The wifi payments world of the very near future

I was talking about the internet of things again today, and realised that I have a grand vision of the not too distant future where everything communicates with everything.  We have chips as tiny as nanodots inside every brick, pavement slab, tyre, wall, ceiling … you name it.  We have more intelligent chips inside car engines, visual entertainment systems (the TV is no more), wearable devices from rings to necklaces to bags to shoes.  Everything is communicating with everything and our devices are all attached to us through the blockchain.

The result is that my Star Trek vision of no one paying for anything becomes a reality.  I drive to the big city and park.  My car tells the metering system it’s my car and it’s parked here until I come back.  When I come back it asks the system how much it owes and pays.  I do nothing.

My car then drives me to the gas station – I don’t drive anymore as it’s self-driving – and it asks the station robot for $30 of LPG.  The robot pump system delivers and I just sit, working and enjoying the entertainment and world around me.  The car drives off and all of the transaction is seamlessly in the background.

I’ve asked my Tesla to take me downtown to a decent bar – I haven’t been in this town before – and it delivers me to Joes 99er.  I have no idea who Joe is or why he’s talking 99 and I don’t care, I just want a drink.  Joe – or the guy behind the bar – gives me a large Whisky and Bud.  It’s my usual tipple and my shoe just told his stock management system that’s what I’d want.  I felt a little vibration from my shoe that confirmed this would be ordered and just let it go.  It was too much trouble to shake my left foot for a Gin & Tonic.

After three Buds and Whisky combos, I jump back in the car and am ready to hit the casino.  The car asks me three times if I really want to do this – it knows what happened last time – and I just say yea.  I’m cool and mellow and a little bit drunk, something I’m ultra-aware of as I’m supposed to be sober in charge of a self-driving car.  Why that law still exists, I have no idea.

So the car drops me at Caesar’s Shed, it’s kinda five steps down from the Palace, and I start shooting some Blackjack.  My shoe vibrates again, as I’ve just lost $2,000 in the first five minutes and my budgeting balance for the month for gambling has been reached.  But it’s only June 2nd for heaven’s sake.  I stamp my foot and the balance is lifted, along with a healthy top-up of $10,000 moved from my savings account in real-time.

By the end of the evening, my savings are gone and the bank’s given me a loan of $15,000.  I hate it when I click my shoes together and say there’s no place like home.  After all, that’s the trigger for my biometric check to ensure it really is me saying that I want an extra line of credit.  No-one notices the heartbeat check and the touch of my finger to the side of my glasses.  Works every time.

Unfortunately, it works and makes sure that I lose every last dime of my money but then I have this lady who seems to have joined the ride home, and the car is asking where to go.  I say home with an S (for seduction), and the car heads to my destination of choice.

As we arrive, the nest is bathed in purple light.  Ed Sheeran schmoozes Thinking out Loud from the wireless speakers and we’re soon enjoying an intimate moment.  As our bodies touch, something in my ring tells me a transaction just happened.  It is only then, with the combination of my gambling losses and Bud combos, that I realise this is no ordinary woman as I gather she’s not here for a long-term relationship.

In fact, the following morning, as my red eyes open and realise she’s gone, that the sun rises on my virtual walls and my infomediary assistant tells me my account has been frozen.   It just goes to show that the shoes I brought last month really are a bad influence.  Next time, I should stick to the watch.

Ah well, a good night was had by all and not a payment or authentication was visible to all.  Just wireless credits and debits from the stamp of a shoe to the touch of an eyebrow. 

The world has changed a lot in the last ten years.  I remember in 2010, I used to keep lots of pocket change in my car to pay parking metres, and got frustrated with the endless stops at toll booths to swipe my credit card.  By 2015, things had improved immensely.   Now I just had NFC payments, prepaid apps and one time passwords.  No longer would I jiggle around trying to find the right change.  My tech would help me to sort out the detail.  Now, my tech just does it all for me.  I just try to work out : was it all worth it?

