledFordvehicles,March2017—http://www.retaildive.com/news/starbucks-enabling-ordering-via-voice-in-alexa-enabled-ford-vehicles/438730/.

Source:https://techpinions.com/there-is-a-revolution-ahead-and-it-has-a-voice/45071.TheFourthTransformation:HowAugmentedRealityandArtificialIntelligenceWillChangeEverything,byRobertScobleandShelIsrael,PatrickBrewsterPress(December2016).

ShoulddesignhavetowaitforAIanddevicecapability tocatchup,orshouldwerethinkdesigninacontextualworld,wherebankingisembeddedinourday-to-day life? Are banks even capable of evolving the role of data in decision-making and consumer engagement, such as categorized transactions, geo-locationandbehaviouraltriggers?

Arebankingchatbotsthefuture?AccordingtoareportreleasedbyJuniper1,chatbotswillberesponsibleforoverUS$8billionofcostsavingsby2022.Arethesesavingstotheconsumerorforthebank?

I think clearly we would have to answer, the bank. Today, chatbots areregarded by most banks as a potential cost savings mechanism designed toreplace call centre personnel. Yet worse, the companies developing chatbotshave market and investor pressure on product, preventing them fromreimaginingcustomerinteractionsthroughtheprismofhumanemotionandrealcustomerneeds.

Investigatinghowaconsumertrulyfeels,whatdrivesthemandmakesthemhappyistime-andresource-intensive.MostoftheFinTechprovidersworkingonchatbotsgenerallycannotjustifyundertakingthatsortofresearcheither.Instead,they plough ahead, developing incrementalAI that tends to focus on product-basedandmarketing-heavyadvice, rather thansomethingmorevaluable to theendconsumer.

As per Brett’s earlier chapters, the problem here is thatmost chatbots arederivativeofbranch-basedbankingorcallcentre interactions, thusmostof thescenarios or use case resemble current call centre type support questions or

cross-sellmarketingoffers.Afirstprinciplesapproachtoachatbotwouldstartwiththeday-to-dayproblemsthatplaguecustomersaroundmoney,andtheroleofbanksinfacilitatingsolutions.

Over the past few years, with the emergence of Human Centered Designpractices, industry press and research organizations have repeatedly shamedincumbentbanksfornotinvestingenoughtimeandeffortintoreducingfrictionin engagements. Brett makes a strong case at the start of his book for kick-startingthedesignofbankingfromscratchusingfirstprinciplesdesignthinking.A strong argument in support of this proposition is that when we researchproducts designed with the insight of consumer’s needs, they tend to besignificantly more profitable than those built without those considerations.Despite itmaking good business sense, banks have been unable to deliver onthat,hamperedbycomplianceissuesandheavylegacyintermsoforganisationalculture,processandtechnology.

The FinTech companies that are building AI-powered voice banking orchatbot applications have none of those cultural legacy problems, yet all toooftentheyputimmediateoperationalfunctionalityaheadofdesigningaproductthatrecognisesandactsonemotion.

“Financialchatbots”areaworryingsubsectionofAIthatisontherise.Theseparation between a real, intelligent assistant that makes meaningfulcontributionstoourlives,andadumberversionthatcansimplyinferwemean“interest rates for savings” and “potential gain/loss scenario” whenwe query,“HowmuchwillIgetchargedifIleavemyoverdraftintheaccount”,shouldnotexist.

Tobecometrulyrelevantandmakeanimpactonbehaviour,AIwillhavetobecomeaday-to-daycompanion.Itwillhavetobeanentitythatunderstandsnotonly the client’s actions as inferred by location or spending patterns, but theirintent,theiroverallemotionalstateandeventheirdeepestsecrets—andbeableto steer their state of mind towards where they are inclined to make betterfinancial choices, instead of solely offering dry, meaningless information.Obviouslyfinancialcoachwillbeonlyasubsetof thecapabilities thatavoicebasedAIorcompanionfromApple,AmazonorGooglehas,andyetbankstreatchatbots likeApps today.They think thatpeoplewill come to their chatbot tointeract insteadofSiri orGoogleHome.That’s theheightof arrogance if youaskme.

The builders of chatbots shouldn’t be asking themselves, “How do Iimplementgeo-locationpushalerts thismonth?”but“Whenandhowdo Iusethenotificationsbasedonlocation,ensuringtheclientgetsasenseofgratitudeforhavingbeennotifiedcontextuallyofapotentialgain,insteadofjustannoyed

iftheyperceiveitasmindlessmarketing?”Theyshouldconsiderhowtobecomethattrustedandinvaluableadvisorthattheconsumerturnstowhenneedinghelpwiththeirmoney.

AI with this capability is still a few years away. In the meantime, bankscould tighten theirgame inbringing something thathasbeenwellwithin theirreach since the advent of PFM in 2009: notification-banking, also known as“Contextual1.0”. Irrespectiveof thenuances, theoverarchingprincipleof thisinvolvesofferingtheconsumerrelevantfinancialinformationattherighttimeorplacethroughtheformofnotificationsontheirmobiledevice.Astheplatformsmature, voice and augmented reality will provide further reach for contextualnotifications.

At its core, being able to provide contextualmoney advice has onemajorprerequisite:thatthebankhastheinformationtobothtriggerthenotificationandprovide the right advice. There is a substantial—and in this case, defining—difference between “data” and “information”. Banks do capture consumer’sfinancialdata (andcouldcapturemuchmoreof it).Whether theyprocess it inany way to extract meaning, inference and relevancy and turn it into“information”isanothermatteraltogether.Anoverwhelmingmajorityofbanksdonot.

InmyEmotionalBanking™method,Ispendalotoftimestudyingwhythishappens, why banks do not explore the psyche of the consumer enough tounderstandhowparamounttheneedforfinancialinformationis.Thereasonsarecomplexandarechiefly rooted in thecultureof theorganisation.But thisalsogives rise topractical impediments, suchas the fact thatmostbanks todayarenotequippedtoeithercollectorcollatedatainafashionthatwouldallowthemtoturnitintorelevantinformationthattheycanservetheconsumerthroughwellplacednotifications.

Whilebeingnotifiedofanamazingopportunitytosaveonafavouriteitemas you pass a shopwould be great, today the bank has no idea that item is afavourite—orifyou’repassingsaidshop.Whilebeinginformedthatbyforgoingthemythicalcupofcoffeeyou’llbeaweekclosertoyoursavingsgoalwouldbepotentiallyuseful,todaythebankhasnoideayou’reabouttohavethatcup,orwhat your savings goal is. The bank simply can’t advise you in respect tospending less on a certain type of expense or for thinking of retirement bystarting direct payments to a private pension plan, because it doesn’t actuallyknowwhatyourcurrentsituationordriversaretoday.

Transforming “data” into “information” requires not only storing it, buthavinganability toeffectively,efficientlyandaccuratelyanalyses it—with theabilitytocategorisetransactionsandbehaviourbeingatthecoreoffinancialdata

analysis—andthenhavingawaytoaccessandtransmitthatinformationascloseto real-time as possible. Each of these steps is a sine qua non condition toachievingeffectivenotificationsthatofferrelevantinformationthatmakearealdifferenceinsomeone’sfinanciallifeinlieuofmeaningless,ill-timedtidbitsofdata.

Once banks learn how to slice and dice data and realise the promise ofContextual 1.0, real advicewill follow shortly thereafter (2.0)—and itwill bebased on an ability to tap into other IOT-related data sources to infer widerbehaviouralcuesforincreasinglymeaningfulcontext.

Timing: Information is not received and consumed the same way at alltimes,sonotificationsaboutfinanceswillhavetobecomesensitivetothatfactor,inadditiontolocation.Deliveringanencouragingmessageaboutone’ssavingsis immensely more efficient when the consumer is particularly receptive andreadytoreceiveit,suchasaweekendmorning,asopposedastoaninconvenienttime in the middle of their commute. Taking into account the consumer’spsychologyandstylewillalsobecriticalintermsofmessaging.

Widerlifecontext:Smartdevicesholdandareabletoaccessdatathatgoesfarbeyondmeretransactionssuchashealthparametersandemotionalclues.InContextual2.0anditsAIcomponent,bankswillhavetounderstandhowtousethisdatatobuildaddictiverelevanceinoutliningandassistingMoneyMomentsfortheirconsumers.

Whichofthefollowingseemsmoreefficient?

1

Figure1:Examplesofsmartdeviceengagement.

Consumerswillreceivethistypeoffinancialcompanionwithinthenextfewyears, whether it will be from their banks or, most likely, other technologycompanies that have developed the capacity to aggregate financial data andmakewider,relevant,contextualsenseofit.IfyouwanttobepartoftheBank4.0revolution,youneedtostartworkingonthebroaderdatarequirementsthatwillpowerthistypeofemotionallysensitiveandrelevantbanking.

Endnoteshttps://www.juniperresearch.com/press/press-releases/mobile-banking-users-to-reach-2-billion-by-2020.

4 FromProductsandChannelstoExperiences

Westillhaveonemillionpeoplecomingtoourbrancheseveryday,andtheyneedthatchannel.Someneedittotransact,butalotofthemcomeinforadviceandwewantthemtodothat.So,weneeda

certainfootprintoffinancialcenters.—PaulDonofrio,CFOatBankofAmerica

Thenew“network”and“distribution”paradigmsLet’sproposeabinaryquestionforthedigitalage.In10yearstime,whodoyouthink will have a greater chance of survival—a bank wholly dependent onbranches for revenue and relationships, or a digital pure play, challenger bankwhollydependentondigitalchannels?

If you answered a branch-based bank, I think the facts suggest a differentreality1. While branches aren’t going to disappear in the next 10 years, therelativeimportanceofabankbranchforday-to-daybankingismostcertainlyindecline. In December of 2015, Bankrate.com reported that 39 percent ofAmericanshadn’tvisitedtheirbankbranchin the lastsixmonths,andareportfromCACIin2017predictedthatvisitstobranchesaresettodeclinebyanother40percentover thenextfiveyears.This isaglobalphenomenonindevelopednations.

We’veseendropsof30to40percenthappeningoverafewyears,andinsomeofourtraditionalbankbranchesaroundAustraliainsomeareasweseeaslittleasfiveortenpeople[visit]aday,andtheeconomicsareverydifficult…Butwhat’shappeningisthegrowthindigitalinteractionsisphenomenal.Sowe’vegonefromzeroto11.5milliontransactionsamonthona…smartphone.

—MichaelCameron,CEOSuncorpBank,TheCourierMailinterview,November2016

Therealityisthatbymeasuringjustonesimplemetric,it’sveryeasytotellthefutureofthebankbranchandhowitsimportanceisdiminishingovertime.Thatmetric is the average number of visits per customer per year to a bankbranchinyournetwork.Ifyoudon’tknowhowtogetthatmetricandyouworkin a bank, it’s easy—take the number of products sold, applications lodgedortransactionsmadepercustomerperbranchoverthecourseofayear,butcountamaximumofoneinteractionperdayasa“visit”2.

You’d be surprised3, but themajority of banks I’veworkedwith not onlydon’t give out this number, but they neglect even to measure this internally,relying instead on the number of product applications per branch per year astheircoredistributioneffectivenessKPI.Thedata,though,isirrefutable.Mybetisineverybankinthedevelopedworldwhenmeasuredbetween1990andtodayyou’d see a decline of somewhere between 60–80 percent in respect to thatsinglemetricannually.Meaning,thatifyouexpectedtoseeacustomervisityourbranch10timesayearbackin1990,todayonaveragethey’revisitinglessthantwoorthreetimesperyear.I’dalsoarguethatalargepercentageofthosevisitswouldbefalsepositives,wherethebankorcompliancerequirementsmandateacustomervisitthebranchversususinganalternatechannel;forexample,whereyouonly allowmortgage applications for newcustomers through a branch, orwhere a bank requires you to visit if you want to restore access to internetbanking4 after forgetting a password. Recently, Chase required me to visit abranchintheUStodoanIDcheckbecauseItriedtodoawiretransferonmyaccountforthefirsttimeinsomemonths.

These examples I’ve given are all false positives—they certainly do notrepresent an argument for continuedviabilityof thebranch.Why?Because assoon as a neo-bank competitor establishes a benchmark competency for thesesame capabilities without requiring a visit to a branch, then your bank willeventuallybemeasuredagainst that standard.Keep inmind thatnoneof theseexamples I’ve given are required by regulation either, but they are in placebecauseofanoverlyconservativeinternalcomplianceprocess.

Formanybanks,however,theirdistributionplatformistheirbranchnetwork:it’stheiraccessidentity;it’sthewaytheyareembeddedinthecommunity;it’swheretheirbrandingsits;it’showtheymeasurecustomerexcellence,experienceand engagement.When bankers used the terms “network” or “distribution” inthe80s,90sand2000s,theyknewinternallytheyweretalkingexclusivelyaboutbranchnetworkandbranchdistribution.Fromastrategicperspective,whilethathasobviouslyshifted inmost large retailbanks today, it’saveryhardhabit tokick—allthatrevenuefromthebranch.AsMichaelCameronalludedtoabove,if visits per customer to your branch network continues to decline, brancheconomicsforallbutthemostactivebrancheswillfail,aswillrevenue.

Now, for those that really get upset when I talk about changes to branchnetworks,letmestatethisfortherecord:Idon’tthinkbranchesarecompletelydead, nor are theyALL going away, but by 2025most brancheswill becomemuchmoredifficulttosustaineconomicallyasweseealternativeapproachestobanking gain traction. These alternative approaches will consistentlydemonstratebranchesdon’tdeliverrevenueandrelationshipsat thesamescale

or cost effectiveness as digital.Once themarket starts to regularly compare aneo-bank like Moven or Monzo, a Tech giant like Amazon or Alipay, or aFinTech like Acorns or Betterment with an omni-channel bank with massivereal-estate investments side-by-side, branch networks will come under hugepressure to close because of climbing acquisition costs and reducingdifferentiation.Withinafewyearsstockmarketanalystswillsimplyaskwhetherbranchnetworksareasustainablewayofdoing thebusinessofbanking.Oncethat happens, itwon’t be long before analysts are discounting bank stocks fortheir excess real estate. Right-sizing branch networks will be forced uponpubliclylistedbanks.Banksreliantonbrancheswillhavenowheretogo,they’lljustcontinue toarguebranchrelevancewhile theshrink. In thesameway thatretailers argued people stillwanted to come to their stores,while retail storeswereclosingbythethousands.

The problem for banks is that in this new experienceworld, network is afunction of technologies that deliver capabilities in real-time at scale, thatanticipateorpredictyourneeds,thatareembeddedinyourworld,thatreframethe utility and import of banking in your day-to-day life. This has very realconsequencesforthefutureofbanks.

In July 2017, Kakao, a Korean internet platform that has the largestmessenger app in the country and runs a service likeUber calledKakaoTaxi,launched their own internet-only bank—KakaoBank. In just five daysKakaohadopenedmore thanonemillion accounts5, attracting over half a billionUSdollarsindeposits,andtheyclaimtheywouldhavebeenabletoopenmorehadtheirtechnologynotbeenoverwhelmedbythedemand.

Thisisincreasinglythestandardthenewinternetbanksarebeingheldto,butKakao, Tencent,Amazon,Uber andAlipay have advantages over digital pureplay and incumbents alike. They can apply network effect from their existingplatforms to functions likedeposit taking andpayments. It’s not just that theyhave access to millions of customers, but that those customers will use theirnetworks for payments, commerce and other bank-like stuff. When thoseplatformsstarttoofferbankingutility,it’sanobviousevolutionoftheirnetworkutility.

In2004,wheneverIhadtopaymyrent,Iwouldgotomybank,queue,withdrawmyrentascash,walk it across the street tomy landlord’s bank, take a number and queue, and then eventuallydeposit themoney into his account.Today, I paymy rent usingAlipay fromAlibaba. I investusing WeChat from Tencent, and I bought a mutual fund from Baidu. The landscape hascompletelychanged.

—Kapron,AShanghairesidenttalkingbankinginChina;BloombergMarkets6

Changesinday-to-daybankutilityasaresultof theunderlyingtechnology

weusedaily also changes thewaybanking effectivenesswill bemeasured. InChinawhereAlipay andTencent’sWeChat dominate the payments landscape,bankstherehavehadtorapidlyretooltobuildtheirownmobilecapabilitiesastheirdepositsandfeeswereincreasinglyatrisk.

Distribution of financial services in China has fundamentally changedbecause of TechFin. But nomatter where you are based, if you don’t have arevenueorrelationshipstrategybuiltonreal-timedelivery,youaregoingtobeseverelyhamperedinthenearfuture.Ifyouhaveaproductorservicethatstillrequiresasignatureinfiveyears,youaregoingtobestrugglingforanycross-sell and up-sell.You simplywon’t be able to survive as a bankwith revenuefrom the branch alone. No way. Friction will be the biggest killer of bankrevenueinthenext10years.Thelowestfrictionexperienceswillwinthehighestnetwork adoption rates. We can already demonstrate that in China, India,Bangladesh,Kenyaandelsewhere.

Ask ICBC, the biggest incumbent bank in the world, based in China.BecauseofthemassivedominanceofAlibabaandTaoBao,theywereforcedtolaunchtheirownAlibabae-commercecompetitorinrecentyearscalledRongE-Gou ( roughly translates as “buy easily”)—today, more than 10,000merchants sell their goods and services across this platform, generating morethan1.27trillionyuan(US$184billion)insalesin20167.In2015,RongE-Gousoldmorethan100,000iPhones,thetrickbeingthatICBCalsoofferedfinancingfor these purchases online. One needs to ask, how many banks have theresources necessary to build anAmazon or Alibaba competitor in their homemarketstostayconnectedlikethistotheircustomers?

ICBC added business services to Rong E-Gou in 2015, and today 3,000companieshavesoldUS$218billionofproducts,withthingsasvariedasofficesupplies through to manufacturing robotics. More than a quarter of a millionbuyershaveusedtheplatform.Inthiscase,ICBCisnotbuildingbankplatformorchannels,theyarebuildingwaystoincorporatebankingutilityintoeverydaycommerce. Why? Because they realize that banking is quickly becomingembeddedintheircompetitorsplatforms,andcustomerswhohavealowfrictionchoicewillchoosethesamefinancialservicesthroughaplatformproviderratherthan“go to thebank”. I reallycan’t imagineICBClaunching thise-commerceplatformifnotforthesuccessofTencentandAlipaytheselastfewyears.HowmuchdoyouthinkICBCspentonlaunchingRongE-Gou—$200million,$400million?At least.That sortof investment in retailcommercewouldhavebeenconsidereduntenableinyearsgoneby,especiallyasitisnotcoretothebankingbusiness.

Butitwasasmartmove.

EmiratesNDBenteredtheretaile-commercefrayinMaythisyearwiththelaunch of SkyShopper, a platform through which merchants from around theworldcanoffer specialdeals toEmiratesNDBcustomers.Whyarebanks likethis looking for more commerce action? Primarily because the data andbehaviourthatdrivesuseofbankingservicesisincreasinglyshiftingonlineandtomobile—andadvertisingonbillboards,TVsandnewspapersjustdoesn’tcutitanymore. Today, if youwant to get a customer to use your banking services,increasingly it has to be wrapped around some other sort of transaction orinteractionwheretheyneedcreditavailabletocompleteapurchase,forexample.Additionally,onceaconsumerisusingbankingembeddedinanotherplatform,bankslosevisibilityonwhatcustomersaredoing.

InasurveyconductedbyaBeijingnewspaperinMarch2017,70percentofconsumers in China’s urban centres said they would be comfortable leavinghomewithout cashor cards today.TheNewYorkTimes reported in July 2017that there are large sections of urban China that are virtually cashless andcardlessbecauseof thehugepopularityofmobilepayments8. InAugust2017,theprimeministerofSingaporesaidinhisnationaladdressthatChinesetouriststoSingaporeareaskingwhyitissobackwardthattheystillhavetousephysicalcash.ItwasthenthathestatedSingaporehadtogocashlessfast,andannouncedagovernment-backedinitiativetoachievethat.

Commercial banks, Mastercard, Visa and Union Pay are just not leadingplayersinthemobilepaymentsgameinChina.Why?Becauseplasticisnotinthe mobile payments game in China, neither are POS terminals or even, godforbid,ATMs.Newecosystemshavetakenovertheeconomy.Ifyouareabankstill using debit cards in China today, you’re probably scratching your headwonderinghowyoucangetpeopletousetheirplasticcardsagainifit’snotforonlinepurchases.Ifyourlatestinnovationisopeningabankaccountinamobileappand shippingcards toyour customers, you’re still behind the eightball inChina.

Thisisaworldwhereissuingplastic,orapplyingforplastic,isnolongerofany significant value. In 2016 mobile payments overtook card payments inChina. In 2018China’smobile payments volumewill overtake the rest of theworld’screditanddebitcardstransactions.ThedeclineofplasticinChinaisjustthebeginning.

Uber made waves in the auto-financing market launching its XchangeLeasingprogram.AtoneNissandealershipinChicagolastyear,UberXchangeaccountedfor41percentoftheirsales9andcontributedtoa200percentincreasein year-on-year Q1 sales figures. Didi Chuxing, Uber’s equivalent in China,launcheditsownleasingbusinessin2016also.

Youmayhaveheardofsmallbusiness lenders in theUSsuchasKabbage,OnDeck Capital, or in the UK Funding Circle, but platforms like Amazon,SquareandPayPalareincreasinglyactiveinthespaceaswell.Amazonlent$1billion last year and has lent $3 billion tomore than 20,000 small businessessincelaunchingtheirsmallbusinesslendinginitiativein2011.Alibabaalsohasarapidlygrowingloanbook,extending¥50billionyuan(US$7.5billion)ofloansto businesses and providing credit lines to over 100 million individuals forcustomersonSingle’sDayalone.

InastrategicmovedesignedtogainaccesstoChinesetourists,evenMarriottgot into theAlipaygamewhen they announced inAugust 2017 that theywillacceptpaymentsfromAlipay’sdigitalwalletacrosstheirglobalproperties10.AsdidNewYork’syellowtaxis.

These examples are all illustrative of banking becoming more and moreembeddedinnon-banknetworksandplatforms,wheremanyofthosebusinessesare starting to offer financial services in context. The big shift is this: in theworldofbankingfromthe1400sto1995,everybanktransactionorproductwasissued through a bank-owned and operated channel—a branch, call centre,brokerorATMnetwork.Today,non-bankchannelsclearlydominateday-to-daybanking access and transactional activity (mobile app, web, and voice asexamples).Withinadecade,non-bankchannelswilldominaterevenuealso.

Bye-byeproducts,helloexperiencesTencent’sWeChat,Alipay,GCash,Kakao Pay, Paytm,Venmo andM-Pesa allofferday-to-daypaymentscapabilitythatdon’trequireaplasticcardtotransact—they are platforms that have created differentiated payment experiences.AlibabaandAmazonoffer smallbusiness loansandUberofferscar leasing toentrepreneurson theirplatform thatdon’t requireapplication forms, traditionalcreditapprovals,orcreditscoring.Digit,Acorns,Qapital,MovenandStashareall examples of apps that stimulate savings behaviour, but don’t have atraditionalsavingsorinvestmentaccountstructure—youdon’tevenapplyforasavingsaccounttostartsaving,youjustapplyforaccesstotheserviceorapp.

Nowbankersmightarguethisissemantics,thatattheendofthedayit’sstilla bank that is holding themoney. But if that was your first thought, you aremissingalargertrendatplayhere.

To illustrate. Think about payments evolution andwhere technologies likevoiceandaugmentedrealitysmartglassesaretakingusoverthenextdecadeortwo.IfyouliveintheUSorUKatthestartofthe20thcentury,youmorethanlikely got paid in cash, and did all your payments in cash.But 50 years later

chequeswerethedominantformofpaymentforlargeitems,andpeoplewouldeven use cheques to pay for groceries. Then in the 1980s cards becameincreasinglypopular,andwereadaptedtobeusedforonlinewhene-commercecamealong.

Cashwasinstant,butrequiredyoutocarryitandtovisitabanktogetmoreofit.

Chequestookthreetofivedaysataminimum,wereprocessedthroughbankclearing houses, and required you to carry a paper booklet that you weresuggested to “balance” regularly. Until cheques started to bounce, they hadprettyhighutility.

Cards were super-convenient and once we dispensed with knuckle-bustersand moved to electronic point-of-sale terminals, payments were effectivelyinstantaneous.

In China, India and Africa today, Alipay, M-Pesa, MTN mobile money,PaytmandWeChatPaywalletsareallinstantaneous,butdon’trequireplasticorPOSterminals,orgoingtoabankbranchtosign-up.Venmo,PayPal,ZelleandothersaretheequivalentintheUS.Whilemostoftheseservicesenableyoutolinkadebitcardorbankaccountfortop-ups,activitywithinthesenetworksdoesnotrequiregoingthroughyourbankaccount.

If you trace these developments over the last 50 years, you have anaccelerating emphasis on low-friction, payments immediacy and consistenterosionofcomplexity.Thefutureofpaymentsisclearbasedonthistrend:real-time, frictionless payments from one value store to another, independent of aphysical payments artifact (like a cheque or card), with the greatest networkeffect.

Figure1:Emergingpaymentsexperiencesappeartobegettingsimplerandmoreinclusiveovertime.

As payments have evolved the tendency is to move away from both theclosed, proprietary nature of bank owned and operated payment networks andfromcomplexslowsystemstowardsinstantornearreal-timepayments thatsitonopennetworks,becausenetwork-effectallowsgreaterpaymentsutility.

Cashisfastbutrequiresgoingtoabankperiodicallytogetaccess,whileitisgenerallyslowinaforeigngeographyandcan’tbeusedonlinewithoutatonoffriction—so that’s the baseline. Bank-to-bank networks in the EU and cardnetworks are fast, but are also not inclusive generally. Chequesmight appearsimple to those that have used them for 40 years, but ask a young workingprofessionaltowriteacheque,ortryusingaUSbank-issuedchequeoutsidetheUSoronline,andyoumightbelaughedat.

TherealityisthatnetworkslikePayPal,WeChatPayandAlipayhavegreaterutilitywithin their networks than bank-to-bank transactions or cash today due

simplytothescaleofthosenetworks.Yes,theyareclosed-loopsystemsinmanyrespects,butthescaleofthosesystemsarebasedtodayonsocialmediametricsofhundredsormillionsorbillionsofusers,sothattheymayaswellbeopen.JPMorganChasehas80millioncustomers,AliPay650million,WeChathasonebillion,Facebooktwobillion.

Emerging market digital wallets are built for broad inclusiveness, lowbarrierstoentry,andarereal-timebydesign,becausethey’vebeenbuiltontheIP layer.The trendseems tobeaclear indication that futurepaymentswillbesimpler, more inclusive and built into the digital ecosystem as seamless andexperience-optimised.Thebest retailexperiences in thefuturewillbewalk in,grab thegoodsyouwant, andwalkout.Thebest online retail experiencesviavoice or A/R will simply know who you are and how you pay, taking anytransactionalfrictionoutcompletely.Thefastestwaytopayyourfriendwillbetouseasimplegesturetoswipemoneyfromyourmobilewallettohis,orwhenyousay“Siri,payMark$50”.

The future of payments is unavoidably experience-rich and friction-andartifact-poor.

Figure2:ChinaversusUSversusJapanFinTechecosystems(ImageCredit:Life.SREDA).

Examining savings, credit and lending, and other aspects of finance, willdemonstratethesametrend.Onlineandmobileexperiencedesignisleadingustowardrapidutilityandfulfilment.Thefastest,mostseamlesscreditexperience

isnotanapplicationforacreditproductonyourphoneorlaptopwhileyou’reina store, but simply a provisioning of credit based on a preferred or enabledrelationship. The product (credit card, overdraft, personal loan, line of credit,etc.)structuredisappearstosimplyenableyoutogetaccesstotheutilityofextracashwhenyouneeditthemost.Youdon’tneedthecard,youjustneedthecash.Applyingforacardissimplyunnecessaryfriction.

Fromafirstprinciplesapproach,weshouldseenewtechnologieslikevoice-smartassistants11andaugmentedreality(AR)smartglassesasways toexploreentirelynewwaysofleveragingbankutilityonanexperiencebasis.Innovationwithabankisoftenverymuchthinkinginsidethebox,restrictedbycompliance,legal and legacy systems behaviour. Iteration on these processes and systemsdoesn’t produce the same innovations as someone starting without thoserestrictions,orsettingupbasedoncompletelydifferentassumptions.

The end gamewith these technologies is contextual banking services andutility. So instead of paying your credit card with Alexa using your voice orgoing to a bank branch to apply for a physical credit card, we can use firstprinciples to think very differently about credit access itself. First principlesasks:ifyouhaveaccesstoapersonalAIcapabilitywhileyouareshopping,howwouldyoudesignaccesstocreditbasedonwhothecustomerisandwhattheyaredoing?

Afirstprinciplesapproachmightbeillustratedusinggroceryshoppingasanexample.Using first principles thinking I look to predict your need for credit(your balanceof your value store is lower thanusualwhengrocery shopping)andwhen youwalked into theWhole Foods or Tesco, I’ll then offer you theextra cash you need to do your shopping, with a simple and transparent feestructure.Rememberinthegrocerystoreofthefuturetherewon’tbeacheckoutcashier, either—you just take the goods and exit, with payment occurringautomatically12.

Figure3:Creditandpaymentsareincreasinglycontextualandextremelylow-friction.

Designbybranchanalogywouldstillrequiremetoapplyforacreditcardinadvance(evenifviamymobileorviaAlexa),justincaseIneededthemoneyone day. First principlesmean new financial service networks wouldn’t buildcreditscoresthatpunishyouformissingapaymentonyourcard.Firstprinciplesorganizationswoulddesignsystemsthatpredictyourbehaviour,onlyencouragecredit use when you really need it, and help you manage that credit linereactively, including influencing new spending decisions so you don’tcompromiseyourabilitytopaybackyourcreditline.

Firstprinciplesdesignincreditmeansthataproviderwilllikelyhaveamuchstronger relationship that encourages incredible loyalty, instead of like today,where it might lose out to another bank’s plastic card at the checkout line—because it’s integral to your life.A bank’s ability to understandmybehaviourandpresenttomeasolutionofthegreatestrelevance,willreinforcetheirbrand.Design by analogy might seek to present a credit card offer via your smartassistant (Alexa/Siri/Cortana) and streamline the application process. Firstprinciples design thinkingmeans you don’t need a plastic card or applicationprocessatall.

Context is the new experience battlefield because it brings the utility ofbankingtoyouwhenandwhereyouneedit,insteadofrelyingonthecustomerasking tobe approved for a facility.This is thekey switch that is beingmade—Bank 4.0 experiences will be an attack on the entire onboarding andapplicationprocessbankshavedesignedtoday.

Sohereisalistoftypicalbankproductsthatcoulddisappearoverthenext15–20yearsasaresultoffrictionandchannelobsolescence, tobereplacedbyreal-time,responsiveexperiencessurfacingbankutility:

FinancialProductorService ReplacementEmbeddedExperience

CreditCard Predictiveandcontextualcreditaccess

Overdraft Emergencycreditaccess(groceryandhealthcareoptimized)

Checking,CurrentAccountorDebitCard Cloud-basedpersonalvaluestorelinkedtoamobilewallet

SavingsAccount Behaviouralsavingstoolsandprompts

PersonalLoan Paymentoptionsadvicein-storeorcontextually

Mortgage Homepurchaseassistant

CarLoan/Lease Autonomousvehicleaccesssubscription

SmallBusinessBankAccount Intelligentbusinessvaluestore(withaccounting,taxationandpaymentsAI)

BusinessLineofCredit Predictivecashflowanalyticsandsmoothing

LifeInsurancePolicy Longevityandafter-lifemanagement

HealthInsuranceCoverage Healthoptimisationandmonitoringservice

TermDeposit,CD,InvestmentorHighYieldSavingsAccount

Wealthbuilderrobo-assistant

MutualFundorInvestmentProduct Robo-advisorwithnetworthmanager

ForeignExchangeService Globalwalletadd-in

Table1:Listoftypicalbankproductsthatcoulddisappear.

Ifyouconsidersomeoftheemergingtechnologiesthatmighthaveamarkedeffect on access to banking services (in the samewaymobile andweb have),herearesomedesign-by-analogyversusfirstprinciplesapproachestoinnovationinthespace:

Table2:Design-by-analogyversusfirstprinciplesapproaches.

DesigningexperiencesintheBank4.0agemeansthatthepreviousproductandchannelstructuresofferalmostzerobenefitinthisnewworld.Infact,theymay bias you towards experiences with unnecessary friction and limit you intermsofscale.

Thetrickwithfirstprinciplesisthatyouneedtostartfromscratch.Thinkofhow tooptimally solve aproblemwithin theboundsof thenew technology—howbest to buy a home, how best to buy something like groceries in a storewhen you don’t have enough cash, how to deal with healthcare costs in anemergency while you’re at the hospital, and simple advice like “How can Iafford to buy this new dress for a friend’s wedding?” You don’t begin bythinkinghowyoucanstickanexistingbankproductonanewchannel.Thatisdesign by branch analogy, andmeans by virtue of the competition that you’reslippingfurtherbehindintermsofexperiencecompetitiveness.

Platform owners like Alibaba, Amazon, Apple, Google, WeChat andFacebookmayhavesomeconsiderableadvantageshere.It’swhytherearewaymore mobile and augmented reality payments patents owned by technologymanufacturers than banks. Think about that—if patents are a measure ofinnovationinatechnologyfield,thenwhywouldn’tbanksandfinancialservicesplayerstodayownthevastmajorityofpatentsemerginginrespecttopayments?

This begs the question: if products have to make way for contextualexperienceswhatdoesabankorgchartlooklike?Wheredoalltheproductsandchannelsgo?

BBVAwillbeasoftwarecompanyinthefuture.—FranciscoGonzález,ChairmanandCEOBBVA,MobileWorldCongressin2015

TheBank4.0organisationchartlooksverydifferentIfyouwanttotrulyunderstandtheimpactoffirstprinciplesyouneedtolookatthestepchangeeffectthatfirstprinciplesthinkinghasonecosystems.

When the automobile was invented the dominant form of urbantransportationwashorses—within30years that had all changed, alongwith ittheshapeofcities,manufacturing,andsupportsystemsaroundcars.When thetelephonewasinvented,itrapidlychangedcommunication.ThesameispatentlytruewiththeimpactoftheiPhone—notonlyhasitchangedthewaypeoplethinkabouttheir“phone”,butitcreatedentirelynewwaysofdoingbusinessviaapps,itchangedthemusicandtaxiindustrymarkedly,itchangedthehourswespendonourdevices, and it changed thewaypeople consumedandcreated content.Thebusinesses thatemergedon topofmobiledidn’t look like those thatcamebeforethem,andsomeofthosebusinessesarenowworthbillionsofdollars,andyettheywouldn’texistwithoutthesmartphone.

Justtakeonesmallareaofthesmartphone’simpact—photography.Priortocommercial cameras only a few million photos had ever been taken. When

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Kodak introduced the Brownie in 1900, it rapidly changed photography, withover a billion photos a year being taken by 1930. The emergence of digitalcamerasmeantthatbytheyear2000weweretakingabout86billionphotosayearacrosstheplanet.Butthenthesmartphonearrived.In2017itisestimated13that 1.2 trillion photos were taken, and we’ll be storing 4.7 trillion photosthroughoursmartdevicesandonthecloud.Of the1.2 trillionphotos takenin2017,only10.3percentofthemcamefromdigitalorconventionalcameras;85percentofthosephotoswillcomefromsmartphones.

Welcometothebroaderimpactoffirstprinciplesthinking.It’swhyTeslaisnot just about building electric vehicles (EV), but also about superchargingnetworks,solar-chargingstations,andautonomoussystems.

When we think about the impact that the smartphone has already had onbanking, it isclearlysignificant.2015wasthefirstyear thatmorepeopleusedtheirsmartphone tobankthanvisitedabankbranch,callcentre,ATMorbankwebsite.Ittookjusteightyearsforthesmartphonetobecomethedominantformof day-to-day banking access14. Despite that, we’ve not really made majorchangestothebankorgcharttocaterforthisbehaviouralshift.Today,headsofmobile,CDOs(chiefdigitalofficers)andthetechguyshavemoveduptheorgchart hierarchically (sometimes), but structurally the rest of the bank has notsignificantlychanged.ButasindicatedbyFranciscoGonzález’squoteabove,astechnology comes to dominate the banking experience landscape, theorganisationchartmustchangetoreflectentirelynewoperationalcompetencies.

What’smissing?When I’m asked by bankers who they should hire for what’s coming next, Ialwaysbeginwith“Stophiringbankers!”Theskillsneededtobecompetitiveinthefuturewon’t requireanybankingexperience,but thesenewskillsarewhatbanks could live and die on.Over the past fewyears I’ve been surveyingmyFinTech friends on what hires will be most critical to the growth of theirbusinesses andwatching jobboards and the like.Thequalitative research I’vecarried out has come up with just a few of the jobs that will be consideredcriticalinrevenueandcapabilitygrowthinfinancialservicesoverthenextfiveyearsorso.

DataScientistDatascientistsareanewbreedofanalystsanddataarchitectswhohavethetechnicalskillstosolvecomplexproblemsandtoanswerbigquestions.Moreoftenthannot,datascientistsfindthemselves

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exploringexactlywhatproblemsneedtobesolved,basedonwherethedatatakesthem.They’repartmathematician,partcomputerscientistandparttrend-spotter.TheysitbetweenthebusinessandITworlds.MachineLearningSpecialistMachinelearningoralgorithmspecialistsarespecialistprogrammers,architectsandmodellersthatbuiltthesystemsthatusecutting-edgeartificialintelligence.TheydesignMLalgorithms,sourcedata,train,evaluateanddeployMLmodels,andworktodeveloppredictiveandcognitiveprocessingcapabilities.Theabilitytotestsystemsquicklyanddeployatscalerapidlyarekey.ExperienceDesigner/StorytellerExperiencedesignersand/orstorytellerscanplacethebankanditsutilityincustomers’livesthroughtechnologyinthemostfrictionlessmanner.Theylookataspectsofdesignlikeinteractionandinterfacedesign,rapidprototypingandusabilitytodevelophighlycompelling,low-frictionengagement.Theabilitytothinkdifferently,circumventexistingprocessesandpoliciesandchallengetheorganisationarekey.BehaviouralPsychologistWhenitcomestodesigninginteractionsandnewsystems,thecapabilitytounderstandhowsomeonewillreact,whatbehaviouralmodelstheywillapplyincertainscenarios,andtheuseofconsciousandsub-conscioustriggerstogamifybehaviourwillsoonbecomeleversforshort-termandlonger-termengagementandloyalty.BlockchainIntegratorAsblockchainbecomescriticaltomoneymovement,IoTwalletcapability,identitypassporting,tradefinance,etc—thecoresystemsoftodaywillnotcopewiththelevelofchangethrustupontransactionbanking.Thus,asbankscannolongeraffordthetimeforfullcorereplacements,cloudintegrationofblockchaincapabilitiesthatextendthebankplatformandallowintegrationintonewplumbingwillbecritical.ComplianceandRiskProgrammerAllcompliance,lawandriskwillbeembeddedinautomatedprocessesbeforelong.Thiswillshiftthefunctionsofcomplianceandriskawayfromhumanprocessesandbankpolicy,toasystemofmonitoring,alertsandactiontriggers.Within20yearsmostregulatorswillalsohavemovedtosimilarsystems—sothebankAIwilltalktotheregulatorAI.

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CommunityAdvocateCommunityadvocateslookatplacingthenewexperienceinthebestplacestogetthefastesttractionandscale.Communityadvocateslookatconsumertrends,networkeffectandemergingtechnologiestoseewherethebankneedstobemostactiveinthefuturetoengagecustomers,justlikeplannersusedtolookatfoottrafficandvehicleflowsinacitytodecidewhereabranchneededtobephysicallysituated.IdentityBrokerInthefuturenon-bankentitieswillhavemuch,muchbetteridentity,heuristics,biometricsandbehaviouralinformationthanthatofbanks,sowe’llneedbrokerstoidentifycustomersaccuratelyandinreal-time.IdentitybrokerswillconstructthenewIDV(identityverification)systemsthatreplaceourcurrentKYC(knowyourcustomer)processes.Thiswillbeaboutreal-timecustomerprofilingandverification,notonboardingthroughaprocess.

I refuse to add Robot Psychologist, Emoji Translator and CustomerExperienceNinjatothislist.However,ImightbetemptedtoaddanAIEthicist,forexample.

SomerolesI’veleftoutthatarecriticalforfuturedevelopmentalreadyexistin numerous banks, but theywill become increasingly important in building abank platform that is competitive. They include business analysts, venturecapital teamsforinvestinginFinTech,thosethatmanageandgrowtechnologypartnerships,hackathonandincubatorlabs,etc—basicallytheabilitytorapidlygrow the bank’s technology capability without building it internally. The realchallengeforbanks,ofcourse,isthatifyou’reatechgraduatecomingoutofauniversitylookingforajobtoday,wouldyoubelookingtoworkforastartup,atechmajorlikeFacebook,AppleorGoogle,orwouldyouwanttojoinabank?Recruiting these skills will surely be a challenge for financial servicesorganisationsculturally,aswe’lldiscussinlaterchapters.

Technology partnerships with organisations outside the bank will becomeincreasingly commonplace as banks realize that they no longer have thetechnologyexpertise thatoutsideactorsdo,andthat tobuildit themselveswillcost much more and take much, much longer than simply partnering with aFinTechortechfirmthatexcelsatthatsamecompetency.

AtMovenwecallthistheabilitytobendspaceandtimeforourpartners15.To deliver the same or better technical or customer experience capability thebankrequires,butatafractionofthetimeandcostitwouldtaketodeliverusing

internalresources.Iknowtherearebankerswhowillremainscepticalaboutthisassertion, but let me throw down some home truths here usingMoven as anexample.

AfterwelaunchedMovenin2013wehadanapproachfromoneofthebigfour Australian banks. They engagedwith usmultiple times, we presented totheminAustralia,theyflewtoNewYorktwicetomeetwithus,andtheyevenlookedtoengageusoffshoreinAsiaonsomespecificprojects.Theyvisitedourpartner bank TD, to check outMoven’s white label product we launched forthembranded“TDMySpend”—oneofthemostsuccessfulproductlaunchesinTD’shistory,accordingtotheirCEO16.Butovertimeitbecameclearthatevenafter two to three years of engagement, that they were tire-kicking, trying togleanasmuchtechnicaldetailaspossibleaboutourproductroadmap,buttheyhadnorealintentionofbuyingourservicesorpartnering.

Then in 2015 things got interestingwhen they recruited our chief productofficer,offeringhim inexcessofUS$500kperyear to leaveMoven.Over thenext two years they proceeded to spend a reported $20–30 million to finallylaunchtheirown“financialwellness”capabilitycalled…yes,youguesseditMySpend—veryoriginalfellas.

Yes,intwoyearsatacostof$20+milliontheylaunchedtheirownversionofMoven’sfinancialwellness,whichtheycouldhavelaunchedinthreemonthsforunder$1millioniftheyhadpartneredwithusratherthangoingitalone.Notonlythat,butthefeaturesofMySpendreflectessentiallythecapabilityMovenhadin2015,andtodaywe’veadvancedfeaturesonourproductforbehaviouralsavingsandcontextualcreditthatwilllikelycostthemanother$20–30milliontodevelopandtakeanothertwotothreeyears.Partneringwithuscouldhavegiventhemthatcapabilitytoday.

NowI’msureaplayerat that leading financial institutionwillhaveaverysoundexplanationforwhytheywentdownthispath,andthey’lltalkabouthowagilethey’vebecome.Butattheendoftheday,itcostthisbank20timesmoreand took them 10 times longer to build it internally than if they had simplypartneredwith us.Now I’m not telling you this story because I’m upset theydidn’t partner with us, they had that right. I’m telling you this because inhindsightitwasclearlyapooreconomicdecision.Shouldthissortofcasereallybeasurprise,though?

Who is going to be faster and cheaper at building new tech for financialservices? A company that only focuses on tech, has a smaller more agilestructure,workswithmultipleFIsaroundtheworldandhastoanswertoaboardfull of venture capitalists? Or a bank that has to deal with legacy systems,complianceand risk issues, and significant challengeswith recruiting the right

skillstobuildthesenewtechnologiesinthefirstplace?MoreandmorethiswillbeaquestionthattheCEOsofmajorinstitutionsare

going to have to answer. Do they retool to become an agile, technologyorganisation, or do they look increasingly to partner with those that aretechnology-first,andarecheaperandfasteratinnovations?

AnecdotallyastoryisdoingtheroundsrightnowthatJeffBezosisbigonAIanddata science, so big that he told his teamhewanted to recruit a thousandnewdatascientistsandtodowhateverittooktogetthem.Reportedly,thiseffortgleanedonly600newrecruits,workingforoneofthehottestcompaniesontheplanetinthisarena,payingbetterthanaveragesalaries.Nowthinkaboutabanktryingtorecruitjust20or30datascientists,andtellmethey’regoingtobemoreeffectivethanAmazon.Toughproblemtosolve—andonethatmayrequireevensponsoring university scholarships or creating internal training programs tohome-growthoseskills.

Thisall speaks to thebroadercapabilitiesofabank.Howdoyouorganisethesenewcompetenciesina21stcentury,Bank4.0bank?Doyousimplycreatenewrolesintheexistingbusiness,ordoesitrequirereorganisingthebusinesstobemoreeffective?

Anexerciselikethis inorganisationaldesigntheorycouldtakemanyyearsofroomsfullofacademicstocrack.Explainingthisisbeyondtheparametersofthisbook,soinsteadletmetrytotakeashotatitinsimplecompetencyterms.Let’sstartwithwhatatypicalbankorganisationchartmightlookliketoday,inverygeneralterms.

Figure4:Representativeorganisationchartofacommercialbanktoday.

An organisation chart in today’s modern bank reflects an evolution overdecades—incrementalchangeasa resultofmarket focus, increasedregulation,andtechnologyimpact.Inrealityit’snotall thatdifferentfromanorganisationchartyoumighthaveseen30or40yearsago inbanking,but therehavebeennewcompetenciesandcapabilities inserted into thestructure.Afirstprinciplesapproach to banking is necessarily going to have a significant impactorganisationally.