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What do narrow banks mean for wide banks?

In this world of choice that emerges from the integration of new technology models and old financial models, we see hybrid systems emerging that bring together the best-of-the-best.  A great example was announced today, as Metro Bank and Zopa join forces.  The deal allows deposits from Metro Bank retail customers to use P2P lending as an asset class for their deposits, with the expectation that this will provide higher returns on their savings.  It’s an innovative deal in that P2P lending surely cannibalises that other asset class: credit.  But it’s all about choice and if customers know that they can place money in Zopa, then why not allow them to do so through the intermediation of the bank to assure its viability?

This is where it gets interesting as I’ve seen innovative deals like this before.  Fidor Bank (Germany) has been offering Smava’s P2P lending for some time through its operations whilst Caja Navarro (Spain), a non-profitable foundation, offered its own version of P2P some years ago.  They called this Civic Banking and gave every customer the right to know the profit they made from each transaction and account.  Through Civic Banking you could also invest in friends and family businesses and loan requests, with the bank ensuring the loan was repaid.

This is the point I am making when talking about aggregating the customer experience.   If a customer has so much choice these days, do they really want to be opening accounts here there and everywhere with eToro, Circle, PayPal, Zopa, Friendsurance etc, or do they want to have an aggregator on top?  I think the new emergent form of retail bank will be that aggregator.  Like a Trip Advisor for travel, we will see front-end services that integrate many back end providers for finance.  Some may say that this is just what the comparison websites do, but the comparison websites are not integrating and aggregating.  They are just providing a rate choice and then you have to jump out to the provider’s own website to complete the transaction.

What I mean by the new component-based bank is that they will find the best providers of alternative finance and offer these services through their own portfolio of access.  A one-time sign-on to get access to choice all in one window.  That’s what Fidor are offering and, through the deal between Metro and Zopa, it’s another step in the right direction.

Meanwhile, a rock to throw.

I was pretty surprised to read these two headlines side-by-side the other day:

The reason I was surprised is that SMEs (Small to Medium Enterprises) are being commonly rejected for credit by banks, because they don’t meet their risk criteria.  They are too small, too young, too untested, too unproven, too risky to lend to.  So banks are recommending they go to Funding Circle and similar alternative finance houses.  These alternative finance houses (AFH’s) opened a lifeline for businesses in the UK in the last year.  For example, here’s Funding Circle’s homepage today:

Funding Circle 200515

And 13 months ago (yes, this was 20 April 2014):

Funding Circle 200414.png

Note the statistics: £225 million of lending enabled by Funding Circle a year ago climbing to £625 million today.  A tripling in enabled funding in just over a year.  

Meanwhile, the number of businesses borrowing through Funding Circle has almost doubled in that time, as has the awareness of this alternative financing marketplace.  A lot of the funding of Lending Club comes from the UK Government, and it’s interesting to note that almost 98% of P2P Lending funds in the USA come from institutional investors.

So you have two key things happening here.  First, the large banks are turning small businesses away to AFHs whilst de-risking their own portfolios by funding the AFHs.  So the AFH becomes the risk manager.

That’s all well and good, but then take the other headline: SMEs stung by £425 million in hidden fees.  This is where the Christensen disruptive innovation does start to hit as the AFH market looks like nothing today but, when I attended an Alternative Financing conference the other day, they didn’t call it alternative finance (which was a bit strange, as that was the name of the conference).  They called it narrow banking.  Narrow banking takes a part of the bank – a component – and squeezes that component to make it as efficient as can be for the process of its usage.

Here, in lending, it is a narrow bank focus on SME and consumer credit.  A Funding Circle or Zopa squeeze the process of getting funds to those who need them to the max.  And their customers love it.  77% of Funding Circle users say that after their first loan, they would return to Funding Circle first next time, rather than a bank.