Whatismostnoticeableaboutanorganisationchartofabankinthefutureisthat the bank functions as a “platform”—it has the ability to surface theunderlyingutilityandcapabilityofthebank.InaBank4.0organisationitisnotomni-channel capability that is the key, it’s complete channel agnosticism,engagement and revenue-pragmatic focus. In a world where you compete onutility,productstructuresandchannelcapabilityarewhatlieunderthesurface,whereas the tip of the iceberg is all about experience mechanics. In anexperience world, the whole business is geared towards great bankingexperiences—it’s not a channel-based afterthought where you retrofit a creditcardintoAlexasoacustomercanmakeapaymentontime.

WhenitcomestoAI,whichwillbynatureseektoautomatemuchofwhatwehavehard-codedinlegacyarchitectureandprocesstoday,thiswon’tjustbeadepartment thatsitsunderIT.ArtificialIntelligencewill likelyeliminatewholeswathesoftheorgchartasitstandstoday,butAIanddataminingandmodelingwillpowerelementsofalmosteveryinteraction.IfyouaretemptedtothinkofAI like you do your bank’s website (a piece of tech), then iterative thinking(design by analogy) will dramatically limit your ability to compete becauseyou’llendupwithcompetingAIprojects,datasilos,competingteams,fracturedbudgets,andinconsistenciesinprocessapproach.You’llhavehighlyautomatedprocessesinretail,buttonsofretainedfrictionincorporatebanking,becausetheretailguyswillgetmorebudget.

Thetableonthenextpagebreaksitdownintopotentialcorecompetenciesby functional area, showing how revenue might be delivered and people andresourcesmanagedinthenearterm:

Table3:Corporatefunctionversuscorecompetenciesbyfunctionalarea.

The organisation becomes less hierarchical and more collaborative asproductstructuresandchannelcapabilitiesdon’tcompeteforbudget,butarejustlevers for engagement, relationship and revenue. This approach, in theory,allows formuch greater leverage of technology agnostically across the utility

spectrumand allows for use of distributed technologies like blockchain or IP-basedsolutionsfrompartners,withoutrunningintosacredcowsorsilos.Theisamuchmoreagilebankingorganisationstructure,onethatcancompeteside-by-sidewithtechnologypureplaycompetitors.Themodernbankingorganisationisfocusedaroundcustomerdelivery,whetherretail,SME,corporateorotherwise.Assuch,theorganisationbecomesmuchmoremission-focusedwhenitcomestorevenuedelivery.

WhenyoulookatthelikesofAntFinancialandothersattackingthisspace,theyhavebusinessunitsaroundcorecompetencies,butnotorganisationchartsfocusedonproduct.Theirorganisationchartisunconventional,focusedonKPIsthat measure active users, daily engagement, cumulative actions such asborrowing over the lifetime of the customer, and year-on-year growth. Theircollective business unit growth is designed to speed up the reach of theirnetworkasitgrows17.

This leads us to think of the newBank 4.0 organisation structure not as achart showing strategic business units, but as core competencies across theorganisation that can sharemissions, customer goals and so forth in amatrixformthatatypicalbanktodaywouldencounterhugechallengestoaccomplish.

Figure5:TheBank4.0CoreCompetenciesChart(circa2025).

Intermsofcompetencies,weseethat“banking”persejustbecomesoneofthecompetenciesofthebank,andinequaltermsDelivery,BusinessOperationsandTechnologyOperationsarejustascritical.

WhilewemightseetodaythatAIandsomethinglikeAmazonAlexaorthelatestmobileappwouldsitunderthepurviewoftheinformationtechnologyordigital team, in this new world delivery capability becomes a customerexperience and engagement platform that is far reaching—essentially the newdriver of revenue, relationship and reach. In this new model, technologyoperations become the underlying platform capabilities that are needed tosurfaceutilityandexperiencesinreal-time.Insteadoftraditionaloperations,wehave technology and business operational competencies, as both are just ascritical,butrequireverydifferentskillsetsanddivisionoflabour.

A few new areas emerge that you wouldn’t find on an organisation chart

today.Namely,Research&Development, PartnerManagement&Operations,DataModelling,ExperienceDesignand,ofcourse,ArtificialIntelligence.Manyofthesefunctionsarecounter-intuitiveforthebanksthathaveiteratedfromtheBank1.0world—theirimmunesystemsofinternalcoresystems,legacyprocess,compliance, and entrenched product teams are extremely likely to push backagainst these new strategic business units. If these competencies aren’t built,however, the ability to deliver revenue in a real-time tech-first world will betough.

Banksthatstillrequiresignaturesonapieceofpapertoonboardacustomershouldbevery,verynervousrightnow.FinTech[start-ups]arebuilttodelivereveryproductimaginableinreal-time,withoutasignature.

—AccenturePerspectives,2016

OnboardingandrelationshipsellinginthenewworldInaworldofexperience-basedbanking,there’snosuchthingascross-sellingaswe’d describe it in today’s world. Given the dramatic shift in behaviourregardingpreferredbankingaccess,thelikelihoodisthatbanksaregoingtohavetoadapttothisnewnormal.Intheshort-term,ifyoucan’tdeliveraproductorservice in real-time over digital, youwill be losing customers and revenue by2020.By2025,there’sabetterthanevenchancethatyou’llbehunkeringdowninsurvivalmode.

Figure6:PreferredBankingMethodsintheUSA(Source:ABA2017).

Figure7:PreferredBankingMethodinLatinAmerica(Source:Statista2015).

Figure8:PreferredBankingMethodsintheUKby#ofinteractions,2010–2020(Source:BBA).

Ifyoulookatthisdatafromdifferentgeographies,whilethetimeframesareslightly different, the trend is the same—branch as a preferential day-to-daychannel has declined between 50–80 percent since 2008. Surveys fromNovantas,Statista,CACI,BBAandothersallsuggestthatthistrendislikelytocontinueorevenaccelerateoverthecomingyears.

Again, this datadoesn’t suggest everybranch is going to close—that’s notwhatI’mgettingathere18.Thedata,however,absolutelyshowsthatpreferencefor branch interactions on thewhole is continuing to decline (as it is in retail

storefrontsbroadly).Therefore,multi-channelrevenuecapabilityisnotoptionalanymore, it isamatterofsurvivalforaretailbankbeyond2020.FinTechsarealreadyonboardingnewcustomersat1/20thandeven1/50thofthepriceoftheirforebearswith non-branch acquisition. So it can and is being done.We’ll talkmoreaboutthisshortly.

The addition of voice-user interfaces (from 2016–2022) and therepresentationofadviceand feedback inanaugmented realityhead-updisplay(estimated from 2025–28), are both technologies that will further detach thebranchprocessfromdailyengagementandsales.Themoreseriousissueisthatacquisition, cross-sell and upsell capability in this new world is based on anentirelydifferentcompetencytothatbefore.

“Alexawhataremyoptionstoinvestthismoney?”

TherearenodemographicsinKansasanymore,TotoTodaywemeasurekeysegmentsbasedondemographicsandbehaviour that isexhibited amongst their peers. In today’s banking world when someonemeasures that a segment like “Mass Affluent” can achieve a ratio of, forexample, three to five products per customer, we aim for that average as aproficiency benchmark. It mostly comes down to sales targets and marketingspend,ratherthanplatformcapability.

Intomorrow’sworld,yourabilitytoupsellorcross-selltoacustomerwillbebased on actionable data and customer behaviour intelligence. Your ability toanticipatewhen andwhere a customer needs your bank to solve a problemorfulfil a need will be the trigger for a real-time, or near-time, highly relevantcross-sellorupsellengagement.Differentiationwillbebasedonyourdatapools,partners and sensors that lead to the right trigger at the right time, and yourabilitytodeliverthatcontextuallywiththeleastfriction.

While some might be tempted to see this as an evolution of databasemarketing,thekeyhereisgoingtobebehaviouralmodelsandnotsegmentationand targeting. It is a pretty significant shift in underlying capability, becausemostmarketingdepartmentsdon’thavethatskill.It’sadatamodellingproblem,notatargetingproblem.It’sdatascience,notmarketresearch.

Andyet…thisiswheretherelationshiprevenueiscomingfrominthefuture.If you only have branches and traditional marketing capability trying to pullcustomersintoabranchtosignapieceofpaper,youaremassivelyhamperedinthisexperience-ledworld,andyousimplywon’tsurvive.

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EndnotesAndIthinkyou’reprobablyaresidentofColorado,OregonorWashingtonStatesmokinglegally.Thatis,iftheyvisitedabranch,withdrewcash,appliedforacreditcardandforaCDortermdepositonthesamedate—itstilljustcountsasonevisitforthatday.

Maybeyouwouldn’t…IhaveabankingrelationshipinHongKongwherethisisstillthecasetoday.

SeePulsenews,“KakaoBankattractsmorethanonemillionaccountsinitsfirstfivedays”,31July2017.“AHundredAppsBloominChinaasMillionsBankonTheirPhones,BloombergMarkets”,August2015—https://www.bloomberg.com/amp/news/articles/2015-08-19/wechat-baidu-and-alibaba-help-chinese-embrace-digital-banking.

Source:IndustrialandCommercialBankofChina—AnnualReports.“InUrbanChina,CashisRapidlybecomingObsolete”,17July2017,TheNewYorkTimes.

Source:FoxBusiness,June2016—“Uber’sLeasingProgramIsChangingTheAutoLoanMarket”.Source:MarriottPressRelease—http://www.digitaltransactions.net/news/story/Marriott-Will-Accept-Alipay-As-Part-of-an-Ambitious-Joint-Venture-With-China_s-Alibaba.

Seearticlebelow:“FutureVision:YourPersonalVoice-BasedAIBanker”,byBrianRoemmele.SeeAmazonGo.

Source:InfoTrendsWorldwideConsumerPhotosCapturedandStored,2013–2017.Seealso:http://mylio.com/true-stories/tech-today/how-many-digital-photos-will-be-taken-2017-repost.SeeATMMarketplace“Mobilevs.branch:Beyondthetippingpoint”,March2016.

ShoutouttoGregMitdbowhocameupwiththisone.Source:TD2016Q4QuarterlyEarningscallwithCEO.MySpendhadthefastestevergrowthtoonemillioncustomersofanyoftheTDproducts/platformsintheirhistory.MySpendwasalsotheonlyTDappevertohit#1ontheCanadianAppleiTunesandGooglePlayappstores.

SeeAntFinancialInvestorDayReport—http://www.alibabagroup.com/en/ir/pdf/160614/12.pdf.SettledownRonShevlinandKevinTynan.

From the introduction of the ATM machine in the 1970s to the web-basedinterfacesoftoday,bankshavebeenfamousfortheirlove/haterelationshipwithtechnology.TheearlydaysoftheATMwasnearlycurtailedbytheinsistenceofbankstochargepatronsforATMusage,eventhoughtherewasampleevidencethatmanybasicfunctionswouldsavethebanksmoneyandservepatronsfaster.When theATMwas finally adopted, it started a trend away from full servicebranchvisits,offering theopportunity for the localbanker tobecomecloser toregular patrons, to know them personally and their financial needs and goals.The technology began to push bank patrons away from their bank, and thisstartedabreakintherelationship.

Todaythechasmiswiderthanever,mostpeopleundertheageof35could,perhaps,countthepainfultimestheyhaveventuredbeyondtheATMlobbyofabank. Those older customers remember the bank visits, but it falls into thecategoryofapostofficevisit,orworse—aDepartmentofMotorVehiclesvisit.Mucholder peoplemaybe able to remember buildings and loans and savingsandloans,withtheessencecapturedintheclassicmovie,It’saWonderfulLife.Inthesememoriesofthepastwecanseethearcofthefuture.

Thereisnowagenerationthathasbeenraisedwithfinancialservicesthatare100 percent self-service. Of course, some of this was needed, yet what nowappears elusive is a personal, almost human connection. In the old days ofbanking, inmostmedium to small towns the banker knew the customer, theywatched them grow up and meet the milestones from first savings account,college loan, car loan,wedding ring finance, first home finance and so on. Inbetweenallthesebankingmilestonestherearethousandsofpointsofguidanceand advice. The relationship with the banker was almost raised to that of afamilydoctor.Theadvicewaswelcomed,therewastrustandconfidenceandthe

patronwasmorefriendthancustomer.Thismayallsoundoldfashionedandquaint,yettodaywehaveageneration

of younger people coming into the financial system with no real trustedconfidant fromwhich to ask financial advice. Certainly, one could search theinternetorcallatoll-freenumberandgetsimpleanswersreadoffofascreenbya person thatmight bemildly interested in helping you, orwhowants you toapply for their product so they get a sales commission. The rise of thesmartphone app has, however, started a trend that now allows for a deeperconnectionofpersonalizedserviceswithbanks.Theappecosystemevolvedusfrom the isolatedATMdays and set up a foundation for the next shift, voice-controlledAI.

As it stands today Alexa, Siri, Google Assistant and Cortana are alreadybecomingvery useful question and answer systems (Q&A).Q&A systems arelimitedinthattheydonotrecognizeacontinuityandacontextbetweenyouandtheAI system.Continuity hasmany elements, but themost simple element isthatat theveryminimumitunderstands thequestionsyouaskedbeforeand isable to establish how questions are connected with previous conversations.Context has evenmore elements, but the simplest element is recognisingwhoyouareandwhatyouare trying toachieveduring thismomentof interaction.ThisisthenextstageofwhatIcallthe“VoiceFirstRevolution”anditsetsthestage for even more advanced interactions we can truly call a dialogue orconversation.

ThisisallmediatedbyacontextualformofAIthatrestsuponknowingtheuser to a degree not achieved by currentAI systems and voice-first platformslike Alexa. This will change in a remarkable way. There are many new andinnovative techniques and protocols we can use to achieve continuity andcontext.Itwillformthebasisofatruedigitalpersonalassistant,somethingthatwillbecomemoreusefulandmorepowerfulover time.Therearemany thingsour true personal assistantswill do; one of themwill be financial advisementcustom-tailoredforyou,basedonyourdeepcontextandyourgoals.

Yourpersonalassistantwillbeavoice-firstAIsystemthatneverleavesyou.Overtimethecontextitestablisheswillbewithyourclearpermissionandwiththehighestsecurity.Youwillalsoformanalliancewithyourpersonalassistantinawaypreviouslyunseenintechnology.Thiswillallowfortheriseofthenewautomated, personal banker powered by your personal assistant and integratedwithyourbanksandotherfinancialcompanies.

Theinteractionswillevensurpasstheadviceonewouldhavereceivedfromafamilybankerin1950s’UnitedStates.Thetremendousabilitytocompareyourcurrent context and continuity with proactive interactions on your behalf will

formthenewvoice-firstAIpersonalbanker.Thispersonalassistantwillknowallpast,currentandpotentialfuturefinancialeventsdowntotheminutestdetail.Your AI-powered banker will know details that cannot be found in bankingstatements, investment statements or credit card statements. It will ultimatelyknowitall.

Hereisanexampleofatypical interactionwithyourpersonalassistantAI:“Lesley,canIaffordthisnewVRsystem?Isthisthebesttimetobuyit?Isitthebest price?” Your AI banker can respond based on how you have curated“afford”overtimeagainsttheotherpurchasesyouhavemadeorplantomake,andcreateacontextualinsightspecifictoyou.Youmaynotbeabletoaffordthispurchase; however, theremay bemany other suggestions and options. Let usassumefor thispurchasethat$2,000is thebestpriceandthebest timetobuy.Thenextquestionis:howdoyoupayfor it?YourAIbankercanestablishon-demand credit to be issued or a payment plan. There can also be a real-timebankingauctionthatcanuseyourcurrentfinancialcontextandtypeofpurchasetobebidoninaprivateway,givingyoufarmoreoptionsthaneverbefore.Thesystemcanalsoestablishthebestpossibleloyaltyandbonuspoints.

Considerthisinteraction:“Lesley,whencanIaffordtobuymyfirsthouse?WhatcanIdonowtoshortenthetimeitwilltaketogetadepositready?Whatinvestmentswillhelpmegetthere?”Today,answeringthesetypesofquestionswould require the insights of financial planners, as investment advisers andbankers working together. Yet with your new AI banker—a single point ofcontact that understands all of your context—a simple conversation will giveyouausefulanswer thatwouldotherwisehave takenhours toderive.YourAIbankerwon’tbesellingyouamortgage,itwillbehelpingyouunderstandwhatyouhave todo tobuyahome.This isalreadyan improvementonamortgageadvisorwhocanonlyreallysuggestdifferenttypesofmortgages.

Withourever-persistentAIbankerworking forus24hoursperday, sevendays a week, this will form a dedicated intermediary between you and thefinancialworld.Inthisworld“advertisements”willnotbeaimedatyoudirectly,but to your AI banker. Banks and financial service companies will developtechnologiesthatwillallowthemtobecometheserviceyourAIbankerchoosesandprefers.Allofthiswillbeperformedwithyouroversight;however,atsomepointyouwillforgeatrustwithyourAIbankertoalwaysdothebestthingforyou.

Thepowerofvoice-firstAIallowsfor theriseof thisnewpersonalbankerthatcanbesummonedbyvoicewheneverweneedit.Thedeepknowledgeanddeep context will create a “relationship” that would rival that of a personalbanker for theverywealthy.The ability tohave anongoing, perhaps life-long

dialoguewithourpersonalAIbankerwillcreatearelationshipthatmaybecomethe single most important business relationship we form in our lives. Thisrelationshipwillweaveintojustabouteveryaspectofyourlife.OnceyouhavethepowerofapersonalAIbanker, there isnochance thatyouwouldwant tocontemplateaworldwithoutit.There’salsonoreasontogotoabranchtospeaktoahuman,either.

5 DLT,Blockchain,Alt-CurrenciesandDistributedEcosystems

Dubaiisafrontrunnerinadoptingthelatesttechnologyandhassetagoaltobecometheworld’sfirstgovernmenttoexecuteallimplementabletransactionsontheblockchainby2020.Thegovernment

initiativesinthisdirectionpresenttremendousbusinessopportunitiesfortheprivatesectorintheUAE.—AhmadAlMulla,chairmanofCIOMajlis,24July2017

Now before I start, I’ll make the obvious observation. By the time this bookcomes out, whatever I’ve written here about blockchain and cryptocurrencieswillbeoutofdate.NewsaboutChinaand theirBitcoinexchanges, regulatoryresponses to initial coin offerings (ICOs), bankers talking about a bubble orPonzischeme,aredailyoccurrences.Butthatshouldalsotellyousomething.I’llalsobeclear that ifyou’re lookingforanexhaustiveessayonhowblockchainworks,consensusversusprivateversuspublic,etc—you’llbedisappointed—thisis not the book for that. What I want to discuss is how technologies likeblockchainwillforcebankstoevolveandhowcryptocurrenciesandICOsmaysignal an evolutionary change in the way we think about capital markets,commoditiesandcapitalflowsthemselves—afuturist’sperspectiveonthewholeecosystem,ifyoulike.

Priorto2008wehadn’theardofBitcoin,blockchainordistributedledgers.Therewasscatteredtalkofdigitalcurrencies,liketheearlyQQcoinsandLindendollarsfromSecondLife™,butDLT1wasnowheretobeseen.

Today the total capitalization of cryptocurrencies is measured in thehundreds of billions; ICOs are exceeding early venture capital investments instart-ups;whilemajorbanks,governments and firmsaredeployingblockchaintechnology.Blockchain,Bitcoin,alt-coinsandICOsarehot.

Thisshouldn’tbenews.Neithershoulditbeallthatsurprising.Today,fiveofthetopsixstocksintermsofmarketcapitalizationintheUnitedStatesaretechcompanies(Apple,Alphabet,Microsoft,AmazonandFacebook).Itwasn’tthatlongagopeopleweredebatingwhetherFacebook’s IPOwasa totalbust.Andbefore that people were debating if the internet was a fad. Technology istransforming every sector today, from EVs and solar that are obliterating the

future of fossil fuels, to Apple’s app ecosystem that has created some of thefastestgrowingcompaniesintheworldtoday(suchasUberandAirbnb).We’veeven had to invent new language to describe these shifts, like the “sharingeconomy”,the“giggingworkforce”,“unicorns”,“socialmedia”,etc.

Ifyoucanstepbackfromtheheavyregulatedbankingsectorandobservethechangestakingplaceintheworldwritlarge,theviewfromthebleechersisthatwe are simply replacing all the old infrastructure and value chains withtechnology-first constructs. In the world we are moving into, old regulatedsystems on old rails can’t survive—even with protectionism—because theysimply aren’t fast, flexible and scalable enough in a world where 200,000internet-enabledsmartphonesaresoldeveryhourofeveryday2.Ifyoucanlookout fromthe treebranchyou’resittingon,you’llseea forestofchange that isinexorablyforcingarethinkinthewaywedothings:howwesendmoneyfrompointAtopointB,howwegrowbusinesses,howwecreatebrands,howvalueisexchanged,andmore.

EmergingdigitalcurrenciesBitcoin, and theblockchain it sits upon, iswhat inevitably emergeswhenyouhavetoretrofitmoney,valuestoresandpaymentssystemstoareal-timeworldsitting on the IP layer, directly accessible by the user rather than through agatekeeper.Thissortofsolutionemergeswhenyourealizethatasinglebankingcore systemsitting in a singledata centre somewhere can’t possiblydealwith“deposits”and transactionshappening simultaneouslyeverywhere in theworldwhere amobile walletmight exist. It emergeswhen you realize that a singledatabaseaccessedbypotentiallymillionsofcomputerssimultaneouslycouldn’tpossibly handle the security requirements you need to keep secure custody ofdigitalmoney.Whenyourealize thathaving to first jumpthroughKYChoopsjusttogetaccesstoapaymentssystemdoesn’tworkwhenthetransactingdeviceisanAIoranautonomousvehiclewithitsownautonomouspaymentcapabilityfor road-tolls and charging stations. When you realize it’s no longer just atransactionyouneed to execute, but all theother data (geolocation, biometric,behavioural,heuristic)thatgoeswiththetransaction,thatwillbejustascriticalforbuildingthefutureofyourbusiness.

Those involved in cryptocurrencies like Bitcoin and distribute ledgertechnologywilloften tellyou that it’sgoing tochange theworld.Notbecausetheyareall“truebelievers”,butbecausethey’veseenthepossibilitiesofaworldthatisn’tconstrainedbyregulationbuiltfor19thcenturybanksontopoflegacysystemsbuiltdecadesbeforetheinternetexisted.

Asdiscussedinearlierchapters,thefirstlayerofchangeswesawinbankingwerechannel-led.Wefirsttalkedaboutinternetchannels,thenmobilechannels,thenomni-channel banking.Asusers started to get frustratedwith bank speakandbankinterfaceswestartedtotalkaboutusability,thepremisethatwecoulddesign better user experiences,make screens easier to read and apps easier touse.Thisledustounderstandthatemergingtechnologiesmightchangeaccesstobankinginfundamentalways.Suddenlythefastestgrowingfinancialinstitutionsin theworldwere based on technology interfaces and experience design. Therulesaroundfinancialinclusionwerebeingcompletelyrevolutionizedbysimplevaluestoresaccessiblethroughabasicmobilephone.Next,justastheFinTechworldseemed tobestabilizingaroundbest-practiceuserexperiences,a secondstage of innovation kicked-off—FinTech and technology startups focused onrebuilding the core infrastructure and back-end uponwhich banking operates.Upgrading the pipes and rails. Finally,we started to realizewemight removetraditionalinterfacesalltogether.

In July of 2017, the then largest ICO to date raised an incredible $232millioninfundingforTezos3.TezosusedbothBTC(Bitcoin)andETH(Ether)foritsraise.Tezos,reportedly,wasn’taimingtoraise$232millioninfunding,itwasaimingfor$30–50million,buttheytookin65,693XBT/BTCand361,122ETHinjustdays.AsIwritethischapter,Bitcoinhasbeenononeofthebiggestrollercoasterrideswe’veseen,risingtotopoutatUS$20,000beforeChristmas2017,thenhittingalowofaround$6,000attheendofJanuary2018.AtthosepricesthevalueBTCcontributedtoTezosisstillwellover$400million.

Truthbetold,TezosraisedsomuchmoneywiththeirICOtheydidn’tknowwhat todowithall thecrypto-cash.So theystarted theirownVCfund4.Sincethenthey’vegoneintoabitofameltdown—Iguessanunexpectedwindfallof$230mcashwilldothattosomefounders.

TodayTezosisoldnews.Theynolongerholdtherecordforthefastest$200millionICOraisedinhistory.Injust60minutesearlyinAugust,Filecoin’sownICOraisedmorethan$250m5,andtheninDecember2017EOSfollowedwitha$700mICOtreblingthepreviousrecord.AsIwritethisI’mpainfullyawareofthefactthatI’llbeupdatingthefiguresinthischapterrightupuntilthepointitispublished.Then,assoonasthebookispublished,thesefigureswillallbeoutofdate.Weliveinaverydynamicworldinallthingscryptocurrency-andICO-related.

For the first half of 2017, CNBC reported6 that ICOs accounted formorethan$1.2billioninstartupfundraising,morethanthetotalVC-basedearlystagefundingfor thesameperiod.That isan incrediblestatistic.Why?Because that$1.2billioninfundingisupfromjust$78millionin2016(excludingtheDAO’s

failed$150mICO),andintheUnitedStates,asmentionedearlier,formanyofthestartupsthathaveraisedcapitalviaanICO,itmightallsoonbeconsideredillegal thanks to anSecurities andExchangeCommission (SEC) ruling.Why?Becauseaswithanytechnologicaladvancementthatallowsrapidreturns,thereare numerous bad actors out there thatwill inevitably give a bad name to thehonestguys trying tousean innovativemethodof raisingcapital to start theirbusinesses.

Imaginethatafriendisbuildingacasinoandasksyoutoinvest.Inexchange,yougetchipsthatcanbeusedatthecasino’stablesonceit’sfinished.Nowimaginethatthevalueofthechipsisn’tfixed,andwill insteadfluctuatedependingonthepopularityof thecasino, thenumberofothergamblersandtheregulatoryenvironmentforcasinos.Oh,andinsteadofafriend,imagineit’sastrangeronthe internetwhomightbeusingafakename,whomightnotactuallyknowhowtobuildacasino,andwhomyouprobablycan’tsueforfraudifhestealsyourmoneyandusesittobuyaPorscheinstead.That’sanI.C.O.

—NYTimes,“Isthereacryptocurrencybubble?JustaskDoge”,15September2017

All-timefundingbyICOshit$5billioninDecember2017,withabigsurgeinQ4.Toputthatinperspective,$4billionofthattotalcumulativefundingwasin 2017 alone.Despite the SEC’s InvestorBulletin on ICOs in July 2017 andvariousgovernmentscrackingdownonICOs,thingsdon’tseemtobeslowing.Ifanything,theywouldappeartobespeedingup.

Figure1:ICOFundingexplodedin2017(Source:CoindeskICOTracker).

Despite this flurryofactivityandmassivegrowth in funding,notall ICOsaresuccessful.

In2017,BitcoinMarketJournal’sanalysisshowedthatofapproximately600ICOsevaluatedbytheirteam,only394ofthesecompletedtheirICOsreaching

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theirend-date.About35percentofthesereportedorpublishedfundingdetails.Thus,theassumptioninthatdataisthatalmosttwo-thirdsofICOsin2017failedto reach their intended funding target. It doesn’tmean they failed completely,just that they didn’t hit their numbers. That is one explanation. The otherexplanation is that in an unregulated market, auditing of financial results issimplyoptional.

Thereweresomespectacularfailures,though.Whetherviafailedtechnology,poorexecutionoroutrightscams,ICOsgenerallygotaprettybadrapasanassetclass,primarilybecause it relieson self-governance, and thereareenoughbadactors that negative stories are not isolated instances. The most publicisedfailuresof2017included:

OneCoin—Atextbookscamofthemulti-levelmarketingPonzischemevariety.$350millionlost,and18foundersjailedbyIndianauthorities.Enigma—Poorexecutionfailedthiscryptographyandsecurityservice.TheCEOwashackedlosing$500k,whichkilledtheirsecurityimprimatur.Droplex—AscamICOthatliterallycopiedanothercompany’swhitepaper(QRL)bydoingaglobalfindandreplace.Still,theymadeoffwith$25kofinvestors’cash.Coindash—Ahackerboosted$10moffthisIsraelistart-upviaaphishingsite.Rumoursofaninsidejobcontinuetoplaguetheirteam.Veritaseum—YouTubeadspumpedupthisICObefore$5.4millionincoinswerestolenandquicklyconvertedtoEthereum.ClaimsthattheVeritaseumteamengineeredthehacktopocketfundscontinue.Parity—Straight-uphackofthemultisignaturewalletbyexploitingaflawinthecodeandtwo-stepverificationprocess.WhitehathackerswereabletorecovermostofthestolenEther.

TheonelessonlearnedfromallthisisthatdespitethepromiseofICOsasafundingmechanismforstart-ups,itisstill“buyerbeware”fornow.

BitcoinandcryptocurrenciesonasurgeBitcoin and Bitcoin Cash (BTC/BCH), Ether (ETC), Ripple Coin (XRP),Litecoin (LTC) and otherswere all performing at record highs at the close of2017,withmany traditional investorsand traders lookingonandshaking theirheads.XRPwas up almost 4,000 percent in the first half of 20178 alone, andtoday is listed on 30 exchanges around the world. But Bitcoin is thecryptocurrencythatstarteditall.

On22May2010,oneofthefirstreal-worldtransactionsonBitcoinoccurredandwillforeverbememorialisedas“BitcoinPizzaDay”,whenaBTCuserpaid10,000 Bitcoins for two pizzas from Papa John’s Pizza in the Bay Area. AtBitcoin’speakpricing inDecember2017, thosepizzaswouldhavebeenworthmorethan$200million.

In February 2011, Bitcoin wrestled with US dollar parity, coming closenumerous timesbefore finallysettlingon themilestoneon9February. InJune2011,Bitcoinwastradingatalmost$30per“coin”;thenon19JunethefamousMtGoxhackoccurred,withthepriceofBitcoinplummetingto$2inthemonthsthat followed. At the time, theMtGox hack represented a loss ofmore thanUS$2billionassets(orabout300,000Bitcoins).

Formany,thiswasclearevidencethatBitcoinwassubjecttoweaknessesduetoitscomputer-basednature,andthereforedoomed.

However, thenatureofBitcoinwaschanging—peoplewerestarting to talkaboutthefuturevalueofBitcoininloftyterms9.By2013,Bitcoinhadpassedthe$1,000valuemark,andtoppedoutat$1,242neartheendoftheyear.Butthenall hell broke loose again as the Chinese government banned financialinstitutionsfromdealinginBitcoins.ThepriceofBitcointhensteadilydeclinedover 2014 and reached a level of trading around $200–250 throughout 2015.Many traders and analysts thought that Bitcoin had reached a stable point oftradingand itwasunlikely to revisit itsheightsof2013.Theywereobviouslywrong.

In2017allcrypto-hellbroke loose.Onemilestoneafteranother fellby thewayside as Bitcoin grew and grew and grew. JohnMcAfee, the crazy formerresident of Belize, came out and said Bitcoin would hit $1 million. Morespecifically,McAfeemadeabet thateitherBitcoinwouldhit$1million,orhewouldeathismaleparts liveonTV.TheillusiveSatoshiNakamoto’spersonalnetworthclimbedpast$1billion,then$10billionandthen$19.4billionbasedon his10 holdings of Bitcoin. You couldn’t turn on a finance show withouthearingaboutBitcoin.JamieDimonsaidBitcoinwasthegreatestPonzischemein history, and the same day JPMorgan Chase traded millions of dollars inBitcoins.Ransomwarestarted topop-upglobally,with theonlywayyoucouldrelease your files being to send Bitcoin to the hackers. The world had goneBitcoin crazy. Incidentally, if Bitcoin ever does get to $1 million per BTC,Satoshiwouldbecometheworld’sfirsttrillionaire(ifBezosdoesn’tbeathimtothepunch).

Then inJanuary2018Bitcoincrashed, spectacularly.Thesame tradersandanalysts that were saying Bitcoin had stabilized in 2015, were now sayingBitcoinwasheading to zero.Nobel prizewinning economistswere saying the

bubblehadburstandBitcoinwasgoingoutofbusiness11.Atthetimeofwriting,Bitcoin is slowly edging its way back up around the $7–10,000 range, whileinternationalmarketshavegonethroughtheirfirstseriesofcorrectionsof2018.

Calling Bitcoin volatile would be an understatement. Some analysts arecallingBitcoinacrypto-assetclass thesedays,notadigitalcurrencyanymore.Others are still telling us that it’s going to replace all the central banks in theworld, while the predictions of a Ponzi scheme and bubble continues. TheBitcoinfaithfulevencameupwith theirowntermtodescribetherollercoasterrideinBitcoinvaluationsandvolatility—HODLor“HoldOnforDearLife!”

Howonearthdidwegethere?

UnderstandingBitcoin’sriseIfyouhaven’treadDaveBirch’slatesteffort(BeforeBabylon,BeyondBitcoin12)yet,pleaseavailyourselfofhiscomicandacademicbrilliance.Oneof thekeypointsBirchmakes inhis reviewof the futureofcryptocurrencies is thatovertime money has increased in both utility and function, and that money mustbecomeintelligenttoretainutilityandfunctioninthemediumterm.Ultimatelymoneyisbecomingaformoftechnologyitself.MichaelJCaseyandPaulVignamakesimilarargumentsintheirmostrecentbookTheTruthMachine.

Whilethismightsoundalittlebitlikesciencefiction,BitcoinandICOsaresimply part of the digital evolution of ourmonetary and trading systems.Butthere’ssomethingelsehappeningherebeyondjusttheevolutionofcurrenciesormoney.

Bitcoinhasprovedanumberofthings.Blockchainwasastabletechnology,andalthoughevolving,ithadstoodthetestoftime.Numerousinfamouswallettheftshadoccurred,somefamouswalletownershadlostanoldharddriveyearsagoandhadcometotherealizationthattheywouldhavebeenmillionaireshadtheynotlostit.MtGoxandotherexchangessufferedspectacularthefts.Buttheblockchainnevergothacked.Itprovedresilient.

Blockchain is a new architecture enabling applications like Bitcoin andICOs.SomesayICOtokensalesarethe“killerapp”ofblockchain.Butconsiderthis: theseapplicationshavebecomealmost self-sustaining today,withenoughmarket capital that total failure (going to zero) is becoming inconceivable—there’s almost too much capital tied up for it all to disappear. Once Bitcoinsurpassedthevalueofgold,fromatradingperspectiveithadalreadybecameanasset class that many claimed would hedge against market changes. Whilevolatile, its performance hasmade it a solid long-termbet, and if institutionalinvestors continue to play in the space, it will just become a mainstream

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Isthisaglobalcapitalmarketsevolution?The rise ofBitcoin needs to be seen in the context of themarket as awhole.Whilestockmarketsaroundtheworldcontinuetoreachrecordlevels,therearesignsofstructuralchangestocapitalmarketsandeconomiesglobally.DevelopedeconomiesliketheUSandUKarenotinsustainedlow-GDPincreaseterritory.Whilenotinrecession,moderneconomiesaren’tcapableofthehigherratesofgrowthwesawinthe20thcenturybecauseproductivitygainsareslowing.WecelebrateaGDPfigureofbetterthantwopercentlikeit’s10or20percenttoday.The mainstream companies which fuelled economic growth, like GE, Exxon,andthebanks,arestillprofitable,butcomparedwiththetechgiantslikeFAANG(Facebook-Apple-Amazon-Netflix-Google) and BAT (Baidu-Alibaba-Tencent),theyaren’tgoingtoseeresultsliketheyhadinthe80severagain.Underpinningthisareafewmajormacrotrends:

Productivityisallmovingtotechnology,andsotraditionalplayersareeitherhavingtobecome“tech”orseerevenues,stockpricesandreturnsenteraslowdecline;Austerityandmultipleroundsofcostreductionsarearoadtonowhereeconomically;EarlyindicationsarethatBrexit13andTrumppoliciesareslowingeconomiesandindustries(agricultureisthefirsttogoduetoimmigrationpolicy14),givingcredencetotheglobalisationmantraasaprerequisiteforgrowth;Energymarketsareundergoingdeepstructuralchanges,andthiscreatesashiftwhereoilisnolongerthefoundationofcommoditiesmarketsandfutures;Capitalflowsandmarketmake-upappearstobetransformingalmostexclusivelyaroundtechnologyecosystems.

PriortothebigcorrectionofJanuary2018,theUSstockmarkethadgained$3billioninvaluein2017andsawgainsof17percent.Butfullyonefourthofthatgrowthcameexclusivelyfromtechnologystocks,namelyApple,Microsoft,Facebook,Amazon,andAlphabet(Google’sparentcompany)15.

An ageof digital commodities, technology infrastructure, smart economiesandnewvalue systems is rising.Theeconomycannotpossibly function todaylike it did in 1960, and thus protectionist efforts like Brexit and the Trumpadministration’spoliciesthreatentoisolatetheireconomiesfromtheleversthatwillcontinuetocreateeconomicgrowth,namelyinvestmentsincoretechnology

advancements thatunderpin21stcentury infrastructureandeconomies. Iknowthisisdebatable,buttherearerealstructuralchangeshere,andwe’veseenthisbeforeduringtheIndustrialRevolution.

Chinahasmademassivemoves towardssolarenergy in the last twoyears.Indeed,in2017aloneChinainstalledmorethan60GWofsolarcapacity—that’smore than theentireUSsolarcapacity—andChinadeployed it in justasingleyear. India is rushing to do similar,withboth economies shedding relianceoncoalasquicklyasisviable.Coalisrunningat$40/st,atapproximatelythesameprice levelsas itwasback in2001,andoil crudepricesareat sustained lows.With renewables looking toovertake fossil fuels in the2030s in termsof totalgeneration capacity, and with solar this year becoming the cheapest form ofunsubsidized electricity generation per kWh, we are looking at a slowlycollapsingcommoditiesmarket.

DespiteTrump’seffortstobringback“bigcoal”,theUScreatedmorethan350,000 jobs in solar between 2016–1716. Coal jobs increased by 50,000according to the administration, but the entire coal industry employs only160,000 people in total according toDepartment ofEnergy figures—less thanhalfthesolarjobsjustaddedinthelasttwoyears.TheninJanuary2018Trumpraised tariffs on foreign solar panels and started talking about levies on solarenergy itself. This is one of the fastest growing industries globally and in theUnited States in terms of job creation, and the administration aims to slow itdowntofavourfossilfuels.

In2016,energy-basedcommoditiesrepresentedmorethan50percentofUStradingvolumes17. If thosecommoditiesare set to remain flatordecline, therewillbeatotaldeclineincommoditiestradingandvolumeoverthenext30yearsinthetrillionsofdollars.Marketsdesiregrowth.

Figure2:Oilpricesareinforsustainedlowsgiventhatsolar’spriceisdecliningsorapidly(Graph:BrentPetroleumpricessince1987).

Clearly while the stock market is growing, commodities overall (largelybecauseoffossil-fuelcommoditiessustainedslump)willnotprovidethegrowthopportunities they once did, save for perhaps rare earth metals. Hence it isreasonabletothinkthatdigitalcommoditiesanddigitalassetsmightmovetofillthe gap in available investment dollars or tomakeup a balancedportfolio forgrowth investors—especially with the strong returns we’re experiencing. Ifyou’re an investor and you want growth, cryptocurrencies like Bitcoin arevolatile,buttheyaregoingtherightwayin3–5yeartimehorizons.

Think of it like this: in the 1850s and 1860s, the growth economieswereinvesting in electricity, railways and telegraph lines. In the early 1900s itwasroads, telecoms, and factory-based assembly lines. In the 1960s it waselectronics,computingandbusinessservices.Eachofthesecompetencieswerethe core infrastructure and talent components for industrial and GDP growthoverthenext50years—theabilitytostaycompetitive.Economiesthatfailedtoinvest in that infrastructure found themselves significantly behind thecompetitionwithinjustadecadeor two.Developedeconomieswerethosethatcontinually invested in the infrastructure required to make themselves morecompetitive.

Figure3:USStockMarketbysector,1900–2017(Source:CreditSuisse).

Are cryptocurrencies like Bitcoin part of the new, smart infrastructure theglobaleconomyisgoingtoneedtobeviablein2030,orcoulditallbeabubble,aPonzischemeandascam?

Thewhole“Bitcoinisafraud”argument

Figure4:BitcoinvsJamieDimon(Credit:MarketWatch,GettyImages).

On 12 September 2017, Jamie Dimon, the CEO of JPMorgan Chase,proclaimed Bitcoin a fraud—and it wasn’t the first time. The price of XBTplummeted overnight and itwas reported that traders at JPMorganChase hadinitiated more than $17 million worth of buy orders on Bitcoin immediatelyafter.SomesaidDimonwas involved inadump-and-pumpscheme.After thatDimon said he wasn’t going to talk about Bitcoin anymore. But he did. InJanuary 2018 he simply said he regrettedmaking that comment—oh, and hisdaughterhassomeBitcoininvestment,apparently.

InaninternalJPMorganreportpublishedon8February2018,theleadingUSbank said that cryptocurrencies were “unlikely to disappear”. The reportanalyzed the future potential of cryptocurrencies in general, along with theincredible risk-adjusted returns that cryptocurrencies have provided as analternativeassetclassoverthelastfewyearsforinvestors,whencomparedwiththeS&P500andstockmarketsingeneral.

CCs[Cryptocurrencies]areunlikelytodisappearandcouldeasilysurviveinvaryingformsandshapesamongplayerswhodesiregreaterdecentralization,peer-to-peernetworksandanonymity,evenasthelatterisunderthreat…TheunderlyingtechnologyforCCs[cryptocurrencies]couldhave the greatest application in areaswhere current payment systems are slow, such as acrossborders,aspayment,rewardtokensorfundingsystemsforotherBlockchaininnovationsandtheInternetofThings,aswellaspartsoftheundergroundeconomy.

—“J.P.MorganPerspectives:DecryptingCryptocurrencies:Technology,ApplicationsandChallenges”(8February2018)

Some, like Dimon, have over the last nine years regularly asserted thatBitcoinisabubble,liketheSouthSeaBubbleof1720ortheGreatTulipCrazeofthe1630s.Thesebubblesareoftencreatedwithinvestmentvehiclesthatarehighly subject to market speculation, often with the creators making the bigbucks as the craze reaches the broader market. The South Sea Bubble usednetwork effect like Bitcoin and ICOs by giving British politicians, lords andevenroyaltyaccesstoaformofstockoptions,whichencouragethemtopumpup demand for the stock (they could hold their stock without cash changinghands and sell it back to the company or to the public once themarket priceexceeded their option price). Ultimately, the claims made by the South SeaCompany were found to be fraudulent, and an Act of Parliament helpedintroducethemodernstockexchangetoprotect themarketfromthesetypesoffrauds.

The total market capitalization of cryptocurrencies today is fluctuatingbetween $300–500 billion, or in the range of the value of Wells Fargo as acompany. Bitcoin alone exceeds the market cap of McDonalds, CBS, 3M,Netflix18 and others in today’s terms, and it’s closing in on Disney’s currentmarket capitalization. However, rather than being purely an asset class in aspeculativebubble,ICOsarenowdistributingBitcoin’svalueacrosstokensthatarelinkedtoawiderangeofcompanies—operatinginaverysimilarwaytothewaysecuritiesareissuedonanexchange.

TheproblemforregulatorsisthatBitcoin,alt-coinsandICOshavebecomealmostself-sustaining in thesameway that thestockmarket is self-sustaining.As long as enough investors participate, and their exposure is limited ordiversified,thelikelihoodofacompletecollapseofBitcoinorEtherisaboutaslikelyasthecompletecollapseofasecondarystockmarkettoday.

That’s not to say that the occasional bad actors that issue their own ICOswon’t affect the price of Bitcoin or ETH. There are plenty of stories ofunscrupulous actors that have disappearedwith their ICO“winnings”, and thefact the SEC is gunning for them. The collapse of numerous token-basedcompanies and funds are certainlymore likely than the collapse of a publiclytradedcompany.Despiteallof that, the fact that tokensenableemergingstart-upstoraisecapitalwithoutlisting,andwithoutgivingawayequity,issimplytoocompellinganideaformanyfounders.Thus, it is likelymorecapitalwillflowintotheICOmarketovertime,andultimatelyin10years,thetotalICOmarketwill surpass some of the world’s smaller stock markets in terms of marketcapitalization.

Venturecapitalistshavebeeninvestingininnovationanddisruptionforaverylongtime,butasanindustrytheyrarelyinnovatethemselves.Ifyou’reintheblockchainorbitcoinspace,ourviewisthatwe’re tryingtodecentralize theworld,we’re tryingtodemocratize theworldinawaythatcreatesalevelplayingfieldwhereeveryonehasequalaccess.Crowdfundingwasthefirstmajorleapinthedemocratizationoftheworldofearly-stagefinance.Ibelievethetokenizationofit—whatwe’redoing—isthenext,evenlargerleap.

—BrockPierce,BitcoinFoundationandEOS

Some regulators will certainly ban ICOs, some will even bancryptocurrencies altogether. But others will see this as a competitivedifferentiationinaglobalisedeconomythatisrestructuringarounddigitalassetsandcommodities.

The trick here is that the ICOs and cryptocurrencies represent a sort ofsystemicshiftsimilartowhatoccurredaftertheSouthSeaBubblecollapsed,notduringtheSouthSeaBubbleitself.Thisistheformationofanewmarketplacebuiltwithoutthelegalandgeographicalhurdlesofthestockmarketsthatoperateglobally today. ICOs on top of cryptocurrencies are simply an IP-optimizedsystem designed for value exchange in a real-time world, where the value isdecentralised,basedoncomputingpowerandnetworkeffect,notcentralbanksandgovernment legislation. ICOsare, likemostFinTechsand technologies,anattackonfriction—thefrictionofraisingcapital.

Figure5:RegulatoryresponsestoICOsandCryptocurrenciesoverthelast12months(Source:Nikkei.com,others).

Ipersonallybelievetheregulatorswhowinwillbethosethatenablealight-touch process for legal ICOs, encouraging investment, but with enoughprotectiontoweedoutthebadactors.Theinvestorswhowinwillbethosethatinvest in cryptocurrencies for the long-term and pick tokens that are clearlylinkedtotheperformanceofthecompanythey’reinvestedin,andnotdesigned

just as a way to raise funds sans equity. As with the best markets, the bestperforming companieswillwin for both their investors and for their founders.Badactorswon’tbe able tokill this.But theywillmostdefinitely forceus toregulate the ICOmarket, just like theSouthSeaBubblecreatedmodern stockmarkets.

It’snotgoingtobeatotalcrashwithICOsandcryptocurrenciesdisappearing—it’sjustgoingtobetheformalisationoftheICOmarketbyregulators,backedbycryptocurrenciesasbothalternativeassetclasses,alternativevalueexchangesystems and payments networks. So maybe HODL on to those Bitcoins andEthereumforabitlonger.

ThestructuralimplicationsofDLTHearingabout thewholehistoryof theblockchain tied toBitcoin, thegrowingICO market and the stories of banks scrambling to implement their ownblockchainintiatives,you’dbeforgivenforthinkingthatblockchainwassolelythedomainof thefinancesector.Thereality is thatblockchain initiativeshavealready touched dozens of industries, from government through to diamondmining,fromenergytosmartinfrastructure.

Figure6:DifferentflavoursofDistributedLedgerTechnologiesbyconsensusmechanisms(Source:KPMGResearch/DaveBirch).

Distributed ledger technology (DLT) is now being implemented by banksaround the world. We’re starting to see trade finance and cross-bordertransactionsmovingtoblockchainPOCs.Thetypesofblockchain,ordistributedledger, technologies are varied. In fact, some private blockchainsmay not be

considered“distributed”atall,asDaveBirch’sflowchartshows(Figure6).Aprivatesharedledgermaybeheavilyrestrictedinrespecttouse,sointheclassicpublicmodelslikeBitcoin’sblockchain,therestricteduseoftheledgerdoesn’treallylenditselftobeingcalleddistributedatall.

ThereseemstobenoendofapplicationsforblockchainorDLTtechnology.Andblockchainishavingadirectimpactonthebankingsector.

In 2017, Ripple announcedmore than 100 banks had joined RippleNet tomoderniseglobal andcross-borderpayments transactions.That’s still a far cryfromthe11,000banksusingtheSWIFTnetwork,butit’s100morethanafewyearsagoandgrowingrapidly.Ina2017reportbyIBM,“LeadingthePackinBlockchain Banking: Trailblazers set the pace”19, 15 percent of the top 200global banks said they had rolled out full-scale, commercial blockchainapplicationsin2017,and65percentwereexpectedtohaveblockchainprojectsinproductionby2020.Largeinstitutionswith100,000employeesormorewereconsistentlythoseleadingthecharge,accordingtoIBM’sresearch.

So what prompts banks to work on blockchain or distributed ledgertechnologies? Often it is future-proofing their business in respect to keyelements of the back office, such as transactional flexibility and speed andinteroperability with emerging networks, but in many cases it is becauseemerging blockchain technologies offer security and auditability that existingbankdatabasesandpaymentsnetworksdon’thave.

But it’s not just banks that are seeing the benefits of distributed ledgertechnologies. Companies like the Sun Exchange are building their entirebusiness smart assets, smart contracts, and ICO tokens on blockchain.Everledgeristrackingdiamondsfromthemomentthey’reextractedfromamineinZambia,totheengagementringsoldinTiffany’son5thAvenueinNewYork.HansonRoboticsandSingularityAI is lookingatmanagingemergentmachinecognitionontheblockchain.Inthefutureababymighthavehisidentitytrackedfrom the moment of birth through his schooling, his first bank account, hismarriageanddeath—allontheblockchain.

In 2017Vladimir Putin proclaimed that theRussian governmentwould bere-engineereduponblockchaintechnology,startingwithtransportationservices.This comes just a few months after Vitalik Buterin from Ethereummet withPutinattheStPetersburgEconomicInvestmentForuminaclosed-doormeeting.Dubai’s ruler Sheikh Mohammed set 2020 as the date for all governmenttransactions to be done on blockchain infrastructure. At the 2018 WorldEconomic Forum, governments around the world announced that a globallyrecognisedtravellerandidentityprogramwouldbeimplementedonblockchain,whichcouldonedayspelltheendofphysicalpassports.BrazilandCanadaare

alsotalkingaboutnationalidentityprogramsontheblockchaininlinewiththisinitative.

Figure7:Corebenefitsofprivateblockchainscomparedwithcurrenttransactionalsystems(Source:Gilbert+Tobin).

Theworldappearstobeinlovewiththeconceptof theblockchain.Belowarejustafewoftheareaswhereactiveblockchainimplementationsandstart-upsareoperatingtodayinthenon-financialspace.

Figure8:Blockchainapplications.

Ifyouthoughtblockchainwasaboutcryptocurrencies,you’rewrong.Ifyouthought blockchain was a finance thing, you’re wrong again. If there is adatabase somewhere in the world that needs a distributed presence, strongauditability, and/or automated management, then it’s likely we’ll see theblockchain become the foundation of those datasets over the next couple ofdecades.

Blockchainisstillinitsinfancy,eveninthebankingworld.Ifyoustepback

fromthepresent,youcouldenvisageblockchainasanelementoffirst-principlesthinkingandasaredesignofbasictransactionalservicesthatpowerthefinancialservicesmarket.Itoffersthepotentialtocreatebroadinteroperabilityacrossnewidentity systems, technology services, financial products and paymentsnetworks.It isawaytobreakthroughthecurrentsystemconstraintsof legacy“pipes and rails” that the banking systemhas established over decades.WhilethelikesofSWIFTandNACHAtalkabout theirownblockchainattempts, thereality is that the fastest growing networks in financial services today are notconnectedtoincumbents,butarenewsystemsdevelopingontopofmobileandinternetprotocols.

Whyyourcore-systemhasashelf-lifeTodaythelargestsuper-walletsinChina,IndiaandAfricaareeffectivelyclosedloopsystemsthatareholdingdepositsinthetrillions.Thesemobilewalletvaluestoresareessentiallywhatweused tocallabankaccount.Eventhoughwe’vehad alternative value store mechanisms like airline mile programs, transportcards,etcforsomeyears,thesheerscaleofthesealternativewalletecosystems,and the fact that they are interchangeablewith cash and card payments,makethem extremely bank-like in nature. Just 10 years ago the only players in theveryspacethatM-Pesa,PayTM,Alipay,Venmo,andWeChatPayoperatedwerebank-owned,withtheonenotableexceptionofPayPal,ofcourse.

Aswe’vealreadypointedout,however,PayTM,Alipay,M-PesaandTencentdon’thavebankingcoresystemsunderpinningtheirmobilewallets.Atleastnotfortheledgeroperations—theyhavetostorealltheircashdepositstheytakeinaccordancewithlocalregulationsinanactualbankaccountwithapartnerbank,butwithintheclosedloopsystemtheyarecore-less.

AsIoTdevices, ICOtokens,e-moneylicenses,cryptocurrenciesandsuper-wallets become more and more common, a great deal of day-to-day bankingactivity,particulararounddeposits,paymentsandinvesting,willbecore-lessandbank-less. Now you could argue that this is just crying out for regulation, toforce these organisations to become chartered or formal (licensed) financialinstitutions, but that still won’t require them to put in place a banking coresystem. This is because their digital value stores aren’t part of a universalbankingmodel,theyaren’treplicatingtheproductsthatbanks,cardnetworksorinvestment houses are built on today. They are surfacing the same utility asbankswithcoresystems,butthatonlyrequiresastrongexperiencelayer,andnotacoresystem.

Ultimately, as banks are forced to compete on utility and build more and

1

more technology experiences to surface that utility, they’ll be beefing up amiddleware layer that looksmore andmore like blockchain platforms and thelikesofAntFinancialorTencent’sWeChat.Essentially,they’llbestrippingthecorebacktoitsverycore(excusethepun).Yes,theabilitytoofferinterestrateswillbethere,theabilitytostorevaluewillstillbethere,andaccesstocreditwillbethere.Butthecoresystemsthatreinforcebranch-analogousproductswillbeused less, and more of the middleware will be used to surface bankingexperiencesacrossmobile,voice,augmentedrealityglassesandthelike.

Whatdoyougetwhenthe“bank”isnotdeliveringanyoftheoldproductsitused to deploy in the branch; when it is just a concentrated core of bankingutility, its processes around capital adequacy still enforced by regulators; itsidentity outsourced to brokers and government blockchains; and its riskoperationsmanagedbyArtificialIntelligence?

The core banking system will largely have disappeared, replaced byimprovedutilityandubiquitousbankingexperiences.Ataminimumitwilljustbepartofamuchlargertechnology-and-experiencesdeliverystack.

Iknowwe’retalkingaboutadecades-longshifthere,butthinkagainaboutthe organisational structure, technology architectures and competencies tocompete in this world side-by-side with core-less players like Ant Financial.Doesyourcurrentcoresystemofferacompetitiveadvantageagainstthesenon-bankFIs?

Butwhatabout challengerbanks?Thechallengerbankswe seearemostlystilloperatingundertheassumptionthey’llhaveasupermodern,real-timecorewithakick-assfrontendtodifferentiate.Butsomeneo-banks,likeStirlingandRevolut, are now starting to construct alternatives to these models, likemarketplace banking. My own challenger bank, Moven, doesn’t have a coresystem—wejusthaveabigmiddlewarelayer.

It all comes back to first principles. If you were building a bank’sarchitecture fromscratch todaybasedoneverythingweknownow,wouldyoubuilditbasedonatraditionalcoresystemdesignedin1960,butupdatedforreal-timeoperation?Notifyouunderstandbanking4.0isaboutexperiencessurfacedthrough technology,andnot thedigitisationofbranch-basedbankingproducts.Blockchainwill be a necessary, core-building part of the architecture requiredfor21stcenturyreal-timebankingexperiences.Old-stylecorebankingsystemswillnot.

EndnotesDistributedLedgerTechnology.

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1718

19

Source:IDCData(that’sover3,000smartphonessoldeveryminute,1.7billionannually).

Ethereumwasactuallythefirstorganisationtoissueaninitialcoinoffering.Source:BusinessInsider—“Whatdoesatechstartupdoafterraising$232millionsellingdigitalcoinstoinvestors?SetupaVCfund”.

“$200millionin60minutes.FilecoinICORocketstoRecordamidTechIssues”,CoinDesk.com—https://www.coindesk.com/200-million-60-minutes-filecoin-ico-rockets-record-amid-tech-issues/.Source:CNBC,August2017—https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html.

Seehttps://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings.SeeCNBChttps://www.cnbc.com/2017/07/21/ripples-xrp-digital-currency-rose-3977-percent-in-the-first-half-of-2017.html.

Source:BusinessInsiderarticle—“Bitcoincouldgoto$1million”,HenryBlodget,8Nov2013.AssumingSatoshiisactuallyaman,oraperson.SomebelieveSatoshiisacreationofNSA.IhaveheardthatSatoshiisactuallyfourseparateindividualswhocollaboratedonthefirstwhitepaper,oneofwhoisnolongeralive.

NobelLaureatesRobertShillerandJosephStiglitzbothpredictedbigcrashesinBitcoin;see—https://www.ccn.com/nobel-laureate-economist-predicts-bitcoin-crash-wont-go-to-zero-it-will-just-come-down/.AvailableonAmazonandwherevergoodbooksaresold.

See:Independent.co.uk—“UKcropslefttorotafterdropinEUfarmworkersinBritainafterBrexitreferendum”,5February2018See:USDAReport—“ThePotentialImpactofChangesinImmigrationPolicyonU.S.AgricultureandtheMarketforHiredFarmLabor”.

See:Quartz.com—“JustfivetechcompaniesaccountforaquarteroftheUSstockmarket’sblockbusteryear”,30October2017.Source:EDF/Fortune—“RenewableEnergyIsCreatingJobs12TimesFasterThantheRestoftheEconomy”.

Source:TFRcommoditiesreview2016—www.tfreview.com.Source:Comparehttp://www.corporateinformation.com/Top-100.aspx?topcase=bhttps://coinmarketcap.com/.

Seehttps://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=GBP03467USEN.

Part03WhyFinTechcompaniesareprovingbanksaren’tnecessary

6➡FinTechandTechFin:FriendorFoe?

7➡TheRoleofAIinBanking

8➡TheUniversalExperience

6 FinTechandTechFin:FriendorFoe?

As[…]technologiesdevelopandseason,they’regoingtocreateatotallydifferentwayofdoingbankingandfinancialservices.Nowwewillseethepossibility—notnecessarilytheprobability—ofwhatwecalla“Kodakmoment”,whereincreasinglybanksbecomeirrelevanttotheircustomers.—AntonyJenkins,FormerCEOofBarclays,founderofFinTechstartup10xFutureTechnologies

IfyougotoGoogleandtypeinFinTech,amongthetopautomatedsearchtermsthat appear are “FinTech killing banks”, “FinTech disrupting banks”, “willFinTech replace banks”. If you follow through on such searches you’ll findpages and pages of news stories from themajor financial news outlets, alongwithblogs, press releases and so forth proclaiming that, yes,FinTechwill killbanks. But then you’ll equally find a plethora of articles showing that it’s allmuch ado about nothing and banks are not only up to the challenge, butwilloutlive the “fad”ofFinTech.Somewill argue this is a zero-sumgame, that itwillallworkoutwithFinTechsandbankslivinginsomesortof technologicalharmonyoncethedustsettles.Thetruthissomewhatmorecomplex.

WillFinTech(orTechFin)killbanks?Mostcertainlysomebanks,butnotall.Will banks (or regulators for thatmatter) kill some FinTechs?Absolutely, butagain,theFinTechsthatsucceedwillbecomeanestablishedpartofthefutureoffinancial services and, as Antony Jenkins forecasted above, FinTechs andTechFinsaremateriallychangingwhatfinancialservicesitselfmeans.

Investment levels show that the FinTech “fad” is far from over: it’s eitherstillgettingstartedorwe’rerightinthethickofit.StronginvestmentofUS$8.7billioninQ4/17propelledglobalFinTechfundingtooverthe$31billionmarkfor2017,sustainingthesamehighlevelofinvestmentseenin20161.Thisbringsthe total global investment in the FinTech sector over the past three years toUS$122billion2.ThenumberofVCtransactionsexceeded1,000forthefourthconsecutive year in 2017. This is part of a wider trend of increased VCinvestment in technology firms; in fact, 2017 marked the highest spend inventurecapital since thedot-comboom.A totalof$84billionwas invested inover 8,000 technology companies and startups last year3, with FinTech takingmorethanathirdofthatinvestment.Ratherthanthisbeingabubblelikethedot-

comboom,therearenownumerousFinTechstartupsthatare large,high-valuebrandswithestablishedandprofitablecustomersbases.Manyof thesestartupsare at least as big as their equivalent competitors who are listed, publiccompanies. Like Uber, many of these companies have elected to remainprivatelyownedfornow.

UltimatelythismeansthatwhetherornotyoutrulybelieveFinTechswillkillbanks is largely irrelevant. The investment flooding into emerging technologyplayers is already changing financial servicesdemonstrably, and these startupsare changing financial services at a much faster rate than banks are able torespondto.As thesenewentrantscontinue togetgreaterandgreateraccess tofunding,thismakesfuturedisruptionevenmorelikely4.

Let’smaketheargumentevensimpler.IfAntFinancialandAlibaba,LuFax,Simple, Square, TransferWise, Betterment, Stripe, Venmo, Xero, SoFi, CreditKarma,Coinbaseandothersdidn’texist,wouldbanksbeinvestingintechnologyatthesameratethattheyaretoday?Orwouldthestatusquohavecontinuedtoreinforceaslowerrateofchange?Ultimatelythenewbenchmarksineconomicperformance, leveraging of social media and network effect, customeracquisition across digital channels, cross-sell and upsell strategies tied tobehaviouralmodels,andsoforth,are inexorablylinkedtokeyFinTechplayerswhohavechangethegameandmovedthegoalposts.

For example: if youwere JackMa startingup in financial services,wouldyoubeginbybuildingbankbranchesorappointingagentsandadvisorstobuildyour business? Or would you use first-principles thinking to outline moreaggressive growth methods in the digital age? I’ll let Jack Ma answer thatquestion:

Imadeabet[withtheCEOofWalmart]:in10yearswe’llbebiggerthanWalmart,basedonthesales.Becauseifyouwanttohave10,000newcustomers,youhavetobuildanewwarehouseandthisandthat.Forme?…Twoservers.

—JackMa,FounderofAlibaba,speakingatthe2015WorldEconomicForum

Figure1:JackMaspeakingatthe2015WorldEconomicForum(Imagecredit:WEF).

JackMahasbeenveryclearthatasthefounderofthelargestFinTechstartupin the world, there’s no advantage in the digital age to building physicalinfrastructure togrowabrand. Ifyouwant togrowfast—ithas tobedigitallyenabled.

“Forme?Twoservers”The future of financial services is clearly about financial services experiencesembedded in technologies that are ubiquitous. Technologies that allow rapidscaling. Technologies that solve the big problems of financial inclusion, fraudandidentitytheft,friction,andsoforth.FinTechsareconsistentlyfirsttomarketwithexperiencesonthetechnologyplatformsthataccountforthevastmajorityofdailyaccesstofinancialservices.InChina,AlipayandWeChatwerefirsttomarket,anddominated.IntheUSPayPal,VenmoandSquarepre-datedthelikesof Zelle by years. The first banks to launch digital onboarding were neo orchallengerbanks.Asaresult,whentheseplayersgetscale,theyendupforcingincumbentstomimictheexperiencethatcustomersnowknowispossible5.

EveryFinTechintheworldhasthesamebasicmission.Killnotthebanks,agents, brokers and insurers of theworld, but kill the friction associatedwithfinancialservicestoday.Theydothatwillinglyanditisattheverycoreoftheirmission. For banks, they often have to battle legacy system constraints,compliance-basedapathyandresistance,lackofexecutivesupport,andthefearof cannibalization of their existing “channels” before they can even start

transformativeprojects.WhatthismeansisthatFinTech’sareconsistentlymoreefficient at deploying investment capital for the purpose of removing friction,whencomparedwithincumbents.

Thus,itisinevitablethatthefastest-growingfinancialservicesorganisationsweseearoundtheworld todayarenotbanks,but theFinTech, technologyandchallenger bank startups.Does thismeanwewon’t need banks in the future?Youdon’thavetochannelBillGatestodaytoknowthat inmuchof theworldpeopleareusingFinTech’severydaytodostuffthatonlybanksusedtodo.Infact,in20marketssurveyedbyEYlastyear,consumeradoptionofFinTechwasonaverage33percent,withChinaashighas69percentoftheinternet-enabledpopulation.

I’mnot arguing that everybankwill disappear.However, the standardsbywhichbanks areheld to is no longer their own—it’smore than likely that theday-to-daybankingexperiencesyouenjoyin2025willhavebeenmostheavilyinfluencedbytechnologystartupsthanbyincumbentbankswhohaveinnovated.FinTechsandTechFinsareshapingthelandscapethatistocome.Notregulators,notbanks.

Figure2:FinTechAdoptionRatesacross20Markets(Source:EYFinTechAdoptionIndex2017).

NormanChan, the head of theHongKongMonetaryAuthority, cited thisexactproblemwhenannouncingasevenpointplanforHongKongtocompetegloballyonaregulatorybasis.InhisspeechgivenattheannualHKInstituteofBankersconference,Chan said incumbentbankshavebeenunable to innovatequicklyenough,soforHongKongtomaintainitsleadershipasanInternationalFinancial Centre the HKMA has turned to FinTechs. Let that sink in—HongKong is pegging their future as a leading financial centre on encouraginginnovation from FinTechs, not relying on incumbent institutions. The lack of

innovationbyincumbentplayershasnowbecomeamarketthreat.

Digital only banks have seen greater take upoutsideHongKong.For example,UK regulatorshaveencouragedthedevelopmentofchallengerbanksasawayofbolsteringcompetitioninthesector.Meanwhile, incumbent banks in HongKong have beenmuch slower to close physicalbranchesthanrivalsbecauseofthehighprofitabilityofindividualbranchesinHongKong,andthecomparativelyslowtakeupofdigitalservicesbycustomers…

—NormanT.L.Chan,HKMAChiefExecutive,25January2018

Whenyoulookatthemostdisruptiveinnovationsintheworldoverthelast250years,fromthesteamenginetothetelephoneandcomputer,whatweseeisclearevidencethatfirstprinciplesdesignthinkingcreatesthefastestinnovations,the biggest leaps, themost disruptivemarket changes. Those shifts very, veryrarely come from incumbents innovating themselves incrementally over longperiodsoftime.It’swhyAntonyJenkinscalledita“Kodak”momentforbanks.Thefact thatKodakinventedthetechbehinddigitalcameras,butstillcouldn’tadapttothedigitalageandthusimploded,isarelevantanalogy.

Figure3:Kodak’soriginaldigitalcameraprototype(Imagecredit:Kodak).

Thisdoesn’thavetoendintearsforbanks.Firstly,moneybehaviourisprettysticky so changes in customer behaviour admittedly occurs more slowly infinancial services than, say, music purchases or digitisation of video, butfinancialbehaviourisn’tsostickythatitcan’tbecircumventedastheEYstudycitedearlierdemonstrates.Inmanyinstances,thebigdisruptionswe’reseeingin

financial servicesare the resultofnetworkeffect6.Moneyneeds tomove—wepaymerchants,wepaybills,wesendmoneytoourfriends,wepayourrent—ifthosepeopleareonaparticularnetworkweshareincommonthenourbehaviourshifts,alongwithourmoney.Paymentsrepresentupto80percentofourdailyinteractionswith financial institutions, so if you change thewayyoupay, thatopens up risk for credit access, savings,merchant acceptance andmany otherareasthatflowonfromthatshift.

InChina,wheretherearelesslegacypaymentsbehaviouraroundplasticandcheques (for example), the shift has be able to occurredmuch faster, becausenetworkeffecthaslessresistance.Ifyou’reoneofthosebankersthatinsiststhatBritsandYankswillstillbeusingchequesin30yearstopayforstuff,thenyouareineffectarguingthatyoureconomyisgoingtowillinglyfallbehindChina,India,KenyaandmostofEuropeintermsofday-to-daymoneymovement,andprobablyasafinancialcentreofexcellence.It’swhyIcanneveragreewiththeargument I hear from bankers that “regulators won’t let it happen”. That’sludicrous.LookatShanghai,HongKong,Singapore,andLondonregulators—toname a few. They all are sandboxing, going open banking, enabling rules forICOs andworkingwith FinTechs, because they realize the future of financialservices is being built today. If these countries and cities want to remain asleading financial centres, stopping FinTech advances would slow innovationconsiderably.Whyonearthwouldaregularprotectlegacybehaviourinthisfast-pacedenvironmentthatistransformingfinancialservices?Theywoulddosoattheirmarket’speril.

Let’stalkaboutwherethesenewplayersareimpactingspecifically.

WherethenewplayersaredominatingStartups have the advantage of being free of legacy technology systems and tough regulation,bothofwhichlimit thedigitaldevelopmentsofestablishedfinancialservicesfirms.Asaresult,startupcompaniescanmoreefficientlycreatemobile-focusedservicesorproducts that threatenexistingfinancialcompanies.

—“FinTechstartupsputbanksunderpressure”—FinancialTimes,12September2016

AlreadytherearestrongsignalsemergingthatindicateFinTech’sandTechFin’sarestartingtorewritetheunderlyingeconomicsoffinancialservices.It’snotjustin building or deploying tech either, but operating expenses, acquisition costs,scalability, etc. Just like during the dot-com explosion, however, there areplayerscapturingrealrevenue,playersthataregettingscalefast,andplayersthatjustwon’tmakeitoutofthestartingblocks.

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Itcouldbereasonedthattherewillbeenoughofthesenewplayersthataresuccessful in getting traction that market expectations around certain metrics,KPIsandeconomicswillinevitablyshift.Inthatenvironment,incumbentsmayfind themselves competing with one hand tied behind their back—a legacyorganisation,technicalandlegalstructurethatsimplyisnolongereconomicallyviableinmarketterms.

Thinkaboutthecoreelementsoftheday-to-dayretailbankingbusiness,suchascustomeronboardinganddistribution—whatJackMawasalludingtointhatearlier quote. It goes without saying that no FinTech neo-bank is launchingbranches today7,but thinkabout the reasonswhychallengerbankshaven’t ledwithabranch-baseddistributionstrategy:

Comparedwithsuccessfuldigitalacquisitionstrategies,branchesaresimplytoocostlyandtooslowforthescalethesebusinessesneed,inthetimeframeandwiththeavailablefundingtheyhave;mostchallengerbankshave12–18monthstoprovetheircaseandhence,raisemorefundingtocontinuetogrow.ThecostofdeployingahighimpactphysicallocationinaFinTech-richcitywouldlikelybemorethantheentiredevelopmentcostofaFinTech’sbasicapportechnology,andbranchactivityisdecliningdemonstrably.EveryFinTechistryingtocompeteinreal-timeforcustomers,thustheymusteliminatetheneedfora“wet”signatureorface-to-faceinteraction,becausetheneedforsuchwouldslowdownrevenueandgrowthdetrimentally.Investorssimplydon’tfundbranchnetworksforFinTechsbecausethey’realsoallaboutrapidscale.Acquisitioncostpercustomerin-brancharefive-toten-timestheacquisitioncostsviadigital.

RememberwhatJackMasaid:“twoservers”.We’re starting to see significant differences in customer experience,

establishing clear new standards as a result of challenger bank innovations.Whetherwe’re talking neo-banks in theUS,N26 across theEU region or thenumerous challenger banks in the UK, digital customer onboarding is now asignificant differentiator.When it comes to account switching in theUK, datashowsthatthelengthoftimetakentoopenanaccountisasignificantbarriertoswitching behaviour8. So, you’d think onboarding improvements would be amassive priority, let alone for reduced costs of acquisition. For incumbents,apparentlynot.

OfthechallengerbanksintheUK,allofthemofferaccountopeningwithin

minutes of downloading the app or going to thewebsite. Starling andMonzooffer one-step 100 percent digital account application and opening, and othersoffer two-step identity verification processes. Of the major banks in the UK,only RBS has made progress towards a 100 percent digital account openingprocess9. Let that sink in—every challenger bank in the UK offers digitalaccountopening,butonlyone incumbentbankcanclaim the same. In theUSonly18percentofbanksandcreditunionsofferanaccountopeningprocessviasmartphone10,andofthoseonly24percentallowcustomerstofullycompletetheprocessviamobile.Forthoseofyoudoingthemath,that’slessthanfivepercentofUSbanksandcreditunionsthat in2017offered100percentdigitalaccountopeningviamobile.Less than fivepercent!Moven,Simple,BankMobile andGoBankhaveallhadthesecapabilitiesformanyyears.

Figure4:DigitalBankingReportdatashowingDigitalOnboardingcapabilityUS-wide.

In2017EYsurveyedmorethan22,000digitallyactivecustomersandfound43.4percentofthemchosetouseaFinTechduetoeaseofuse/access.ClearlyaprimarydriverofthegrowthinFinTechissimpleaccountopeningexperiencesand ease of use. Given the data is clear, the lack of efforts by incumbents torectifyaccountopeningfrictionisagoodproxyforthewholeFinTechvsbanksargument.

If you want to compete with FinTechs now and in the future, there’ssomething you absolutelymust do—you need to get rid of the requirement tosignanapplicationformwithawetsignature.Fullstop.

Challengeror neo-banks alsooutperform incumbentson several other coremetrics. According to KPMG11, the average return on equity for challengerbanks in theUKmarket is between 9.5 percent for larger challengers and 17percent forsmallerchallengers,asopposed to largerbanksat4.6percent.KeyfactorsbehindthebetterperformanceisduetolowerlegacyITcosts,aswellasasimplifiedproductportfolioprovidingaCTI(cost-to-income)ratiojustbelow50percentforthesmallerchallengers,comparedto80percentCTIratiofortheirincumbentcounterparts.

Whenyouextrapolate these issuesacrossmultipleneoorchallengerbankslaunching in a market like London, the medium-term effect will be tofundamentally change theway themarket views retail banking economics.Atsomepoint(probablywithinthenextfiveyears),stockmarketanalystswillstartlookingatretailbankbranchnetworksandviewingallbutthebest-performingbranches as inefficient mechanisms for retail bank operations, whether foracquisitionorservicing.Comparedwithsuccessfulchallengerbanks,they’llbeviewedsimplyasoutmoded,highcostlegacyinfrastructure.

Figure5:Challengerbanksbycountry(Source:BurnmarkasatDecember2016).

Whenitstartstohitthestockprice,wheneveryearningscallbecomesabouthowfastyoucandivestyourselfofyourlegacybranchnetworks,reducecosts,speed of acquisition and what percentage of your acquisition is 100 percentdigital, then simplyput, thepressurewill beon retail banks to lookmore andmorelikeachallengerbank.Atleastfromanoriginationperspective.Thesameisgoingtobetrueofwealthmanagement,insurance,payments,younameit.

ResearchbyPwClastyearshowedthat95percentofbanksbelievethatpartoftheirbusinessisatriskofbeinglosttostand-aloneFinTechcompanies.Thisisnolongerjustacademic.

Now I know the first defence that many incumbents will offer—marketshare. The argument will be that until FinTechs take real market share offincumbents, this is largely a moot point. But is it? Is the aim immediatedominanceinasector?WasAmazondominantinretailsalesin1995whentheirinternet service launched? What about in 2005, 10 years later? Was AppledominantinmusicsaleswhentheiPodlaunchedin2001?Werethoseinitiativesafailureintheearlyyearsbecausetheydidn’tdominatetheirindustrywithinjustafewshortyears?Thedataclearlydoesn’tsupportthatargument.

In the US market, regulators have chosen to drag their feet on FinTechlicensing for banks12, but there is already awell-established creditmarket thathas been largely based on non face-to-face distribution.Directmail, outboundcallcentresales,brokeredlending—allhaveallbeencommonmodelsoverthelast20yearsorso.Thus,pureplayFinTechsinthelendingspacedon’thavetheregulatoryhurdlesthatFDIClicensedcheckingaccountoperatorshave,andthusthemarketsharechangeshavebeenmorepronounced.

ThisshiftislikelytogetevenmoreacuteforincumbentsasthelikesofSoFi,CommonBond,Prosper,LendingClubandothersventureoutintomorecomplexdistribution partnerships to enable greater reach. Check out the data fromTransUnionshowingtheshiftsinunsecured,personalloanportfoliosintheUSmarketoverthelastfewyears.Fromjust2012to2015,FinTechswentfromjustthreepercentofmarketsharetoover30percent.

Figure6:FinTech’simpactontheUSlendingspace(Source:TransUnion).

Idon’tknowhowyou’darguethatthisisjustacoincidenceoranon-issueforincumbents.Butifyouneedfurtherproofofwhythisrepresentsastructuralchange, just look at the side-by-side operational cost structures of a FinTechlenderlikeLendingClubcomparedwithatraditionallenderinthespace:

Figure7:LendingClubbasedondatafromFederalReserveBankofSt.LouisandFoundationCapital(Source:Let’sTalkPayments).

The data shows Lending Club’s business has a 400-basis point costadvantageoveratypicalbankcompetitor.Whenitcomestooriginationthere’san80percentreductioninaveragecost,andcloseto80percentadvantagewhen

it comes to collections and fraud. In fact, the only costswhere LendingClubexceeded the average incumbent was in marketing. You might think LendingClub’s ITcostswouldbemore thana traditionalbank,given that is their coreplatform, but no—there, too, they have a 20 percent cost advantage overincumbents. That’s hardly insignificant. This is one of the reasons banks areincreasingly working with FinTechs. The fact is that maintaining legacyarchitecture is superexpensivecomparedwithworkingwithanew technologystack.

Thesechangesarenotlimitedtothelendingsegmentandchallengerbanks.For example, a recent report by EY showed that use of FinTech players formoneytransferandpaymentservicesrosefrom18percentin2015to50percentin2017,with65percentofconsumersanticipatingtheywouldusesuchservicesat some point in future13. McKinsey reported in 2017 that one UK-basedinternationalmoney transfer service provides P2P international transactions atjust10percentofthecostoftheaveragebankintheUK14.PwCandAccentureresearch show that between 28–30 percent of existing banking and paymentsbusinessesareatriskfromFinTechdisruptionby2020alone.That’stwoyearsaway,folks.

Accenturewentevenfurtherintheirresearch15oftheimpactofFinTechonthe industry. According to Accenture, there are only one of two possibleoutcomesforincumbentsbasedonthemacrochangesweareseeingasaresultofinvestmentandtractionaroundFinTechcompanies:

Scenario 1: Digitally disrupted—as banks lose their profitability to themoreeffectiveFinTechcompaniesinthedigitalage,theywillcontinuetoofferaproduct-basedsalesapproachratherthantoimprovethecustomerexperience.

Scenario 2: Digitally reimagined—banks will increasingly integrateinnovations at the business model level. Their focus will shift from assetmonopolies to improving a customer’s life by embedding financial servicesexperiences.

FinTechsarelean,agileandinnovativeStartups rely on leading-edge technology, don’t have to worry about anylegacyarchitecture,andareonlypartiallysubjecttotheregulatoryconstraintsthat apply to conventional banks.They require fewer but highly specialisedstaff,andhardlyanyphysical infrastructure.Theirdynamismattractsdigitaltalent.FinTechsdisrupt the salesofbankingproductsby fulfillingcustomer

expectations using agile processes and greater customer orientation andaccelerating their speed of innovation. They establish a “new normal” formobileandonlineuserjourneysusingunique,intuitivefeatures,withregularnew releases. They disintermediate client relationships from banks byprovidingaggregatorservices,puttingbanksinthepositionofpureprovidersof infrastructure and commodity products in extreme cases. As well asoffering old products in a new guise, FinTechs develop completely newservices,suchascross-border,peer-to-peer(P2P)payments,micro-lendingorrobo-investmentplatformswherealmostallprocessesarebasedonalgorithmsandbarelyanyhumaninterventionisrequired.Thismakessomeestablishedofferingsobsoleteanddiminishestheprofitpoolsofbanks.

FinTech—ChallengesandOpportunitiesMcKinseyReport,May2016

Partner,acquireormimic?Innovation is simply not in the DNA of most bankers. They’ve been trained throughout theirwholecareertoidentifyandavoidrisks,andinnovationisabouttakingsmallrisksandfailingfastandcheaplyandlearningfromthosemistakestogettotherightanswerquickly.

—J.P.Nicols,FinTechForge

Since 2012, the top 10 US banks by assets have participated in 72 roundstotaling$3.6billionofinvestmentin56differentFinTechstartupsalone.All10ofthosebankshaveblockchainandAIinvestments.

Research shows that FinTechs are consistently between 25–70 percentcheaper to market, or operating at a significantly lower cost base thanincumbents16. FinTechs are faster and first-to-market at delivering the biginnovations,which are the likely foundation of the future of banking from anexperienceandtechnologiesstandpoint.

If you’re a bank, then, statistics indicate you have two choices.Deliver itinternally at a slower and more expensive rate than a technology player, orpartnerwithaFinTechtodothesame,butfasterandcheaper.Andyet,thevastmajority of banks today are not yet partnering with FinTechs. Regardless,McKinsey research shows that only eight percent of incumbents believe thatthey don’t need to respond to these industry wide changes. That meansmostbanksalreadyknowtheymustrespond—thequestionremainingishow?

Figure8:Therearenowveryfewincumbentbanksthatdon’tseeFinTechsasathreat(Source:McKinsey).

Firstprinciplesthinkingisakeyelementinthislandscape.ItwouldbeillustrativetorevisittheSpaceXexampleintheirquesttodeliver

cheaper launch costs for rockets and spacecraft. Recall that the recent FalconHeavy(FH)launchboughtthecostofdelivering64tonsintoorbitdowntojust$90million—a90percentcostreductionfromthedaysoftheSpaceShuttle,andreusabilitywill bring that down further.Thenearest government competitor tothis is the long-awaited SLS, or Space Launch System, being developed byNASAanditscontractors.ButtheSLS,whichwillonlybeabletocarry70tonsinto orbit (just 10 percent more payload than the Falcon Heavy) and has anestimated cost of $1 billion per launch, is already three years overdue. TheprojectedcostsoftheSLSaregreaterthan10timestheFHlaunchcost,forjusta10percentincreaseincapacity.Inotherwords,forthecostofonelaunchoftheSLSplatformthatpushes70tonsintoorbit,SpaceXcouldhavedeliveredmorethan 700 tons into orbit for the same spend. That’s illustrative of the sort ofcomparisonswe’reseeinginincumbent-baseddigitisationeffortsversusthoseinFinTech.Sure,youcanbuild ityourself,but economically it simplymakesnosense.Ifyoucangetthesameresultforone-tenthofthepriceinone-thirdofthetime,whyareyouscrewingaround trying tocopywhataFinTechhasalready

1.

2.3.

4.

built?

BankStrengths FintechStrengths FintechDifferentiation

Broadexistingcustomerbase Newideas/thinking Experiencestailoredtospecificconsumergroups

Broadproductset Agileimplementation Greaterflexibilityinserviceapproaches

Lowcostofcapital Cuttingedgeanalyticsanddatamanagement

Newbusinessmodelsthatchangeeconomics

Regulatoryprotections(depositguarantee,etc)

Onlinecustomeracquisition Inclusionandservingunderservedcustomers

Revenuesource(forfintaech) Online/MobileUXoptimizeddesign

Shiftawayfromproductstodifferentiatedtechnologyexperiences

Table1:ThebenefitsofcollaborationbetweenBanksandFinTechs.

FinTechs bend space and time for incumbents when it comes to technicalcapability.

Tobefair,FinTechsneedincumbents,too.Theyneedthescaleandrevenuethatpartnershipswithbanksprovide.Theirgrowthisdependentonthesesortsofpartnerships to deploy their technologies. It sounds like a marriage made inheaven, but only if you recognise the key strengths and weaknesses of bothparties.

In the end, banks actually have four choices in how to respond to thestructuralchangesfinancialservicesiswitnessingasaresultoftheexplosioninFinTech-ledinnovation:

Donothing(slowdeclineintoobsolescence,ultimatelyveryexpensive)PartnerwithaFinTech(cheapestandfastest)AcquireaFinTech(potentiallyfast,butstillexpensiveandculturallychallenging)CopyormimicFinTechinnovations(slowandveryexpensive)

WhatarethebenefitsofcopyingaFinTechinsteadofworkingwithone?It’shard todefine specificallybeyond retainingbudget internally, avoidingcultureclashandowningtheIP.It’sunlikelythosebenefitsjustifythesortofcostsanddelaysthatwouldotherwisecomefrompartnershipwithamoreagiletechnologypartner.

InalmostallcasesincumbentbankscanonlyreallyiterateonwhataFinTech

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has already done.Look atGreenhouse fromWells Fargo, Finn fromChase orLivfromEmiratesNBD.Whataretheseiftheyaren’tclonesofMoven,Monzo,DigitandAcorns?Imitationisthesincerestformofflattery,butwhenitcomestobanking,technologydevelopmentisalsothemostexpensiveformofflattery.

Hackathons,acceleratorsandincubators—shallwedance?Itisquitecommonforlargerbankstostarttheirownincubatorsoraccelerators,offering up mentoring, legal, marketing, or technology support to startups toattract them. Such programs can also be accompanied with direct equityinvestments inparticipants.For instance,WellsFargo investsbetween$50,000and$500,000ineachparticipantinitsacceleratorprogram,whichwaslaunchedback in 2014. Wells uses the program as an extended audition to considerpurchasing the startups’ products.Barclays runs an accelerator program that itrecently expanded to New York, London, Tel Aviv and Cape Town—withinvestmentofupto$120,000.

JPMorgan Chase partnered with the Centre for Financial ServicesInnovation17tocreatetheFinancialSolutionsLab,witha$30millioninvestmentoverfiveyears.TheadvisorycouncilforFinLabincludesKostaPericfromtheBill and Melinda Gates Foundation, Arjuna Costa from Omidyar Network,Susan Erlich from Simple, Arjan Schutte from Core Innovation Capital, andothers.

On the down side, these kinds of programs are extremely costly to run.Banksshouldhaveextensiveexperience indealingwithstartups throughotherkinds of collaboration before shelling out for such a program. Additionally,banks need to have very specific objectives when they start an accelerator toensure they get their money’s worth. Barclays have already invested theresourcestodevelop43differentfinancialblockchainapplicationsinitsinternallabs, so it makes sense to strategically supplement that work through itsacceleratorprogram.

Someofthesepartnershipsarenowmatureenoughfortacticalbenefitstobemeasured.A recent survey fromglobal law firmMayerBrown18 showed threekeyareaswhereincumbentssaytheirpartnershipswithFinTechsarepayingoff:

Costsavings:87percentofrespondentssaidtheywereabletocutcoststosomeextentbyworkingwithFinTechproviders.Mostlikely,thesesavingsarecomingfromincumbentsspendinglessonthedevelopmentofnewexperiences,aswellastheefficiencies

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FinTechsbringtolegacyprocesses,theiragileoperatingstructuresandtheuseofthelatesttech.Brandrefreshes:83percentofrespondentssaidcollaborationswithFinTechsofferedopportunitiesforincumbentstorefreshtheirbranding.Speedtomarketandcheaperdevelopmenteffortsallowincumbentstorepositionthemselvesasbetterservingaparticularmarket,orsimplyascutting-edge.Increasedrevenue:54percentofrespondentssaidpartnershipshadresultedinboostedrevenue.

Ultimately, however, if your organisation structure is not geared towardsworkingwithstartups,theseacceleratorsandhackathonsdon’tgetyoubigbangforyourbuck.Ifyouhaveanyoneinthebanktellingyouthatyoucouldrunahackathonand take thebest ideasand implement themyourselves in thebank,thengiveupnow.Thismightworkonce,butafterthatyourbankwouldquicklybecomelabelledwithintheinformalnetworkofFinTechprofessionalsgloballyasan innovationbystanderand tire-kicker, andnot as a teamplayer.Theonlyway these programs work is if you are really serious about engaging withFinTechsforlonger-termpartnerships.

Theproblemforbanksisthatevenwithanincubatororacceleratorprogram,your access to FinTechs is extremely limited compared with stand-aloneaccelerators.ThesuccessofastandaloneacceleratorlikeYCombinatorisinpartbecause it has fundedmore than 500 startups since 2005.By comparison, theinnovation labsat someof thebiggestbankshousenomore thanahandfulofstartupsatanygiventime.SomeacceleratorsI’veseenonlyacceptoneortwopercentoftheapplicationstheyreceive.ThisishardlyaguaranteeofdiverseandcomprehensiveinnovationthroughFinTechpartnerships.

Theotherkeyproblemweare seeingdevelop is that leadersofacceleratorand innovation programs are increasingly being aggressively targeted bycompetitors who want to start their own initiatives. When a leader of anaccelerator or innovation team leaves, in many cases the executive team thattheyhiredbeneath themdissolves ormoveson too. It appears that innovationprogramswithin banks often hinge on a key individual.When that individualmoves,itsetsbacktheteam’sprogressconsiderably.Innovationneedstobeanorganization-wideactivity.That’spossiblewhenyouarerunningaFinTech;it’salmostimpossibleatanincumbentbank.

KillingFinTechpartnerships—thebarrierstocooperation

We have a chance to rebuild the system. Financial transactions are just numbers; it’s justinformation.Youshouldn’tneed100,000peopleandprimeManhattanrealestateandgiantdatacenters full of mainframe computers from the 1970s to give you the ability to do an onlinepayment.

—MarcAndreessen,AndreessenHorowitz,October2014

Looking at all of the above data, there are a ton of compelling reasons forcooperationbetweenFinTechsandincumbents,butpartnershipsbetweenbanksandFinTechsarestillintheirnascentstage.Thegoodnewsis,itischanging.In2012morethan50percentofbankssurveyedbyStatistafeltthatFinTechswerelargely irrelevant, but by 2017 that number had changed, with 93 percent ofbanksintendingtopartnerwithFinTechs.Butwhatarethekeystosuccessandthebarrierstocollaboration?

Figure9:SomeofthebarrierstosuccessfulFinTech-bankpartnerships.

InternalbuildmindsetI thinkwe’ve covered this often enough already, but needless to say thiswill

become harder and harder to justify over the coming years. I can tell youpersonally that at Moven we’ve engaged with a number of banks that spentliterally years pickingour brains about our tech. In the time these incumbentsspent trying to learn asmuch as they could about our technology, they couldhaveimplementedthetechnologymuchfasterandcheaperbyworkingwithus.

Licensing technology rather than building technology internally also givesthebanktheabilitytorejectapathinthemediumtermwithoutcommittingtoomanyinternalresourcestoit.

PoorculturalfitFor the next few years thiswill remain a potential area of conflict. A startupmovesfast,doesn’tworrytoomuchaboutregulationuntil there’saneventthatthreatens thebusiness,andhasacultureofriskacceptance thatwouldcurl thetoesofmostchiefriskofficers.Abankneedstobecarefulthattheircompliance,legal and risk teams don’t kill off the advantages, enthusiasm and drive of aFinTechpartner inacollaborationeffort.Whilebeing riskadversehasbeenatthe core of banking, the ability to transform your organisation digitally willincreasinglydependon agility.Banks should seek to learn from the culture ofFinTechstheyworkwithandgetthesupportofkeyinternalstakeholderstogiveFinTechpartnersplentyof latitudewhen itcomes tosolutionsarchitectureanddelivery.Toooftennewinitiativescomingintoabankareperceivedculturallyasa threat because of the change it forces, and the bank reacts like an immunesystemattackingavirus.

ProcurementworkloadIt’s likely thatwhenyoufirstmeetaFinTechtheprocurementand legal teamswill drive contracting. In that case bankprocurement departmentswill tend tofavour contracts that have previously been drawn up internally in the bank,becausenewcontractswillneedmuchlongerapproval times.Thedrawbackisthat inmanycasesanITcontractwithservicelevelagreementsfortechnologypartners (like Oracle, IBM or Temenos) will be massive overkill for a smallstartup working with you on integrating, say, voice AI technology. Internetsecuritycomplianceandauditrequirements,jointIPownershipclawbackrightsforprojectfailures—or,inthecaseoftermination,80pagesoflegalese—andsoforthareallgoingtobemassivelyproblematicforasmallVC-backedFinTechwhoisjustoutofbetawiththeirtechnologyandhasnoin-houselegalteam.

A 30–40man FinTech operation shouldn’t be spendingmonths or tens of

thousandsonlegalpaperworksosomeinternalstakeholderatanincumbentbankgets to cover their derrière.That is an insanely bad use of FinTech resources.Simplercontractsandmorecheckpointsarecritical.

Also keep inmind that inmany caseswhen aFinTech comes to youwiththeir technology stack, it will likely be in the cloud.What thatmeans is thatcybersecurity, uptime performance, data storage and residency, will all be thedomainofthecloudpartner.Ensurethatyoudon’tsimplypassonlegalworktoa FinTech requiring them to act as an intermediary with, say, Amazon WebServicesonyourbehalf.