So, on the one hand, banks are de-risking their credit portfolios by both funding narrow banks and encouraging their higher risk customers to use them.  On the other, they are stinging their higher risk customers – small business customers – with higher hidden fees.  And, on the third hand (yes, doing well here with my artificial limbs business), their customers now love their narrow bank and would not return to their old bank in the future.

That’s a broken model if you ask me.  Broke for the bank that is, unless it really does not want any SME or consumer credit market operations in the future.

What banks should be doing is the Metro, Fidor and Caja Navarra approach of integrating the narrow bank offers into their customer aggregated experience.  Instead, what RBS and Santander who partner with Funding Circle appear to be doing is saying that we would rather offload you to the narrow bank, than keep you with our bank.

That may be just my misperception, but it’s one that sits uncomfortably if true.


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Goldman Sachs estimate 20% of bank lending will move to alternative finance ($12bn of profits lost)

One of my good connections via social media is Huy Nguyen Trieu.  Huy writes a regular blog at Disruptive Finance, as well as being a Managing Director for Macro Structuring at Citi.  He posted something in the last week that I felt was worth re-posting here as a guest blog.  Read and weep.

If you can’t beat them, join them: Goldman Sachs enters Fintech

Goldman Sachs has been a very active investor in Fintech (and Tech in general), with the latest investment in Circle (Bitcoin), but also CompareAsiaGroup (Comparison website for financial services), Oscar (Challenger Insurance) or Kensho(Data analytics for finance) for example.

But what caught my eye was the very detailed research they published a couple of months ago about how non-bank lenders will take away business from banks.

Their conclusion was that :

  • US banks earned $150bn profit from lending in 2014
  • In 5 years, $11bn of these could be captured by non-bank lenders – and in particular online lenders such as Lending Club, Prosper, SoFi, Kabbage etc.
  • The table below (click image to enlarge) shows very clearly what are the areas they have in mind, and the competitive advantages of the online lenders.


Non-Bank Lenders will take away profit from Banks says Goldman Sachs
Source: Lend Academy 

The research document is very interesting, and shows that GS had clearly identified a very important trend in lending – and a potential threat to banking profits.

But then investing in Fintech and writing good research is not really a game changer, so what did they do?

They announced that they will build an online lending activity,  within the bank itself: ” Goldman Sachs Group Inc. hired Harit Talwar, the head of Discover Financial Services’ U.S. cards division, to help develop an online lending effort for individuals and small businesses…is seeking to join startups such as LendingClub Corp. in using technology to disrupt traditional banks.” (Bloomberg, May 2015)

And that is very interesting indeed, because we’ve had from Goldman Sachs:

  • Investing in and working with the Disruptors
  • Analysing the Disruptors
  • And now, Disrupting the Disruptors! 

Which seems very simple said like this, but to my knowledge this is the first such initiative at this scale.

Until now, there has been a love-hate relationship between online lenders and banks, where banks observed online lenders with interest, but saw them as smallish competitors that were not really taking business away. And banks were even happy to partner with online lenders like Santander with Funding Circle.

Now, with Goldman Sachs’ announcement, both Lending Club and Ondeck had to justify why GS would not be a threat. This is a game changer in my opinion, with banks having to ask themselves the question: how should online lending be part of their strategy? Should they partner with startups or develop their own solutions? 

And what kind of online lending? Is it data-driven lending a la Kabbage or Ondeck? Is it p2p (b2p, b2b, p2b?) platforms a la Lending Club or Funding Circle? Is it invoice-financing a la Finexkap or MarketInvoice? It seems from the first reports that GS will focus on a Kabbage model – i.e. data-driven lending – but it would definitely make sense to have some disintermediation component for their institutional investors (i.e. p2p).

Going forward, this will obviously impact more than just online lending. It will be fascinating to see what happens over the next few months, and if other banks follow suit.

For updates on Disruptive Finance and Fintech, follow Huy on Twitter here


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Moving from banks as money stores to value stores

I’m talking a lot about the ValueWeb – how the internet is changing the things we value in banking, trade and commerce as well as life, love and relationships – at the moment, as this is the subject of my new book.

One of the most intriguing things about the ValueWeb is the latter – the ability to create value out of nothing but a relationship. 

We all value our relationships.  Our friends and family are probably more important to us than our work and salary, or they should be although it doesn’t always work that way.  It’s a bit like we used to talk about work-life balance, where our work was day and life was night, but that’s gone away in the networked economy.  Now we have work and life 24*7.  When we wake we check our email, facebook and twitter notes to see who’s talking and, before we go to bed, we do the same.  It’s why we are living in an insomniac world, with people tweeting, talking and emailing at all times of day.  We also live in a global community, which is why we’re insomniacs.

Our relationships are now being formed on the network.  That doesn’t necessarily mean love, but certainly our lives are becoming digitised.  We stare at our devices 24*7 looking for meaning, sharing and understanding.  We want to be entertained by our friends and celebrity likes, and we want to find knowledge and interest from sources as diverse as the Economist and Pew Die Pie.

This is the age where traditional media has become fragmented and social media has gained a voice.  A voice where anyone from a guy blogging naked in his bedroom (truth be told I don’t do that, well, not today anyway) can be as meaningful as your favourite columnist in the paper, or more so.  In mentioning Pew Die Pie, we live in an era where one person can be as influential as the BBC or even more so.  Pew Die Pie has around 40 million subscribers.  That’s more people than the entire population who watch television in the UK.

Some time ago, I noted that free is the business model, because free can be monetized.  My blog is free; Pew Die Pie’s videos are free; most media is free … so how do we make money?  We make money be being relevant.  Relevance and attention are the new value mechanisms that attract investment, not just goods and services.  Relevance and attention demand support and, just like traditional media, will get that support in the form of sponsorship, dialogue and engagement.

My blog is free because I monetize the blog through producing books, speaking at conferences, advising technology firms and banks and generally being an all-round pain.  Pew Die Pie makes over $4 million a year from online adverts that align with his media channel.

Free makes money.   Ideas make money.  Content makes money. It’s all about the value of relevance and attention.  If you get the eyeballs, you get the money.

This is where it gets intriguing as this side of the ValueWeb is untapped by banks, and untapped by many others.  Banks forces upon currency exchange and being a store of money, when they should focus upon value exchange and being a store of value.  A store of value will store everything from your cash and money to your investments and savings to your memories and mementos.

Who stores your memories?

The average baby born in 2015 is forecast to have a lifespan of 150 years.  What will your babies be watching in 2165 as they reach their final year?  Will they still have access to their memories?  Will Facebook still be around?  Will the USB sticks, the Teradata hard drives and the dongles be readable?

Many commentators are concerned about our digital graveyard where all of our digital assets become useless a century from now, when technology has moved forward at such a pace that your valued things today become irrelevant.  The problem is that the things become irrelevant but their value to you does not.  Those photographs of baby growing up are just as important to you today as they will be to your children tomorrow and their grandchildren a century from now, but who will store those memories?

What is a value store?

A value store is what a digital bank will become: a store of all the things you value.  Traditionally, banks have offered value stores in the form of lock boxes in the branch; in the future, the value store might be your Dropbox on the internet.  But do you trust your Dropbox, your social media or your other stores to be accessible a century from now?  Can a bank provide a value store that can guarantee such a thing?

If banks move to being value stores rather than currency stores, then that is exactly what they will do.  Their promise with money is that they guarantee not to lose it and, if they fail, you are guaranteed to get at least €100,000 returned (European rules).

What about if you promise to store my memories.  What guarantee do I get then?  What about a guarantee that you will bank my memories and guarantee they will be accessible forever.  If you fail, then you guarantee to provide reimbursement to the value I insure my memories for.  If I say my memories are worth €1 million, then you can charge me €100 a year (or whatever you feel the premium should be) to store my memories with a guarantee they will be retrievable for 100 years.  Should there be an impact where you fail, I get the million.