TechnologychasmOf course, there’s going to be a technology gap—that’s why you arecollaboratingwiththeFinTechinthefirstplace.Makesurethat thereareclearexpectationsabouthowthisgapwillbefilled.Does theFinTechhaveanAPI-readysolution?AreyourequiredtobuildtotheirAPI,orwilltheFinTechhavetomodifyorextendtheirAPItointegratewiththebank’sexistingITstack?Isworkneededtopreparefor thepartnership justsoyour internalbankteamcanmeetthedataprovisioningandformatsrequirementsoftheFinTech?Wehadamajor bankout ofEuropeopt-out of a strategic investment inMovenbecausetheirteamsaidourtechnologystackwastoodifferentfromtheirown—insteaditcouldhavebeenanopportunitytoobserveandlearn.

FinTechsoftenhavemoreup-to-datetechnologyknowledgearoundthecorecomponents they’re using. Bank IT departments are not used to being behindtheir IT service providers on technology—normally, it is more of a licensingprocess than a technology learning curve. Expect that in a collaboration yourinternalteammaybelearningfromtheFinTech,andthelearningcurvemaybesteep.Finding aCTOor internal projectmanager that isn’t precious about thetechnology stack the bank has already built is going to be a challenge—especiallywhenitcomestostufflikethecloud,blockchainandAI,wherebanksareclearlyplayingcatchup.

Bothteamsneedtostronglyfocusonoutcomes.

Tooshort-termROIfocusedOneoftheculturalreasonsFinTechsandbanksclashisthataFinTechhaslikelygrownupwithventurecapitalfundingdesignedtogivethestartupsometimetodevelop and test their product in market. Profitability is not a strongconsideration, even for mature FinTechs like Ant Financial—the focus is

predominantlyongrowth.Forbanktechnologyprojects,however,ROI(Returnon Investment) horizons tend to be fairly short—maybe even a 18–24monthpayback.Thisisgoingtobeasourceofcontention.

In themedium-term,muchof thecapabilitiesFinTechsaredeploying rightnow don’t have a clear path to profitability, but are essential to being able toprovide differentiated financial services experiences on the technology layer.Short-termROI focus to underwrite an internal business case could verywellderail collaboration efforts before they start. This doesn’tmean banks have tojustwriteofflargeinvestmentsinnewtechnologies.Itdoesmean,however,thatROImightneedtobemeasuredbydifferentkeymetricsthataresofterthanthetypical IT project. Thesemetricsmight include brand equity from associationwiththeFinTech,acquisitionofnewskillsonanemergingplatform,out-of-the-boxthinkingcapabilities,ortheabilitytoexperimentwithanewtechnologytoestablishfeasibility.

RegulatorysoundnessAFinTechcomestoyouandhasacloud-basedAIservicethatwillallowyoutodocontextualrecommendationsandcross-selloffersviavoiceandmobile,withreal-timefulfilmentforonboarding.Whatdoyoudo?Technically this ticksallthe right innovation boxes, but depending on which country you are in, andwhichcentralbankregulatoryouarelicensedby,thisFinTechmaybeinbreachofa rangeofcurrent regulations.Youmaynotbeable todeploy in the cloud,data residency might be an issue, and the regulator may still require a wetsignatureforacustomeracceptingacreditofferfromyourbank.Thisneedstobefactoredintothepartnership.

However,regulatorycompliancemaynotbetheflashingstopsignitusedtobe for banks. Increasingly, FinTechs are getting adept atworkingwith centralbanks and regulators to prototype new technology approaches that circumventcurrentregulations.Regulatorsareevensettingupregulatorysandboxestotestthesenewofferings,orissuingwaiverstoexistingregs.

Makesure thatbeforeyoukill thepartnershipwith theFinTech,orassumeyoucan’tproceed,thatyouatleastgivetheregulatortheoptionofallowingyoutoprototypethisnewtechnologyinthefieldandseehowcustomersrespondtoit.Maybeasktheregulator toallowyoutoreleasethetechnologyonalimitedbasisto10,000customersinitially,toassesstherisktothosecustomers.

This does require a different compliance approach from the incumbent. Inthe past the compliance team acted as gatekeepers, preventing the bank fromdoingprojectslikethisbecausetheywouldputthebankinbreach.ButFinTechs

don’t work like that. FinTechs will knock on the front door of a regulator,explainthatothercountriesalreadyallowthemtoimplementtheirtechnologyintheirmarketsand that the technologyhas resulted inhigher levelsofcustomersatisfactionandlowerincidentsoffraud,andthatthismightbeajustificationforallowingatrialofthattechnologyinyourhomemarket.Thisapproachispartofthe culture shift that incumbents are increasingly having to grapplewith. Theanswerisnolonger,“No,theregulatorwon’tallowthat.”It’snot“Let’stalktotheregulator.”

Ifyoucan’tbeatthem,jointhemClearly the atmosphere is changingwhen it comes to bank collaborationwithFinTechs. A few years ago, both FinTechs and banks were talking about thecompetitive landscapeand“whowasgoing towin” the fight.Today, there areevermore announcements of collaborative efforts.Certainlywhen it comes totechnologiesliketheblockchain,partnershipsarethenorm,nottheexception.

The smarter incumbents are now recognizing that a “not made here”philosophy is unlikely to serve them well in the fast-moving and diverseecosystem of FinTech innovation. Instead, they are shopping around forpartnerships with the most innovative FinTechs. Events like Money 20/20,Finovate, FintechStage andNextMoney are increasingly becomingplatformsforthistypeofspeeddatingservicebetweenFinTechsandincumbentbanks.Butonceapotentialcourtshipisdeemedpossible,that’swhentherealworkbegins.

Figure10:CollaborativevscompetitiveFinTechinvestmentsbyregion($M)(Source:AccentureanalysisofCBInsightsdata).

Banksmustdoalotofworkjusttomakecollaborationeffortsviable.Itstartswithaculturechangeinthebank,butitincludesthefactthateventhebudgetingprocess and allocation of funds is going through a sea change. In 2016 banksinvestedaround$5billionintoFinTechdealsandcollaboration,but$50billioninternally on their own systems and innovation projects19. If youwant to be adigital-firstorganisation,thatratioisdefinitelygoingtohavetochange.

Lastly,strategyisgoingtobekey.Ifyou’reabankmaking$1billionayearinnetmargins,whenistherighttimetostartcannibalizingyourbranchbusinessin favour of a digital-first onboarding process? Organisationally, what is theimpactofthat?PartneringwithaFinTechisgoingtodeliveryoucapabilitiesthatarequitepossiblyindirectoppositiontoyourcurrentlinesofbusinessinrespectto distribution and fulfilment. And yet, if you don’t act, you know there isanother bank and a dozen FinTechs already deploying that technology in themarket.Damnedifyoudo,damnedifyoudon’t.

Therealityisthatwhateveryourstrategy,it’sprettyclearthatagile,creative

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thinking is going to be essential in staying ahead of the digital curvewhen itcomestotheevolutionoffinancialservices.Inthatcase,yourbestbetistoworkwiththedisruptiveendofthemarket,ratherthantrytocompete.Yourbestbetistoexperimentwithnewtechnologiesusingaskilled,freshsetofeyes,thantotryto reinvent thewheel internallywhen you know itwill simply cost youmoremoneyandmoretimethanthroughapartnership.

Yes, the time is now for collaboration and partnership between these twoworlds.Thebenefitscertainlyoutweightherisks.

EndnotesSource:KPMGPulseofFinTechReport(2018).Source:MarketInsider,BusinessInsider.

Source:Bloomberg/MercuryNews—“VentureCapitalhits$84billion,highestsincedotcomboom”,11Jan2018.IrecognizeasaFinTechfounderthatImaybebiasedinmyviewofwhereFinTechfitsinthefutureoffinancialservices.

I’mtalkingtoyouZelle®,HSBCPayMe®,etc.ThinkMetcalf’sLaw,Gilder’sLawandtechnologyadoptiondiffusionrolledintooneinexorablewaveofconsumeradoptionofnewtechnologies,socialmediaandmessagingplatforms.

Sorry,theUK’sMetroBankdoesn’treallycount.Source:BritishBankersAssociationsurvey2016.

Source:MitekScorecard—UKbankaccounts:asurveyoftruedigitalcapabilitiesincustomeron-boarding(December2017).Source:TheDigitalBankingReport,10July2017.

Source:KPMGReport:“Anewlandscape—Challengerbankingannualresults”(2016).Atthetimeofwriting,theOCCFinTechcharterlieslegallytiedupinTrumpadministrationandvariousstatebankingcommissionchallenges.

Source:EY’sFinTechAdoptionIndex2017.Source:McKinsey—“FinTech:ChallengesandOpportunities”,2016.

See“TheFutureOfFinTechAndBanking:DigitallyDisruptedOrReimagined?”ReportfromAccenture.Source:Various—McKinsey,EY,TheFinancialBrand,Celent,ForresterResearch.

Fulldisclosure—IsitontheboardofCFSI.Source:MayerBrown—“TheABCofFinTechSurvey”,November2016;asurveyof70financialinstitutionsintheUK.

“ITSpendinginBanking,AGlobalPerspective”,Celent,February2015;“DigitalDisruption:HowFinTechisForcingBankingtoaTippingPoint”,Citi,March2016.

We are still in the early stages of how the FinTech industry will impact thefinancial sector, regardless of any hype thatmight suggest otherwise. FinTechstartupsandtechgiantswillchangethebankingindustryinwaysthatwecouldnever have imagined, especiallywhenwe look back in just 10 years’ time.AFinTech tsunami is heading towards the financial industry’s shore, so banksshould diligently prepare for the vast and disruptive changes to come. Mostbanks have historically been resistant to this message, but it is happeningregardless.Therealityisthatmostincumbentsthataren’tinthetop100globalbanksarealreadyyearsbehindtheaverageFinTechintheirspecificdomain.

We’veallheardthefrogparablethatbasicallysaysthatafrogthatisputinapotofboilingwaterwilljumprightoutofit.However,ifthefrogisplacedinthepotwithacomfortablewatertemperatureandthenthewaterisheatedupslowlytoboil,itwillnotrealisethedangeroflikelydeathuntilitistoolate.Althoughscience does not corroborate the so-called “frog experiment”, it serves as anexcellentmetaphorfortheriskthatorganisationsfacebynotadaptingtothenewenvironmentcreatedbytechnology-ledbankingexperiences.

Future scenario-planning is a core skill for incumbent banks in particular.They should ask themselves: are the changes we’re seeing in the experiencelayerandcorebuildingblocksoffinancialservicesledbyFinTechstheboilingwater in this metaphor? Or are there incumbents smart enough to realise thedangerandactaccordingly—inthiscase,adaptingtothenewstandardsinday-to-daybankingcreatedbyFinTechstartups?

Thebroaderevidencesuggests thatwhilewehaveseensomebanks takingsteps towards capitalising onwhat the FinTech startups or technology leadershave to offer, such as cutting-edge technology implementation, innovativesolutions and an excellent user experience, not enough are taking the threat

seriously.ThetypicalpostureoftheindustryatlargehasbeentoseeFinTechsascompetitive threats. That is a pity, because I believe the FinTech industry cansignificantly assist incumbents in addressing their legacy systems limitationsand,moreimportantly,theirlegacythinking.

OnepositiveeffectcomingfromtheFinTechwaveisthatitiscertainlynoweasierforthoseinsideabankorganisationwhowanttechnologytobeascutting-edgeaspossibletogetattentionfromseniormanagement.Slowlybutsurely,theinjection of innovations from the FinTech space has given way to top bankmanagement feeling the urgency to stay competitive. These examples arebecomingmorecommondaily:suchasWellsFargo’sGreenhouse,Chase’sFinnandEmiratesNBD’sLivappsinresponsetothelikesofMovenandMonzo;orHSBC’sPayMeP2PappandEasyPayinHongKongasaresponse toWeChatandAlipay’s dominance there. There is also Schwab, Fidelity andVanguard’sown robo-advisor efforts in response to Betterment,Wealthfront and PersonalCapital. Inmost cases, though, incumbents still lag three-to-four years behindthe innovationscreatedby leadingFinTechs; andevenafter they launch, thesesame FinTechs remain ahead in terms of design innovations, features andthinking.Thewaterisstillboiling.

Itmakes sense, then, thatpartnershipsbetweenbanksandFinTechs shouldbefarmorecommontodaythantheyare.SomeincumbentshaveexperimentedwiththeopportunitiesFinTechpartnershipscanofferthem,butstatisticallythisistrueonlyforahandfulofbanksglobally.Isthisaquestionoftryingtofigureouthowtoworkwitheachotheraspartners,givenbothbringdifferentstrengthsandadvantagestosuchapartnership?

FinTechcompaniesusuallyhaveafasterandcheaperinnovationprocessandare extremely customer-focused, qualities that are out of reachof probably allbanks today. On the other side, the advantages banks bring to a possiblepartnership,suchasrevenue(fortheFinTech),customers(scale)andbrandarealsoextremelycompelling.ThatiswhyIbelieveweareabouttoseeawaveofcollaborationbetweenFinTechsandbanksthatwillaccelerateindustrychange.For those banks still resistant to such opportunities, they are going to findthemselvesfallingfurtherbehindthechangesintheindustry.

OneoftheprimaryreasonsthebankingindustryisbeingforcedtoadapttothisnewworldisplainlythatcustomersareincreasinglycomparingofferingsbybankstowhatFinTechstartupsortechgiantshavetooffer.Itstartswithsimplethingslike:whycan’tIopenmyaccountthroughyourappinsteadofabranch?Whydoesyourapplooksodatedcomparedwith thesechallengerbanks?Andwhy hasn’t your internet banking design changed in a decade? It is clearlyreminiscent of how Apple set the standard for design, user experience and

innovation for all their competitors by focusingondelighting the customer. Inthesameway,FinTechstartupshavesuccessfully redefinedwhat thecustomerdemands from a bank. FinTechs have set the bar for the user interface muchhigherthanincumbentbanks.

The solution is patently obvious. The smartest bankswill increasingly seethat FinTech startups should serve as virtual innovation hubs,which they cantake advantage of by partneringwith or acquiring some of them.Accelerator,incubation,innovationandhackathoninitiativesbybankssimplydonotprovidethedesiredeffectofbecomingmoreinnovative,oftenbecausethecultureofthebankdoesnot allow innovative ideas tobeadoptedat the same rate aswith aFinTech.However, theseprogrammescanbeused togain insight intoFinTechofferings,andbetterjudgetherightFinTechstopartnerwithoracquire.

Duetotheiroperationalcomplexity,complianceconstraints,legacysystemsand thinking and just the organisation’s sheer size, incumbents are by natureslowtoadapt.Anotherreasonforbanksmovingslowlymightbetheassumptionthat their older customers with money do not care about the difference, forinstance,betweenacutting-edgebankingexperienceandthecurrentstateofthebank’stechnology.Thatwouldbeaflawedanddangerousassumption,becausewe clearly see older people use cutting-edge technology like iPads orsmartphones in their daily life. Regardless of age, demand for cutting-edgebankingtechnology,reducedfrictioninfinancialservicesandbest-in-classuserexperiencewillbeabarsetbythesuccessofFinTechplayers.

When you are delivering hundreds of millions of dollars or more in netmargineachyear,itisunderstandablewhybanksarehesitanttocannibalisetheirbusinessmodel bymore aggressively applyingFinTechoperationally, and thattheywouldrathersee itdoneslowlyby thestartupsandactasaso-called fastfollower when it succeeds. Statistically this lag is resulting in gradual (andsometimesdramatic)shiftsinmarketshare1.Thus,thebetterdecisionmaybeforthebankstocannibalisetheirownbusiness,stayingincontroloftheprocessandtheir destiny. In contrast to the startups, banks have the brand, customers andmoney to feed new business units, and therefore to increase the likelihood ofsuccess.

However, at the same time, banks need to address and manage thefundamental disadvantages they carry of lack of execution speed and focus.Ultimately,itstillcomesbacktothefactthatifyouwantfast,cheapinnovationwithin your bank, you should be looking to change the culture internally toleveragemoreeffectivelyofftechnologypartnerships.

Whetheryourbankendsupasthefroginthisscenarioistoalargeextentinthehandsofitsleadership.Formanyincumbentsthefrogmetaphorwillplayout

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intheworstwaypossiblebecausetheyfailedtoseeanindustrybeingreshapedby emergingplayers, imagining that therewas enoughmomentum in their oldbusinessmodeltorideitout.Theirsmartercompetitorswilljumpoutofthehotwater to aggressively pursue partnerships with the FinTech agitators andtechnology innovators, recognizing the boiling water as one of the greatestopportunitiesthefinancialindustryhasexperiencedinthelast700years.Doyouwanttobethefrogortheboilingwater?Bethewater,myfriend…

EndnotesForexample,inChinamobilepaymentsandmicro-loans.

Faststartupvsslowcorporate?Theword“corporate”itselfisnowoftenusedasanadjective todescribea typeormodeofcompanythat,asaFinTechstartup,youdon’twanttoemulate.CEOsofstartupsoftensay:“Wedon’twanttogoallcorporate”.

Sowhatdoweunderstandby thewordcorporate?Formanypeople,whentheyhear thewordcorporate it implies: slowmoving,bureaucratic,potentiallyoutofdate.Notwords thatweassociatewith thedynamicFinTechcompaniesthatwereadaboutinthepress.However,therearetwothoughtsonthisthatmaygive us a clue intowhat is driving the optical differential in growth, and theybothstemfromoneword:“legacy”.

Legacy, the gift or transfer of value from the past to the present time, thenotionthatvalueisbeingcreatedandbuiltupon.

Legacy, the termused todescribeout-datedsystemsandprocesses thatarenolongercurrentandcompetitive.

Sowhenweare consideringa largecorporate,wedohave toview itwithboth definitions in mind. They have, by their very nature, demonstrated anability to create a scaled, profitable business that has endured for decades,servingmulti-generationalcustomers,returningmoneytoshareholdersandwithacapacitytoinvestforthefuture.Thelegacyofvalue.

With this we also typically see an organisation that has its foundations intechnology,cultureandorganisationaldesignthatisfromadifferenttime.Ithasaniterativeapproachtoproduct,technologyandorganisationalsystems—whichmakesitverydifficulttotransformacrossallofthesedimensions.

When we look at the growth of FinTechs, what we see is often thedevelopmentofabusinessfromafirstprinciplesbasis,andthisistrueacrossallbusinessfunctions,andinalloftheinherentorganisationalprocesseswithinthe

business.Ithastheabilitytocreateanorganisationtofit thecurrent times, thecurrent challenges and to develop current solutions. In all elements of thebusiness, whether that is the design of the product or service, there is norequirement to keep in mind the management of the existing business orcustomers. They are not constrained by the maintenance of existing revenuestreamsandthemanagementandmigrationofexistingcustomers.Theyarethenotionalblanksheetofpaper.Buthasn’tthisalwaysbeenthecaseforstartups?

Andtheansweris,yes,ithasbeen—butwithadifference.Wenowliveinatimewheretechnologyhasfundamentally,seismicallyshiftedtwoofthebiggestbarriers to entries, or to put it another way, “moats around the incumbentscastle”.Thisistheabilitytocreateproduct,andtheabilitytodistributeit.

Thistechnologically-drivenand-enabledinnovationcapability,coupledwithanorganisationthatisusingfirstprinciplesdesignprocesses,withoutalegacyofcustomers (and even employees) that it needs to consider, has an enormousadvantage:speed.Productsareenvisaged,prototyped,tested,amended,refined,andlaunchedintimescalesthatmaybefasterthanalargecorporate.Soisitalldown to the technology?Well, it is in part; but there appears to be another,potentially even more impactful, difference between the fastest-growingFinTechsandtheincumbentcorporates:culture.

In creating an organisation from scratch, there is an ability to develop aculturethatitselfisdesignedtooperateatapace,shapeandevenamethodthatmirrors the technological design capabilities of our times. Leveraging agilecollaboration tools such as Slack/Trello, in an environment where diaries aremanagedmonthsinadvanceandinvolvecomplexsteeringcommitteeandmatrixalignmentcriticalforalldecisions,isananachronism.Thisiswhysomanylargecorporatesthataretryingtotransformtheirinnovationcapabilitiesarestruggling—thelegacyofthecultureplaysaverylargerole.

Sowe know thatwe have the ingredients for fast-paced growth in a first-principles based, technologically-driven startup. With the right leadership,cultureandpersistencetheyhaveanabilitytodevelopproductatpacethatisnotconstrainedbytheexistingnormsofoperatingascaledbusiness.Theabilitytoleveragetechnologytotaketheseproductstomarketisthekeydifferenceoverthelast10years.AFinTechappcanbedownloadeddirectlytooneofmillionsof individual consumers in amatterof seconds fromadevice that fits inyourpocket. Imagine how inconceivable it would have been 20 years ago for acompanylikeInstagram,whichhadatthetime13employees,totakeaproductto 30 million people? The distribution model of mobile download has asymbiotic relationshipwith socialmedia sharing capabilitieson thevery sameplatform.Themarketplacehasbeenlevelledatleast,andintheearlystagesmay

beeventiltedinthedirectionofthestartup.Butawordofcaution.Firstly,ourimageisdistorted,theunicornsaregetting

adisproportionateshareofvoice.Thisofcoursemakessense—thestorytellingof the company from the garage becoming a global mega-brand is highlycompelling.Andconversely,thestoryofyetanotherstartupfailingtoachieveafundingroundisnot.

Secondly, we are seeing a regulatory environment that is struggling toaccommodatefor,supportandgovernarangeofrapidlyemergingpaymentandfinancial services companies. As the FinTech startups hit true scale they areenteringaphasewheretheincumbentsareabletoplaytotheirownstrengths.Sothe transition from a high-growth, even-scaledFinTech to a company that hasserved the test of time is a tricky one. The giant financial services corporateshavemainlybeenabletoweatherthestormofeconomicdownturn,andcreateatruelegacyacrossgenerations.

Andthatleadsustomaybethefinalconclusion,andonethatweseeboththechallenging entrants and the legacy incumbents embracing: partnership.Allowing the FinTechs to leverage their natural capabilities in terms of pace,early stagegrowth, and innovation;but then integrating this into theoperatingmodelsoftheincumbents.

7 TheRoleofAIinBanking

Arobotmaynotinjureahumanbeingor,throughinaction,allowahumanbeingtocometoharm.—“HandbookofRobotics,56thEdition,2058”,IsaacAsimov(1942)

In1942, science-fictionauthor IsaacAsimov introduced theworld tohis threelawsof robotics1.An incredibly prescient visionary,Asimov started theworldthinking about the potential challenges sentient or cognitive technologymightpresent humanity. The number one principle for robotics may end up being:createmorevaluethanthehumanyoudisplaced—theprimarythreatfromAI’smaywellbetechnologicalunemploymentasopposedtorobotoverlordstakingover the planet and enslaving humanity. While likely neither malevolent orbenevolent,AIstillhasthepotentialtodolargescaledamagestructurallywhereemploymentandequalityareconcerned.

When you look for the organisations making big bets on ArtificialIntelligence today2, the lists always include technologymajors, but as yet wedon’tseemanybanks investinganywherenear thescaleofMicrosoft,Google,Apple,Alibaba,Baiduandothers.IndustrialplayerslikeBoeingandTeslaarebynecessitymakingbigbetsonAI, so it is entirely reasonable to expect thatweshould see a similar scale of investments coming through financial services,healthcare,etc.However,whenwelookatAIinfinancialservicesrightnow,thelion’s share of progress appears to be coming fromplayers likeAnt FinancialandsmallerFinTech’swhoareabletospecialiseintheseemergingtechnologies.AntFinancialthemselvesisreportedlyinvestingmorethan$15billionoverthenext three years on AI and Quantum computing3. On their current valuationthat’sabout10percentoftheirtotalmarketcap.

There are a handful of banks taking steps in the right direction. JPMorganChase spent 16 percent of their budget on technology in 2016, $9.6 billion intotalandupfrom$1.2billionin2012,buttheyhavenotdisclosedhowmuchofthatspecificallygoesintoAIresearchanddevelopment.GoldmanSachsStratsdivision (quantitive strategy/technology) now makes up around 30 percent ofGS’ headcount, and they’ve recently been seen aggressively recruiting AI

specialists in Machine Learning (ML), Artificial Intelligence (AI), programmanagementanddigitalproductdesign.BofA,BBVA,DeutscheandHSBCaretalkingabouttheirstrategicspendinAI,whileTDacquiredtheAIstartupLayer6 in January of 2018, driven by Rizwan Khalfan, their Chief Digital andPaymentsOfficer.

The ability to anticipate the needs and preferences of individual customers doesn’t exist inbankingtoday,butwillbearequirementgoingforward…There’ssuchlittletalentandexpertisein the AI space, and for us to be able to partner with organisations like Layer 6, who areconsidered both best-in-class from a research and a pragmatic perspective, is really the secretsauce.

—RizwanKhalfan,TDBankGroup

Rizwanpointsusdirectlyatthecoreproblemfortheindustryatlarge.AIisanentirelynewskillsetandbanksdon’thaveanyrealexpertiseinthespaceand,frankly,arealongwayfromhavingworld-classcapabilitiesthatcouldcompetewith the techmajors.GivenAI isnot a corecapability, andbanksare startingbehind the eight ball on both budget and talent, it’s pretty clear that strategicpartnerships,acquisitionsandsuchwillbeessential.

The advantage of tech majors is that they have both the capital andtechnologypedigreetobeabletofocusonAI.FinTech’sarealreadybuiltfromthegrounduparoundtechnology,theyhavetalentthatismoreeasilyadaptedtoAI R&D and they don’t have process, policy or legacy that could slow themdown.AllthisaddsuptothelikelihoodofbanksslippingfurtherbehindonAIovertime.Thus,itislikelythatwhenAIstartstooperationallyimpactfinancialservices, incumbentswillhave far lesscontrolover theoutcome than, say, theimpactofregulatorychangeorcustomerbehaviourmighthaveonAI.

WhendiscussingAIinbankingorfinancialservices,it’simportanttodefinewhatexactlywe’retalkingabout.ManybankersmakethemistakeofthinkingofAIissomethingthatisalongwayoff,andwhenitcomesitwon’tbefocusedonbanking. These types of algorithms, which allow for leaps in cognitiveunderstanding for machines, have only been possible with the application ofmassivedataprocessingandcomputingpowerinrecentyears.

TalkingaboutAIingeneraltodayislikepeopletalkingaboutTokyolikeit’ssynonymouswithAsia.ItbeliesamisunderstandingaboutdifferenttypesofAI,andhowandwhereAIwilllikelyimpactbanking.Forexample,we’renotgoingto need a bipedal android with artificial general intelligence to eliminate aplethora of banking jobs. Even today, with nascent developments in AI, wealreadyhavethefoundationsformaterialchangesinthewaywestafffinancialservicesoverthecomingdecade.

In the 2000s, UBS moved their trading floor out to its headquarters in

Stamford, Connecticut. The trading floor housed more than 5,000 tradersholdingprideofplace in their700,000square-footbuilding.Today the tradingfloor stands empty, abandoned as a result of automationof the trading armofUBS’business.Inquantifyingtherateofchange,Goldmanhasfoundthattodayone computer engineer can replace four or five traders. Today one-third ofGoldman’s staff are already computer engineers as they speed up automationinternally.

Figure1:UBStradingfloor,Stamford,CT,circa2008(BeforeAI)—Todaythesetradersaregone.

GoldmanandUBSusecomplexalgorithmsthatmimicwhatahumantraderused to do—simple machine intelligence with human equivalent decision-making capability for a specific task.One good example of this is the projectthat UBS and Deloitte created in 2016—a simple, automated program fordealing with their clients’ post-trade allocation requests. The system does anautomatedreviewofemailssentbyclientsdetailinghowtheywant toallocatelarge block trades across funds, then processes and executes the requiredtransfers. This takes the automated system seconds to execute, reducing downfromthehourorsoitwouldhavetakenahumaninvestmentbankerpreviously.Wesimplyprogrammedanalgorithmto replicatewhatahuman traderused todo.

Theshiftsincapabilityherereallycentrearoundtheprinciplethatweareno

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longer coding a set of rules in an IF-THEN-THAT type syntax into computercode. We build algorithms, databases and learning engines that can observebehaviour, and learn to act accordingly.We are building computers that learn.Allweneedtodoatthatpointisfeedinthedata—ofwhichwehaveplenty.JustaskFacebook.

AIwillessentiallyevolvethroughthreedistinctphases4:AlgosandMachineIntelligence—Rudimentarymachineintelligenceoralgorithm-basedcognitionthatreplacessomeelementsofhumanthinking,decision-makingorprocessingforspecifictasks.Neuralnetworksoralgorithmsthatcanmakehuman-equivalentdecisionsforveryspecificfunctions,andperformbetterthanhumansonabenchmarkbasis.Thisdoesnotprohibittheintelligencefromhavingmachinelearningorcognitioncapabilitiessothatitcanlearnnewtasksorprocessnewinformationoutsideofitsinitialprogramming.Infact,manymachineintelligencesalreadyhavethiscapability.Examplesinclude:Googleself-drivingcar,high-frequencytrading(HFT)algorithms,facialrecognitionsoftware,insuranceassessorappsusingimagerecognition,andcreditriskassessmentalgorithms(e.g.sesamecredit).ArtificialGeneralIntelligence—Ahuman-equivalentmachineintelligenceandlearningsystemthatnotonlypassestheTuringTestandrespondsasahumanwould,butcanalsomimichumandecision-making.Itwilllikelyalsoprocessnon-logicorinformationalcuessuchasemotion,toneofvoice,facialexpressionandnuancesthatcurrentlyalivingintelligencecould(canyourdogtellifyouareangryorsad?).Essentially,suchanAIwouldbecapableofsuccessfullyperforminganyintellectualtaskthatahumanbeingcould.Examplesinclude:Sophia(HansonRobotics)andSingularity.io5.Hyperintelligence(StrongAI)—Amachineintelligenceorcollectionofstrongmachineintelligences(whatdoyoucallagroupofAIs?)thathavesurpassedhumanintelligenceonanindividualorcollectivebasistotheextentthattheycanunderstandandprocessconceptsthathumanscannotunderstand.

Wedon’tneedtowaitanother10,15or30yearstoseethishappen,andtheTuring Test is fairly meaningless as a measure of the ability of machineintelligencetodisruptabankintermsofitsday-to-dayoperations.

The range of impact ofArtificial Intelligence is going to be broad. IBM’s

developerWorks team has an excellent primer on the advancements that havebeenmadeinArtificialIntelligenceovertheyears,andhowtheseareclassifiedby the industry6. Terminology like cognitive computing, machine intelligenceand artificial intelligence are not interchangeable, but do relate to the broaderdevelopmentsinAIthatwe’reseeingevolvetoday.

Figure2:VariousAIdisciplinesasappliedtofinancialservices.

Tosimplifythechartopposite,essentiallytherearetwobroadareaswhereAIwillimpactfinancialservices.Thesearetheinteraction/conversationalAIlayer

between the customer and the institution, and internally from a processperspective—anywhere we currently have a human checklist, a transaction oractivity against compliance, risk or credit assessment rules,whereverwe takeinstructionsandapplythosetoanapplication,buyorsellorder,orwhereverwehavealegalorcontractualrelationshiptoexecuteagainst.Anyprocessahumancanlearnwithinabankthatdoesn’trequirestrongdependencyonsocialcues,analgorithmwillbeabletolearnandreplacethathumaninshortorder.

AIwillmassivelyaffectmarketing;itwillradicallychangecustomerserviceexpectations;itwilldominateourabilitytoengagecustomersonabehaviouralbasis;itwillreplacehugeswathesofprocess-drivenjobs;andwillrevolutionizethewayweviewandoperationalizerisk in theorganisation today. Infact, justtakingthatlastelement,itisentirelypossiblethatriskmanagementinfinancialserviceswillbecometheexclusivedomainofAIwithinthenext10years.ButthisisnotgoingtohappenfromwithinanAIdepartmentinthebank,notevenfrom the IT department. This is a systemic attack on the core of what weconsidertheoperationalengineofmodernfinancialservicestoday.

Thismaysoundlikehype,buttheworstcaseisthatbankshavethree-to-fiveyearsbeforetheyhavetostartfiringstaffbecauseofAI’s impact;andthebestcaseis7–10years.InJanuary2017,aMcKinsey&Companystudyfoundthatabout30percentof tasks in60percentofoccupationscouldbecomputerized;whilelastyear, theBankofEngland’schiefeconomistsaidthat80millionUSjobsand15millionUKjobsmightbetakenoverbyrobots7.

Ofcourse,notall jobsarecreatedequally.In2013,ahighly-citedstudybyOxfordUniversity academics, called “TheFuture ofEmployment”8, examined702commonoccupationsandfoundthatsomefinancejobs—banktellers, loanofficers, tax preparers and insurance claim assessors—are more at risk thanothers, including economists, financial analysts, financial modellers andstatisticians.

Deeplearning:HowcomputersmimicthehumanbrainCentral to the revolution in artificial intelligence is not computers that areprogrammed,butcomputersthatlearn.Buthowdocomputerslearn?

Itallcomesbacktoprocessinginputs(data)andmimickingneuronsor thebrain.InTheEconomistof6May2017,datawascharacterizedasthenewoiloftheemergingdigitaleconomy.Well,ifdataisthecrudeoilequivalent,databases,blockchainsanddatawarehousesare thedrilling rigs,anddeep learning is therefinerythatturnsthatoilintootherusefulproducts.DeeplearningisattheheartoftheemergingAIboom.

Deep learningneuralnetworkshavebeenarchitected touse thesamebasiclearningprinciples thatoccur in thehumanbrain.Thehumanbrainconsistsofspecial cells called neurons, which are composed of several parts, includingbrainfibresknownasdendrites.Asyoulearn,thesebrainfibresgrow.Thefibresconnect your brain cells to one another at contact points called synapses. Thelargeryourbrain fibresgrow, and themorebrain cells theyconnect, themoreinformationcanbestoredinyourbrain.Whenyoureinforcelearningovertimeor practice skills you’ve learned, the dendrites in your brain grow stronger,forming a fatty tissue layer anddoubling connections betweenkeyneurons ormemories.

In deep learning networks, we’ve created artificial neurons calledperceptrons.Theseartificialneuronsare thebrainchildofFrankRosenblattofthe Cornell Aeronautical Laboratory, who designed these way back in 1957.Initially designed for image recognition, the first perceptronswere hard-wiredlogiccircuits,andnotthesoftware-basedcodetheyaretoday.

In true computing terms the perceptron works with inputs applied to analgorithmasabinaryclassifierasitlearns.Forexample,ifthealgorithmisbeingusedtolearntodistinguishbetweenacatandadog,thealgorithmappliesvariesvectors (inputs) against a bias to create a linear decision boundary. Simplystated, the algorithm filters inputs to produce a oneor a zerooutput, but overtimethealgorithmcanadaptitsbias(shiftingthelinearboundary)asitlearnstoproducemoreandmoreaccurateresults.Thecapabilitytocorrectlyidentitythedifferencebetweenanimageofacatandadoggetsbetterandmorepreciseovertime.

Figure3:Deeplearningneuralnetworksuseartificialneuronscalledperceptrons(Imagecredit:ChristophBerger).

Figure4:Perceptronupdatingitslinearboundaryasmorevectorsareadded(ImagecreditWikipedia).

Historically,ifwetalkedabouthowhumansdifferentiatefromtechnology,itwasalwaysaboutourabilityashumans to recognisepatterns, thinkcreatively,understandabstractconcepts,etc.Byteachingmachines to learn, it’sclear thatour ability to recognize patterns or to reason on things is no longer the clearadvantageitoncewas.

Thereareavarietyoftechniquesusedindeeplearning,suchassingleversusmulti-layerperceptrons,backpropagationnetworks,alternatestep-functionsandlinearvectoring,butyoudon’tneedtobeanAIexperttounderstandthatAIisalreadystartingtoimpactbroadswathesofsociety.

WearealreadylosingouttomachinesIntheEuropeanUnion,UnitedKingdom,UnitedStates,UnitedArabEmirates,Singapore,HongKong,Australiaandmanyothercountriestoday,ifyouenteraportwithabiometriccapablepassport,you’llhavetheoptiontogothroughane-gateorsimilar.Itmightbeafairlyobviousstatement,butthereasonforthisissimple—computerstodaydoamuchbetterjobatrecognizingafaceorverifying

•••••

your identity than a human customs officer ever could. Research shows thatfacial recognition software is 15–20 times more accurate at identifying acustomerthanatypicalface-to-faceinteraction9.Afactthatwouldindicateface-to-facebankaccountopeningisno longersafe, incidentally.Statisticallybasedonsoftwarecomparators,itisprobablythesingleriskiestthingabankcoulddointhisdayandage.

Chinahasdevelopedanationalidentitydatabasethatcanidentifyanyoneofthe 1.4 billion Chinese citizens via software in two-to-three seconds10. WhilemanyintheWestmightscreamaboutthecivilrightsissuesassociatedwithsuchpolicies, the fact iswe’vebeen seeing this sort of tech fictionalised inmoviesandsoforthfordecadesnow.Mostmodernpolicingorganisationsalreadyhavethis capability, and the technology is maturing for a very simple reason.Governmentscantrustthistechtoworkbetterthanhumaneyeballs.

How many of us would want our borders compromised by inferiortechnologytoday?Wouldn’tweallwantthebestchanceofcatchingacriminalor identity thief? In these scenarios, it’s pretty straightforward to prove thatalgorithms,biometricsandidentitydatabasescanconsistentlyoutperformhumanworkers.

In airports the applications are straightforward. Airlines like JetBlue andFinnairaretrialingfacialrecognitionsystemstobypasscheckingyourboardingpass at thegate.Before longyoumaybe able to enter the airport, boardyourflight and pass through customs at the other end just by using your face. Thegoldenageoftravelmayreturnsimplythankstobiometrictechpoweredbyanalgorithm.

Sowhatarewetomakeoftheinsistencebythosebanksandregulatorsthattoopenabankaccountyoumusthaveahumanphysicallypresentthemselvesinabranch?Inthelightofbroadertrendsinidentityverification,arequirementforahumanbankofficertofacilitateaccountopeningisananachronism.Verysoon,based on both cost and performance, humans won’t be competitive when itcomes to the front line on the basis of identity verification alone. If yourbusiness is built on in-branch customer acquisition, you will find that AIcapabilitiesingeneralareabigthreattoyourprimaryacquisitionapproach.

Some of the broad areas where artificial neural networks are alreadyoutperforminghumansinclude:

ImageandpatternrecognitionBoardandvideogamesVoicegenerationandrecognitionArtandstyleimitationPrediction

• Websitedesign/modification

Between2009and2016,machineintelligentHFTalgorithmsaccountedfor49–73 percent of all US equity trading volume, and 38 percent in the EU in2016.On6May2010,theDowJonesplungedtoitslargestintradaypointsloss,onlytorecoverthatlosswithinminutes.Afterafive-monthinvestigation,theUSSecurities and Exchange Commission (SEC) and the Commodities FutureTradingCommission(CFTC)issuedajointreportthatconcludedthatHFThadcontributedsignificantly to thevolatilityof theso-called“flash”crash.Alargefuturesexchange,CMEGroup,saidinitsowninvestigationthatHFTalgorithmsprobablystabilisedthemarketandreducedtheimpactofthecrash.

Foran industry thathasdeveloped trading intoa fineartover the last100years,HFTalgorithmsrepresentasignificantdeparturefromthetradingroomsof Goldman Sachs, UBS and Credit Suisse. The algorithms themselves havedeparted significantly from typical human behaviour.Very different behaviourand decision-making has been observedwhen analysingHFT trading patterns.Whathasledtothisshift?

Perhaps it is the fact that HFT has neither the biases that human tradersmighthave(for instance,staying inanassetclassposition longer thanadvisedbecausetheindividualtraderorassetmanagerlikesthestockortheindustry)northesameethicalbasisformakingadecision.WhilesomemightarguethatWallStreet isn’t exactly a bastion of ethics, the fact is, an HFT algorithm simplydoesn’thaveanethicalanglefordecision-making(unlessthoseskillshavebeenprogrammed in). Those deep-learning algorithms have created different linearboundariesfromhumansdoingthesamejob.

While HFT has been pioneered by the big trading companies, and hascertainly helped them, what impact are algorithms having on investmentportfoliosandwealthmanagement?

Robo-advisors,robo-everythingAswith theother trendswe’veseenin theBank4.0world, thefirstmovers intherobo-advisorspaceweretheFinTechstartups.Bettermentlaunchedin2010,andforCEOJonStein,“oneofthemostsatisfyingresultsoftheworkwestartedseven years ago is seeing the entire industry change”. That change is a tacitacceptance that human advice is amarginal value add, andwhen it comes toportfolio performance over the medium-term, robo-advisors may offer anopportunity for rebalancing and optimization consistent with your returnexpectations,thathumanswon’tefficientlybeabletomatch.

I’vemetJonnumeroustimes,interviewedhimonmyradioshow,andIlikethefact thathe’s largelyaquietachiever.Youdon’theara lot fromJon in themedia for months at a time, and he lets the results of Betterment speak forthemselves. Iamalsoabig fanofBetterment’sstartupstory,as the first robo-advisoryfirm,becauseitdemonstrateshistenacity.

Figure5:TheRobo-Advisorrevolution(Credit:Barrons).

Jon Stein and his roommate, Sean Owen (a Google software engineer),startedbuildingBetterment’splatformbackin2007.Steintaughthimselftocodeinorder tobuild theearlyprototypesbehind theplatform.However, startingabusiness in a highly regulated industry thatwould require licensing and othercompliance-related competencies required more than technical competency.Before starting Betterment, Stein had attended weekly poker games with EliBroverman(circa2003–4).WhileElihadcomeoutofthosepokergamesbetteroffthanhimself(accordingtoStein),itwasarelationshipthatallowedSteintotapBroverman,asecuritiesattorney,forhelpwiththestartupintheearlystages.In 2007, while Stein was still studying at Colombia University’s BusinessSchool,heandElimetupforlunchataDominicanrestaurantontheUpperWestSideandsketchedoutaplantomoveforwardwiththeuglyregulatorystuffthatwouldotherwisehaveheldBettermentback.

By 2008, the small team, including Jon’s girlfriend (hiswife today) doinggraphicdesign,wereworkingonfundingandthelaunchplatform.Thelicensingand business formation followed in 2009, and then in 2010 they launched atTechCrunch,withChrisSacca(ofSharkTankfame),levelingsomeprettytoughcriticism theirway: “Iworry that it’s too simple. People don’t always trust it.Peopleexpectalittlebewildermentthatgivesitcredibility.Thisstartstofeelalittlelikeatoy.”

Today that toy manages more than $10 billion in AuM (assets undermanagement), and Betterment’s growth is estimated at around 106 percentannually,althoughitappearstobeslowingastheygetlarger(itwasaround300percentjustthreeyearsago).Steinsaysheisaimingfor$1trillioninAuM,sotheyhavebigaspirationsandmoregrowth togo.Toreach thatgoal,however,

therewillneedtobeasubstantialshiftinbehavioursaroundinvesting.Today, we’re at a pivot point for personal investing. In the past the

assumptionwasyou’dneedbothadviceandfinancialliteracyinordertobeabletosuccessfullyinvestasanindividual.That’saproblemtodayasthedatashowsthat financial literacy amongstMillennials is actually significantlyworse thanthatoftheirforebears11.Asurveybackin2015conductedbyBankofAmericaU.S. Trust found that just 47 percent of multimillionaires aged 18–34 use afinancial advisor12. For those Millennials that aren’t multimillionaires, thestatisticsareevenworse.

AssumingthatMillennialswillbebothliterateenoughtoinvestandseekouthumanadvisorsinthefutureisabigassumption.Theemergenceofautomatedinvesting tools like Stash, Digit and Acorns, and the development of robo-advisorytoolsseemsmorelikelytofillthisgapinskillsandbehaviour.

When doing research for this chapter, I tried to find portfolio returncomparisons between human advisors and robo-funds. From a moderate-riskportfolio perspective, when I used to work with private bankers and wealthadvisorsback in theday,we’d lookfor10–12percentannual returnsasasafeassumptiononalonger-terminvestmenthorizon.Typically,thiswouldbeamixofequityandincomeproducingbonds.

Roboadvisors todayareperformingright in thatrangeofexpectedreturns.Barron’sconducteda surveyof robo-advisorsover the2016calendaryearandfoundannualreturnsforthebetter-performingroboswereinthe11–12percentrange13.That’salsoconsistentwiththeaverageannualisedreturnoftheS&P500Index,whichwas11.69percentfrom1973–201614.BIIntelligenceforecaststhatrobo-advisorswillmanagearound$1trillionofAuMby2020,andaround$4.6trillionby202215.As a trend, by2030wewould expect robo to dominate themassmarketinvestmentindustry.

Onaportfolioperformancebasisthen,thedifferencebetweenarobo-advisorandahuman-basedassetmanagementfirmarenegligible.Certainly, ifyouarewilling to take greater risks with your portfolio, or you are investing largeramountsinmorediversifiedpoolsorstructuredproducts,thenyoumayfindthatahumanteamcanperformwithhigherresults.However,thefirmsandadvisorsthatproducethoseresultstypicallyrequireaminimuminvestmentthatisoutofreach of 99 percent of the population. Thus, it seems entirely reasonable thatrobo advice will come to be seen as one of the greatest tools for large-scaleaffluentwealthmanagementsincethecreationof“premier”banking.Accessible,automatedportfoliomanagementwithoutthefriction.

Seeingthistrendemerge,ICBCinChinahasmadeabigbetonAIandroboadvice. Their robo-advisor tool doesn’t require a traditional risk profile

questionnairetogetstarted.It learnsfromyourinvestmentstylealongthewayand teaches you how to invest in your optimal range for your level or risktoleranceandyourreturnexpectations.

Figure6:ICBC’sRong-elineofproducts,includingAI投orrobo-investment.

ICBC’sAI投,orAI invest, representswhat iscertain tobecomeabaselinecapability for wealth management capabilities moving forward. It also willfundamentally change the legal and compliance requirementswe have around“risk”forbasicinvestmentorwealthmanagement.Forthelastthreeyears,everytime I’ve done an annual “risk” reviewwithmy bank inHongKong,HSBC,they’veusedatelephonetorecordourconversationsothereisanaudiblerecordofmeaccepting theriskconditions.Each timeIgo throughmyannual review(whichgenerallytakesaboutanhour),atleast75percentofthetimeisspentoncompliance-related activities. They do all of this for regulatory and legalreasons.