This is a tricky course, but there is a far wider role for a bank as a value store than as a monetary store, particularly as we move to a world of digital rather than physical assets. 


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Why the blockchain will radically alter our futures

There’s an interesting debate about blockchains, sidechains and identity taking place that is emergent right now but, soon, will be mainstream.  For those who are unclear about these things, blockchain is the technology protocol invented by Satoshi Nakamoto with bitcoin, although it doesn’t have to be based upon bitcoin.  The blockchain allows you to create a public ledger system that is accessible for all and secure.  This is achieved by having public recording of transactions whilst they are secured by private keys.  As a result, any exchange on the blockchain is secured until the private key is passed along.  At that point, the ledger records the exchange of the key and the movement of a digital asset, and that asset can be anything from a currency transaction to a securities settlement to a mortgage deed to a marriage contract. 

In fact, in order to allow different markets to create different blockchains to record these different styles of transaction, there is now this thing called sidechains.  Sideschains are just spin-offs of a blockchain used to record a specific market transaction, such as house deed sales, and sit alongside the main blockchain.

It is this is the technology that all the banks are excited about, as it allows the exchange of digital assets to be recorded digitally for near free and, for those who read them, the recent case studies with Ripple, Jon Matonis and Jeffrey Robinson illustrate the great debate around this technology well.  The core of this debate is whether this blockchain technology needs to reside on the bitcoin currency.  For some, such as Jon Matonis, this is a given.  Why would you create another currency?   For others, such as Jeffrey Robinson, as soon as blockchains are endorsed and operated using dollar, euro or yen, then why the hell would you need bitcoin?  You can make your own mind up, as this is a sideshow to the emergent discussion about the internet of things and how the blockchain may make it work effectively.

So here’s the scenario in the very near future.

You buy a fridge, a car, a house, a smartphone, a wearable, a whatever.  All the things you buy have clear serial number identifications as well as chips inside to enable them to transact wirelessly over the web.  Upon purchase, your device is recorded as being yours using your digital identity token (probably a biometric or something similar).  That recording of that transaction takes place on the blockchain. 

Now, you have multiple devices transacting upon your behalf.  Your fridge is ordering groceries from the supermarket; your car auto refuels as it self-drives the highways; your house reorders all the things needed for the robot vacuum and other cleansing devices it uses; and so on.

Each transaction is a micro-purchase around your wallet, but involving no authentication of you.  The authentication is of your devices.  Should a large transaction occur, or maybe just to check-in as contactless payments do with every twenty or more transactions, you are request to agree that this is your device ordering on your behalf by providing a TouchID or similar.

And all of this is being transacted and recorded on the open blockchain ledger of your bank cheaply, easily and in real-time.

What this provides is the scenario I keep talking about. The scenario invented years ago by Gene Rodenberry, when he came up with the idea for Star Trek.  Now Star Trek has lots of things that were forecasts of the future that came true from communicators that were the predecessors of Motorola flip phones to body scanners that could be hand held.  One of the other predictions was that we wouldn’t need money.

Did you ever see anyone ever pay for anything on Star Trek?

The reason you don’t need money in the future is that all the transactions you make take place wirelessly around you, through your internet of things.  You walk into a store or mall, and all of your devices and identity are communicating your location and intention.  As a result, you never pay for anything.  You just authorise with the blink of an eye or the wave of a watch.

The future is so bright, I gotta wear shades, and it’s coming within the next decade.  By 2025, the only humans who will be using cheques, cards or cash, will be the ones who are happy to pay the penalty fees charged by the merchants and banks for these transactions.  The rest of us will be using chip-based identities for ourselves and our devices to wirelessly order everything without having to think.


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Talk about 'access' rather than 'channel'

I’ve written quite a lot about my disdain for the use of the word channel, multichannel and omnichannel, and some people asked me: so what should we call it then?  I’ve written about this too but, to be exact, we should call it AccessAugmented Access, Proximate Access, Intelligent Access or whatever phrase you want, but it’s purely about access to services, information and support in a digital form.

Access to the banks’ digital platforms via any form factor I choose – my mobile, watch, desktop, tablet, car, television or any other form factor I choose.  Access via Skype to a human, via phone to a human or via branch to a human.  Humans who are also being provided access to digital services through the banks’ platforms.

In other words, the whole bank sits upon a digital foundation, a digital core, a digital ecosystem.

In this world, no-one thinks about segregated systems, silo structures or channels.  We don’t think: oh today I’m using my mobile channel but tonight I will switch to my call centre channel for service.  We just think: I’m using my banks’ services.

In this world, the bank does not think about deploying layers of separated systems and then try to work out how to stitch them all together.  The bank just adds new services and access for new form factors to their digital foundation.

But access is key.  Consistent access to a reliable, resilient, real-time digital service.

It is for this reason that I’ve kept persisting with the call to replace core systems, because then you can build a reliable structure with data in the cloud and processors for provision of access to the digital core from the ground up.

What I mean by this is that today, we add channels to old infrastructure and keep therefore adding legacy to legacy.  What we should be doing is replacing the old infrastructure such that it’s cleansed and ready for providing access to reliable, resilient, real-time digital services.  Then the future will be adding further access and leveraged service to that digital core.  Adding digital to digital rather than legacy to legacy if you prefer.


I mentioned Augmented, Proximate and Intelligent Access because when you have a digital core platform, the information that derives from that platform can be fed to all access points and all form factors.  The intelligent digital bank uses the information from their platforms to populate all access points and all form factors with differentiated service and support.

Many banks talk about the likes of Apple, Amazon, Facebook and Google as their aspirational heroes.  What is it about these big internet giants?  Do they have channels?  Do they have segregated structures?  Not at all.  They have a single digital approach to service.  They do not consider mobile, tablet, internet and telephone as separated systems and channels.  They just see access through form factors to their digital services.

That is the transition banks will go through in the next five years, if they haven’t gone through this change process already.  Banks will move from adding legacy to legacy, cementing their back end systems further into place through front-end systems lock in; to building a clean core digital foundation for the bank that can then feed service to any digital or physical form factor where service is needed.

It will not be an easy transition, but it is a transition demanded if banks are going to be fit for purpose in the digital age. 

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Why you should feel revulsion for the term ‘omnichannel’

A lot of folks are asking me whether I’m really saying that banks need to start all over again?  Is that really feasible, Chris?  How can you recommend that we tear down the house and rebuild it?

Well, there’s a lot of reasons I can say this, and believe it.

First, we started building systems in the 1960s based on automating transactions in the back office on a mainframe.  The transactions were the debit and credit accounting ledgers, and the information derived from branch-based operations.

In the 1970s, we implemented 3270 green screens in branches to feed those mainframes with data for the transaction ledgers.  This was a cost-cutting, administrative and efficiency play.  It worked.

In the 1980s, we introduced ATMs to the network. The ATM was designed to get rid of tellers (it didn’t btw …


… and have become the main electronic outreach point for most banks in a physical sense. 

In the 1990s, the next major electronic movement was to remote customer support through the telephone call centre.  Already, by this time, banks had multiple legacy systems created through M&A, expansion of offers and disparate IT strategies.  Most banks had multiple head office systems on multiple providers platforms, because they built their deposit account administration on IBM, for example, but then introduced insurance, mortgages, cards and other product lines from other specialists from Unisys to Fujitsu to Amdahl.  This is why most call centre customer service representatives were already struggling by 1999, having to use multiple windows on their desktop screens to answer a simple customer call, as they had to access multiple systems across multiple platforms to get a comprehensive customer view.