With AI managing risk tolerance and optimising your portfolio for yourrequired investment horizon and return expectations, the whole regulatoryprocess requiredby theFSA,SEC,etc involvingsigningapieceofpaperoratelephone system legally recording my formal response to a risk tolerance

questionnairewillbequicklyundermined.Humanadvisorswill just lookslow,clunkyandboundbyfriction.Roboadvisingwillquicklybecomethebenchmarkonexperience,and thenonassetmanagementperformance.Regulatorswillbeforcedtoadapttoo.

For those of you still sceptical about robo advice generally, it would behelpful to step back and see where AI-based advice fits from a technologyperspective,ratherthansimplytryingtoarticulateitashumansversusmachines.

AbankaccountthatissmarterthanyourbankIfyoucanimaginetechnologylikeSiri,GoogleHomeorAlexamaturinginthenextfiveyearsandbeingabletoorderyounotjustsocks16,butapizza,andbookUber rides, flights, restaurant reservations and doctor’s appointments. Oncecommerce is integrated into our tech so seamlessly, the next obvious area totackleisday-to-daymoneyinteractionsandfinancialadvice.

If you think this sounds like a science fiction story, you are in for a bigshock.Rememberthatbackduringthedot-comboom(orbubble),themajorityof non-tech presswas extremely skeptical about the effect e-commercewouldhaveonretailbusinesses.Todayonlineshoppingdominateschoice,withmanycategoriesofretailshowing50percentormoreofsalesareeitherinfluencedbyor initiatedvia thewebormobile17. ForChristmas2017, itwasprojected thatalmost40percentofallsalesweredoneonline18,andAmazonownedthelargestpercentage of that. That shift in consumer behaviour has been devastating forretailers, with 7,000 stores closing in the US alone in 2017 (which is a 300percentincreasefrom2016).IntheUKitisexpectedthatmorethan5,000storeswillclosein2017,butthatisactuallydownonpreviousyears.

Inmarkets like China,mobile commerce now dominates day-to-day retailactivityforawiderangeofsegments,andtoday75percentofalle-commerceismobile-ledinChina19.Inparalleltoagrowingmiddleclass,thismobilebiasiscreating slower growth in retail stores than we would have expected, givenChina’s economic growth. The big growth is certainly centered around onlineportals more than physical retail, and the erosion in physical retail is plainlyapparent20.

In the near future you’ll bemaking these everyday purchases increasinglyvia voice on a smart assistant built into your home and smartphone. Voiceassistantsarealreadybeingusedtomakepurchasesby40percentofMillennials,withthatnumberexpectedtoexceed50percentby202021.

Sowhy is this trend towardsmobile andvoicecommerce so important forbankstotakenote?Ifyouliveinadevelopedeconomyoranurbancentrelike

Tokyo, New York or London, there’s a fairly good chance that if you wereorderingatake-outdinnerfordelivery,thatyou’dbeusinganapp.IfIaskedyoutocheckyourbalance,chancesareyou’d likelyuse thesameapproach.Todaymore than 50 percent of customers in most developed economies use theirmobileforcheckingtheirbalanceversusanyotherbankchannel.Twentyyearsago it was dominated by ATM or phone banking. In 10 years it will bedominatedbyvoice-basedoragency-basedcommerceengines22.

Consumer:“Alexa,what’smyaccountbalance?”Consumer:“Siri,hasmysalaryhitmyaccountyet?”Consumer:“Google,howlongwillittakemetogettotheofficeifIleavein

twohours?”

Figure7:Howpeopleusesmartspeakersonadailybasis(Source:NPRandEdisonResearch).

Now,youwouldbewrongtodismiss thisassimplyanotherchannel in thebank arsenal, because this is the start of actually redefining your day-to-dayrelationshipwithtechnology,notjustyourbankaccount.Voicehasthepotentialtobecometheunderpinningofday-to-dayadviceforyouandyourmoney,butincreasingly it will be just the way you access a range of basic technologycapabilities.ComScoresays50percentofsearchwillbevoice-basedby2020,and commerce is obviously going the same way. But search leads toconversational commerce, which is more than just asking a question—it’s adialogue.

Increasinglywe’llbeaskingourbank,viaGoogle,SiriorAlexa,whetherwecan afford to go out for dinner; or, atmy current rate of savings,when I canaffordadepositonahouseortobuythatreplacementvehicleI’vebeenlookingat;orwhatIneedtodotopaydownmycreditcarddebtfaster(ifyoustilluseplastic).Askandyeshall receive.Voicewillcombinenatural language,searchandAItoprovideanswerstothesequestionsmuchfasterthanthroughabranchorwebchannel.Primarilybecausevoicewillemphasizetheutilityofthebanktosolvetheseproblems,notdirectingyoutoaproducttodownloadviaachannel.

The growth in capabilities behind smart assistants like Alexa is franklyunbelievable.

Figure8:ThegrowthofAmazonAlexaskills(Credit:Voicebot.ai).

At current growth rates, Amazon Alexa will have approximately threemillion skills by September 2018, and 10 million by the end of 2018. Thatgrowthisobviouslyunsustainable,butit illustratesthemassivepotentialofthetechnologyintermsofcapabilitiesanditdoescloselymirrorthegrowthinappson app stores over the last decade (albeit faster thanmobile app store growthcurrently).

The capabilities go far beyond skills, it also speaks to the capabilities ofmachinestounderstanduswhenwetalktothem,ortohaveaconversationthatishumanequivalent.

Figure9:Google’svoicerecognitionaccuracycomparedtohumans(Credit:Google).

Thisalladdsuptooneundeniabletrend.Thecapabilitiesofconversationalcommerceonsmartassistantsisgrowingatsucharatethatitsimpactonthewaywe use computing technology is greater today than the internet’s potential forimpact back in the year 2000. The frictionless, conversational nature of thistechnology will absolutely force service providers to adapt to a world wheretheirserviceswillhavetobedeliveredviaavoice-basedtechnology.

Figure10:VariouscategoriesofpersonalAIimpactemergingoverthenext5–10years.

Theseamlessnatureofvoicewillforceustocreatecompelling,frictionlessexperiences where advice and utility meld together. The movements toward“open banking” will give Google, Apple and Amazon amazing abilities to

incorporate this data into voice assistants.Youwon’t even need a bank app—thesewilllikelybecomenativeserviceswithinthenext10years.

Alexa:“Youcan’taffordtobuyanewcarrightnow,butifyousignupforUbertoday,Uberwillcoverhalfofthenexttwoyears’leasepayments.YoujustneedtoagreetodriveforUberatleastfourhoursaweek.Isthissomethingthatinterestsyou?”

Siri:“Youarepayingtoomuchusingacreditcardtoday,Ihaveotheroptionsforfinancingthatcouldsaveyou$230permonththatIcouldautomaticallylinktoyourApplePaywallet.Wouldyouliketoseethem?”

VoicewillleadtocustomerslearningtotrusttheirAIassistanttorecommenda day-to-day financial solution to them, rather than them going to look for itthemselves.ItwillbelikewetrustWikipediaorGooglesearchtoday.Wemightstillgetan“offer”viavoice,butgivencontextandbehaviour,voice interfacesmight lead us in a new direction in terms of thinking about our finances thatdon’tfitwithourcurrentbankingrelationshiportheproductsthebankcurrentlyoffers.Forexample,ifyourbankdoesn’toffervoice-basedcreditlines,thenanofferforanewcreditcardmightsimplyloseouttoabankwhocandothatviavoice,onthebasisofcontextalone.

Siri:“That’sbeentakencareof.We’veextendedyoua$730lineofcredittopayoffyourson’sschoolfeesforthequarter.Thelineofcreditwillbepaidoffmonthlyfromyouraccount,unlessyoutellmetopayitout.Icanalsosuggestwhenyouhaveenoughfundstomakeanadditionalpayment.Wouldyoulikemetodothat?”

Frankly, if a bank doesn’t start thinking about the digital bank account,accessible through voice and mobile, as their primary channel for day-to-dayaccessandadvice to theircustomers, then theywillbecaughtoffguard in thesamewaybankswerewhenboth internetandmobileappsfirstappeared.Thistime, however, the risks are much greater, because the shift from product toexperienceswilldramaticallyerodetheability tosimplyretrofitvoiceonto theexistingchannelmiddlewareorbankcoresystemsarchitecture.

WhatwillyouneedtomakevoiceandconversationalAIwork?Data.Tostartwith…ThelargerproblemforbanksisthatAlibaba/Taobao,Tencent,Apple,Amazon,Baidu,Google,andotherplatformsincorporatingpaymentgateways,willoftenknowmoreabouttheircustomersthanthebanksdo.IfaBeijingcardealerusesabankdebitcardforabusinesstriptoShanghai,thebankknowswhatairlinehe

orsheflew,aswellasthehotelandrestaurantspatronised.Ifheusesamobilesuper-walletlikeAlipayorTencentWeChat,thebankknowsnothingaboutthattripandthebankisdatapoor.

“If the customer ‘interface’ is happening elsewhere, the bank has zero visibility overtransactions,”saidJamesLloyd,Asia-PacificFinTechLeaderatEY.“That’snotagoodsituationtofindyourselfin.”

—WallStreetJournal,“TheCashlessSocietyHasArrived—OnlyIt’sinChina”,January2018

Voiceas thecustomer interfacewill result in increasingpoolsof financial-related behavioural, merchant and location data that sit outside the bankecosystemwithinvoiceoraggregatedtechnologyplatforms(mobile,augmentedrealityglasses,etc).Forbankstobeabletorespondtoyourneeds,they’llneedthedatathatcapturesreal-timebehaviour—butAlexa,GoogleandSirimaynotsharewhatleduptoanAPIrequestforacreditfacility,theymayjustsharetherequest.

Todaywehavethreeoverarchingpiecestothevoicestack.WehavethecoreVoiceOSandserviceslayer,whichiswhathandlesnaturallanguageprocessing,search,weather, time and basic enquiries, alongwith installed skill activation.WealsohavetheskillsorappsthatsitontopoftheAlexaplatform.Lastly,wehave APIs that give access to smart sensors, home automation and otherextensionsoftheplatform.

Figure11:HowAmazonskillsandservicessitontheAlexavoicearchitecture(Credit:Amazon).

So, first and foremost, banks are going to have to get comfortable withworkinginthecloud.TheycanhaveaprivatecloudconnectedtovoiceserviceslikeAlexa andSiri, but they’ll getmuch faster capabilities onAmazon’s ownarchitecture,whichisbuiltforpurpose.TherealityisthatAmazon’scloudis,inalmostallinstances,goingtobefasterandmoresecurethanabank’sinternal,onpremisearchitecture23.

Secondly,bank’sneedadatapoolthatcanbequeriedacrossthevoicelayer.

For this data pool theywill need to have cross-silo data integration,whatweused to call a 360-degree view of the customer. But this is more aboutanticipating natural language queries and customer behaviour where a voiceeventmightbetriggered.

Thirdly,bankswillneedbroaddata-basedandtechnology-basedpartnershipsthat lead to better integration of their financial services capability into real-world,real-timescenarioswheretheycanaddvalueeasily.

Finally, banks will need voice-based and behavioural-based design teamsthatareintimatelyfamiliarwithhowpeopleusetechlikevoiceday-to-dayandwheretechnologyfitsintotheirlife.Thisisacompletelynewskillsetforbanks.Thisisnotmysteryshoppingoneofyourinvestmentproductsortryingtocomeupwith demographic-based or psychographic-based credit card offers. This isbehaviouralgamification,economicsandpsychologyasadesigncompetency.Inthevoiceworldyouareanexperientialsolutionsprovider.Youarenotpushinganofferforanexistingbankproductdownanewchannel—ifyouare,youwillfail!

TheonlywayvoiceworksforbanksasabusinesstoolisiftheyacceptthatAlexa is an extension of their voice to the customer—but it only works in aconversationalmanner. Pitchme a product that I don’t immediately need, andyou will lose access to the channel, because I’ll block you faster than a badTinder date. The key skill will be anticipating the customer’s needs andrespondinginafrictionlessmanner,whetherviavoice,mobile,inanaugmentedrealityhead-up-display(smartglassescirca2022–25)orsimilar.

WhereautomationwillstrikefirstInourbankwehavepeopledoingworklikerobots.Tomorrowwewillhaverobotsbehavinglikepeople. Itdoesn’tmatter ifweasabankwillparticipate in thesechangesornot, it isgoing tohappen…Thesadtruthforthebankingindustryis,wewon’tneedasmanypeopleastoday.

—JohnCryan,CEOofDeutscheBank,September2017

Consumer trends are clearly driving adoption of technologies like voice-basedsmart assistants, but fromanoverall perspectivewe can see that therewill bemultiplemarketforcespressuringFIstoadoptartificialintelligence.

OrganisationalArea AICompetency/Classification

AdoptionDrivers

RegulatoryCompliance Machine/DeepLearning Regulatory,Cost

TechnologyImprovement Various Supply-sidePressure/Savings

1.2.3.4.

InfrastructureAdvancements Cognitive,MachineLearning Competitive(FinTech),Economics

Marketing/Sentiment/Brand NLP,MachineLearning Competitive,Responsiveness

Onboarding/Acquisition NLP,MachineLearning Economics

TradingSignals MachineLearning Economics

AML/KYC/FraudProtection MachineLearning Regulatory,Economics

CreditScoring/RiskAssessment

Machine/DeepLearning Competitive,Behavioural

Pricing/Underwriting MachineLearning Economics,Profitability

PortfolioManagement MachineLearning Performance,Productivity,Consistency

OptimizingBack-office Cognitive,DeepLearning Economics,Demand-side

Procurement MachineLearning,Cognitive Productivity,Economics

AlgorithmicTrading MachineLearning Competitive

DataAnalysis/Personalisation DataModelling,DeepLearning

Competitive,Supply-side

Table1:AIcompetenciesanddriversinbanking.

Whether on the supply-side, demand-side, competitive, legal or economic,there will be consistent pressure over the next decade to invest in ArtificialIntelligenceforprofitabilityandbest-practiceoperations.Broadlyspeaking,thetopfourbenefitsdrivingAIadoptionwillbe:

IdentifyingnewbusinessopportunitiesAutomatingrepetitivetasksImprovingworkforceproductivity,andCompetingwithpeers

The impact will be broad in scope, but is centered initially around IT,finance/accounting,customerexperience/engagementandfulfillment.

Figure12:WhereAIwillhaveanimpactoncompetitivenessinfinancialservicesby2020(Source:consultancy.uk).

Asregulatoryandconsumer-facingtechnologypressureshavecometobearonfinancialservicesoverthelast20years,we’veseenaverypurposefulshifttotechnologyasacorecompetency.ArtificialIntelligenceacceleratesthistrendofreliance on technology for profitability over the corporate levers of assetmanagement, marginal interest rates and so forth. As we’ll see in the nextchapter, aswemove away from universal bankingmodelswe’ll discover thatbanks that had operational advantages based on quasi-governmental orregulatoryprotectionsareheavilyexposedinanarenawheredeliveryofbankingservicesistechnology-dominated.

Asthesetechnologiescomeintoplay,therequirementtoreducefixedcostsandimproveagilityinservicedeliverywillbeacute.Essentially,we’llseebanksincreasingly having to compete with the likes of Ant Financial and neo-challengerbankswhoseeconomicsarevastlydifferentbecausethey’vealreadyautomatedouthumansforacquisitionanddelivery.By2025,stockmarketswillbeconsistentlyaskingthequestionofbanksthathaveretainedbranchnetworks(orinsurers/wealthmanagerswithfrontlinerepresentatives),iftheeconomicsofthatreal-estatecanbejustifiedwhenotherdigitalcompetitorsarescalingfaster,have better cross-sell and up-sell ratios, and have highermargins due to theirlower fixed costs. Defending existing distribution systems will become moredifficultasAIimpactsthewaywethinkaboutthecoreoperationsofabankorinstitution.

The reason AI will hit acquisition and customer relationships harder thanback-office solutions in thenear-term isnot just about channelmechanics likevoice. It comes down to the fact that technology in the onboarding andrelationshiparenaactuallycreatesamagnitudeofotherbenefitsratherthanjusta

full-timeequivalent(FTE)replacement.We can expect an automated onboarding process, for example, to pay for

itselfinyearoneofdeployment,whereFTEshasbeenreleased.Inyeartwo,itmeanswe’realreadygettingeconomicbenefitsfromtheinvestment.However,arobo-processforonboardingacustomercanwork24/7/36524withoutholidaysorweekends,wheretimetakentoopenanaccountistypicallylessthanonethirdofthat of a human-involved process; it has much greater volume tolerance andscalability,andfranklywillbelesserrorprone.There’simmediateFTEbenefitstobe sure,but the improvements inclient servicingand riskarehard toargueagainst.

Theonlyremainingargumentbecomes:whatifourcustomersliketalkingtoahuman?

RedefiningtheroleofhumansinbankingFordecadesasIVRsystemsweredeployedyou’dhearpeoplesay,“Ijustwantto talk to a human!”. When we outsource call centre operations to offshorecentres like India, you’d hear anecdotal criticismof the fact that the customerservicerepresentativeansweringdidn’thavealocalaccentorlocalknowledge.Thus,formanyyearshavingareal, localhumanansweryourphonewhenyoucalledwasconsideredacompetitivedifferentiator.Theprincipleherewasbothservice-andadvice-related—youcouldexpectbetterservicethanaclunkyIVRthatyouhadtonavigatethrough,andbecausetheywouldhavelocalknowledgethatwouldleadtobetteradvice.

Infact,broadlyspeaking,informationasymmetryhasbeenthefoundationoffinancialadvisory,insurancesalesandmostfront-linecustomerservicerolesinfinancial services. In contract theory and economics, information asymmetrydealswith the study of decisions in transactionswhere one party hasmore orbetter information than theother.Thus,whenyouwantedamortgage tobuyaproperty,youwantedtoinvestinthemarket,oryouwantedadviceoneventhebestcreditcardforyoutoapplyfor,therewasahumaninabankthatknewmoreaboutthoseproductsorservicesthanyoucouldknow.Havingsaidthat,inpureinformationalterms,thisasymmetrywasoftenheavilybiasedtowardsproductsofferedbythebank.

Inthelast30–40yearstheadvicewereceivedfromabankbranchwasn’t,infact,adviceonhowtobuyahomeorhowtoinvestyourmoney,asmuchasitwaswhichproductthebankcouldofferyoutobuyahome,orwhichinvestmentproductorassetclassyoushouldputyourmoneyinto.Ifyouwantedtrueadviceindependentofbankproducts,youwouldhavetogotoabroker,buteventhen

brokersreceivedcommissiononintroductions,sotheiradvicewasn’tunbiased.Youcouldengagetheservicesofamoneycoachorsimilarandthenyou’dgetunbiasedadviceonmoneymanagement, but that camewith adirect cost.Thebiggerproblemforhumansinthefinancialservicesadvisoryspace,however,isthattheinformationasymmetrythatjustifiedtheirexistenceisnowcomingtoanendduetotheadventofAI.

Figure13:Lidarpoint-cloudmappinginanautonomousvehiclesetting(Imagecredit:LidarNews).

Asdiscussedearlier,autonomousvehiclesare increasinglybeing integratedonto our roads. Today, humans remain competitive with autonomous vehiclesdue toour ability to analyze andmakedecisions regardingdriving conditions,obstaclesandroadmarkings,butouradvantagesarequicklybeingeroded.

More data, faster processing and cognition times,means better advicefortheendconsumer.

Itwon’tbelongbeforetheimprovementsinbothsensorsandcars“brains”,orprocessing,meansthattheyconsistentlyoutperformhumanswhenitcomestodriving.Atthispoint,we’llseereductioninroaddeaths,decreasesininsurancepremiums for autonomous driving vehicles and even changes in road usagebiasedtowardnon-humandrivers.Itwon’tbelongbeforeautonomousvehiclescanprocessmoreinformation,morequicklytomakeadecision,thanahuman—classicinformationasymmetry.

Getting back to financial services though, the same will apply. Asalgorithms, AI customer interfaces like smart assistants gather tons of data—they will soon have much more data than an analyst or customer service

representativecouldeverhopetoabsorb.Withmachinelearningtechniquesandincreasingerrorcorrectioncapability, thesealgorithmsandAIswillquicklybeable to improve theapplicationof thisdata ingivingcustomersadvice inreal-time that fits with their life. Whether portfolio management or investmentadvice, day-to-day money coaching, or help navigating credit options,algorithms will simply have information asymmetry over the human agents.They’llhavebetter,moreperfectdatathatcanbeappliedinreal-timecomparedtoahumanserviceprofessional.Atthispoint,therollofhumansatthefront-end“advice”portionoffinancialserviceswillbefacingthesamelong-termthreatsastruckdriverswillfacefromself-driving,autonomousvehicles.Nottomentionthat theadviceanAIgivesuswillbemuchmoreconsistent fromcustomer tocustomer,andwon’trelyontheindividualknowledge(andlackofbias)ofthefinancialadvisor.

Designing these systems, these machine-based interactions, understandingcustomerbehaviourandcreatingnewexperiencesbasedonemergingtechnologyaregoingtobecriticalcreativeskillsforthefinancialinstitutionsofthefuture.Thesewillremainhumanareasofdifferentiationoverthenextcoupleofdecadesat least.AI todayand in the short term remainacollectionof capabilities thathumans used to do—driving a car, assessing risk, reviewing an identitydocumentagainstahuman,readinganemailandexecutingatrade,etc.Theleapfrom watching behaviour or observing an issue and redesigning a system orproductorsolvingadesign/processerrorisgoingtobebeyondmachinesforafewyearsyet.AIwillcertainly impactelementsofdesignalso,but theoverallinterface between customers and the bank will be dominated by humancreativity,andwillbeamassiveareaofchangeasbankstransitionfromproductsto experiences. Your hiring practices shift focus out of the back office andrelatedprocesses,andintodesignforthefrontoffice.

Ifyoubelievethat,justbecauseyouareinapositionofleadershipinabank,thisdoesn’tconcernyou,thechallengeswillstillbebasedonhowwellyouworkwithAI.

HowtoleadwhenyouremployeesareAlgosSince the industrial revolution, we’ve been designing education systems andmanagement architectures built on manufacturing processes and productionlines.Command-and-control, top-down,hierarchicalorganisationchartsare thetypes of terminologies that have been common in describing traditionalmanagementapproachesinlargeorganisations.Overthelast30–40yearswe’vebeen focussed on efficiency gains within this environment, so we’ve

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concentrated on process optimization andmetrics.Key performance indicators(KPIs),costaccountsystems,processre-engineeringandsoforthwereallaboutmaking the operational heart of the organisation as efficient as possible, andmanagers rose to the top of that structure when they were good at enforcingprocesses and eking out small efficiency gains over time. But when yourprocessesarecommandedbyArtificialIntelligencemuchofthearchitectureoftraditionalmanagementbecomessuperfluous. Ifyouwantefficiencygainsyoutweak the algorithm or manage the data inputs, you don’t do 360-degreeperformancereviews.

Harvard Business Review recently did some solid research25 on this andshowed that over the last 50 years personality traits such as curiosity,extraversion,andemotionalstabilityhavebecomemoreandmorecritical,twiceasimportantasintelligenceorIQ.Theabilityofbanksandfinancialinstitutionstostayontopoftechnologychangeisalreadydoubtful.

The notion that there is some kind of intersection between banking and technology is amisconception.Through a process almost of osmosis, they have come to be one and the samething…We’vereachedapointwherethetechisdevelopingmuchfasterthanpeoples’capacitytoworkoutwhattodowithit.

—CathyBessant,ChiefOperationsandTechnologyOfficer,BankofAmerica

Whatare themanagementskills thatyou’llneed in theAIAgetosurvive?HBRmappedoutfourkeyskillsinagileleadershipthatareverydifferentfromthoseweusedtohireforinbanking:

Humility—Willingnesstolearnandtoknowwhenyoudon’tknowwhatyouneedtomoveforward,reachingoutsidetheorganisationforinput,trustingotherstodotheirjob,andunderstandingthatadatascientistorMLexpertmightbeabletomakeacriticalcontributionyoucan’tmatch.Humilityisn’tsomethingthatmanagersoftheGordonGekkoeraareusedto,neitheraretheleadersofbankswithbigbalancesheets.Lackofhumilityleadsyoutocommittooutmodedstrategieslikebranch-basedengagement,plasticcards,paperchequesandinsuranceagentslongafterthey’vebecomeirrelevanttoyourfuture.Adaptability—Recently,SiamCommercialBankannouncedaseveranceprogramforstaffandmanagerswhocouldnotadapttothechangesthebankwasplanningarounddigital26.InanAIorganisationtheabilitytochangerapidly,underminingideas,positionsoregosheldbykeystakeholderswillbekey.Managerswillneedtofocusonlearningratherthantryingtobe“right”.Do

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youhavetechadvisorsonyourboard?Doyoukeepamapofcompetitors’initiativesandkeytechnologiesinthespaceintermsofadoption?Vision—VisioncomestotheforeinAI-poweredbanksbecauseyouhavetofightlegacymorethaninmostindustries.StrongvisionarieslikePiyushatDBS,TorresandGonzalezatBBVA,ThompsonatAtom,VichitandArthidatSiamCommercial,HartewholeadCBA’stransformationamongstothers,areexamplesofstrongpersonalitiesandvisionariesdraggingtheirorganisationsthroughacontinuousprocessofinnovation.Theirlanguageisdifferentandtheydon’ttakenoforananswer,andtheycontinuallylearn.ButthinkMusk,Bezos,JackMaforevenbettervisionaries—theirvisionsaren’tshort-term,theythinkintimeframesof50yearsormoreandaredriventousetheirorganisationsasplatformsforlong-termchange.BankCEOsbringing30yearsofretailbankingexperiencetotheteamhavenoplaceinthisworld.Engagement—KeepingteamsengagedinaneraofconstantchangewhereyourjobcouldbetakenbyanAIatanytimeisn’teasy.There’salsoagreatdealofnoise,sobeingabletofilterthenoiseandlistenforthecriticalsignalsthatfocusresourcesaroundoutcomesiscritical.LeadersintheAIageusedigitalallthetimetoengagetheirteams.

Does thismean that leadershipwill be radically different for banks in thenear term?Yesandno. IquotedCathyBessant fromBankofAmericaearlier,whereshemadethepointthatbankingandtechnologyaresynonymousnow.Ifabank is not lead by technologistswith deep technology experience, then therewill be resistance to the effects ofArtificial Intelligence and technologymoregenerally, and thiswill negatively impact your ability to buildmission-criticalfuturecapabilities.

In the Bank 4.0 world, smart people skills will be eclipsed by smartmachines and soft skills like those listed above will be increasingly critical.Strong leadersare thosewithvision, that canadapt to rapidchangeconstantlyanddon’t fear change, don’t stay invested inwhat theyknoworwhat they’vebuiltinthepast,andcangetotherstoembracetheirvision.Butmostofall,thebankleadersoftodayneedtoknowthatthebankwon’tstayaleaderiftheytryandkeep it all in-house. In aworldwhere technologyconstantly separates thewinnersandlosers,bankswon’tbeabletobuildit themselvesfastenoughandwillneedtobepartneringconstantlywith thoseplayersontheleadingedgeof

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EndnotesSeehttps://en.wikipedia.org/wiki/Three_Laws_of_Robotics.“10CompaniesmakingbigbetsonAI”—USNews,19July2016:https://money.usnews.com/investing/slideshows/artificial-intelligence-stocks-10-companies-betting-on-ai.

Source:SCMP.ForamoreextensivediscussionontheimpactofAIonsocietyandjobs,pleasereadmybookAugmented:LifeintheSmartLane.

ItshouldbenotedneitherofthesearecurrentlyAGI-capable,butarefoundationalelementsforsuchpotentialAIs.See:https://www.ibm.com/developerworks/library/cc-beginner-guide-machine-learning-ai-cognitive/index.html.

See:http://www.bankofengland.co.uk/publications/Pages/speeches/2015/864.aspx.Source:http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf.

ResearchshowsthatAustralianCustomsandBorderPatrolOfficersdoingface-to-faceverificationmissedoneinsevenfakeIDs—http://theconversation.com/passport-staff-miss-one-in-seven-fake-id-checks-30606.Source:ChinaDaily(seealsoWashingtonPost,7January2018—“China’swatchfuleye”).

Source:PWCReport—“Millennials&FinancialLiteracy—TheStrugglewithPersonalFinance”.Source:InvestmentNews—“Wealthymillennialsdeclinefinancialadvisers’services”(May2015).

Schwab’sIntelligentPortfoliosrobowasthetopperformer,byanarrowmargin.Itsportfoliogained11.94percent,edgingoutBetterment(11.68percent),E*Trade(11.60percent),SigFig(11.41percent)andVanguardPAS(10.92percent).Source:S&P500.However,itshouldbenotedthatinflation-adjustedreturnsarecloserto7percentonanannualisedbasis.

Source:BusinessInsiderIntelligence—“TheEvolutionofRoboAdvisingReport”(2017).CheckouttheadwhereactorAlecBaldwinorderssocksonAlexaforreferencepurposes.

See:https://www.bigcommerce.com/blog/ecommerce-trends/.Source:NetElixir.

Source:eMarketer—https://www.emarketer.com/Article/New-eMarketer-Forecast-Sees-Mobile-Driving-Retail-Ecommerce-China/1016105.See“TheAcceleratingDisruptionofChina’sEconomy”,Fortune,26June2017(PaulLiu,XuemeiBenninkBai,JasonJia,andEvaWang).

Source:https://www.forbes.com/sites/tompopomaronis/2017/12/15/e-commerce-in-2018-heres-what-the-experts-are-predicting/.Agency-basedreferstodelegatingapurchasetoyourvoiceassistantorpersonalAI.

See:“CloudaremoresecurethantraditionalITsystems–andhere’swhy”,TechTarget,January2014.Or24/365,ifyou’reasticklerforthatsortofthing.

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See:“AsAIMakesMoreDecisions,theNatureofLeadershipWillChange”,HarvardBusinessReview,January2018.

Source:BangkokPost—“SCBproposesseverancefornon-adapters”;https://www.bangkokpost.com/business/news/1405254/scb.

8 TheUniversalExperience

WewerewrongaboutUniversalBanking.Fewcostefficienciescomefrommergingmanyfunctionsinasinglebank.

—JohnReed,formerChairmanandCEOofCitibank

Yourfinancial life issupposed tofollowafairlypredictablepattern,at least inthedevelopedworld.Youstartoffinschoolwithabasicstudentdepositaccount,you might even visit the bank on a school field trip or excursion. Then yougraduatehighschoolandtakeonapart-timejob.Ifyougoofftouniversityorcollege,youmighttakeonastudentloan(ifyouliveinthoseprimitivecountriesthat make education a capitalist exercise) and if you don’t, you’ll likely startyourfirstfull-timejob(ormaybeacoupleofpart-timejobs).Youtakeoutacarloan to get your first car. Then you’re thinking about gettingmarried, gettingyourfirsthome,andafewyearsafterthatyou’vegotcreditcards,lifeinsurance,incomeprotection, a secondmortgage for an investmentproperty—andyou’restartingtothinkaboutretirement.

ThisisthedreamcustomerprofileoftheUniversalBanker.Getthemwhilethey’re young, and then every single banking product you ever need will beprovidedbythebankyougrewupwithinyourhometown.You’llconstantlybecross-soldandup-soldto,andbecauseyou“trust”thebankthatgaveyouyourfirstbankaccount,you’llsimplyusethemasaone-stopshopforeverybankingproductyou’lleverneed.Theyweretherewhenyouopenedyourfirstaccount,andhopefullybythetimeyourkidsneedabankyou’llmarchthemintoabranchtokeepthebankinthefamily.

Except,itjustdoesn’tworklikethatanymore.TheaverageconsumerintheUS,UKandAustraliahasarelationshipwithbetweenfourandsevendifferentfinancial institutions1, for theaveragebusiness it’sat least two,andsometimesupward of five or six, different institutions.More than half of investors havemultiple brokerage and investment accounts also. The fact is, historically wesimplydon’tmaintainthisidealisticsingle-bankloyalty,likea50-yearmarriage,withourmoney.Weareinopenbankingrelationshipsallthetime.

TheexpectationsofthePost-MillennialconsumerGeneration Y (Millennials) is the first digitally native generation born into aworldoftechnology.Theygrewupinaworldwhereifyouneededtoknowinwhich city Abraham Lincoln was born, who built the pyramids (Aliens?) orwhenthenextsolareclipsemightoccur,insteadofpickingupanEncyclopediaBritannicaatthelocallibrary,you’dsimplyask“theGoogle”.Morethanthat,asthey started working and became consumers, they had access to a world ofinstant gratification and e-commerce thatwas unimaginable to their forebears.They could order pizza online, bookmovie tickets, airline tickets, hotels and,more importantly, they could find out what their peers thought of variousrestaurants, service providers and the like. Network effect and social mediaamplified this trend with the latest, coolest service, getting faster and fastertractionastheysharedwiththeirfriendstheirlatestdiscovery.

Just like it would be counter-intuitive for a Millennial to reach for anencyclopedia,tocallupDominosonalandlinetoorderapizza,orgotoatravelagent’soffice tobookaflight, it isalsoincreasinglycounter-intuitivefor theseconsumersto“gotothebank”.ResearchshowsthatMillennialsonaday-to-daybasisarealmostmyopicallyfocusedondigital.Theywouldneverthinkofusingphone banking to check their balance, they can’t work out cheques and theywonderwhyanyonewouldeversendyouoneinthepost.Theyliveinaworldwheretheyexpectbankingtoworkinafrictionless,real-timemanner.

Insist on getting aMillennial into a branch to open up a new credit cardfacility,andit’sstatisticallylikelythatyou’llsimplyneverhearfromthemagain—they’vealreadyselectedanalternativethey’vefoundonline.Iftheyareapost-financial crisis Millennial, they’re going to be paranoid about taking onunnecessarycreditanyway.Moreonthatinamoment.

Havingsaidthat,dependingonwhichmarketyouarein,strongdigitalusagebyMillennialsdoestranslateacrosstheboardtooverallbetterengagementwithyour bank as a brand, including the occasional branch visit. Research by JimMarous and the “Digital Banking Report”2 shows that US Millennials areaccessingtheirbankviamobile8.5timespermonthonaverage,comparedwithjust3.1timespermonthfornon-Millennials.They’realsofourtimesmorelikelyto connectwith thebankvia email thannon-Millennials (4.6 timespermonthversus 0.9 times). Online account opening is the norm and preferred byMillennials(61percent),whereasonaverageaboutone-thirdofnon-Millennialsprefer to open an account online (28 percent), versus face-to-face. Forinvestmentaccounts,onlineisevenmoreprevalent.Theystilloccasionallyvisitabranch,but for theaverageMillennial that’s less thanonevisitayear today,

andmostofthetimethat’sbecausethebankcouldn’tgetitdoneanyotherway.Interestingly, the research showed that 10 percent of Millennials are now

usingadigital-onlybankas theirprimaryrelationship,and15percentofhigh-networthindividualsarealsousingpure-playdigitalofferings.

Indeed, theUS Federal Reserve released a study in 2016 showingmobilewastheprimarychannelofchoiceforMillennials67percentofthetime.IntheUnited Kingdom, mobile banking use increased 356 percent from 2012–173,withMillennialstwiceaslikelytousemobilebankingastheirpredecessors.UKChallenger and specialist banks saw a 56 percent growth in gross lending in2016,increasingtheirmarketshareby2.9percent,accordingtotheCouncilofMortgageLendersthere.VirginMoney,anonline-onlybank,isnowtheeighth-largest lender in the country, above the Yorkshire Building Society andClydesdaleBank,bothlong-establishedinstitutions.

It is pretty clear that if you are a bank targetingMillennials, your primaryinterfaceday-to-dayfornurturingthatrelationshipisyourmobileapp,andyouhadbetterofferstreamlinedaccountopeningonlineandviamobile,withouttherequirementforaface-to-facevisittothebranchorasignaturecard.Ifyoucan’t,youhavedefinitelyalreadylostbusiness—whetheryouassertthatyoustillhaveMillennial customers using your branch today or not. Statistically, there is noother conclusion to reach. There are definitelyMillennials who came to yourwebpage, saw they’d have to visit a branch to open an account, and simplymovedonwhenitcametodecidingwhichbankthey’dchoose.

Figure1:Generationsbythenumbers(Imagecredit:ThinDifference.com).

ForpostMillennials,theproblemwillbeevenmoreacute.GenerationZare

growingup in amobile, ubiquitous technologyworld.Not just internet accessthrough a computer, but they will grow up with computers you talk to;supercomputers you carry in your pocket, gaming consoles, digital videocameras and the nexus of much of their social interactions; computers thatrecognise themby their faceandvoice;computers thatpredict theirneedsandbehaviours,thatmonitortheirhealth,andthatareevenadailycompanion.

Inthelast10years,atypicalresponsethatI’veobservedmightbesomethinglike“Hey,waitasecond!WestillhaveMillennialswalking intoourbranches.You’rewrong.Once they need amortgage or start investing, they’re going towanttotalktoahuman!”

Ifabankisthinkinglikethis,theyarefallingbackonthewaytheygrewupbanking,andarehavingtroubleunderstandingadifferentframeofreference.

If you’ve grown up in world where everyone goes to the branch to dobanking,ifyou’vedonethatyourentirelife,ifyou’vebuiltyourbusinessaroundthat behaviour, you’re unlikely to embrace a change or threat to the culturerapidlyandeasily4.Thisculturalbias,whetherinsocietyorintheworkplace,arethenaturaleffectof systemswherebehaviour is reinforced,andgenerally takelong periods of time to shift. I first have to seek to change your frame ofreference,Ihavetogetyouintoamindsetwhereyouarewillingtoacceptnewbehaviour,andyoucan identifywith thoseexhibiting thatbehaviour, thenyoumayallowyourselftochangeyourthinkingpatterns.

Today,it’sincreasinglyraretobepaidincash,unlessyouarewaitressingintheUS,ordelivering foodforUberEatsorSeamless.Parentsarepaying theirkids via Venmo because that’s what their friends use, and they just ask theirparentsiftheycanpaythemintotheirVenmoaccount.My17-year-olddaughterdidn’twanttothinkaboutadrivinglicenseaftershewasoldenoughtobecomeastudent learnerdriver;she initially thoughtshe’dbefinewithanUberaccounttherestofherlife,untilshemovedtoalocationwithoutUber.Whenitcomestopayinganallowance intoVenmo,PayTMorwithWeChat, this isoftendue tonetworkeffect,wherepeergroupbehaviourcreatesapositivefeedbackloopthateffectsthecommunityathome.“MyfriendsalluseVenmo,dad,can’tyougiveme the money there?” Or in the case of my 14-year-old son, up until veryrecentlyheonlywantedmetopayhiminiTunescreditsandPayPalsohecoulduseitonline.

Generational psychology cannot be underestimated as an influencerregardingbankinginstitutionsthemselves.Themarketcrashof24October1929caused a “run on the banks”, and still, decades later, older customers cite theneedtohaveaccesstoaphysicalbankbranchasadriverfortheirchoiceofbank“just in case”. The global financial crisis of 2007–8, the massive credit card

debtsof the1990s, the looming student loancrisis in theUS, the increasinglypartisan and antagonistic nature of politics, reverberating echo chambers insocial media, and so forth, is leading to a broad distrust of institutions likegovernmentandbigbanksforGenerationsYandZ.

IntheUSlessthanathirdofMillennialsownacreditcardtoday(thelowestlevelsoftheiragegroupinthelast40yearssincecreditcardslaunched),whiletheirpredecessorsuserthemattwicethatrate5.Thisisbasedonsurveydataoverthelastsevenyears,sodon’t tellmeit’sananomalousstat.AsMillennialsgetolderthey’reclearlynotaskeenontakingondebtaspreviousgenerationswere.Traditional credit card rewards programs aren’t stimulating the use of crediteither.Thetotalrewardspaidbythe topsixUScardissuersdoubledfrom$11billionto$23billionbetween2010and2016,inaclearattempttoattractmoreyoung people to use credit cards6, and yet Millennials remain obstinatelyunmoved.

It is clear to economists who study payment patterns that Millennials are gravitating towardpaymentmethodsthatskirtbothcashandcredit.Whycarrycashwhenyoucanwhipoutadebitcardforthesmallesttransaction—asandwichorabottleofsoda—oruseanapplikeVenmooranonline payment service like PayPal? All of those typically draw funds directly from a bankaccount.

—“HowMillennialsBecameSpookedbyCreditCards”,TheNewYorkTimes/DealBook,14August2017

Thisispartofabroaderbehaviouralshiftinpayments.Therealityisthatifyou’re tapping your phone to pay, you’re going to be less and less likely toprioritise a credit card over a debit card as a payment vehicle. The improvedutility of mobile payments themselves is tending toward more focus on yourbalanceinyourspendingaccount,andthatiscreatinggreaterawarenessforwhatyou can afford.Millennials and Gen-Z, beingmore focussed on the tech, aresimplyadjustingtheirbehaviourfasterthantheirforebears.Thusweseeadirectcorrelation between technology use and acceptance of these older paradigms,like credit cards and revolving debt. It turns out a device that allowed you to“impulsepurchase” in themomentbecauseyouonlyfelt the impactwhenyougotastatementattheendofthemonth,doesn’tfitwithtoday’sreal-timeworld.

Banking products and systems are very slow to change, even when facedwith thesebehavioural shifts.However, ifyou lookat thehistory,youcan seebanking evolution as a step-change in respect to access, behaviour andpreferences.

Figure2:Theevolutionofbankingsystemsasitpertainstoaccessandbank–customerrelationships.

Intheevolutionfromcommunitybankingtouniversalbanking,theobjectivewas to create the same stickiness that used to come from geography, throughchoice and access.A bank that allowed you global access to its platformwasonly necessary as we started to travel the globemore. A bank that promotedcredit cards, personal loans,mortgages, fixed deposits and so forth, was onlypossible as the middle-class grew. The underlying assumption was that youwould have some form of loyalty to your primary financial institution. Thatyou’d only ever really need one bank relationship—anything else was eitheroverkillordisloyaltothebankthatgaveyouyourfirstpassbookwhenyouwere10yearsoldonthatfieldtrip.

Inthe1980sand’90s,beingtheprimaryfinancialinstitutionwasthegoalofeverymajorbankingbrandintheworld,anduniversalbankingwasthewayeachbankthoughtthey’dachievethis.However,ifyouweren’tmyprimaryfinancialinstitution, your goal was to try and capture as much of my business viaspecialisingonspecificproducts—acreditcard,carloanorinvestmentaccount,perhaps.Astheinternethasgrown,we’veseenanexplosionofchoicefromallsorts of mainstream and alternative financial services providers. The need todevelop alternative acquisition approaches led banks to establish partnershipswith car dealers to sell you a lease or car financing, to establish relationshipswith retail merchants to offer discounts or in-store financing deals, and withpropertydeveloperstooffermortgages.Astimewenton,thelikelihoodofyourbankbeingthesoleorprimaryfinancialinstitutiondiminishedasbankproductsandserviceswerenolongerlimitedtothatsinglebankbrandthatinhabitedyourtown.

Theemerginggenerationofcustomers,however,willhaveamuchdifferentexpectation of the so-called “bank”. If they have a problem or need amoneysolutionoradvice,they’llasktheirtechnologylayerforasolution.Intheshort-

termthey’llusetheirmobilephonetosearchonquestionslike“howdoIbuyacar”or“howcanIaffordtobuyahome”.Inparallelthey’llasktheirpeersandtheir parents. Some of that will result in reinforcing traditional bankingbehaviour, but as they becomemore independent and as bank utility becomesmore ubiquitous, itwill simply be a case of “ask and ye shall receive!”Evenmore importantly, in themedium-term youwon’t have to ask, because by thetimewe’rewearingaugmentedrealityglasses,thetechwilllearnourbehaviour,ourneeds,andstarttoactivelyanticipatesolutions.Ifanything,we’llbelookingforaprimaryfinancialmanageronour technology layer rather thanaprimaryfinancialinstitution7.

The customers of tomorrow will expect that when it comes to money,payments,creditaccess,etc,thatitjustworks.Zerofrictionwillbetherule,nottheexception.Inthisnewworld,ifyouaskmetosignapieceofpaperorvisitabuildingtogetaccesstoaservice,apost-Millennialconsumerwon’tthinkyouare crazy… they simply won’t understand what you are talking about. Thecognitivedissonancewillbeacute.ItwouldbelikeaskingthemtochecktheirencyclopediaforthelatestpriceofBitcoin.

RebundlingexperiencesThefirstphaseofFinTechwasanunbundlingoffinancialservices.Whetherininvestment services, day-to-day banking, student loans, in-store credit, andprettymucheveryotherareaofretailbankingyoucanthinkof,therehasbeenaplethoraofstartupswhohaveclaimedthey’regoingtoeat thebankindustries’lunch.GoldmanSachs’“FutureofFinance”reportsaysit’splausiblethatupto20 percent of industry revenues could be captured by external entrants(translation:FinTechsandTechplayers).

Figure3:Thegreatunbundling,astoldbyBradleyLeimer(imagecredit:AmericanBanker).

However, unbundling and non-traditional competitors aren’t exactly new.BankslikeHSBC,Citigroupandothershavecarvedofftheirsecuritiesdivision,mortgagebusinessandcreditcardfunctionsintoseparateoperationsforyears.

Themarketplacelenders,forexample,areofferinganalternativeforsmallbusinessownerswhootherwisemustwaitthreetofourweeksormoretogetabankloan(iftheycangetoneatall).Bylookingatdifferentdatapoints andevaluatingabusiness’ financials inamore systematicway,marketplacelenderscanget thesamethingdoneinhoursordays.Thatefficiencydoesmakeadifference.Thinkaboutarestaurateurwhoneedstoquicklyreplaceabrokenstove,orsomeonewhoneedstofinanceacoupleoftruckstoexpandtheirbusiness.Itmaynotbethebestdealfor

them,butspeedcounts.—“TheGreatRebundlingofFinancialServices”,BankThink(Oct2015)8

In an October 2015 article on the rebundling of financial services, BradLeimerandMarcHochsteinwentontodescribeaworldwherebankscouldusetechnology to bundlemore efficient services based onFinTechs, to essentiallyrebuild a universal banking approach based on technology platforms.LendingClubloansfordebtconsolidation,aBettermentaccountforinvestment,Moven for financialwellness coaching, etc.Banks likeFidor inGermany andUSAAeven tried this typeofapproach,andStarlingBank’sbusinessmodel isbasedonit.

Marc andBradwere right about the tech rebundling of financial services.However, it’s lookinglike the technologythatwilldeliverfinancialservicesofthefuturewon’tdosoatthebanklevel,itwilldoitincreasinglyatthepersonalexperiencelevel.

Behaviourincreasinglywillbecenteredaroundthetechnologyplatformsweuseonadailybasis.TrainyourpersonalAIonGoogleandyou’llbeusinganAndroidphone,GoogleHomeandGoogleSmartGlasses.TrainyourpersonalAIonAppleandit’llbeSiri,CarPlay,HomePodandAppleTV.AmazonwillbeembeddingAlexainasmanydevicesaspossible,too.Thisisliketheoperatingsystems and personal computer platform battles of the past—PC vs Mac.Eventually these smart assistant voice technologies might even becomeinteroperable.

Todaywehaveappsonourphones.Wehaveanappforbanking,anappfortaxis, an app for booking movies, etc. But in the voice-based future we areaccessingservicesorskillsembeddedintheplatform.Wedon’tloadupanapponourAlexaspeakerathome,wejusttellAlexatoenablethatskill.Unliketheworldofmobileappstoresweliveintoday,onceweenablethatskillweareabletoaccesstheunderlyingfeaturesofthatservicewithoutopeninganapp.Itislikethatskillbecomespartofourtailoredoperatingsystemforthatdevice.

Thisiswherefinancialservicesbundlingwillstarttobereframed.Wemightopenanewaccount,orgetaccesstoanewcreditfacility,withouteverknowingthe bank that is behind that facility, or maybe only finding out after we’veselectedthefeaturesofthefacilityweaccepted.

The other element that is critical here is recommendations and ratings.Today, banks have been able to avoid side-by-side comparison generally infavour of direct channel reinforcement for access. But when voice and AIbecomea criticalpart ofbundled financial services experiences, that ability toanswerthequestion,“Whatisthebestloanformeinthissituation?”wouldbe

vastly different to the way we shop for financial services today. Retail,restaurants,hotelsandsuchhaveallhadrecommendationengines,socialmediaand feedback systems thatdramaticallychanges theirbrand’scredibility in themarket.Inbanking,whiletherehasbeenpressureappliedviasocialmediaatthebrand level, it’s been harder to directly apply this to specific bank locations,products and services.Thenext layerof technologieswill increasinglydo justthat.

Geolocation,context,behaviour,socialfeedbackandsentiment,andidentityindicators, are data points and technologyplatform capabilities that largely lieoutsideof theexistingbankarchitectures.This isgoingtocreateaplatformofnewbrokersandintermediariesthatbecomeessentialinthedeliveryoffinancialservicesinthefuture.

ThenewbrokersandintermediariesThroughout this book we’ve talked about many of the new technologies andcompetenciesthatbankswillneedtobuild,butwe’vealsotalkedaboutthefactthatfirst-principlesthinkingandnewtechnologylayersthatincreasingly“own”ordominatecustomeraccess,dataorexperiences.Tothatend,I’vetriedtoputtogethersomeillustrativeexamplesofbrokersandintermediariesthatwilloverthe next few years become increasingly essential to day-to-day bankinginteractionswithcustomersandpartners.Theseplayersare, insome instances,an evolution from existing players, like public cloud vendors (Amazon WebServices), telecoms operators and mobile phone app stores; but in otherinstances, they offer new capabilities that will be faster to integrate than forbankstobuildinternally.

In many instances, such as voice-smart assistants, in the short-term youmightfeelthathavinganAI-tellerbuiltintoyourapporwebfront-endputsyouin the running. However, in the longer term, the technology layers for smartassistantswillbeOS-basedbuiltintoyoursmartdevices,homeandcar,andbemuchmore sophisticated in termsofnatural languageprocessingandplatformcapabilitythanyourchatbot.Ifyouaren’tworkingwiththeseexternalplatforms,itisincreasinglylikelythatyourhomegrowncapabilitywon’tevengetutilizedbyyourcustomers.Ofcourse,buildingvoicecapabilities internally today isn’tnecessarilyabadthing,asitwillgetyoureadyfromadatastructuresandAPIperspectiveforworkingwithplayerslikeAmazon,Appleandothers.

Let’slookatsomeillustrativepoolsofcapabilitiesbeingdevelopedoutsidetheinstitutiontoday:

Figure4:Howcapabilityisbeingdeveloped.

IdentitybrokersAs already noted, in the mobile payments arena the world is increasinglydominated by IP-based players that aren’t part of the bank-owned or grownpayment networks that dominated the world of plastic. Facebook, Apple,Google, Alibaba, WeChat and others are all likely better at identifyingindividuals thanbanksare today.Governments likeCanadaare trialingknowntraveller digital identity systems on the blockchain that will one day replacepassports9. As discussed in earlier chapters, rather than collecting KYCinformation from scratch, as banks do today, in the future they will use anidentitymarkerlikebiometrics,behaviourorsimilartocheckagainstdatabaseslike this to verify the customer’s identity. As Dave Birch pointed out earlier,banksmaybecomekeyplayersinthistrustedidentityarchitecture,butthatstillwon’tmeanwhenyouopenanewaccountyou’llhavetosupplyallyouridentityinformationagain.

DatabrokersYouprobablythinkthatGoogle,FacebookandApplehavethemostdataonyou,right10?Well, ifyouliveintheUSorEurope, thoseorganisationsareprobably

noteveninthetop10ofcompaniesthathavedataonyou,ordatathathelpsusunderstandwhoyou are andwhat youdo.A2014FederalTradeCommission(FTC) report11 describes an industry that collects data from many sourceswithout consumers knowing; that is multi-layered and intertwined; and thatstores billions of data points covering nearly every US consumer. In the EU,whiletheGeneralDataProtectionRegulation(GDPR)regulateshowcompaniesuse, protect and utilize EU citizen’s data, this doesn’t provide banks with aninformational advantage over other organisations. In fact, with open bankingregulations,increasinglynon-banktechnologyproviderswillhavegreateraccesstoyourbankingdata.

But here’s what data brokers know. Your data profile is going to beincreasingly critical to organisations that are technology led. Ultimately, thismeansthatifyouareinthebankingexperiencebusinessyou’regoingtohavetobe working with data brokers that help you understand when and where acustomerisgoingtoneedtheutilityofyourbank.Thedatayouhaveinthebankis no longer enough to make that connection; and the data you do have istechnically owned by the customer—and they will use it to access servicesoutsideyourinstitution.

Cloud-basedservicelayersTodayagreatdealofthecorearchitectureachallengerbankcarries,likecyber-security, identity verification, session management, app store and mobile-OSintegration,aresimplyplug-inservicessittingon topofGoogle,AmazonWebServices(AWS)orMicrosoftAzure12.Formanybanks,privatecloudsareasortof enhanced data warehouse. For challenger banks, we see the cloud as averitableshoppingcartofserviceswecanbringtobearwithouthavingtobuildthemourselves.Inaddition,cloudserviceslikeAWStodayregularlyoutperformbanks’owninternetsecuritystackbyafactoroffivetoten.AmazonisgettingpummeledbyDDOSattacks,hacking,spoofs,andeverytypeofsecuritythreatyoucouldimagine,tensofthousandsoftimesperday.DowntimeofAWS-basedappsisincreasinglyrare,astheirsystemsbecometougherandtougher.

In the cyber security world, this is often spoken of in terms of a type ofimmunesystemresponse.Asyousolvemoreandmoreattacks,yourarchitecturebecomesmoreresilient.InthecaseofAWS,theysimplygetmoreattacksthananybankintheworld,sothereforethey’vehadtomaketheirsystemsstrongerandsmarter.Ibetyou10Bitcointhatifyouputyourbankhead-to-headagainstAWS on cyber security, they’d beat you like The Rock at aWWEwrestlingmatch13.

Thepointis,forachallengerbank,thedecisiontogocloudisano-brainer.Itgives you a whole suite of services you can spin up fast, has military-gradesecuritycapabilitiesandyoucanturnonprocessorsandstoragespacelikealightbulb when you need to rapidly scale. You don’t need to buy more hardwarecontinuously.

TechnologyaggregatorsWhetheraggregationspecificallyinthefinancialservicesspace,oraggregationofotherservices, increasinglytechnology-basedaggregatorswillplayacriticalrole as a new generation of gatekeepers. In China, Alipay and WeChat haveeffectivelybecomepaymentsaggregatorsandthishasbecomeasignificantissueforbanks inChina,andincreasinglyaroundtheworld14.Smartphoneoperatingsystems and app stores are natural technology aggregators today, as are voiceplatforms likeAlexa. In2015, JPMorganChase,BankofAmerica (BofA)andWells Fargo precipitated a battle between the big banks and popular personalfinancial management and aggregation services like Intuit/Mint, Geezeo,MX/Money Desktop, Yodlee and others. BofA, Wells and JPMorgan Chaseargued the reason for slowingdata responses to requests from thesesitesweresecurity related. However, since then customer demand for these services hasonlyaccelerated, resulting inmoreandmoredata sharingagreementsbetweenbanksandaggregators.

The reality is that there is a first-mover advantage here,where bankswithpreferential data sharing agreements will get better leverage off aggregationplatforms.

DataresidencyjurisdictionsLet’ssayyouarestartingachallengerbankinVietnamorPanamaandyouwanttousethecloudtodothat.YougotoMastercardandVisaandgetaBINsoyoucanissuecards.YougototheregulatorandgetaFinTechbankingcharterandyou’rereadytogo.There’sonlyoneissue:Amazondoesn’thavealocalinstance(availabilityzone,orAZ,intheirlingo)incountry.Soyou’llhavetouseAWSserversinSingaporeorGooglecloudinBrazil.Technicallythisisn’tanissueatall. Latency is fast enough that the lag between a transaction at the POS inVietnamandposting iton thecloudserver inSingaporehappensessentially inreal-time.

The problem is that your customer data isn’t stored in Vietnam. Now asAmazon addsAZs around theworld thismay become less of a problem, but

Amazon sees their cloud business like they do their retail business. They useregionalhubscombinedwithlocaldistribution.ThereisnoreasontoexpecttheymayeverhaveinstancesinVietnam.Thus,youhaveVietnamesecustomerswiththeirdataheldoffshoreinSingapore.ItisalmostcertainthatthecentralbankinVietnamwon’tbetoohotonthisidea.

CustomeraccesslayersIn 1990 every channel a customer used to get access to banking was bank-owned; today themajority of day-to-day banking access is through non bank-owned and bank-controlled channels. Thismeans as a bank you need a long-term strategy of specifically engaging with the vast array of technologyplatformsthathavebetteraccesstoyourcustomersday-to-daythanyoudo.

Figure5:Illustrationshowingbankingaccesstodaythroughnonbank-ownedorbank-controlledchannels.

AIserviceprovidersFacebook,Apple,Google, IBMandMicrosoftareall spendingbig timeonAIresearchanddevelopment,which is resulting in technologycompanies leadingR&Dspendglobally today.Since chief executiveSundarPichai tookover thetop job at Google in 2015, Alphabet has spent $30 billion on AI and relatedinfrastructure, which includes the data centres necessary for the computingpower that makes Google Assistant function as well as its cloud computingdivisionandAI-backedconsumerhardwarelineup.Clearlywewon’tseebanksspendingatthislevelonAI,buteveniftheydid,theywouldn’thavethebroadreachthatGooglemighthave,forexample.ThismeansthatifyouwanttoplugyourbankintoanAIservicelayerthatyourcustomersareusingdaily,itwon’tbe a bank-specific AI. Today, the entire US banking industry is spendingapproximately 1–2 percent on AI research and development when comparedwiththetechsector.Themathisfairlystraightforward.

Figure6:TechcompaniestakingtheleadinR&Dspend(Source:Factset).

VenturecapitalstructuresIf you’re going to be investing in FinTechs you can create your own VCcapability, such as those that BBVA, Citi and Santander have done, but thatrequires some pretty deep pockets, likely north of $100 million to be reallyserious.Ifyou’renotaglobalbankingplayer,thisisgoingtobeprettydifficult,butthereareoptions.Increasingly,smallerbanksarejoiningaslimitedpartnersorstrategicinvestorsinFinTech-themedVCfunds,suchasthefundcreatedbySBI Group (previously known as Softbank Investments) or Anthemis Group.Thisputstheminanetworkoflike-mindedinvestorsandgetsthemaccessonaprioritybasistotheindividualFinTechsintheportfolio.

UbiquitousbankingAs the shift towards embedded banking becomes complete, the leading bankswon’tbe thosewithbigdistributionnetworks, they’llbe thebankswithbroaddata capabilities that generate advantages in contextualization of day-to-day

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banking. Increasingly that will take not only a purposeful shift towardredesigningthewaytheutilityofthebankfitsinthelivesofcustomers,butalsoa massive commitment to partnerships with non-bank partners that have theaccessordatatomakearealdifferenceinareal-timebankoffering.

As a bank, recognising that you can no longer be the primary financialinstitution bywaiting for a customer to “come to the bank”will allowyou tostartthinkingabouthowtodesigncompellinginteractionsday-to-daythatmakeyourparticularsetofcapabilitiesindispensabletoyourcustomers.Becomingtheprimary financial experience for your customers won’t be through products,people or even channels—it’s all through anticipating and deliveringexperiences, when and where the customer needs it the most. The era ofubiquitous banking is almost upon us, and that means that banking will beembeddedinthelivesofyourcustomers,butnotbankingasweknowittoday.

EndnotesSource:Various—ATKearney,Forrester,Kitchenman.Source:DigitalBankingReport/TheFinancialBrand(March2017).

Source:BritishBankersAssociation.GobackandreadthelastsectionofChapter7onAIifyouidentifywiththis.

Source:BankRate.Source:MagnifyMoneycompilationofFDICfilingsfromthesixlargestcreditcardissuers(May2017).

Thisisnotanewconcept—RonShevlinhasspokenaboutthispreviously.“TheGreatRebundlingofFinancialServices”,byMarcHochsteinandBradleyLeimer,BankThink,13October2015.

Source:WorldEconomicForumPressRelease—“CanadatoTestAdvancementsinBiometricsandBlockchaintoWelcomeInternationalTravellers”,Jan2018.CertainlyMarkZuckerberg,anyway.

“DataBrokers:ACallforTransparencyandAccountability”—FederalTradeCommission,2014.Yes,Iknowtherearemorecloudprovidersthanthis.

Iknowhe’sretiredfromWWE.Istillwouldn’ttakehimon…Source:“Bigbanksonnoticethatthey’relosinggroundtoChina’sfintechgiants”,SouthChinaMorningPost,9August2017.

Thesuccessofe-commerce,P2Ppayments,Uberanddigitalvoiceassistantsallhave a significant commonality—they provide an experience that simplifiesdaily life.Withconsumersusing their smartphonesanddigital appsmore thanever,winnersinthefuturewillbethoseorganisationsthatcancreateembedded,contextualdigitalexperiencesthatdon’trelyonphysicalchannels.

Themodernconsumerdoesn’thavetimetovisitabankbranch(despitesomesaying they still want them around). They don’t want to sit through a newaccount-openingprocess,meetwithaninvestmentadvisor,writeapapercheckorpulloutadebitorcreditcard.Theywantsimplicity in their life thatcanbeachievedthroughtheapplicationofadvancedanalytics(AI),digitaldeliveryandreal-timepersonalisedrecommendations.

Modest-sized FinTech firms and large tech giants continue to make retailbanking inroadsworldwide,providing services that leverage thebest indigitaltechnology to deliver a customer experience that removes cumbersome stepsfromboth routine andmore involvedbanking engagements.Relative financialnewcomerslikeAlipay(China),WeChat(China),Rakuten(Japan),Atom(UK),Monzo (UK), Starling (UK),Moven (US),N26 (Germany) andRevolut (UK)have joined household names like PayPal,Amazon andGoogle to disrupt thebankingecosystem,leveragingmoderninfrastructuresandinnovativecultures.

Manyofthetechgiantspossesstheingredientsofsuccess:digitalprowess,largecustomerbases,organisationswellversedinimprovingthecustomerexperience,andampleleewaytoextendtheircorporatebrandsintobanking.

—Bain&Company,EvolvingtheCustomerExperienceinBanking

Moreconcerningmaybethatsomeof thesefirmsaregeneratinga leveloftrustpreviouslyreservedonlyfortraditionalbanksandcreditunions.Asaresult,

an increasing percentage of consumers are willing to use financial productsoffered from these non-traditional firms—especially where the experience issuperiortothatofferedbylegacyorganisations.

Figure1:TechnologycompanieslikePayPalandAmazonaretrustedalmostasmuchasbanks(Source:Bain&Co).

GoingbeyonddigitalbankingbasicsAt a time when some of the most complex interactions—such as starting abusiness,applyingforanautoloanorhomemortgage,sendingmoneyoverseasandbuildinganinvestmentportfolio—havebeendigitized,itismoreimportantthan ever for traditional financial institutions to digitize entire engagements,especially the opening of basic banking accounts. This will take a completerevamping of most banking websites, mobile banking apps and back-officeprocesses.

Migration to digital makes excellent financial sense. For example: routinetransactionsthatrequirebankstaffnotonlycost20timesmorethanthosedoneonlineor throughmobile,butconsumersalsoprefer tohandle routinebankingbusiness digitally. For instance, while “self-serve” leaders in the Netherlands,Poland andAustralia transact the vast proportion of their transactionswithoutever interacting with a human, 40 percent of US respondents still go to thebranchtelleratleastonceaquartertomakeadeposit,comparedwith21percentusing digital channels and 18 percent using ATMs. Even within geographicmarketsthereisasignificantgapbetweentheleadersandlaggardsinthequestfordigitaloptimization.

Forthosewhosaythatthemigrationtomobilebankingandtheuseofsome

digital services appears to have levelled off, this is more a reflection on theinability of most financial organisations to improve their digital capabilities,ratherthanconsumersnotwantingsomethingbetter.Thebottomlineforbanksis the challenge that consumers expect even better experiences in mobilebankingapps,digitalpayments,roboadvice,andvoicebanking.Thisonlyseekstoincreasethelikelihoodofnon-traditionalcompetitorsgettingafootholdoverthenextfewyears.

Banks and credit unionsmust begin to explore emerging technologies thatleverageconsumerdata,advancedanalyticsandnewdigitaltools,suchavoice-controlleddigitalassistants.Researchshowsthat25percentofUSrespondentssaid theyusevoice assistants such asSiri,AlexaorGoogleAssistant on theirsmartphones or Alexa or GoogleHome at home. And, while only five to sixpercent of respondents currently use voice technology for their banking in theUS,AustraliaandtheUK,between20and25percent-plusareopentotryingthetechnologyfortheirbankinginthefuture.

Banksthatmasterthedigitalbasicswillbeabletofurthersecurecustomers’loyaltybyquicklyputtingthenewtechnologiestopracticaluseintest-and-learnprototypesthatcanbeimprovedinafewiterationsandthenbroadlyrolledout.In determining which new technologies should be rolled out, financialinstitutions must look at the options from a consumer benefit perspective, asopposedtosimplyasawaytoreducecosts.

Figure2:Shareofcustomersusingvoiceforbankingisexpectedtorapidlyincrease(Source:Bain&Co).

AmazonmodelprovidesaguideforbankingThereisnodenyingtheexplosivegrowthandcompetitiveimpactofAmazontothe retail industry. For their retail business, the foundation of this success isAmazonPrime.Amazon’sPrimemembershipprogramhas80millionmembersin theUS according to recent estimates fromConsumer IntelligenceResearchPartners(CIRP),upfrom58millionat theendofQ12016.Today, thatmeansthat64percentofUShouseholdsnowhaveAmazonPrimememberships.1

Whilemost casualobserverswould think that the increased loyaltyaroundAmazon Prime is about free shipping, it is really about changing consumerbehaviourthroughreducedfriction.

Reducing friction to radicallyalterbehaviour iswhatwasbehindone-clickordering, Super Saver Shipping (encouraging customers to fill their shoppingcart)andtheentirefamilyofAlexadevices(usingvoicecommandstosimplifyordering). Reducing friction and improving the consumer experience is alsowhatisbehindtherecentdecisiontoacquireWholeFoods.

CoretotheAmazonstrategyisthecompany’sinfamousFlywheel(picturedbelow). The Flywheel, dubbed as “The Virtuous Cycle”, was created beforeAmazonaddedbusiness segments inaddition to its retailmarketplace, suchasAmazonWebServices.

Figure3:Amazon’sFlywheel(Source:TheFinancialBrand).

Looking at the original Flywheel, it is evident that all the pieces revolvearound a continuous improvement of the customer experience. A strongcustomerexperiencewill leadtomoreshoppers,whichwill in turnbringmoresellers. More sellers will lower costs and prices through competition whilebolsteringselectionforcustomers.Lowerpricesandmoreselectionwillbringinmorecustomers—andthecyclerepeatsitself.

AstheFlywheelincreasesmomentum,thereismassiveamountofcustomerinsightbeingcollected,analyzedandacteduponforimprovedrecommendationsandbehaviourmodification.Insteadofcollectingdataforgreatinternalreports,Amazon applies all of the learning (in real time) to enhance the customerexperienceandincreaseloyalty.

DuetothebreadthoftheFlywheeleffectacrossthebusiness,theyrealiseanadditional advantage. They can make lots of small bets at the fringe of theFlywheel.Meanwhile,thecorebusinesscontinuestobehealthy.

The bottom line is, Amazon Prime wins by making life easier for itscustomers.Byprovidingacomprehensiveselectionofproducts,accessiblewithonlyafewdigitalclicksandtaps,atcompetitiveprices,thebrandexperienceis

reinforced.Wearealreadyseeingthesameimpactinbanking.Thelargestbanks(Chase,Bank ofAmerica,Wells Fargo) are gainingmarket share by reducingfrictionoverdigitalchannels.

Allowingfortheend-to-enddigitalopeningofnewaccountsusingalaptop,tabletorphoneremovesfrictionfromapreviouslyarduoustask.Providingvoiceaccess to balances, basic transactions and customer support sets a financialinstitutionlikeCapitalOne,USAAandothersapartfromthecompetition.Usingartificial intelligence (AI) and a customer’s habits and financial activities topredict future behaviours and needswill be the foundation for future bankingrelationships.

Amazon is setting the bar for customer expectations beyond the retailindustry.Thebanking industrycan learnfromAmazonPrime.Or, itcanallowAmazonandother largetechcompaniestoleveragetheirexceptionalcustomerexperience layer toprovidemanyof thebanking services legacyorganisationsprovidetoday.

Openbanking:adigital“perfectstorm”The combined forces of advanced technology, high-speed internet, increasingpenetration of smartphones and the increasing popularity and functionality ofapplication program interfaces (APIs) has created a “perfect storm” forinnovation beyond the app. The increasing affordability of each of thesecomponentshasfurtherstrengthenedthestorm.

In an excellent report, “Open Banking: How to Flourish in an UncertainFuture”, Deloitte states: “Technologies such as ‘Infrastructure-as-a-Service’(IaaS), ‘Platform-as-a-Service’ (PaaS) and ‘Software-as-a-Service’ (SaaS) haveallowednewtech-enabledentrantstoentertheretailbankingsectorwithlowerIToverheads.Theyhavealsoallowedthemtorespondmoreflexiblytochangingmarketneeds.”

Thereisagrowingconsensusamongindustryobserversthat,whiletheinitialtransformationof thebanking industrymaybeanexpansionof traditional andnon-traditionalprovidersofferingnewalternativestoexistingbankingservices,the ultimate transformation may be far greater. In the future, the bankingecosystemwill expand far beyond just financial services, or financial servicesmaybecomerelegatedtobeingjustasmallcomponentofabroadernon-bankingecosystem.

Thebankingmodelofthefuturewillbesomeformofmarketplacebanking.“Inmarketplacebanking,thetraditionalbankingbusinessmodelistransformedinto a data-intensive, platform-based marketplace, where several financial

services providers continually compete to offer customers tailored, good-valueproducts,” statesDeloitte in the earlier quoted report. “As a result, traditionalbankservicesareaugmentedbyavarietyofofferingsthroughanecosystemofproviders.”

Figure4:Thefutureofmarketplacebanking(Source:TheFinancialBrand).

Amarketplacebanking ecosystemwouldgive consumers access tohighly-personalisedservices that leveragecustomerdatamadeavailable throughopenbankingandAPIs.Asopposedtotoday’sclosedaccessbudgetingtools,thenewecosystemwouldallowconsumerstooptimisealloftheirbankingrelationships—loweringcostsandincreasingreturns.

Beyondtraditionalbankingservices,thenewecosystemwouldallowbankstobecomethe“hub”forother,non-financialancillaryservicesprovidedbyother

banks or organisations in other industries. In this scenario, bank APIs wouldcentralise an array of life-stage services, reducing friction and improving thecustomerexperience.

Insteadofdisjointedcomponentsofalife-stageprocess—likeahomeorcarpurchase, starting a small business, or having a child—all involved players(banks, insurance, retail, governmental units, agents, etc) could be broughttogetherinaholisticmarketplace.

AgooddefenseisastrongoffenseThe best way to prepare for the inevitable increase in competition that thecontinued expansion of banking services offered byAmazon,Google, PayPal,Facebook and an increasing number of start-up banks will bring is to beproactive in the development of personalised digital solutions. This will mostlikely involve new partnerships inside and outside of traditional bankingorganisations,andaredefinitionofwhatabankingecosystemincludes.

If banks don’t reorient their approach and radically accelerate their rate ofprogress,loyaltywillsuffer,andtheywillwatchsmallFinTechfirmsandlargetechnology institutions poachmore business.Meanwhile, their economicswillerode as too many routine transactions continue to flow through expensivebranchandcall-centrenetworks.

As digital technologies and advanced analytics have provided excitingopportunities for financial institutions, only the largest organisations are trulypositioningthemselvesforthedigitalfuture.Whiletherearenotableexceptions,thequestioniswhetherthemajorityofinstitutionsaretoosmalltosucceedinahighly competitive digital banking ecosystem—where winners will bedeterminedbasedon the ability tousedata and insights todeliver exceptionaldigitalexperiences.

The most significant challenge for most smaller financial organisations inbecoming a “digital bank” is to have the expertise and personnel to deploydigital and advanceddata solutions.Not surprisingly, another challenge facingsmallerorganisationsisthestructureofdataavailabletobuilddigitalsolutions.

These challenges are not insurmountable, but they are significant. Inmostcases, smaller financial services organisations will not have the resourcesinternally to address these challenges—especially considering alternativepriorities in today’s marketplace. Smaller banks and credit unions will mostlikelyneedtoevaluateabuild/buy/partnerdecision.

With available talent in short supply, this leaves most smaller (and manylarger)organisationswithadecisionwhethertobuyorpartnerwithaspecialised

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solution provider to deploy digital banking solutions. But more important forsmaller institutions will be the need for top-level commitment to deployresourcestomeettheincreasinglydemandingneedsofthemarketplace.

Intheend,thereisagreatadvantageinthecustomerinsightsthattraditionalfinancial institutions of all sizes possess.Thekey is to apply these insights inways that directly andpositively impact the digital experience, similar to howlargetechfirmscurrentlyimproveshopping,social,searchandpayments.

EndnotesSource:Forbes/InternetRetail—“Sixty-fourpercentofUShouseholdshaveAmazonPrime”,June2017.

The author traces the highlights of Emirates NBD’s digital journey. EmiratesNBD is one of the largest banking brands in theMiddleEast and a leader indigital innovation in the region. The bank won BAI’s prestigious “MostInnovativeFinancialServicesOrganizationoftheYear”awardfor2017.

Withsomeofthehighestsmartphonepenetrationontheplanet,emergenceofayoungMillennialpopulationandadventofFinTechdisruptors, theUAEandtheMiddleEastarewitnessingtheperfectstormonbankingdigitisation.

Starting with offering online banking and SMS banking in the 1990s,EmiratesNBDwasoneofthefirstintheregiontoembracedigital.Ourdigitaltransformation program started in 2012 with the enunciation of a topmanagement-led vision that set digital as a critical priority. For us, it was adigitise-or-diemoment.

In2013,EmiratesNBDputtogetherastrategytoexecuteamulti-yeardigitaltransformation.We started our journey with the setting up of a young multi-channeltransformationteamanddrawingupablueprintbuiltaroundsixpillars:improvingserviceandsalesthroughdigitaltouchpoints,optimisingbranchandcontact centre journeys, end-to-end process digitisation, enhancing datamanagementandanalytics, transformingtechnologyplatformstobecomemoreagileandenhancingfraud.

ENBDisfortunatetobebasedinDubai,UAE,wherethegovernmenthasaproactiveSmartCitystrategycentredondigitisationandinnovation.Aspartofthe country’s transition to becoming a knowledge-based economy, 2015 wasdeclaredtheYearofInnovationand2020istheyeartheUAEaspirestosendamissiontoMars.

Wehad a task ahead of us, to transform a generation of bankers, teachingthemtothinkoutsidethebox.Wewantedourcustomerstoknowthatwewere

listening to their demands for digitally disruptive products that suit a newerlifestyle.Andwewantedstartupstobringustheirlatestproductssowecouldbethe first to market, even during this rapid pace of change. The digital worldbeing a great equaliser, ideas can come from anywhere, allowing us thepossibility to crowd-source innovation from various stakeholders, includingstaff,customersandvendors.

WalkingthetalkWestartedourjourneywithfixingthebasicsandaddressingprominentcustomerpainpoints,suchasintroducingelectronicstatements,enhancingourcallcentreIVRandlaunchinganext-generationmobilebankingsolution.

Oneofourearlywinnerswasintheareaofmoneytransfers.TheUAEisthethirdlargestoutwardremittancemarketintheworld,sendingoutUS$44billionin2016.Remittancesareanintegralpartofourexpatriatecustomers’routines,asignificantmajorityofthepopulationtoday.WelaunchedaDirectRemitservicethat makes possible 60-second money transfers at zero fees using mobile oronline banking to a multitude of homemarkets. Today, DirectRemit volumeshavegrownalmostten-foldsincelaunchandhasgarneredclosetoafivepercentmarket share. Today improvements in that platform enable our customers tomake on-the-go money transfers to friends and family, simply by using thebeneficiaries’mobilenumbers.

To encourage customers to save, we rolled out Shake n’ Save, the firstgamified savings account in the region, enabling customers to savewhen andwheretheywantto,simplybyshakingtheirmobilephone.Risingobesitylevelsin the region was bringing health and fitness into focus, so we providedcustomers with an incentive to become more active with the launch of theFitness Account, the first savings account linked to the Apple Watch. Theaccountearnedinterestbasedonthenumberofstepsthecustomerwalkedorraneveryday,encouragingthemtobehealthier,physicallyandfinancially.

Inbranchwedevelopedin-housetabletappsthathelpedreducequeuetimesas well as improving our processing capabilities. Our CRM systems wereenhancedtoofferpaperlesssigningupfornewproducts:today,abouthalfofourpersonalloansareoriginatedwithoutanypaperdocumentationandtwo-thirdsofall customer requests are fully straight through. A new mePay service waslaunched,enablingcustomerstotransfercashtoanyoneintheUAEthroughtheATMwithout theneedofabankaccountnumber,aswellasallowingforcashwithdrawals using one’smobile phonewithout the need for a card. Today, 92percentofallourtransactionshappenoutsidethebranchandourbranchnetwork

istransformingintoasalesandadvisoryspace.Todrivecontinueddigitaltransformationandbecomefuture-ready,Emirates

NBDhasannouncedaninvestmentofcircaUS$300millionoverthenextthreeyears to support digital innovation and multi-channel transformation ofprocesses,productsandservices.Thishasbeenfocused initiallyon integrationwiththeUAE’ssmartgovernmentinitiative(includingblockchain)andreducingfriction. Additionally, we’ve set up an incubator for FinTech startups in theregion.

Oneof theoutcomesof thesedevelopments is thecreationof theEmiratesNBDFuture LabTM.Among other activities, Future Labworkswith vendorsandpartners toconductresearchonemergingtechnologiessuchasblockchain,artificialintelligence,augmentedrealityandtheInternetofThings,whileactingasanacceleratorforcreatingviableproducts.

One of the successful outcomes of this lab is our futuristic branch atEmirates Towers, Dubai, part of the Dubai Future Foundation’s prestigiousMuseumoftheFuture,wherecustomerscangetacquaintedwithfuturisticbeta-conceptsofbankingandpaymentsolutions.InnovationsincludetheConnectedCar in partnershipwithVisa, integrating day-to-day payments seamlessly; theFuture of Shopping with MasterCard, showcasing immersive virtual reality-basedshoppingexperiences;andaugmentedreality-basedhomepurchaseinco-operationwithSAP.Themostpopularexhibitis,however,Pepper,ourhumanoidrobot that greets customers as they enter the branch, converses with them inEnglishorArabicandprovidesassistanceonproductsandservices.

InNovember2016,EmiratesNBDannouncedtheset-upoftheregion’sfirstintelligent,voice-based,chatbot-drivenvirtualassistant,EVA(orEmiratesNBDVirtualAssistant).EVAallowscustomerscallingourcallcentre to interactandreceiveassistanceusingconversationalEnglishorArabic(afirst intheworld),offering amore intuitive and personalised experience thanwading through anIVRmaze.

We are also the banking partner for the FinTech Hive, the UAE’s firstFinTechacceleratorprogram,whichisrunbytheDubaiInternationalFinancialCentreandAccenturealongthelinesofsimilarinitiativesinLondon,NewYorkandHongKong. A recent study says that there could be over a 100 FinTechcompanies in theMENA region, with one fourth of them in the UAE alone.Startup fever is reaching tipping point in the region, with over US$3 billionraisedin2016bytechfirmsandinspiredbytheregion’sfirstunicorn,Careem,aride-hailingservice.

SocialmediatosocialbankingIt may seemmore straightforward now, but for traditional banks, making thetransition from being formal entities that spoke to the customer from behindglasspartitionstobeing“liked”and“followed”onsocialmediawasadifficultparadigmshift.

WepartneredwithTwittertobethefirstbankintheregiontooffercustomersupport through our @EmiratesNBD twitter handle. Our extensive series of“how-to”videosonYouTubeguidenewercustomersonday-to-daybankingandwhichproductsarebestsuitedtotheirneeds.Ourworthy.aeplatformpublishesindependentcontentonfinancialliteracyandwellbeing.

EmiratesNBDalsohasbeenmakingsignificantstridesintheareaofsocialbanking by making many of our branches disabled-friendly, piloting of anautomatedsignlanguagetotexttranslator,creationofdigitaldonationplatformsanddistributionofBraillecurrency.

NewvistasWithsustainedinvestmentsbehinddigitisation,bankshavenowtheopportunitytouptheanteandbecomedisruptorsintheirownright.

Onesuchopportunity ise-commerce.WiththeUAEe-comindustryonthecusp of big change—Amazon recently announced their entry into the marketwiththepurchaseoflocally-grownmarketleaderSouq.com—onlineshoppingintheUAEisgrowingrapidlyandsettodoubletoUS$10billionby2020.

AsBrettmentionedearlier in thebook, inmid-2017we launchedourownshoppingportal,SkyShopper,thatallowscustomerstoshopandpayforawiderange of goods and services, ranging from flights, hotel bookings, electronicsandfashiontoentertainmentandgroceries,allunderonedigitalroof.Whileitisearly days, customer interest in the platform has been high and we see theserviceasbeingastrongcatalystinthegrowthofthisindustry,andlongterminhelpingthetransformationtoacashlesssociety.

The emergence of a large Millennial segment and their digital affinitypromptedusin2017tolaunchLiv.,theUAE’sfirstdigitallifestylebanktargetedat Millenials. Liv., built from the ground-up by a Millennial team, providescustomerswith a uniquedigital banking experiencebuilt around lifestyle.Theappisafriendandwing-manfirstandabanklater,helpingcustomersmanagetheirdailylifeandsocialengagementsapartfromacoolbankingexperiencethatincludes instant account opening, free transfers, POS payments, bill-splits andthelike.Liv.alreadyaccountsforone-fourthofournewaccountsacquisition.

Our new FaceBankingTM video banking service allows customers to bankface-to-facefromhomeoroffice,orcarryoutlivechatswithabankingadvisor.Thenewserviceempowerscustomers toconnect24/7withanadvisor throughouronlineormobilebankingplatforms,andcarryoutenquiriesandtransactions,includingsigningupforapersonalloanorcreditcardinstantly.

Back in the 1960s when I grew up in a small town in India, the branchmanagerof theneighbourhoodbankwasan iconicfigure.Hekneweverythingabout every family in town, and took lending decisions after a subjectiveassessment of factors, both financial and social. When my father wanted aneducationloantosendmyelderbrothertouniversity,thebankmanagersathimdowntodiscussmybrother’schoiceofsubjects,lamentthestateofeducationinthecountry,andaftermultiplecupsofmilkytea,signedoffontheloanwithahandshakeandahug.

Today,aloancanstillhappenoveracupoftea,ordinner.Butthedifferenceis that you can do it from the comfort of your office or home, without evenknowingthenameofyourbankmanager.Yougoonline,chatwithanadvisor—perhaps even a robot advisor—complete a digital form, upload a couple ofdocuments,andtheloaniscreditedbythetimeyoufinishyourcuppa.Itishigh-tech but also high-touch. And that’s what will continue to win the day forprogressivebankslikeEmiratesNBDifIhaveanythingtodowithit.

Suvo Sarkar is a retail banking professional with over 30 years of multi-functional experience with five leading financial institutions and in multiplegeographies across Asia,Middle East and Africa. Currently, he is the SeniorExecutive Vice President and Group Head of Retail Banking and WealthManagementofEmiratesNBD, thebiggest bank inDubai. In2018,Suvowasrecognizedasthe“RetailBankeroftheYear”attheRetailBankerInternationalglobalawards.Hecanbereachedonsuvosarkar@EmiratesNBD.com.

Part04Whichbankssurvive,whichdon’t

9➡AdaptorDie

10➡Conclusion:TheRoadmaptoBank4.0

9 AdaptorDie

NeitherRedBoxnorNetflixareevenontheradarscreenintermsofcompetition.—BlockbusterCEOJimKeyes,speakingtoinvestorsin2008

Disruptionisnotnew.Whenyoulookbackoverthelastcoupleofcenturies,yousee time and again evidence that incumbents underestimated the impact ofchangeontheirindustry.Inthebankingsectortoday,thehugepotentialchangeswe’re facing are no longer just focused on front-end user experiences.We’reseeing currency, capital markets, wealth management, bank licenses, labourforce and economics all under attack from new emerging systems, paradigmsandtechnologies.

Iguess thequestion shouldbeasked, though:when lookingat the likesofKodak,Blockbuster, Borders,YellowCabs, record labels and cable TV,whencouldwehaveknownwithcertaintythattheyweregoingtobedisrupted?Whatarethewarningsigns,andaretherethosesameindicatorsforbanksandfinancialinstitutionstoday?

The biggest question probably is: why is it, when faced with disruption,incumbentsdon’treactfaster?ThethreatofAmazontotheretailsectorhasbeenclear for over a decade, but despite their steady increase in capabilities andreach,incumbentswhohadplentyoftimetoplanaresponse,havemostlybeenleftreeling1.It’slikeamixtureofdisbeliefinthespeedofthechange,combinedwith fear over being disrupted, often creates a condition like a deer in theheadlightsofanoncomingvehicle.Youknowyouneedtomove,butyoustillgethitanyway.

What are the indicators that banking and financial services, morespecifically,isabouttobedisrupted?

1.PowerisconsolidatedOne of the most typical elements of predicting when an industry is ripe fordisruptionis imbalanceordominancebyafewleadingplayers.Whenindustrybehaviour is consolidated amongst a cabal or oligopoly—a few small playersthathaveconsolidatedvastmarketshare—thelikelihoodofchangeislower,as

those incumbents feel they dominate their sector so completely that they areimmune to competition. That sort of entrenched behaviour leads to greaterincentive to preserve the status quo, especially when it comes to shareholderreturnsinthemediumterm.

Figure1:USbankshareofassetsbytype(Source:2015FedData).

In the US, UK, EU and China banking sectors, this dominance by a fewplayerstendstoskewregulationinfavouroftheselargerincumbentswhowieldenormouspowerpolitically.The“too-big-too-fail”movementduringtheglobalfinancial crisis is a simple indicator of the inflexibility of the industry inallowingdisruptionofthesedominantplayers.

IntheUSin1995,USmajorsheldjust22percentofmarketsharebyassets;today that’s closer to 70 percent2.When consolidation leads to a few playersdrivingtheindustry,thisleadstolesslikelihoodofanorderlytransitiontonewtechnologystates.

2.TheIndustryisinflictedbyoutdatedtechnologyWhenNetflix,Borders,Polaroid,Kodak andotherswent under, itwas largelyconsidereda failureofadaptation toemerging technologies.Thebiggestbanksoftenhavethemostcomplexlegacysystems,andthatmakesitdifficultforthemtoimplementnewtechnologyquickly.Creatingasmartphoneappseemsprettysimple,untilyourealizeyouhavetodealwithyourcorebankingbackendandabusinessmodel,which requirescompliancebasedoncustomer signaturesonaphysicalpieceofpaper.

Figure2:Transformingabankisliketurningamassivefreighter;startupsaremorelikespeedboats.

Respondingtonew,agiledisruptorstakesextremelyflexibletechnologyandorganisationalstructures.Thebiggertheship,thelongerittakestoturn.

It’snotjustthe1960s’eracorebankingsystemscodedonCOBOL.It’sthefact that at the very core, most banks still require manual processing andpaperwork for account opening, accessing a line of credit or, in the case ofcheques, even sending money from one person to another. While someincrementalchangesaretakingplaceontopofthislayeroflegacyprocessandtechnology, the reality is that when disruptors look at this tech they see anopportunity for disruption. If you still require a signature, you are probablygoingtogetyourbutthandedtoyouinthisstory.

Think about the technology failures at banks of late3. Transaction systemfailures of POS, ATM networks, internet and mobile banking hooked intoantiquatedback-endtechnologiesthatwereneverdesignedtocopewiththeloadthey’re experiencing today. Swift network failures and hacks have alsoaccounted for hundreds of millions in losses. Massive card and credit scoredatabase hacks and compromises. Bank-to-bank payments networks that stilltake three to five days to send your money from one bank to another. Therequirementtoseesomeoneinabranchwhenyouraccountislockedupbecauseof some administrativemistake, or because you simply forgot your password.The requirement to submit 15–20 pages of documentation to open an accountand prove your identity. Everywhere these historical processes and outdatedlegacytechnologiesmakeanappearance,weknowthereissomestartupalreadyintheprocessofattackingthoseoutmodedoperations.

3.Trustisstillanissue

Ithinkthepublictrustinusmighttakeagenerationtore-establishitself.—AntonioSimoes,UKChiefExecutive,HSBCBankingCorp,2016

AccordingtoGallopresearch4onlyoneinfourAmericanstrusttheirbanksaftertheglobalfinancialcrisis.IntheUKit’sevenworse,withjust12percentofUK

respondentshavingastrongorverystrongleveloftrustinbanks.IntheEUingeneral trust inbanksvariedbetween14percent (Ireland) to36–38percent intheNordicregion.Obviously trust inbankshitahistorical lowin2008duringthe financial crisis and it has been slow to recover—primarily because bankshavenotreallychangedinthemindsofcustomerssincethecrisis.Thislackoftrustappearsnowtohavebecomesomewhatembeddedgenerationally inGen-Zs’ and Gen-Ys’ attitudes, which significantly lowers the barriers to newcompetitorsemergingandcapturingmarketshare.

Theargumentthatapotentialtechnologymajor5orFinTech“doesn’thaveabanking license” is certainly not a barrier in this environment, where trust inbanks isapenalty rather thananasset.Theargument thatabanking license issomemagicalstandardoftrustcouldnotbefurtherfromrealitytoday.

Ibelievetrustisessentiallyafunctionofutility.Themoreusableabankingserviceisandthemorethebranddemonstratesitseffectiveutility,whetherfroma licensed institutionornot, themore consumerswill tend to trust thebrand’scapabilities.

Figure3:TrustinUKbanks(Source:Statista2018data).

ThisexplainswhyinChina,companieslikeAlipayandTencentWeChatareactuallytrustedmorebythemajorityofconsumersthantraditionalbanks.Ina

survey conducted byE&YandDBS in 2016, they found that thiswas a hugecontributingfactortotherapidadoptionofnon-bankservicesinChina6.Astheinterface between the consumer and the brand shifts more and more to dailytechnologyinteractions,theprimarythingthatneedstoworkisthattechnologyandtheutilityassociatedwithit.Abank’sadherencetoregulationstomaintainitsbankinglicensehasverylittlecorrelationwithcustomertrustifitstechnologyfails.

Let me illustrate it this way. Imagine you are a global, top 50 bank withbillionsinassetsandlocationsaroundtheworld,andyourin-housecoresystemmainframefailsduetosomerandomtechnologyglitchandittakesyouaweektogetitsortedout.Let’ssaythatfaultrepeatsitselfthreeorfourtimesoverthespace of a few months. Consumer and small business stories start emergingabout individuals havingmassive issues because they’ve not been able to paytheir bills or employees due to your technology issues.Howmuch is the factyou’vegotabanking licenseoryou’vehadabranch in that townfor50yearsgoingtomatterintheconsumertrustdepartment?

The fact is, that on newer technology stacks,withmore agile cloud-basedarchitectures and an entirebusinessbuiltwith technologists at the core, newerplayers are statistically less likely to have technology driven failures at thecustomerlayer.

4.Despitenegativecustomersentiment,businesspracticesaren’tchangingfastenoughWhether you buy into themetric or not,Net PromoterScores offer an insightintohowpositivecustomersperceivetheaveragebank.NPSscoresrangefrom-100to100.Ascoreover50isgenerallythetarget,beingconsideredverygoodtoexcellentfromacustomer’s likelihoodthat they’llrecommendor“promote”yourbusiness.Whenitcomestobanking,NPSaveragesrangefrom-17throughto34globally(dependingongeography).Butmostlargebanksrankbelow20.Amazon,Apple,andGoogleallperformconsistentlywellabovethebestbanksonNPS.