The result was that the central head office based focus was securely cemented in play by 2000, thanks to the previous quarter-century developments of systems, and much of this focus was upon transaction processing for internal branch and call centre support.

Then things changed.  Things changed fundamentally.  The focus of support moved from internal to external.

It was at this point, we started talking about multichannel support, as we had to make what was previously only visible internally, external.  We had to give customers online banking, and so we had to rethink the internal machine.  Most banks didn’t.  They just took the internal machine, and stuck a front-end internet bank access to it through a username and password.  That is why most banks’ internet banking looks just like a bank statement, because that’s just what it is.  An online access to the bank statement.

We got away with offering an online access to a bank statement for a decade, but then the smartphone appeared with apps and real-time, and the emperor’s clothes became visible.  Most banks tried to move their head office focused internal systems from big screens onto small screens, and it just didn’t work.  It didn’t work because it’s not real-time, it’s batch.  It didn’t work because it’s focused upon internal cost cutting, not customer experience.  It didn’t work because it supported staffers, not users.  It didn’t work for so many reasons, that almost every bank started looking at what to do and the answer was: buy something so it looks better.

So the banks went out and bought Meniga, partnered with Moven, invested in IND, procured Yodlee and so on and so forth.  That is all that investment in the customer experience in the front office that was highlighted in my blog last week.

The trouble is the back end is still that half a century year old layer of mess that needs sorting out.  In fact, banks are cemented in legacy mess, which is why they talk about channels.  We only talk about channels because each was a layer on our entry point, and our entry point was that transaction systems for debit and credit recording in the head office mainframe dating back to the 1960s.

Branch was layered on the mainframe; ATM another layer; call centre the next one; internet banking the last one; and mobile the latest.  Each layer, we call a channel and now we talk about omnichannel integration.

What complete tripe.

There is no such thing as channel, as I’ve said so often.  The reason there is no such thing as channel is that a channel is just a layer on a legacy.  It is legacy upon legacy.  So when I hear banks talking about omnichannel or digital channel, I know that they are just adding legacy to legacy.  And it will not work.  It will not work because the legacy is based upon a physical infrastructure view or, as I present this, a structure built in the last century for the physical distribution of paper in a localised network.  We now need to rebuild this for the digital distribution of data in a globalised network and the problem is that you cannot rebuild this from the front-end.  You have to start rebuilding this from the core.

In other words, we have to look at that half-century old structure we’ve built for head office transaction recording and rethink it for 21st century structure of augmented non-stop real-time access.

We have to do this for both the user and their user experience, but also to ensure we can monitor in real-time.  Real-time monitoring will give us knowledge of opportunities (cross-sell, increase share of wallet, loyalty offers, etc.) and threats (cyberattack, unusual activity, accessibility issues, etc.).

This is why I keep blogging about digital core, because I truly believe that no bank can evolve their legacy systems to support a 24*7 real-time world.  Those systems just weren’t built that way.   That is why, when I hear the use of the word channel, I feel revulsion.  I feel revulsion because it immediately says that you are thinking in an analogue, 20th century view.  You are in the mind-set of adding whatever it is you are adding as an extra layer on your legacy.  It will never work and is my first alarm for the failure of any digital project in a bank.


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How to spot a fake Digital Bank

I just heard a presentation from a leading American bank on the need to be digital.  This bank claims to be a digital leader in the US and, from all the PR and headlines, you would believe they were.  Listening to their presentation, you might believe it too:

  • Our CEO leads the digital charge
  • Digital is not an add-on
  • Digital is end-to-end
  • Being digital is crucial to our future

Yada, yada, yada.

The presenter then put a slide on screen that blew the whole credibility of his presentation (for me). 

This slide said that to be digital required a new organisational structure that is cross-functional, agile and able to operate in an omni-channel structure.

First, you don’t need a cross-functional organisation in a truly digital bank and, second, you never mention channel or omni-channel in a digital bank.