In recent years, more and more bank CEOs are talking about customerexperienceasacorecompetencyordriver,butasyettherubberhasnothittheroad. Startups like Transferwise, Monzo and Starling in the UK; Betterment,Venmo, Simple and Moven in the US; Revolut and N26 in Europe; Alipay,LuFax andWeChat in China have all grownmarket share almost exclusivelythrough customer referral and network effect, as opposed to traditionalmarketingapproaches.Thisshowsthatthesestartupsstillhaveabasiccustomerexperience differentiation that directly contributes to growth and competitive

posture. In the recent British Banking Awards, Monzo and Starling won theawardsforbestbankbasedontheirsuperiorfront-endexperiences.

At the core of non-bank, shadow bank or alternative financial servicesadoptionis fundamentalchanges indistributionmechanics,andit’s thebiggestconcernforincumbents.Ifyouareessentiallylimitedtoacquiringcustomersin-branch,orevenifdigitalacquisitionisstilllessthan30percentofyourrevenuepipeline,thisisaprettyfairindicatorofrisk.

This new period we are entering is not so much about production anymore—how much isproduced; it isaboutdistribution—howpeoplegetashare in [andaccess to]what isproduced.Everythingfromtradepoliciestogovernmentprojectstocommercialregulationswillinthefuturebe evaluated by distribution. Politics will change, free-market beliefs will change, socialstructureswillchange.

—“Whereistechnologytakingtheeconomy?”McKinseyQuarterly,October2017

Ifyouexamineitsystemically,books,music,retail,taxis,airlines,hotels,etchaveallmovedtoonlinedistributionoverthelast20years.Wearenowtalkingaboutaugmentingthatwithvoicecommerceandotherembeddedtechnologies.This is a fundamental, global shift in behaviour and distribution mechanics,awayfromrelianceonphysicalpointsofsale.Whilebanksliketoimaginetheywill be the sole industry to buck this trend, the reality is book stores, recordstores, retail outlets, travel agents are simple forecasts ofwhatwill happen tobranching. At this stage, there is zero evidence to support the assertion thatbanking is demonstrably different to other sectors in respect to engagementrequirements, particularly with the shifts we’re already seeing in relation tobranchutilization.

As we start to more effectively deploy internet access in the developingworld,mostofthetwobillionormoreunbankedconsumerswillcomeintothefinancialsystemalmostexclusivelythroughdigital.Allthisaddsuptothefactthat by the middle of the next decade more account holders globally will bedigital firstordigitalonly thanbankingvia abranch (moreabout thisbelow).Thus,by2030itishighlyunlikelythatanewGen-Zcustomerwillbethinkingaboutwalkingdownto thehighstreet tovisit theirbranchtoopenanaccount,especially when we’ve had another 10 years of focused development offrictionlessonboardingforaccountopening.

We’re talking about roughly the same period of time between when theiPhonelaunchedandtoday.Withinthattimeframewewillseethedisappearanceofbanksthatarereliantonbranchesforaccountopening,unlesstheyaresomeesoteric brand catering for a very small segment of hipster customers. Howmanyofthosecansurvive?IntheUnitedStates,maybe50percentatmost.Howmanyof the thousandsofcommunitybanksandcreditunions in theUS today

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relyonbranch-basedaccountopening tosurvive?At least95percentof them.Dothemath.

Oh, and the regulator can’t save you. Just ask the recording and movieindustry, which spent hundreds of millions over more than a decade in anattempttostopdownloads.

5.Industrypressandseasonedplayerscan’tstoptalkingaboutdisruptionHereareafewrecentheadlinesinindustrypress:

CIOMagazine:“TheFinTechEffectandthedisruptionofFinancialServices”WorldEconomicForum:“BigTech,notFinTech,causinggreatestdisruptiontobanking”Forbes:“Theraceisontodisrupttraditionalbanking”BusinessInsider:“Banksface‘KodakMoment’asFinTechdisruptionbuilds”TheBusinessTimes:“DisruptionisthenewnormforFinTech”TheNewYorkTimes:“FinTechstart-upboomsaidtothreatenbankjobs”FinancialTimes:“BankersfeartheywillgetAmazon-edintechdisruption”

It’s pretty clear that there is a significant shift in the dialog in the space.Wheneveryoneistalkingaboutdisruptionit’sprobablyalreadyhappening.

6.BankexecutivesarerespondingAccording to research from the Economist Intelligence Unit, more than 90percent of bankers project that FinTech will have a significant impact on thefuture landscape of banking7. Almost a third expect that FinTechwill win anequal share or even dominate the market. Sixty-five percent of CEOs seedisruption as an opportunity for their business according to KPMG’s 2017GlobalCEOOutlook. In that same report,CEOs said agility in responding todisruption over the next three years will be more important than the last 50years!

AMergermarketsurveyof2016alsorevealedthatregionalandcommunitybankingexecutivesintheUSseefuturecollaborationbetweentheFinTechandbanks as essential for survival, with 54 percent of bank respondents callingFinTechsapotentialpartnerand89percentbelievingthatpartnershipsbetweenthetwowillbethenormoverthenext10years.

7.Thewaywebankisfundamentallychanging

Fundamentally the biggest shift in banking is that “banking is no longersomewhere you go, it’s something you do”. If you’re aMillennial or Gen-Y,chancesareyoualreadydothemajorityofyourbankingonlineorviamobile.Ifyou’re under 30, chances are you visit your branch as little as possible, bychoice. PWC research last year identified that this trend has created a new,dominant class of behaviour they classified as omni-digital: that is, customerswhousearangeofdigitalchannelsformostoftheirbankingactivity.

Figure4:Thetrendtowardsdigital-firstbankingisextremelyclear(Source:PWCDigitalBankingConsumerSurvey).

Whiletherearesomedemographicdifferenceshere,theoveralltrendisclear.Giventhatalargepartoftheoperatingexpensestraditionalretailsbanksfaceisthe upkeep of their bricks-and-mortar distribution channels, this reducesinvestment by incumbents in digital out of both fear of cannibalizing theirexistingbusiness, andpurely inbudget terms.Challengerbanks,which are allessentiallybranchless,mighthavesmallermarketshares today,but thesavingstheymakebynotmaintainingexpensivebranchnetworkscantranslatedirectlyintoR&Donnewservicesthatwillfurthercementtheirabilitytocapturemarketshare.

In that samePWCsurveymentioned earlier, only 25percent of customerssaidtheywouldn’tbankwithabankthatdidn’thavebranches.Thatmeansthat75percentofcustomerswouldbankwitha“bank”thatdidn’thavebranches.It’s

clearthatwhilebrancheswillremainwithusformanydecadestocome,theyarenolongerconsideredessentialforaccesstobanking.

KeysurvivaltechniquesThe average lifespan of a company listed in the S&P500 has decreased from 67 years in the1920s,tolessthan15yearstoday.

—RichardFoster,SpecialAdvisortothePresidentonHealthcareInnovation,YaleUniversity

It’s pretty obvious then, at least to anyone paying attention, that disruption isnowreshapingthebankingandfinancialserviceslandscape,justasithasotherindustries.Disruptionishittingthebankingsectordifferentlyfordifferenttypesofbanks,buttherearesignsofiteverywhere.IntheUnitedStatesthenumberofcommunitybanksin1984was17,401;in2017only5,2788.YetthelargestbanksintheUShavegrowntheirassetbaseconsiderablyoverthesameperiod—$31trillionoflendinghasmovedtotheso-calledshadowbankingsystem9(includingFinTechs),andthat’smorethanthreetimesthecreditbanksprovideintheUS.European Central Bank data shows that the number of lenders in the EU isalreadyindecline,havingfallenfrom8,237in2010downto7,110in2015,andfurther consolidation is expected10. India has announced it will reduce thenumberofPSBs(publicsectorbanks)downtoroughlyhalfwhatitistoday.TheGCC region andChina are also expecting significant consolidation. In China,JapanandKorea thepressureonsmallerregionalbanks isacuteas technologyplayersgettraction.

Itmight be stating the obvious, but the first thing that needs to change inresponsetohowwehandlethislevelofdisruptionisthewayorganisationsandleadersthink.Adaptingtochangeisbecomingasurvivalskillinthisdisruptiveage, where technology changes are speeding up, not slowing down. Someorganisationssaythey’llseewherethedisruptiongoesandthenthey’llbeafast-follower,copyingtheinnovationsoftheFinTechleaders.

Figure5:Theproblemwithafollowerstrategyinanindustryfacingdisruption(ImageCreditMarketoonist.com)

As Ron Shevlin pointed out in his excellent post “The Fast FollowerFallacy”11, ifyouwait to followwhen facedwith industrydisruption,youwillinevitablylosemarketshare.Hesaysfast-followerisjustanothernamefor“latemover”,especiallyatthespeedfirstmoversareadaptingtochange.Thereareafew reasons for this assertion, but the most critical one is that the lack oftechnology pedigree in incumbent playersmeans by the time an innovation isshowing significant traction, a follower is still two to three years behind theleaderwho introduced that innovation,withanother twoyearsofdevelopmenttimeaheadofitjusttocatchup.That’sprobablyhalfthetimeyouhavelefttoturnyourship.Ifyouarefacingtwoorthreemajordisruptiontechnologiesinarelatively short timeframe, your future as an incumbent is now clearly injeopardy.

So,whatcanyoudo to respond?Onekeyanswer isa relentlesspursuitofgreat customer experiences at the core of your mission. This will drive theorganisationtoremovefriction,tryengagingthecustomerwithnewexperiences,and force innovative workarounds that break current policy and processstrangleholds.

Here’s what Tiffani Bovi, former Gartner VP and now Salesforce.com’sGlobalCustomerGrowth,SalesandInnovationevangelistsays:“Lookingat it

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fromsalesandgrowthspecifically,thebiggesttrendrightnowishowimportantcustomer experience is in developing and supporting a brand and improvingsales performance.The customer decideswhen and how theywant to interactwith brands, and this impacts theway companies sell to their customers. Bigmacro trends, such as social, mobile, cloud, big data, and IoT help createdifferent experiences, but ultimately the customer is becoming far moredisruptivethanthetechnologyitselfandshapingentirelynewindustries12.”

IBMresearchin2015showedthat65percentofbankingexecutivesthoughttheydeliveredexcellentcustomerservice,butonly35percentoftheircustomersagreed.Thisperceptiongapislikelytogrowaschallengerbanks,TechFinsandtechnologymajorsextendtheiruserexperienceleadontechnologieslikemobileapps,voice-smartassistants,augmentedrealityglasses,andsoforth.

Butthereareafewothertacticalthingsyoucandotostarttransformingyourorganisation’scustomeralignment,agilityandadaptability.

PuttechnologypeopleonyourboardForcommunityandsmallerbanksinparticular,havingaboardthatcamethroughthelocalcommunityoverthelast20–30yearswasastrategythatworkedwhenknowingthecommunitywasatthecoreofmeetingtheircustomer’sneeds.Today,meetingcustomerneedsismuchmoredowntotechnologydeliverythanitisunderstandingwhatthelocalretailersandfarmersareconcernedabout,orwhetherthecentralbankisgoingtoraiseinterestrates.

Thesortoftechnologistsyouneedarethosethatarewellnetworkedonthenewertechnologies,havehadtheirownstartupinthespace,orthathavedealtwithdigitaltransformationatanorganisationlikeyourown.Theobjectivehereistogetatop-downviewtoinformtheexecutivecommitteebetter.Identifywhichtechnologiesyoushouldbeprioritising—andforsmallerbankswhorelysolelyonvendorstoprovidetheirplatforms,whichpartnershipsaregoingtobekeytoanagileexperience.VCsthathavelargeFinTechportfolioscouldbeuseful,astheymaybeabletogetyouintroductionstoprospectivepartnersthatcouldgiveyouatechnologyedge.

ChrisSkinnerinhisblog13recentlyhighlightedthisproblem,wherehepointedoutthatbanksmightsaytheyare“becomingtechnologycompanies”,buttherealityisthattheirmanagementstructuresbeliethoseclaims.Accentureanalysedthebackgroundofaround2,000executivesfrom100ofthetopbanksbyassetsglobally

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toassesswhattechnologyexperiencetheybroughttothetable14.Theresultswereappallinglydismal:OnlythreepercentofCEOsofleadingbankshaveprofessionaltechnologyexperienceOnlysixpercentofboarddirectorshaveprofessionaltechnologyexperience40percentofbankshavenoboardmemberswithanyprofessionaltechnologyexperience

HirelotsofMillennialsandGen-Zs(ifyoucan)Millennials(thosebornbetween1980and1995)recentlybecamethelargestsegmentoftheUSlabourmarketat34percent,andthegreatestshareoftheUSpopulation(24percent).Gen-Z,bornafter1996,isgrowingbothinnumbers(21percentofUSpopulation)andconsumerpurchasingpower.Bycontrast,keyseniormanagementdecision-makersandcorporateboardmemberstendtobefromthosegroupsbornbefore1980(Boomers:22percent;Gen-X:21percent).InChina,31percentofthepopulationismadeupofMillennials(九零後or“jiǔlinghòu”)anditisregularlynotedthatthey’re“moreentrepreneurial,individualisticandopenminded”15thantheirpredecessors.Inlessthan10yearsMillennialswillmakeup75percentoftheglobalworkforce.Theyneedtobeinformingthefutureprioritiesofyourbank.

YouneedMillennialswithinyourteams—buthiringthemistough,unlessyouhaveaculturethatattractsthem.ESG(environment,socialandgovernance)valuesarebecomingcoreimperativesforMillennialsasagroup—formanyofthemaddressingsocialissues,environmentconcerns,incomeinequalityandfindingtheirvoiceasagenerationarecritical.Ifyoudon’thaveaformalpositionontheseissuesinyourcompany,expecttobeaskedaboutitduringthehiringprocess.ThinkaboutthelikelihoodofattractingaMillennialtostartbuildingacareerinbankingasatellertoday.That’sjustcrazytalkgiventheaboveperspective.

Passionprojectsareincreasinglygoingtobecomeimportanttothenextgeneration.Mostimportantlyyouneedaculturethatsayssomethingpositive.Financialinclusion,promotingrenewables,promotinglowercrime,greaterequality—findacausethatyourorganisationcangetbehind.Profitabilityforshareholdersisn’tgoingtomotivatethesecandidates.Asonecommentatorputit:putthe“why”inwork.

3. GetagileEasiersaidthandone.Howdoyoumovelikeaspeedboatwhenyouareasupertanker?Therearesomelargeorganisationswhoareagiletoday,butthemostconsistentplacestofindthemaretechnologyleadersthatstartedasstartupsandbecamelargeplayers.ThelikesofGoogle,Uber,Facebook,etchavemaintainedagilitydespitebeinglargeremployersthanmostofthebanksintheworld.

I’mnottalking“leanstartuptheorem”here.Ihonestlythinkthat’sadistractionwithinabank;butIamdefinitelytalkingabouttheabilitytochangeyourorganisation’sprocessandpolicyrapidly.TherearefivecorecharacteristicsofAgilebanks:

Table1:ThecorecharacteristicsofAgilebanks.

LackofagilitycanalsonegativelyaffectthecapacityforbankstotakeonpartnershipswithFinTechsandtechnologyfirmsthataremoreagile.Ifastartupisreleasingversionsoftheirnewappeveryfewweeks,andbankshavethree-to-sixmonthlyproductreleasecycles,thecultureclashisgoingtobesevere.Inmostcasestheorganisationisjustnotequippedtoworkfaster,andthusthebenefitofapartnershipwithanagileorganisationcouldbelargelylost,orworst—thepartnershipcouldfail.

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Iknowwecouldwriteagreatdealmoreonagileorganisationstructures,butthattopicissolarge,youneedtodosomespecificresearchifyou’reheadingdownthatpath.Iwillsaythatifyouaregoingtodo“transformation”,atsomepointyou’llhavetotackletheorganisationalstructureasweidentifiedearlierinthebook.Stophiringbankers,attractdifferentiatedtalentItiskeythatnewskillsareinfusedthroughouttheorganisation.Afocusonpeoplewhohaveworkedinbankingbefore,or“bankingexperienceessential”onthejobdescription,isonlygoingtoreinforcethetraditionaldecision-makingprocessandreduceyourlikelihoodofsurvival.Buthiringtheprogrammers,designers,datascientists,anddeeplearningspecialiststhatwillbringabreathoffreshairintotheorganisation’sthinkingistoughwhenyourcultureisbankersorbankingfirst,insteadofcustomerexperienceandtechnologytransformationfocused.ArecentarticlebyacoderthathadworkedformainstreamfinancialinstitutionsintheUKfornearlyadecadeistelling:

Bankswill tellyou they’re techcompanies.Don’tbelieve them.Technologistsaresecondclasscitizensinbanks—ifyouworknearthetradingfloor(Idid),thetradersareincharge.Thepoliticsinthetechnologyteamareimmenseandthecareerprogressionislimited.Youwon’tbeworkingoninnovativenewtechnologies.Mostbanksarecuttingcostsandthismeansyou’llbefocusingonmaintainingtheinfrastructure.

—“Banksarenoplaceforcoders”,eFinancialCareers,RichardLing,March2017

HowdoesabankcompetewiththelikesofGoogle,Facebook,Uber,andthetensofthousandsofFinTechsalsocompetingfortalent?PeterLawrey,StackOverflow’smostactivecommunitycommentatorandahigh-frequencytradingcoder,madetheobservationina2015interviewthatbanksarehavingtopay33–50percenthighersalariesjusttoattracttalent16.Inmostcases,however,banksjustdon’tcompete.Ifyouwantthebesttechnologypeople,youdoneedtopresentyourorganisationasabusinessthateatsandbreathesthepotentialfortechnologytochangeyourdestiny.

InabenchmarkingstudybyEmolument.cominSeptember2017,itfoundthattwothirdsofsoftwaredevelopersworkinginbanksbelievedtheirbossesdidn’tcareabouttheworkingenvironmentorthempersonally.Forthosewe’dtraditionallycallbankersthesurveyshowedtheoppositestatistic,withtwo-thirdssayingtheywerehappywiththewaytheorganisationprioritisedtheirneeds.Thatreinforcestheanecdotalevidencethatwithinmanybanksdigitalortechnologyis

stillnotconsidered“realbanking”.Inanefforttoattracttalent,themoreinnovativebanksI’veseen

are“googlizing”theiroffices.IvisitedBancodeChilein2017andwastoldbyCOOIgnacioVerathatinterviewingstaffintheirincubatorofficeshadbeen“anessentialelementinturningaroundourabilitytoattracttalent”.

Figure6:BancodeChile’sLabEnvironmentinChilehasbeensuccessfulinattractingdesignanddevelopertalent.

In2014CapitalOneacquiredthedesignfirmAdaptivePath17.Theydidthisaspartofadeliberatecultureshift,wheredesignbecamecentraltothefuturedeliverycapabilitiesofthebank.Thisisobviouslyakeystrategyinbothattractingtalent,gettingrapiddeliverycapabilitiesandchanginganorganisation’sculture.Asacquiredtalentisinjectedintotheorganisation,theycanoftenbeseeninternallyasthenewbenchmarkinrespecttocultureandapproach.Thiscanhelp,butonlyifyourorganisationisreceptive.

Hundredsofbanksovertheyearshavestartedinnovationdepartmentsonlytoseethemwitheronthevinewhentheheadofinnovationdepartedforabettergig,orclosedthemdownbecausetheydidn’tfitthecultureofthebank.Theissuehereisn’tthattheinnovationteamdoesn’tfitthecultureofthebank,it’sthattheimmunesystemofthebankworkshardtorejectsomethingnewthatthreatenschange.Changeisperceivedasrisk,andriskisthelastthing

5.bankswanttotakeon.PrioritisethemostimpactfuldigitaljourneysandgetstartedTransformingyourentirebusinessovernightisbasicallyimpossible,butyoucanstartbuildingexperiencesthatcircumventtraditionalorganisationstructures,departmentsandtechnology.Experiencesthatdemonstratesuccessfultransformation.

BainandCompanyresearchshowedMillennialswereplacingcallstotheirbanksat1.7timestherateofcustomersaged65plus.Butthatisn’tbecauseyoungercustomerslovetalkingonthephone18.Theresearchshowedthatinmorethanhalfthoseinstancestheyhadtriedusingadigitalchannelfirstandhadfailed—whetherduetousabilityissuesorsimplythatthedigitalchanneldidnotsupportwhattheywerelookingfor.Well-designedcustomerjourneysmakegoodeconomicsense.Eachdigitalinteractionwithacustomerincursavariablecostofabout10cents,comparedwithmorethan$4foraninteractionwithahumantellerorcall-centreagent.Theincentivetogetthosecustomerjourneysworkingproperlyisstrong.Buthowdoyouprioritisethejourneysthatwillleadyourtransformationefforts?

AsimplemethodI’veusedoverthelastdecadeorsowithstrongbusinesscaseperformancehasbeenaweighted,businessimpactscoringmethodology.Youtakethekeyelementsofrevenuegeneration,customerrelationshipimpact,customerfriction,organisationcostsavings,andriskmanagementandlookforthosecustomerjourneysthattickthemostboxes.Thekeyisthatjourneysthatpositivelyaffectthebottomlineandimproveengagement,reduceattritionandincreaserevenuepercustomer,naturallyflowtothetop.Here’sanexampleIpreparedearlierfortypicalretailbankingtransformation:

Table2:Customer/BusinessImpactScoringMatrix.

Theweightedformulausedinthisexampleisasfollows:=((IF(B=“Yes”,5,0))+(IF(C=“Yes”,5,0))+(IF(D=“Yes”,5,0))+E)+(5-F)

Essentially,eachcolumnisgivenaweighting,andthejourneyswiththegreatestimpacttobothcustomerandbusinessprofitabilityrisetothetop.Theformulacouldbeadjusted,butthecurrentformulaprovidesastrongbalancebetweenbusinessobjectivesandcustomerprioritisation.Manyofabank’straditionalproductsandexperiencessimplydon’tratewellusingthismethodology,andwouldnotmakethecut.

AnexamplefromtheoppositeillustrationisaCreditCardUsageOffer—somethingthatthecardsguyswouldinevitablywantstuckinthemobileappasahighpriority.Theproblemisthatitdoesn’tsolveacustomerproblem,anditdoesn’thaveamassivelypositiveimpactinternally,either.WhereasaninstantIn-StoreCreditApprovalperformsmuchbetter,scoringalmosttwiceashighonthepotentialscore.Inmanyregardsyoucouldviewthisasthesamefundamentaloffer,butoneisexperientialandtheotherisproduct-focused.

Thisillustratesthepointonceagain:ifabankisgoingtoworkoncustomerjourneys,itshouldn’tbetojustadaptaproductdesignedforbranddistributionontonewdigitalchannels,butshouldincludethecustomerjourneysorscenariosthatwillmakethemostimpact.ApoorexampleofthisisCapitalOne’sAlexadeployment,wheretheyfocussedonpayingthecustomer’screditcardasoneofthefirst-use

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casestheydeveloped.Whyweretheytryingtoshoveaplasticcardintoavoiceexperience?Everythingaboutvoicecommercesuggestsaplasticcardwitha16digitnumberisananachronism.Thisisamissedopportunity.

Whatisthecoreutilityabankoffers,andhowbestcanthatutilitybepresentedthroughthetechnologylayerinrealtime?ThatshouldbeattheheartofgreatCXdesignineverydaybanking.

Howdoyoutake19thcenturymanagementandmeasurementpracticesandmakethemworkintheworldoftoday—theworldofSteveJobsandMarkZuckerberg?

—JasonBerns,SeniorDirectorofInnovation—UnderArmour

ResearchfromInnovativeLeaderfoundthatthevastmajorityofcompaniesdon’t even have effective metrics to measure their successful transformation.Theresearchdidshowthatbothactivitymetricsandimpactmetricswerecriticalinmeasuring the success of transformation efforts. Activitymetrics being theinputs into transformation—the number of employees involved in innovation,number of ideas generated, number of new projects started, patents filed, etc.Impact metrics were the tangible results of innovation—revenue growth, newmarketshare/entry,newproductorservicerevenue.

Here are the top five measurements that came out of that survey of 200leadersofinnovation:

RevenuegeneratedbynewproductsProjectsinthepipelineStage-gateprocess(i.e.,projectsmovingfromproofofconcepttoimplementation)P&LorfinancialimpactNumberofideasgeneratedperquarter

Ifyouwanttotransform,youshouldbemeasuringhowsuccessfulyourteamisatadapting.

SurvivalstartsatthetopWecan’tsolveproblemsbyusingthesamekindofthinkingweusedwhenwecreatedthem.

—AttributedtoAlbertEinstein

Ifyou’vemadethedecisiontosurvivethedisruptionoftechnologyandFinTech,rather than accept the slow decline into obsolescence, then youmust start bycommitting to changing the culture of the bank. You might want to be atechnologycompany—butthataddsuptoalotmorethansimplysayingyouare

a technology company, swapping out the office furniturewith bean bags, andslapping some pastel paints and whiteboards around the place. It requires acultureshift, startingat the top. It requires leaders thatbothwant to transformthebusiness,andhavetheskillstomakeithappen.

Let’sthinkaboutwhatthedataistellingus.The fastest growing financial institutions globally are either technology

companiesthatacquirecustomersatscalequicklyandcheaplyviadigitaldirectapproaches,orthoseincumbentswhoarespendingliterallybillionsofdollarsayeartoinnovateinahostofareas.FinTechsaregraduallytakingmarketshare,and while they don’t dominate the sector, their growth means they willabsolutely be a part of the future that is coming, and others are likely to getconsolidated out. It is not just happening in the acquisition arena, either.Technologies like artificial intelligence, blockchain and cloud architectures arefundamentally changing the way we build financial institutions for the 21stcentury.Whenitcomesdowntoit,technologyisnotattheheartofthemodernfinancialinstitution.It’stheheart,thebrain,thelegs,thevocalcords—heck,itiswhatweknowasbankingtoday.

Ifyoudon’thavetechnologypeopleontheboardofyourbank,andifyourCEOhasspenttheirentirecareerasabankeranddoesn’tknowaGPUfromaCPU,thencallmeacynic,butIjustdon’tthinkhe’sgoingtobetheguytoleadyouthroughthetransformationrequired.

When I see the likes of HSBC promote a CEO who has practically zerotechnologyexperienceandhasspenthisentirecareerinthebank19,I’mgoingtobet theywill probably fail to transform their business20 before it ismateriallydisrupted.HSBC’sleadershipisstillbuiltaroundacoreoftraditionalthinking,andthatisgoingtobethebiggesthurdletorapidorganisationalchange.HSBCdoeshaveaGlobalHeadofDigitalforRetailBanking,JoshBottomley,areallysolid guy. But when you look at the leadership profiles on HSBC.com21 hedoesn’tevenmakethecut,emphasisingthedisconnectbetweentheskillsneededto adapt, versus the skills needed to just continue being a 20th century bank.Sure, theGroupCOO,AndyMaguire, has technology in his portfolio, but heisn’tadedicatedtechnologist,andtechnologyiscertainlybroaderinimpactthanjustoperationalaspects.ThebesttheHSBCleadershipteamcouldofferontheir“AboutUs”pagewithregardtoatacticaltechnologistwasaHeadofFinancialCrimeRisk.That’shardlytransformational,that’sessentiallyacompliancerole.They do have a technology advisory board that meets quarterly22—but again,howisthatsupposedtomovetheshipfast?

Asanex-HSBC-er, thisdistressesmeimmensely,but it is indicativeof thecoreproblemwithbroadcorporatestatementsaboutdigitaltransformationsuch

asHSBC’s “simpler, better and faster” technologymission statement. I’m notpickingonHSBCspecifically23,I’mtryingtoillustratetheneedtogetrealaboutchange.Yousimplycan’tclaimtobetransformative,innovative,customer-firstor “a technology company”, unless you actually have leadership that gets thetechstuff.Leadershipthatcanexecuteforthe21stcentury.

Bycontrast,ifyougotoBBVA.com’scorporateleadershippage,you’llseeimmediate messaging about digital and customer experience transformation(from the chairman); you’ll see social media metrics around BBVA’s reach;you’llfindplentyofpeoplewithastrongtechnologypedigreeintheleadershiplayer;andyou’llseeahistoryofacquisitionsandpartnershipsthatwalkthetalk.Go toAntFinancial and you’ll see that the entire leadership team is based onyears of strong technology experience and competency24, starting with theExecutiveChairmanPengLei(LucyPeng).

I regularly speak at events where a CEO of a community bank or creditunionwillcomeuptomeafterwardsandsay,“Gosh,afterhearingaboutallthat,I’msogladI’mretiringnextyear.”IguessIdon’tneedtopointoutthatthisisnotactuallyasolutiontotheorganisation’simpendingdifficulties.

Yep,transformationissuperhard.Thebiggertheorganisation,theharderitis going to be to turn that ship. But just saying you are digital isn’t enough.Digital needs to be at the heart of your business, and the organisation chartdoesn’tlie.

InBank2.0 I put it thisway. I asked a simple question in the concludingchapter:“DoesyourHeadofBrancheshaveamoreseniororganisationrolethantheHeadofInternet[orDigital]?”Thatquestion,whichIaskedalmostadecadeago, is still at the very heart of your ability to adapt, but today the Head ofDigitalshouldbeseniortothebranchhead.Why?Becauseifyouaregoingtosurvive, you must recognise you are now competing against a new class ofcompetitor and every FinTechCEO, every technologymajorCEO, is also theHeadofDigitalattheirorganisation.Theanswerin2009whenIwroteBank2.0wasinmostcases“no”.Theanswertodayisstillnotmuchdifferent.

Bankingisnolongeraboutbankingcompetency.Bankingwillforeverbeatechnological pursuit from this point forward. Revenue will be largelytechnology dependentwithin just a few years. Brand, reach and scalewill betechnologydependent.Customer engagement is already95percent technologydelivery, based on daily behaviour.Your ability to attract great talent is aboutcultureandyourabilitytoleveragetechnology.ArtificialIntelligenceattheheartof your futurebusinesswon’t bebuilt byguyswho startedoff as a teller in abranch.

Youcan’tadapttotheincrediblechangesthatareoccurringinourindustry

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by simply being great at banking. That’s no longer enough. You need anunyielding focus on being embedded in your customer’s life through thetechnologytheyhaveathand,andbytransformingyourcapabilitytodeliveronthatpromise,whenandwherethecustomerneedsyou.

First-principlesthinkingmeanstheabilitytostartfromscratchandapproachthe problem in a fundamentally differentway. If you’re iterating on the samebasicbankingmodelyou’vehadfor the last30years,you justwon’tget therefastenough.

Bankingwillbeeverywhere,butonlythroughthetechnologiesthatallowittobeubiquitous—notthroughrealestateandhumans.Ifyoudon’thavetherightleadership transforming your business, if you don’t allow yourself to thinkdifferentlyaboutwhatbankingis,yourbanksimplywon’tbethere.

EndnotesSee:“OnestatisticshowshowmuchAmazoncoulddominatethefutureofretail”,BusinessInsider,KateTaylor,1Nov2007;Amazonisdrivinghalfofthegrowthinretail—Sears,Macy’sandToysRUsareallvictimsofthisshift.Source:FDICData.Seealso“Banksaregettingbigger,notsmaller”TheIndependent,12March2017.

IncludingAustralian,UK,USandGermanmajors.Source:GallopPoll“ConfidenceinInstitutions”July2017—http://news.gallup.com/poll/1597/confidence-institutions.aspx.

Amazon,AppleorAlibaba,forexample.Source:E&Y/DBSSurvey2016“TheriseofFinTechinChina”.

Source:“Thedisruptionofbanking”,TheEconomistEIU.Source:FDICStatisticsAtaGlance(30September2017figures)—Totalno.ofFDICInsuredInstitutions5,737(92percentofthattotalarecommunitybanks).

Source:AmericanBankersAssociation.Thereisonebankforaboutevery50,000citizensintheEurozone,asimilarleveltotheUS,butfarmorefragmentedthantheUK’soneper170,000peopleandJapan’salmostoneper900,000people.

Source:TheFinancialBrand.Interview,March2016,Salesforce.com—emphasisours.

TheFinanser.com.Source:“BridgingtheTechnologyGapinFinancialServicesBoardrooms”,AccentureStrategyReport2016.

SeeGoldmanSachsReport“TheAsianConsumer:ChineseMillennials”.Source:JAXEnter,“Banks‘pay33percentto50percentmore’indevelopersalaries”,March2015.

SeeTechcrunch,“DesignFirmAdaptivePathAcquiredbyCapitalOne”,2October2014.Ifyouhaveteenagechildren,you’llknowfromexperiencehowharditistogetthemtalkingonthephone.

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Seehttp://www.hsbc.com/about-hsbc/leadership/john-flint.

HSBChasstatedforthelastcoupleofyearstheywishtobe“simpler,betterandfaster”.Seehttp://www.hsbc.com/about-hsbc/leadership.

Source:BankingTech.com,FinTechFutures“HSBCtocapitaliseontechinnovationwithtechnologyadvisoryboard”;TanyaAndreasyan,18Jan2017.Well,IguessIam,tobehonest.

Seehttps://www.antfin.com/team.htm.

10 Conclusion:TheRoadmaptoBank4.0

Disruptionisn’taboutwhathappenstoyou,it’sabouthowyourespondtowhathappenstoyou.—JaySamit,authorofDisruptYou

When we talk about Bank 4.0 it is good to establish both a timeline and adefinitionforclarity:

BANK1.0:Historical,traditionalbankingcenteredaroundthebranchastheprimaryaccesspoint.StartedwiththeMedicifamilyinthe12thcentury.

BANK 2.0: The emergence of self-service banking, defined by the firstattempts to provide access outside of bank working hours. Commenced withATMmachinesandacceleratedin1995withthecommercialinternet.

BANK 3.0: Banking when and where you needed it as redefined by theemergence of the smartphone in 2007, and accelerated with a shift tomobilepayments,P2Pandchallengerbanksbuiltontopofmobile;channelagnostic.

BANK 4.0: Embedded, ubiquitous banking delivered in real-time throughthe technology layer. Dominated by real-time, contextual experiences,frictionless engagement and a smart, AI-based advice layer. Largely digitalomni-channelwithzerorequirementsforphysicaldistribution.

If we try to represent this graphically, we would show the economics ofbanking (primarily distribution and delivery mechanics) on one axis, versusfriction(incustomerexperience)ontheother.

Figure1:Embedded,ubiquitousbankingmustbefast,frictionlessandreal-time.

Tobeclear,Banks1.0,2.0and3.0allstillexisttoday.Therearebanksthatare still fundamentally Bank 1.0 in nature, operationally and in customerengagement. There are banks that still don’t have a mobile app and limitedonlinecapability—theywould fall into theBank2.0category.Themajorityofbanks still don’t offer account opening on a mobile, and thus would barelyqualify for Bank 3.0 status—sort of Bank 2.5. The number of bankswho aretrulyomni-digitaltoday,thatareattemptingtoshifttoBank4.0,numberinthedozens globally, maybe. Most will never get there, including some of thechallengerbanks,forwhatit’sworth.

The move to Bank 4.0 is punctuated by significant shifts in customerbehaviour,theemergenceofmajornon-bankcompetitorswithscalethatexceedthe reach of the biggest banks in theworld, and an entirely different skill setnecessary for success. Financial institutions that believe they can survive thisonslaughtbycontinuingtodeliverbasicbankingthroughabranchoffthebackofasignaturecardareindeedatthegreatestriskofdisruption.Ifyouareabankandwanttosurvivethistransitionoverthenext10yearsorso,youcanonlydoso by redefining your organisation, rebuilding your core delivery capability,

evolving your team, restructuring around a completely new organisation chartandbychangingfasterthanyouwouldhaveimaginedpossible.Ifyouareabanktoday you are potentially Kodak, Borders, Nokia, Motorola, Tower Records,Blockbuster, JC Penneys and Sears, Digital Equipment Corporation, Polaroid,Compaq,Borlandandtheirilk.

Technology-baseddisruptionisnotsomeanomalousthingthatisselectiveinitsfocus,thatmightjustchoosetoleavebankingintact.SinceIwroteBank2.0in2009,we’vealreadyfacedmassivechanges.

No challenger bank existed in 2009. FinTech investment in 2009was lessthanUS$2billionglobally,andin2017itexceededUS$31billion(notcountingICOs).In2009,peer-to-peerlendingaccountedforlessthan$1billionglobally;todayithas30percentmarketshare(unsecuredlending)intheUnitedStatesandis approaching US$1 trillion in total annual loan portfolios. In 2009, mobilepaymentswerebeingdebatedandApplewasyettodecidetheirstrategy;butupuntilOctober 2017China alone didUS$12 trillion inmobile payments acrosstwo non-bank networks, Tencent and Alipay. Blockchain existed as theunderlying technology behind Bitcoin, but no bank was considering thistechnology operationally in 2009; in 2018 hundreds of banks are involved inblockchain initiatives globally. In 2009 only one bank in the world offereddigitalaccountopening(Jibunbank,Japan);in2017therearehundredsofbankswho offer mobile-based account opening, with challenger banks being in themajorityasaclass.In2009,5,000Bitcoinswouldhavecostyoulessthan$30tobuy;intheclosingmomentsof2017thoseBitcoinswereworthUS$100million.Since2009, total bankbranchnumbers indevelopedeconomieshavedeclinedby8–22percent,withanaveragedeclineof1.5–2percentperyear.Since2009financial inclusion has boomed in India, sub-Saharan Africa, and elsewherearoundtheglobe,withmore thanonebillionpeoplegettingaccess toasimplestoreofvalue;virtuallynoneofthoseindividualshaveenteredfinancialservicesthroughtraditionalbranchaccess.

Little by littlewe are seeing fundamental changes acrossmultiple lines ofbusiness in financial services.Access is being redefined.Economics arebeingrewritten. Regulation is being refamed. Day-to-day behaviour has shiftedpermanently away from in-branchengagement, and revenue isgoing the sameway.Thenumberofbanksgloballyisshrinkingasconsolidationoccurs,andatthesame time thenumberof technologyandFinTechplayersofferingbankingservicesisexploding.Ifthesetrendscontinue,itmustresultinafundamentallydifferentbankingsectoremergingouttheotherend.Apermanentredefinitionofwhatabankaccountis,andwhatbankingmeansforitscustomers.

To emphasize the potential of this disruptive behaviour, let me give you

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someofmypredictionsforthe2025–2030period:By2025,thelargestdeposit-takingorganisationswillbetechnologyplayers,whethertechnologyleaderslikeAlibaba,Amazon,Google,TencentandApple(potentially),orpureplayFinTechdisruptorswhohavesimplyworkedouthowtoscaledepositsmoreefficiently.By2025,almostthreebillionunbankedwillhaveenteredthefinancialservicessystemoverthepreceding15yearswithouteverhavingsteppedfootinabranch.By2025,everydaymorepeoplewilltransactandinteractwiththeirmoneyonacomputer,smartphone,voiceandaugmentedreality,thanthosethatvisittheworld’scollectivenetworkofbranchesonanannualbasis.By2025,moremoneyadvicewillbedispensedviaartificialintelligence,algorithmsandsoftware,thantheentirecollectivenetworkofhumanadvisorsinfinancialinstitutionstoday.By2025,aroundaquarterofalldailye-commerceandmobilecommercewillbevoiceorsoftwareagentdriven,andthosesupportingvoicewillgetarevenuebumpof25–30percentcomparedtotheirnon-voiceenabledcounterparts.By2025,thebiggestretailbanksintheworldwillalmostalldeliverthemajorityoftheirrevenueviadigital.By2030,adozencountriesaroundtheworldwillbemostlycashless,includingChina’surbanpopulation,theNordics,SingaporeandAustralia.By2030,AIwillhaveaccountedforthelossofmorethan30percentoftoday’sjobsinbanking;andwhilesomeofthosejobswillbereplacedwithdeeplearningspecialists,datascientistsandsoforth,thenewjobswon’tcomeanywherenearreplacingthenumberslost.

Technologyfirst,bankingsecondThe latest news is not only that Alipay is getting into the banking game, butAmazon is as well. At Money 20/20 in Singapore in 2018, Piyush Guptaobserved that despite banks’ confidence that they have brand and networkadvantages over tech giants, these new players have access to billions ofcustomersalreadyandtheiracquisitioncostiseffectivelyzero.Thereisnobankthatcanclaimthesametoday. Ifyouaregoing tobea technologyplayer,youhavetostartwiththebasicassumptionthatyourorganisationmustchange.

Thefoundationofbankinginthe1.0erawassimplybeinggreatatbanking—goodROE,goodcreditriskpolicies,gooddistributionandnetwork,etc.Thefoundation of banking in the 4.0 era is being great at technology—full stop.BeinggreatatbankingwillactuallybeapenaltyintheBank4.0world,becausethatcomplacencycouldpreventyoufromchangingquicklyenough.IntheBank4.0 era you can survive delivering banking serviceswithout any core bankingskills(orcorebankingsystemsforthatmatter)beyondthedistributionlayer,aslongasyouhave theappropriate investments in technologyanddesign.Everytimewe’veintroducedanewtechnologylayerintotheoperatingenvironmentofbanking,we’velittlebylittleredefinedbankingitself.

When the first bank mainframe ERMA1 was introduced it led to theintroductionofbankaccountnumbersforthefirsttime.WhentheATMcame,itled to us shifting from passbooks to plastic cards.When internet and mobilecame we had to move off batch processing to real-time, straight-throughprocessingcapabilities.When socialmedia came it led to IP-based,person-to-personpaymentssystemsthatpressuredbankstochangefromtwo-to-threedayprocessingtimes,totheexpectationofreal-time(ornearreal-time)capabilities.Everymajornewleapintechnologyledtopermanentstructuralandoperationalchangesaroundthatnewtechnology.There’snorelationship,product,serviceorprocesswithinbankingthathasn’tbeenchangedbytechnologyoverthelastfewdecades,andnowevenregulationitselfisbeingtransformedbytechnology.

Figure2:Technologyleapsthathaveprogressivelyaccentuateddisruptiontothetraditionalprocessandpolicymodel.

ThekeyshiftwithBank4.0isthatthetechnologyisnolongertransformingelementsofthebank,itistransformingthewaywebankirretrievablyfromthepast.GuptaatDBSsaysbankingmustbecome“invisible”,simplyembeddedintheworldaroundusthroughtechnology—weagreewholeheartedly.

Francisco González, BBVA’s executive chairman since 2000, believes that sooner or later thegiantsoftheinternet—Amazon,Facebook,Google—willbehismainrivals.Because“thedigitalworld doesn’t allow many competitors”, in 20 years the ranks of banks worldwide could bethinnedfromthousandstodozens,whichwillneedscaletosurvive.Warinessofregulationmaydelaythee-behemoths,butnotforever.“Ifyouarenotpreparedforthisprecisemoment,andyouarenotasefficientastheyare,youaredead.”

—“BBVAreinventsitselfasadigitalbusiness”,TheEconomist,October2017

WhenBBVAidentifiesanopportunityforanewserviceorexperience,theytry to respond like a FinTechwould.After identifying an opportunity throughtheir quarterly “demodays”, threedays later a teamwill havebeen formed toexecute.Withinfourtosixweeksaprototypehasbeendeployedandtestedonasmall group of test customers: sometimes employees, sometimes willing endconsumers.BBVAthenaimsto launchthatnewserviceorexperiencewithinafew months of the prototype or proof of concept. This sort of turnaround isunheardofatmostbanks,andstillisn’tfastenoughforGonzálezandTorresatBBVA.TheyarelookingtocompetewithAmazon,FacebookandGoogle,afterall.

Butrememberatthecoreofthisisasimpleextrapolationofanoverarchingtrend. Technology is increasingly about these things—instant gratification,ultimate personalisation, frictionless engagement and margins based on scale.Theinternetwasthestartandwetookvaluechainsandcommerceprocessesandsimplifiedthemfortheweb.Mobilehadsmallerscreenswithrestrictedcontentdelivery capabilities, sowe need simpler applications, faster fulfilment. Voicesimplifies thisagain—you’renotgoing to readoutyourcredit cardnumber toAlexabeforeitletsyoubuysomethingonAmazon.Everystepofthewaywe’vebeen removing friction, and the economics of the leading businesses has beenframedbydigitaldelivery. It iswhyIkeepemphasizingbrancheconomicsarebeingunderminedbysimplechangeslikedigitalonboarding,andtheability toscaledigitalbanksmuchfaster.

It isnot that Ihatebranches—it is just that in the faceofever-simplifyingdigital delivery design paradigms, branches become increasingly inefficient atcreatingscaleandmargin.

Technologyisinevitablyleadingustoatimewherefinancialservicesmustbefrictionless.TheheavyliftingofKYC,IDV,complianceandriskwillalljustbecome algorithms and data collection challenges—not processes, forms andlegalrulesthatrequireinterpretation.Itwillallbecode.Thus,ifyourbusinessisnotencoded, it’sslower.AsElonMusksaid, thereason theyput robotson thefactoryfloorinsteadofhumansissimple—humansrequireTeslatoslowdowntheproductionprocessto“humanspeed”.

Bank1.0ishumanspeed.Bank4.0ismachinespeed.Now:doyouthinkyou

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arereadyasabanktotacklethistechnology-firstfuture?

TheBank4.0“digitization”scorecardIfyouwanttoknowhowcloseyouaretobecomingaBank4.0player,usethequestionsbelowtoscoreyourself:

Firstprinciplesisyourmantra—Yourorganisationdoesn’tworkoffconventionalwisdom,doesn’titerateofftheanalogyoftheexistingbankingbusiness.Frankly,you’repreparedtoburnitalltothegroundandstartagain,becauseyourealizethewaybankingworkstodaybasedonasystemthatis700yearsoldisn’tthewayit’sgoingtowork20yearsfromnow.Youareexcitedtoreimaginebankingfromscratch.AnytraditionaloperationsaretheretoprovideenoughprofitorworkingcapitaltotransformintoaBank4.0future.Youarewillingtosacrificequarterlyreturnstosupportanewinnovationinitiative,andyou’veconvincedyourboardtogetonboard.Ifyou’veeverpulledbudgetfromanewdigitalinitiativesoyoucanmakeyourquarterlynumbers,youaren’tadigitalbank.Ifyouhaveeverheardsomeoneintheexecutiveteamusethephrase“that’snothowwedobanking”orsimilar—youaren’ta4.0bank.AdigitalCEO—EitheratechnologygeekthathasrisenthroughtherankstobeaCEO,oraCEOthathashada“cometoJesus/FinTech”momentandhastoldtheentirebanktheirmissionistobedigital,andcanspeakwithauthorityontechnologieslikeAIandvoice.IfyourCEOhasn’tgivenyourbusinessamissiontobeadigitalplayer,youwon’ttransitiontoBank4.0.Digitalisnotadepartment,channelorseparatecompetency,itissimplythejobofthebank,andtheCEOistheheadofdigitalwithagreatteambehindhimthatisfullycommitted.Youcanhavesomespecialisedcompetenciesunderthis,butifyouhaveaheadofdigitalthatreportstotheexecutiveteam,thenyouaren’tadigitalbank;youareatraditionalbankwithsomedigitalcompetency.AppleandAmazondon’thaveheadsofdigital—TimCookandJeffBezosaretheheadsofdigital.Legacytechnologyandarchitectureisn’taconstraint—Areal-timebankingcoreorstrongmiddlewarewiththeabilitytocreateanyproductinstanceorserviceexperiencefromyourdigitalplatforminreal-time,andtheabilitytohandlereal-timesettlementsonpaymentsacrossanyplatform,isagiven.KeepinmindthatAmazon,AntFinancial,Tencentandtheirilkdon’tneedacoresystemtodotheir

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versionofbanking,soyou’llthinkthesameway.Essentially,youarebuildingasetoftechnologyplatformcapabilitiestodeliverexperienceswhenandwhereyourcustomerneedsthem—ifthecurrenttechnologydoesn’tallowyoutodoit,you’lljustworkaroundthoseconstraints.Cloudsaren’tacomingstorm—Youthinkofcloudlikeyoudoanyotherpieceoftechnologyorresourcesavailable:ifithelpsyouexecutemoreefficientlyorgivesyouaccesstobettercapabilities,you’llembraceit.Youdon’tneedtohaveallyourtechnologyin-houseoron-premises,becauseaninternalfirewallissimplynoguaranteeofthebesttechnologyorbestsecurity.Ifyoudon’tcurrentlyhaveasignificantexperiencedeliveredviathecloud,youaren’tadigitalbank.Experiencedesignisacorecompetency—Youhaveateamthatisconstantlyprototypingandrevisitingeveryaspectofcustomerinteraction,tryingtonotjustoptimiseitbuttorevolutioniseit.Buildingreal-timeexperiencesisthefastestgrowingbudgetlineitemindigital,saveformaybeacoresystemreplacementandreal-timepaymentsretooling;theabilitytocreateexperiencesforcustomersrapidly,indaysorweeks,isessential.Ifyoudon’thaveanin-housedesignteam,youaren’tadigitalbank.IfyourCTOhasneverdoneawireframesketchonawhiteboardorpieceofpapertoexplainwherethebusinessneedstogo,youaren’tadigitalbank.Ifyourtraditionalmarketingbudgetexceedsdigitaldirect,youaredefinitelynotadigitalbank.Ifaproductdepartmentorheadcanoverrideexperiencedesign,you’renotadigitalbank.Datascienceandmachinelearningareyournewcore—Theabilitytoleverageoffofyourdata,andtheabilitytocapturemoredataandtocrunchthatthroughalgorithmstoidentifynewopportunities,newsegmentsandnewbehaviours,hasenergizedthebusiness.Thebiggestquestionremains:howquicklyyoucanoperationalizethiscapability,notif,butwhen.Ifyoudon’thaveaHeadofDataScienceorastrongbudgetforAI,youaren’tadigitalbank.Ifyoudon’tknowatleastahandfulofAIcompaniesworkinginthespace,youaren’tadigitalbank.Regulationsareneveranexcuse—Tobeadigitalbankyouwillneveruseregulationasanexcuse.Here’sthetest:inthelastsixmonths,you’vegonetotheregulatorwithatechnologyorexperiencepilotthatdoesn’tfitintocurrentregulationstogetapprovalto

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proceed.Ifyouhaven’tdonethis,youaren’tadigitalbank.Ifyourcomplianceteamisallowedtokillnewexperienceinitiatives,newreal-timecapabilitiesorattemptsatreducingfrictionforthecustomer,youaren’tadigitalbank.Yourcomplianceteamthinksofthemselvesasconsultantstohelpnavigatethechangingregulatoryenvironmentsoyoucangetstuffdone.Youarepartneringwith,investingin,oracquiringFinTechs—Thesmartdigitalbanksknowthebiggertheyget,theharderitistoinnovatepurelyasafunctionofsize.Sothesmarterbanksarefindingwaystolearnfasterthroughpartnershipswithveryagileteamsthatarethinkingdifferentlyabouttheproblem.Ifyou’veruna“hackathon”butdon’tfundaFinTechstartup,youaren’tadigitalbank.Ifyouhaveaprocurementteamthatdelugesasmall20personstartupwith80pagesoflegalagreementsthatwereadaptedfromyourlastOracleservicesagreementinsteadofstreamliningthispartnership,youaren’tadigitalbank.Youdon’thavetobuildityourself—Oftenwhenitcomestonewtechnologylikemobile,voiceorAIcapability,you’llhavebanktechnologyteamsspendmillionsofdollarsjusttohavecompletecontrolovertheprocessandkeepitallin-house.Digitalbanksvaluespeedofexecutionoverowningthetech,andsoareagnosticastowhetheritisdevelopedinternallyorjustaccessedviaplugginginapartner’stechnology.Bank4.0playersrealisethatFinTechsandtheirilkaregoingtobefasterandcheaperthanbuildingitinternallynineoutof10times,andtheirorganisationisbuilttoengageassuch.Yourbankisopen—Whethermandatedviaregulationorunderstandingthatyourbankisnolongeranisland,butaplatformofservices,isliberatinginrespecttothepotentialopportunitiesitpresents.YoualreadyhavethousandsofAPIsthatallowaccesstodataandcorecapabilitiesforexternalpartieswhowanttoincorporateyourbankplatformintotheircustomerexperiences.WhetheritissomeonelikeUberopeningbankaccountsfornewdrivers,Amazonofferingloanstosmallbusinessmerchants,oraggregatorsandplatformslikeMint.Youhavetechnologycompetencyontheboardandthroughouttheexecutiveteam—Mobile,voiceandaugmentedrealitywillallbecorecompetenciesoverthenext10years,butthebankingsectorissignificantlybehindmostotherindustriesintermsofinnovativeapproaches(notnecessarilyinadoptionthough),sohavinganon-bank

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technologypersonontheboardtolevelboardexpectationsisreallykey.Ifyourexecutiveteamonthewebsitedoesn’tincludeacoupleoftechnologyveterans,youaren’tadigitalbank.Youarebranch,revenueandrelationshipagnostic—Youarewellpastarguingthatpeoplelovebranches.Youthinkyou’llkeepthemifyoucancontinuetojustifyaright-sizednetwork(muchsmallernumbersandsquarefootage)basedoneconomics,butyouarealreadychannelandrevenueagnostic.Whateverchannelthecustomeruses,youwillsupport.Ifyoucannotsignupacustomerforabankaccountin-app,youarenotadigitalbank.Ifyoustillrequireasignatureforanyproductorserviceyouofferyourcustomers,youarenotadigitalbank—noFinTechusessignaturestoonboardcustomers,period.Ifyoudon’tdomorethan50percentofyourrevenueinretailviadigital,youarenotadigitalbank.Everyone’sjobisdigital—Everyoneispassionateaboutbuildinggreatexperiencesforcustomersandeveryonebelievesthatthebestwaytodothatisdigital,not“futurebranches”orothersuchsilliness.Ifyouhaveaseniorexecutivethathasshotdownadigitalinitiativeinfavourofthestatusquo,youarenotadigitalbank.Ifyourannualdigitalbudgetdoesn’texceedyourreal-estatebudget,youarenotadigitalbank.Ifatleast30percentofyourstaffdon’tknowhowtodosomebasicsortofcoding,youarenotadigitalbank.Technologyisnotachannel—InaBank4.0worldmobile,voice,augmentedrealityandinternetaren’tchannels,theyaresimplytechnologiesembeddedinacustomer’slife.Theproblemwithtalkingaboutomni-channel,opti-channelormulti-channelapproachesistheyareallbasedonthecorebeliefthatbranchbankingisthecorebankingbehaviour,andotherchannelsare“addons”tothatcoredistributionchannel.Thisthinkingreinforcesiterationsoffofthebranchmodelofbanking.ABank4.0CEOlooksatthecoreutilityofthebankandfiguresoutthemostseamless,frictionlesswaytogetthatcapabilitytoacustomerwhenandwheretheyneedit.They’renottakingbranchproducts,applicationformsandprocessesandtryingtoretro-fitthemformobileorweb.Ifyouthinkyouneedaplasticcardtodopayments,you’renotadigitalbank.Ifyoutalkaboutyourmulti-channelcapability,you’renotadigitalbank.Ifyoutalkaboutthebenefitsofseeingahumanin-branchversusadigitalengagement,you’renotadigitalbank.

Everyonewantstobeadigitalbank;therealityisveryfeware.Attheheart

of theBank4.0 shift is a fundamental change that erodes thevalueof currentdistributionchannelsandtheproductsweputthroughthosechannels.

ExperiencenotproductsWhat’sitgoingtotaketosurvive?That’sthebilliondollarquestion,butitstartswiththeobvious:tocompeteagainsttechnology-firstplayersyouneedtoevolveinto a technology-first state. But technology is not the end goal—compellingembedded banking experiences are. As a platform, your bank needs to beintegratedintoitscustomer’sliveswhenandwheretheyneeditthemost—thisiswherethetechnologyistakingus.Understandingthattechnologymeansthey’llneverhaveto“cometothebank”everagain.

CapitalOne,BBVA,DBS,USAAandothershaveall said theywant tobetechnology companies or leading digital banks; but if that’s the case, gettingfromwhere they are today to becoming an organisation that is experience-ledand technology-first will require a substantial organisational makeover. Theresources required towin in this environment have almost nothing to dowithtraditionalbanking.

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Figure3:ThefoundationofaBank4.0-readyorganisation.

Throughout the preceding chapters we’ve discussed many aspects of theBank4.0revolution—thekeyelementsforsuccessaresummarisedhere:

Experiences,notproducts—TheonlywaytowinintheBank4.0worldistorethinktheentireproductparadigmanddelivertheutilityofyourbankplatformembeddedintopeople’slives.Theprinciplehereissimple:technologieslikemobile,voiceandaugmentedrealityareallattackingfriction—theultimatefrictionlessengagementinbankingdoesn’tlooklikeasavingsaccountpushedasanofferonamobilephone,it’ssimplyanexperiencethathelpsyousave.Thesameappliestoeveryotheraspectofbanking.IfyouaretryingtogetsomeonetopaytheircreditcardviaAlexa,you’vemissedthepointentirely.

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Stophiringbankers—We’vesaiditbefore,andwe’llsayitagain,youneedtoattractinnovativetalentthatunderstandsdeeptechnologieslikevoice,machinelearning,blockchain,cloudintegration,biometricsandexperiencedesign.Bankingexperienceisalegacythatyoudon’twantinafirstprinciplesreimaginingofday-to-dayfinancialservices.Dataisthenewoil—The“bank”ofthefuturewillbedrivenondata,butnotthetransactionaldataorcreditreferencedatayouhavetoday;thefutureisaboutdatathatprovidescontextfordeliveryofbankutility,inreal-time.Where,when,why,how?Dataisthefueltopowerartificialintelligence,adviceandseamlessengagement.Withoutanorganisation-widedatastrategy,youjusthavelegacysilosthatdon’tknowyourcustomers.Legacyisn’tanexcuse—Legacycoresystemarchitecturecanneverbeanexcusefornotexecutingacompellingexperiencewithacustomer.Ifyoursystemsenforceaprocessthatoriginatedinthebranchandhasbeengraduallyadaptedtodigital,thenyouwon’tgettoBank4.0status.Youneedtohaveateamthatwillaggressivelyadoptmiddleware,cloudandFinTechsolutionstoplugthegapswherevertheyappear.Progressivelyovertimeyou’llbuildanewstackthatreliesonlyonthecoreforgeneralledger-typeoperations,andmoreandmoredeliverycapabilitywillshifttomiddleandengagementlayers.AgilityisatthecoreofBank4.0architecture.AI,ofcourse—Acentralshifttowherethebankfitsintheworldwillbethereshapingof“advice”.Todaywerelyonhumansface-to-facetoadviseclientsandcustomers,butinthefutureadvicethattranslatestoareal-timeexperiencewillbeincreasinglyAI-driven.Asmachineslearnaboutyourbehaviour,riskandthebesttoolstosolveyourproblems,thesewillrespondtochangingconditionsastheyoccur.AIwillbeatthecoreofaparadigmshiftinbankingadvice,deliveredcontextuallythroughthetechnologylayer.Don’ttrythisathome—KeytoagilityisrecognizingthatifyoutrytoreplicatewhataFinTechhasalreadydoneyou’llburnacoupleofyears—and10timesmoreincosts—thanifyousimplylicensedthetechnologythatanexternalteamhasalreadydeveloped.Asmoreandmoretechgetspluggedin,banksandFinTechswillbecomeveryadeptatdeployingnewcapabilitiesveryquicklythroughAPIsandcommoncloudlayers.Don’tforgetthecorereasonbehindthisisnotjustthatthesepartnershipswillbefaster

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andcheaperthantraditionalin-houseefforts,butthatFinTechswillbemorelikelytousefirst-principlesthinkingandtotakeanapproachthatiscounter-intuitiveforbanksiteratingonbranchmodels.Openthekimono,don’tblocktheblockchain—DespitethecurrentfuroreoverFacebookdatasharingandEquifaxdatabreaches,therealityisthattheworldrunsincreasinglyondata.Theobjectivehereisnottostopdatasharing,buttobringasystemofauditabilityandpermissionstosharingdataeffectivelyandsecurely.Thisiswhereopenbanking,dataprivacyregulations,blockchainandtheroleofthenewdatagatekeepersarecriticalinnavigatingthenextfewyears.IfyouwanttobeabletoaskSiriwhetheryoucanaffordtogooutfordinnertonight,oraskAlexaifyoucanaffordthatnewflat-panelvideowallthatMartyMcFlywouldbeproudof—asaconsumeryouwillneedtogiveaccesstothedatathatdrivesthatcontextualadvice,andyou’regoingtowantmorethanthehopethatAppleandAmazondealwiththatdataappropriately.Inthisworldwhereresponsivenesstodatais80percentofyourcustomerrelationships,ifyouaren’tpluggedintoadatacooperativethatenablessafecollaboration,thenyouareadataislandthatisincreasinglyirrelevant.Bankstodayaredataislands.Tomorrow’sBank4.0won’tevendoidentitycollectionastheydotoday;they’llsimplyverifyyouridentityagainstaknownprofileavailableonablockchain.Otherwisethey’llbedisadvantaged.

Look back through this list of core competencies and you’ll see almostnothing that would be seen as typical banking capabilities. That’s because Ialready assume as an incumbent bank you know how to do “bank”—but youhave amassive leap to be able to competewithAmazon,Alipay and the topchallenger banks like N26, Monzo, Tandem, WeBank, Simple, Moven andothers.Theseorganisationsaren’tinvestinginbecomingbankslikethoseoftheBank1.0,2.0or3.0era—they’re investing in technology that transformswhatwecallbankingintosomethingnew.Wecan’texpectthisinnovationtoplateauoverthenextfewyears—ifanything,innovationwillheatup.

Remember that there are only two innovation paths available to financialservices:eitheriterateonthebranchmodelofbankingorrevolutionizethroughfirst principles thinking. The revolution in banking isn’t happening viaredesigning the branch or simply retrofitting products we used to sell in thebranch to new channels like voice; it is happening in radically evolving

1.2.3.4.

engagement, distribution and relevance. Amazon and Alibaba have vastlysuperior data with which to understand the relationship of consumers to theirmoney;theiracquisitioncostismuchclosertozerothanabankwilleverbe;anddespite assurances of the leading banks of their continued relevance asgovernment-licensedinstitutions,theabilitytoconnectwithacustomerin2025won’tbebasedonacharter—itwillbebasedondata.

OrganisationalimpactTheorgchartischangingtoo.Organisationofthebankwillcentrearoundfourkeycompetencies:

CustomerexperienceordeliveryexecutionBusinessoperationsTechnologyoperationsBankingcompetency

Figure4:TheBank4.0organisationfocusesonfrictionless,agiledeliveryforrevenueandrelationships.

IntheBank4.0organisation,bankingisnotthedefiningcharacteristicoftheorganisation function, unusually enough. The onlyway the core utility of thebankgetsdeliveredisthroughexecutioncapability.Revenueandrelationshiparedriven by the ability to reduce that core utility down to the simplest, mostfrictionless experiences possible. Wet signatures, compliance processes, andproductfeatureshavegivenwaytocode.Creditriskprocesseshavegivenwaytobehaviouraldata.Channelshavegivenwaytotriggers,contextandbehaviour,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 budgetbattles and defining product structures. Mortgage, credit card and CASAfacilities are all gone, the products associated with those departments

transformed into experiences that are significantly more compelling andactionable, without adapting a paper application form from a branch into adigital application. If your organisation chart is dominated by product teamsfighting forbudget,howareyougoing tobecomeexperience firstbased?Youcan’t. Remember some of the key illustrations in Chapter 4. Credit card usecasescanbemuchmoreeffectivelyinstantiatedthroughtechnologyinreal-time,without plastic—for example, getting cash to buy groceries when you’re inWholeFoodsandrealizeyoursalaryhasn’thityouraccount;orwantingtobuythatnewiPhonebutyoucan’tafforditwithoutcredit.Theanswerisn’tapplyingforacard,it’sapplyingforcredit—anexperiencethatbyitsnaturewillredefinethewayweorganisethebusiness.

Thecreditcarddepartmentgiveswaytoteamsthatcansurfacetheutilityofcreditcontextuallywhereitmakesthemostsense.Sure,youneedcreditaccess;but no, you don’t need plastic, you don’t need to apply months or weeks inadvance—you just need the core credit capability surfaced through thetechnologylayer.

Again, the ability to partner brings an agility that is absent in the vastmajorityofbankstoday:wherenewITprojectsarenumberedinyears,notdays;whereprocurementpushesvendorsthroughlegalhoopsthatwouldputTrump’slegal team to shame; where legacy systems, legacy process and complianceroadblocks challenge the sanity and resolve of themost ardent innovators.AnagilebankneedstomovemuchfasterthantheorgchartofaBank1.0–3.0canhandle.

Thekeymessage is that this isaboutcompetingwithTechFinandFinTechplayersforrevenueandrelationships.Productsdon’tcreaterelationshipsortrust.Yourabilitytodeliverdoes.

Ascustomerswe’vejustgotusedtothefrictionandhoopsthatbanksputusthrough.AssoonasAntFinancial,Tencent,AmazonandApplestartedtoshowus a better way, the benchmark shifted. But the economics of bankingfundamentally changed too, because Amazon and Alibaba can both acquirecustomersfordimesonthedollar,comparedtothe$200–350percustomerforabasicchequeaccountrelationshipintheUS,forexample.TheBATs,FAANGs,andGAFAsallhaveaccesstohundredsofmillionsofcustomersandbankingisjust another service theycandeliver to their alreadywillingcustomerbase. Inthisbanksareatadistinctdisadvantage.

RegTechandrethinkingmacro-competivenessWhether RegTech, “SupTech” (Supervisory Tech), data residency, AML

monitoring,financialcrimeorsimplycompliancewiththelawsoftheland,theregulation of financial services is set for a seismic realignment as customerbehaviour evolves. Regulators are going to have to change even faster thanbankstoremainrelevant.Wecanalreadyseethebattlegroundforminggloballyaround things like FinTech charters, sandboxes, blockchain and crypto, etc. Ifyou’reinamarketthat isresistingthesethings, likeintheUS,youcanexpecttwothingstohappen:firstly,SiliconValleyandSiliconAlleywillcontinuetotryto find workarounds that you’ll have to constantly swat out; secondly, yourglobalfinancialcentreswillstarttolooklikethat70sstationwagonthatChevyChasedroveinNationalLampoon’sVacation.

Letmemakeonepredictionoverthenext10years:Ipredictthatsomewhere,acompetentdigitalregulatorwilldecidethatthere’snoreasonwhycustomersofa bank need to be residents of a specific geography, they just need to beadequatelyidentified.Oncethathappens,jurisdictionsandfinancialcentreswillnotjustcompeteforventurecapitaldollarsandtalent,they’llstarttoattempttobe truly global centres for bankingwhere a digital value store for a customerdoesn’t need to be tied to where you live. Following that, every progressivejurisdictionintheworldwillrealizetheyneedtocompeteforopen-valuestore,paymentsandcreditaccess.Estoniaalreadystarteddownthisroutewithdigitalcitizenship,butit’llbefareasiertoallowdigitalKYCthatisborderless.Itwillstart with data and investment—data residency will be the battlefield afterventurecapitalinvestmentinFinTechlevelsout.

Atitscore,however,thekey“firstprinciples”shiftisthatregulatedmarketswillbebasedonregulationencodednotjustinlaw,butincomputercode.Thatrequiresacompletereskillingofregulatorybodies.ItalsomeansthattheabilitytorespondtoextremelyagileFinTechplatformsandplayersmeanshardcodingprocessandpoliciesreducescompetitiveness.Thisinturnmeansthatregulatorsincreasinglywill shift to supervisory technology, rather than legal frameworksthatareinflexible.

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

DeployingcapitalforchangeIn all of this dynamic change, one thing will become increasingly clear: theability to competewill hingeon efficient resource allocation.Whenyou’re anincumbent,youhave to juggleservicingexisting legacycustomerswho lagonthe technology, keeping those old legacy systems running long enough tosurvive,andmakingyourquarterlynumberssoyourstockpricedoesn’ttank.

AFinTechdoesn’thavetoworryaboutthosethings.Theychoosethemostdigitalsavvycustomers, theydon’thavelegacyprocessesorsystems,andtheyhave investors more concerned about their ability to scale than profitability.LookatAmazon,theydidn’treallystartmakingbigprofitsuntilthey’dbeeninbusiness for a good 10 years. Incumbent banks can’t commit to 10 years oflossestorebuild.FinTechsjustneedtoworryaboutraisingthenextround,andthatcomesdowntoscaleandgrowth,notprofitability.

In respects to innovation, however, this is where FinTechs have cleareconomicadvantages.Theirsmallerteams,lackoflegacy,thelatesttechnologystackandtheirgeneralwillingnesstobreakwithconventionsmeanthattheycandeploy capital far more efficiently to create innovative customer experiences.Largeincumbentbankswillneverbeabletogetthesamebangfortheirbuckasthosesmall,agile,firstprinciplesteams.

Ultimately this will lead to parings of FinTech, technology players andincumbentbanks.Bankswhorefusetopartnerwiththesemoreefficientplayerswillfinditeffectingtheirbottomlineandspeedtomarketincreasingly,andthiswill be under the microscope of market analysts. It’s the same reason whymarkets will, over time, start to discount banks who are reliant on branchnetworks for customer access—simply because challenger banks willconsistentlydemonstratemuchcheaperacquisitioncosts,andthustheabilitytoscaleandtakemarketshareinawaythatcan’tbedefendedbybranchnetworks.

Figure5:TheBank4.0Roadmap.

Putallthistogetherandthefutureissuperexciting—butsuperdisruptiveforthosethatavoidrapidtransformation.

TheBank4.0roadmapThe chart opposite represents the milestones we’ve seen in the Bank 4.0

transitionthusfar,andthelikelymilestoneswe’llseeoverthenextdecadeaswemovetowardsembedded,ubiquitousbanking.

AtthecoreoftheBank4.0worldwillbeasimple,dramaticchange.Morepeoplewillbegettingaccess toabasicbankingserviceorvaluestore throughtheirmobilephone than throughabranch.By2025,mostpeoplewill thinkofsome device-based value store as their bank account, rather than a physicalartifact—suchasachequebookordebitcard—theyhaddeliveredbyabank.

Morecritically,thefoundationalelementsoftheBank1.0worldwillrapidlystarttodeclineinimportanceofdelivery.Branches,agentsandbrokersbasedoninformation asymmetry will give way to contextual, behavioural offeringstailoredtoyourpersonalworldinawaythatthetraditionalfinancialinstitutioncouldneverdeliverviaa face-to-faceexperience.Manywilldeny thisshiftupuntiltheverymomenttheyrealizeit’stoolate.

ConclusionBlockbuster,Borders,Kodak, and their ilk have taught us one thing about thescale of disruption that we’re seeing in financial services. Simply, that noindustryisimmune,andnooneadmitstheyarebeingdisrupteduntiltheyhavetofileforchapter11.

It will be the same in the Bank 4.0 space. For many CEOs and boardmembersthey’llbehopingthattheycanretirebeforetheorganisationhastogothrough these radical changes.But putting these decisions off only guaranteesthatthedisruptionwillbemoreimpactfulwhenithits.

AtthecoreofBank4.0isaredefiningofhowfinancialservicesfitsintothelives of the consumers, businesses and organisations that use those services.Technology is inevitably redefining that and in doing so is not just reducingfriction and making delivery more seamless, it’s finding ways to reframefinancialservices.

When we look at major technology leaps that changed entire industries,entire economies and theway societyworks, the biggest innovations occurredthrough first-principles thinking and design. The printing press moving fromhandwritten copies to mass production; horses and steam-driven locomotivesrestrictedtodesignatedtracks,toautomobilesthatdidn’trequirejobberstocomeandcollectthewastedepositsleftbythosehorsesoncitystreets;factoriesthatmovedfromhandcrafteditemswithlimitedscale,toproductionlinesthatcoulddailychurnoutproductsbythethousands.

SpaceX,whichinjust14yearsreducedthecosttoorbitEarthby95percentcompared to other commercial rocket manufactures, and NASA’s own efforts

over50longyearsofgradualiterationanddevelopmentofthesametechnology.An iPhone that bankruptedNokia’s andMotorola’s phonedivision and set thebenchmarkforeverysmartphonemadeafter it—andwhichmateriallychangedthewaywebehavedandresettheindustrysothatAppledominatedfornearlyadecadeafterthisflagshipdevice.

First-principlesthinkingnotonlycreatesrapidinnovation,butalsorewritesthe rulesgoverning the industry’s economics andmarketdynamics. It changesthe baseline of how society operates around the core utility they’ve innovatedon.RightnowweseestrongevidencethatthelikesofAlipay,TencentWeChat,M-Pesa, thechallengerbanksof theworldandothersareallusingelementsoffirst-principles thinking to start from scratch and deliver banking moreefficientlyatscale.

Letmeaskyou this simplequestion: consider everythingwe’vediscussed,technologies likeAI,voice-smartassistants,digitalonboarding, robo-processesandinvestment,behaviouralexperiencedesign,andthelike.Ifyouwerestartingfromscratchtodaybuildingabankfromthegroundup,wouldyoureallyrequirecustomers tovisit abuilding, signapieceofpaper,wait togetdelivered theirplasticdebitcardorchequebook togetabankaccount?Orwouldyoubuild itdifferently?

We already know the answer.No challenger bank in theworld is buildingbranches.Notechgiantrequiresawetsignatureonanapplicationformtolendyou money or help you save. The answer is clear—you’d definitely build itdifferently.Sowhyareyoustilldoing it theBank1.0wayforabasicaccountoffering?

Thefocusnowisonsurfacingcorebankingutility inreal-time,notputtingproducts on new channels. Bank platforms of the next 10 years will bedifferentiated through innovative use of technology, experience design,leveragingoffnetworkeffectandcreativewaystotapintocustomerbehaviour.

Bank 4.0 is a fundamental paradigm shift in delivering banking services,embedded into the lives of customers when and where they need those sameservices.Bank4.0isabouttheemergenceofbankingthatiseverywherethroughubiquitous technology capabilities. Advice at scale through AI; revenue andrelationshipbasedoninstantservicecapability;bankaccountsthathelpyousaveand don’t reward you for spending; Millennials that reject credit, and seeksimplyananswertotheirproblemorquestion.

Moneythatisn’tpaper-based.Revenuethatisn’tpaper-based.Relationshipsthatarenotpeople-based.Bankingeverywhere,butneveratabank.

The biggest “bank” in the world at the end of next decade will bephenomenalat technologydelivery.The functionsof thebusinesswillbebuilt

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around delivery, and not products—those business units will be utility- orexperience-based. The biggest banks and financial institutions will havephenomenal reach and scale, rapidly based on either being embedded in atechnologyyouuseeverydayorinnetworksthatenablenetworkeffect.

Bytheendofthenextdecadethelargest“bank”intheworldwillhavecloseto three billion customers in 100 countries, and be worth almost one trilliondollars.I’mmakingabetthat“bank”willbeAntFinancialandin2025itwillalreadyhavesurpassedICBC,thelargestbankintheworldtoday,inrespecttocustomer numbers, assets, deposits and market capitalization. By 2025 youwon’tbecompetingagainstotherbanks,you’llbecompetingagainsttechnologyplayers likeAntFinancial andAmazon. Ifyou’re still competingas abank, itwillbeliketakingontheseguysblindfolded.

Things just got real—if you’re not running fast and changing everythingfromthegroundup,you’reprobablygotatoughfewyearsahead.

Forme,thismakesbankingexciting,cool,dynamicandinteresting.Ifyou’reariskadversebankerthatseesthislevelofchangeasafundamentalthreat,youshouldstartlookingforanotherjob.MaybegoworkforKodakorBlockbuster…

Thanksforreading,andthanksforbeingapartofthedialog.Ihopeyouarereadyforwhatcomesnext,becauseit’scomingwhetheryou’rereadyornot.

Welcometothefuture—welcometoBank4.0.

EndnotesElectronicRecordingMachineforAccounting(BofAandMIT1953).

Glossary

ACH:AutomatedClearingHouse.

AdoptionRate:Howquicklyittakesnewtechnologiestobeadoptedbythepublicatlarge.

AML:Anti-MoneyLaundering—theeffortsthroughlegislation,regulationandthroughsystemstotrack,identifyandstopthelaunderingofillicitfundsintothemainstreambankingsystem.

Android:AnopenmobilephoneplatformdevelopedbyGoogleand,later,theOpenHandsetAlliance.Itconsistsoftheoperatingsystem(onwhicheverythingruns),themiddleware(allowingapplicationstotalktoanetworkandtooneanother),andtheapplications(theactualprogramsthatthephoneswillrun).

AOs:AlgorithmicOperations.

API:ApplicationProgramInterface.App:Shortforapplication—aprogramorpieceofsoftware,especiallyasdownloadedbyausertoamobiledevice.

AppPhone:Aphonethatprovidesopenapplicationsupportnotlimitedtothephonehandset,manufacturer’soperatingsystemandapplications;mostcommoninstancesaretheiPhone,DroidandNexusOne.

AugmentedReality(AR):Theoverlayingofdigitaldataontherealworld.

Avatar:Acomputeruser’srepresentationofhimself/herself,oralterego,foruseoncomputersystems.

B2B:Business-to-Business—asinintraorganisationalcommunication,collaborationandcommerce;normallyelectronic,andusuallyusingwebsitesand/orwebservices.

BaselIIandIII:ThesecondandthirdoftheBaselAccords,whicharerecommendationsonbankinglawsandregulationsissuedbytheBaselCommitteeonBankingSupervision.

BigData:Datasetsthesizesofwhicharebeyondtheabilityofcommonlyusedsoftwaretoolstocapture,manage,andprocesswithinatolerableelapsedtime.Bigdatasizesareaconstantlymovingtarget,andasof2012,rangefromafewdozenterabytestomanypetabytesofdatainasingledataset.

Bitcoin:AtypeofP2Pdigitalcurrency.

Blog:Acontractionoftheterm“weblog”—atypeofwebsiteusuallymaintainedbyanindividualwithregularentriesofcommentary,descriptionsofevents,orothermaterialsuchasgraphicsorvideo.

BPO:BusinessProcessOutsourcing—thepracticeofoutsourcingsomeorallofthebusiness’sback-officeprocessestoanexternalcompanyorserviceprovider;commonwithcallcentresandITsupport.

BPR:BusinessProcessRe-engineering—re-engineeringbusinessprocessestoeitherreducecostsorimprovetheflowofaprocessforcustomers.

CapEx:CapitalExpense.

CES:ConsumerElectronicsShow.

Churn:Thisreferstocustomersmovingfromaserviceproviderwithinonespecificproductcategorytoanother,basedonprice,valueorsomeotherfactor.

CLID:CallerLineIdentification—asystemthatidentifiesacustomerbasedonthephonenumbertheyusetocallaserviceprovider.

Cloudcomputing:Anemergingcomputingtechnologythatusestheinternetandcentralremoteserverstomaintaindataandapplications;playersincludeDropBox,YouSendItandFlickr.

CPM:Costperimpression;inonlineadvertising,itrelatestocostper(thousand)impressions.

CRM:CustomerRelationshipManagement;sometimesCreditRiskManagement.

Cross-Selling:Amethodoftargetingandsellingnewproductstoanexistingcustomer.

Crowdsourcing:Tappingintothecollectiveintelligenceofthepublicatlargetocompletebusiness-relatedtasksthatacompanywouldnormallyeitherperformitselforoutsourcetoathird-partyprovider.Itenablesmanagerstoexpandthesizeoftheirtalentpoolwhilealsogainingdeeperinsightintowhatcustomersreallywant.

CSR:CustomerServiceRepresentative—staffwhoworkwithinthecallcentretoassistcustomerswithenquiries.

CTI:Computer-TelephonyIntegration/Interface—asystemthatintegratestelephonesystemswithcomputernetworks.

CTR:Click-ThroughRate.

DigitalNatives:Y-Genandyoungerusersoftechnology.

DM:DirectMail.

DurbinAmendment:TheDodd-FrankWallStreetReformandConsumerProtectionActof2010,whichreducedfeeincomeforbanksofcreditanddebitcardswipesatthepointofsaleintheUS.

ECN:ElectronicCommunicationsNetwork—anelectronicnetworkthatfacilitatestradingbetweenstockorcommoditiesexchanges.

EMV:Aninternationalstandardforsmartcreditcardsthathaveabuilt-inCPUchip.UsedwithbrandnamessuchasChipandPINandICCredit,thesmartcardprovidesgreatersafetythanamagneticstripebecauseitcansupportsophisticatedsecuritymethodsandmakedecisionsonitsown.

ETFs:Exchange-TradedFunds.

FAQ:FrequentlyAskedQuestions—questionsaskedfrequentlybycustomersandputonthecompany’swebsitetoexpediteanswers.

FMCG:Fast-MovingConsumerGoods—productsthataresoldquicklyatrelativelylowcosts.

Geolocation:Thetechniqueofidentifyingthegeographicallocationofapersonordevicebymeansofdigitalinformationprocessedviatheinternet.

Gilder’sLaw:ProposedbyGeorgeGilder,thislawstatesthatbandwidthgrowsatleastthreetimesfaster

thancomputerpower.

GPRprepaidcards:GeneralPurposeReloadableprepaidcards.

GPRS:GeneralPacketRadioSwitching—apacket-orientedmobiledataserviceavailabletousersof2Gand3GcellularcommunicationsystemsinGlobalSystemsforMobilecommunications(GSM).

GSM:GlobalSystemsforMobilecommunications—theprimarystandardfordigitalmobilephones,inuseby80percentoftheglobalmobilemarket.

HapticTouch:Technologythatinterfaceswiththeuserthroughthesenseoftouch.

High-Counter:Thetypicaltellerstationwithinabranchforconductingover-the-countertransactions.

HNWI:High-Net-WorthIndividual—themostattractiveclientsegmentforretailbanks;HNWIstypicallyinvestUS$150,000–US$1millionininvestmenttypeproducts.

IC:IntegratedCircuit.

IDV:IdentityVerification.

IM:InstantMessaging—aprotocolforcommunicatingbetweentwopartiesusingtext-basedchatthroughIP-basedclients.

IN:InnovationNewspaper.

iOS:Apple’smobileoperatingsystemforitsiPhone,iPodtouch,iPad,AppleTVandsimilardevices.

IP:InternetProtocol—theprimaryprotocolfortransmittingdataorinformationovertheinternet.

ISP:InternetServiceProvider—acompanythatprovidesinternetaccesstocustomers.

IVR:InteractiveVoiceResponse(systems)—theautomatedtelephonesupportsystemsyouhearwhenyoucalla1-800helplineorcustomersupportnumber,whichusesmenusandresponsesviatouch-toneand/orvoiceresponsefornavigation.

IxD:InteractionDesign—acustomer-leddesignmethodologyforimprovingtheinteractionbetweencustomersandsystems.

KPI:KeyPerformanceIndicators—metrics(ormeasures)usedwithincorporationstomeasuretheperformanceofonedepartmentagainstanotherinrespectofthingssuchasrevenue,salesleadconversion,costs,customersupport,etc.

KYC:KnowYourCustomer—aninternalcomplianceregulationtoensureaccurateidentificationandvalidationofacustomerandunderstandingofhistransactionalbehaviour.

LAN:LocalAreaNetwork—acomputernetworkcoveringasmallphysicalarea,suchasahome,office,orsmallgroupofbuildings.

LOLA:ASiri-liketechnology(seeSiribelow)throughtheinternetandviavoice.

Low-Counter:Typicallyadeskstationwithinabranchwheretherelationshipmanagercansitwithcustomersandpotentialclientsandadvisethemonavailableproductsandservices.

Lo-FiPrototype:Asimplemethodofprototypingproducts,interfacesorapplicationsandtestingwith

targetcustomersorusers.

LIBOR:LondonInterbankOfferedRate.

LinkedIn:Anonlinesocialnetworkforbusinessprofessionals.

Metcalfe’sLaw:AttributedtoRobertMetcalfe,thislawstatesthatthevalueofatelecommunicationsnetworkisproportionaltothesquareofthenumberofconnectedusersofthesystem(n2).

MFI:MicrofinanceInstitution—analternateformofbankfoundindevelopingcountrieswhichprovidesmicrocreditlending.

MIRC:MagneticInkCharacterRecognition.

MobileMoney:Bank-likeservicesdeliveredoveramobiledevicetoenablepaymentsbetweentwoparties;successfulprovidersincludeM-Pesa,Edy,G-CASH,MTNMoney,T-money,Suica.

MobilePortal:Awebsitedesignedspecificallyformobilephoneinterfacesandmini-browsers.

MobileWallet:Anelectronicaccount,dominatedinacurrency,heldonamobilephonethatcanbeusedtostoreandtransfervalue.

Moore’sLaw:NamedafterGordonMoore,thislawbasicallystatesthatthenumberoftransistorsonachipdoublesevery24months.

NFC:NearFieldCommunication—ashort-rangehigh-frequencywirelesscommunicationtechnologywhichenablestheexchangeofdatabetweendevicesoverabouta10-centimetredistance.

OCR:OpticalCharacterRecognition.

OpEx:OperatingExpense.

OTC:OvertheCounter—referstophysicaltransactionsortradesdoneonbehalfofacustomerbyatraderorcustomerrepresentativewhohasaccesstoaspecificclosedfinancialsystemornetwork.

P2P:Peer-to-PeerorPerson-to-Person—amethodofpassinginformationordataviaIP-basedcommunicationmethodsbetweentwoindividualsconnectedtotheinternetviacomputerormobiledevices.

PayPal:AleadingP2Ppaymentprovider;othersincludeSquare,i-Zettle,ClearXchange,Dwolla,PingIt,PopMoney,QuickPay,Venmo,ZashPay.

PCIcompliant:ComplyingwithPaymentCardIndustrydatasecuritystandards.

PFM:PersonalFinancialManagement.

Pod:Modularcustomerengagementstation.

POS:PointofSale—thelocationwherearetailtransactionoccurs;aPOSterminalrefersmoregenerallytothehardwareandsoftwareusedatcheckoutstations.

PPC:Pay-per-Click—amethodofpayingforappearinginsearchengineresultsbybiddingandpayingforspecifickeywords;youthenpayatthesuccessfulbidrateeverytimeauser/visitorclicksonyourlink.

Prosumer:Aportmanteauwordformedbycontractingeithertheword“professional”or“producer”withtheword“consumer”;inrespectofthispublication,itidentifiestheroleofthemodernconsumerofcontent

whoisalsoaproducerofcontenton,forexample,YouTube,FacebookandTwitter.

PSTN:PublicSwitchedTelephoneNetwork—thetraditionalcopper-wireandexchangebasedlandlinetelephonesystem.

RFID:RadioFrequencyIdentification—ashort-rangeradiocommunicationmethodologythatuses“tags”orsmallintegratedcircuitsconnectedtoanantennathatwhenpassedwithintherangeofamagneticreaderisabletosendasignal.

RM:RelationshipManager—adedicatedcustomerservicemanagerassignedtolookafterspecificcustomers,usuallyhigh-net-worthones.

ROMI:ReturnonMarketingInvestment.

SDK:SoftwareDevelopmentKit—apackageprovidedbyamainstreamsoftwareoroperatingsystemprovidertothedevelopercommunitytoassistthemwithapplicationconstruction.

SEO:SearchEngineOptimisation—thescienceofoptimisingwebsitessothattheyappearinthetopresultsforsearchengineenquiries.

SIMCard:SubscriberIdentityModule(SIM)securelystorestheservice-subscriberkey(IMSI)usedtoidentifyanindividualsubscriberonamobilephone.

Siri:SirioniPhone4Sletsyouuseyourvoicetosendmessages,makecalls,setreminders,andmore.

Skype:Atechnologyallowingwebchat.

SMS:ShortMessageService—asystemofcommunicatingbyshortmessagesoverthemobiletelephonenetwork.

SnailMail:Thetermusedbyproponentsofdigitaltechnologiestodescribetraditionalmailandthepostalsystem.

Spam:Unsolicitedbulkemailsentoutsimultaneouslytothousandsofthousandsofemailaddressestopromoteproductsorservices.

Stored-ValueCard:Monetaryvaluestoredonacardnotinanexternallyrecordedaccount;examplesaretheOctopus,OysterandSuicasystemsusedtoreplacepublictransportticketing.

STP:Straight-ThroughProcessing—theimplementationofasystemthatrequiresnohumaninterventionfortheapprovalorprocessingofacustomerapplicationortransaction.

T-DMB:TVviaDigitalMultimediaBroadcasting.

TiVo:AbrandandmodelofdigitalvideorecorderavailableintheUS,UK,NewZealand,Canada,Mexico,AustraliaandTaiwan.

Touchpoint:Anychannelormechanismbywhichaconsumerhasday-to-dayinteractionwitharetailservicecompany,suchasabank,inordertotransactorconductbusiness.

TVC:Theindustryabbreviationfortelevisioncommercials.

Twitter:Asocialmediawebsitethatsupportsmicrobloggingbetweenparticipantsinthenetwork;sortoflikeanSMSbroadcastsystemfortheweb.

UCD:User-CentredDesign.

Up-Selling:Asystemofsellinganadditionalserviceofahighermarginortotalrevenuewithinthesameproductorassetclasstoacustomer,typicallyupgradingfromoneclassofproducttoanother.

URL:UniformResourceLocator—an“address”oridentifierthatisusedtolocateandretrievedocumentshostedontheWorldWideWeb.

UT:UsabilityTesting—thescienceoftestinghowusersinteractwithasystem,productorinterfacethroughobservation.

VBC:VideoBankingCentre(Citibank,circa1996)—aninteractive,24-hourpersonalbankingcentreprovidingaccesstopersonalbankingexpertsthroughintegratedvoice,videoanddataconnection.

VirtualCurrency:CurrenciessuchasLindendollars,QQcoins,ProjectEntropiaDollars(PED),etc.thatexistinthevirtualworldandcanbeexchangedforrealcurrencybyusers.

VoIP:VoiceOverInternetProtocol—anInternet-basedprotocolthatallowsuserstousevoicecommunicationsuchasoveratelephonesystem.

VSC:VirtualSupportCentre—acallcentrevirtuallysupportedbycustomerservicerepresentativeswhotypicallyoperatefromhome(i.e.homesourcing).

WAP:WirelessAccessProtocol—theoriginalprotocolforsimpleinternetbrowsingorsimplemenuinteractionsvia2G(digital)mobilephones.

Web2.0:Webapplicationsthatfacilitateinteractiveinformationsharing,interoperability,user-centreddesignandcollaborationontheWorldWideWeb.

Widget:Agenerictypeofsoftwareapplicationthatisusuallyportableandworksacrossdifferentoperatingsystemsanddevices.

WiMax:WorldwideInteroperabilityforMicrowaveAccess—atelecommunicationstechnologythatenableswirelesstransmissionofdatafrompoint-to-multipointlinkstoportableandfullymobileinternetaccess.

XML:ExtensibleMarkupLanguage—asetofrulesforencodingdocumentselectronically.

Yelp:Awebsitethatletsusersreviewbusinessesrangingfromplumberstopetshopsandwhichhasacheck-inserviceformobilephones.

AboutBrettKingBrettKing is an internationalbestselling author, a renownedcommentator andgloballyrespectedspeakeronthefutureofbusiness.Hehasspokeninover50countries, to more than a million people, on how technology is disruptingbusiness, changing behaviour and influencing society. He advised the ObamaWhite House, the FED and the National Economic Council on the future ofbankingintheUnitedStates,andadvisesgovernmentsandregulatorsaroundtheworld. He appears regularly on US TV networks like CNBC, where hecontributesonFutureTechandFinTech.

King hosts the world’s leading dedicated radio show and podcast ontechnology impact in banking and financial services, called Breaking Banks(150-pluscountries,6.5millionlisteners).Heisalsothefounderoftheneo-bankMoven, a globally recognised mobile start-up, which has raised over US$42milliontodate,withtheworld’sfirstmobile,downloadablebankaccount.

Named“KingoftheDisruptors”byBankingExchangemagazine,Kingwasvoted American Banker’s “Innovator of the Year”, “the world’s #1 FinancialServices Influencer” by The Financial Brand and was nominated by BankInnovationasoneofthetop10“coolestbrandsinbanking”.Hewasshortlistedforthe2015AdvanceGlobalAustralianoftheYearAwardforbeingoneofthemost influentialAustralians livingoffshore.Hisfifthbook,Augmented:Life inthe Smart Lane, was a top 10 nonfiction book in North America and wasreferencedbyPresidentXiinhisnationaladdresstotheChinesepeopleinJan2018.

King lives inNewYorkandenjoysflying,gamingandscubadiving inhissparetime.

AboutMovenIn 2011, Brett King co-founded Moven as the first US direct to consumerneobanktoofferaccountopeningviaamobileapp.Theapp’sengagingdesignhelps customers spend, save and live smarter.This innovative approach led tocreatingglobaldemandfrombanks toofferMoven technology to theirclients,resultinginthefirm’stransformationalMovenEnterpriseoffering.Tolearnmorevisitmoven.comormovenenterprise.com.