My thinking on this is that I’m calling for all banks in my digital bank presentation to firstly create a new digital business model, that moves away from the old physical structures to truly digital structures.  That business model operates as a value systems integrator, taking best of breed apps, APIs and cloud services and rebuilding them into incredible user experiences and capabilities for their targeted communities (digital banks talk about targeting communities, not customers).

A criticality to being able to be agile in a digital structure of value systems integration however, is to be digital at the core, as I’ve blogged often.  This is where the first piece of credibility of many digital banks falls down. They’re not digital at their core.  Their core is still stuck in legacy and heritage.  Hence why they talk about omnichannel.  There are no channels in digital banks because digital banks think of form factors accessing their digital core.  A form factor is a mobile or tablet; but equally can be a fridge or car; a call centre operator or a branch representative; or a customer walking payments on the net.  Any form of access to the digital core becomes a consistent experience, because there is ONE core.  When there is not one core, the bank has channels.  If the bank has channels, they are not digital because the channels create cracks and inconsistencies as you move from one to another.  At the back end are likely to be multiple systems that are purely integrated at the front-end through the lipstick on the pig.

Therefore, unfortunately for this so-called digital bank, the first failure is talking about channels or omnichannel.

The second is the use of the phrase cross-functional.  Cross-functional means that the bank not only has silo systems that need channels, but silo structures that need integration.  Silo structures based upon products and non-integrated interests of silo product leaders. 

A cross-functional approach implies matrix management; different interests; competitive internal structures; skewed rewards mechanisms; and all the other things that are issues of the legacy past.  A customer or, preferably, user- centric approach is what you expect to hear from a digital bank.  A digital bank organises around user-centricity through a digital outreach to their communities of interest.

This is why digital banks focus upon the customer- / user- experience as their priority.  This gets into another interesting discussion, in that most banks focus upon the experience through some internal team that reviews the bank’s internet Content Management System (CMS).  Wrong.  User experience is end-to-end.  In fact, it builds on my blog the other day about the Cap Gemini survey  discovering all these banks investing heavily for front-end experience, but doing nothing for the user-experience in their prioritisation of projects in the middle- or back- office.  That just does not cut the mustard and is like a general asking for more troops in the face of tanks attacking.  The bodies are there, but they’ll just get run over.

In summary and in future, I’m going to judge digital banks as those that are doing tit (user-centric with digital at the core) and will name check those that are just talking about it (cross-functional omnichannel banks).


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Digital channels are just lipstick on a pig

I just sat through a nice presentation from Cognizant President Prasad Chintamaneni at the CEB Summit in Boston …


… and was pleased to see others referring to channels and front-end investments as sticking lipstick on a pig.   Something I’ve been saying for a while, as you have to re-engineer the core to be fit for digital, not just keep sticking things on the front-end; and the only reason we talk about channels at all, is because we have just one in the 1970s – the branch – and have been sticking crap on top of that legacy for the last fifty years, cementing it in place thanks to our channel overlay.  We have to get out of that and rearchitect for a digital core where there are no channels.  There’s just access to the digital core. 

Anyways, I’ve blogged about this so much, I’m starting to get repetitive so, rather than do that, I was intrigued to see the questions posed to Prasad at the end and thought I would discuss them here.

Which of the forces driving digital do you as the nearest-term threat to traditional financial institutions?

Probably social lending and crowdfunding.  According to Foundation Capital this is forecast to rise to a trillion dollar market by 2025 and I see Kabbage, Lending Club, Funding Circle and more taking a huge slice of the traditional credit market from banks.  Some say that banks are just offsetting direct credit risk to these guys through wholesale funding of their businesses.  I say that if lean and mean loans and savings firms offer services on a razor-sharp margin basis directly through servers between savers and borrowers, then what are the banks left with?

How do you drive adoption through an aging customer base?

 Well it’s blatantly clear that the highest earners are often the most digitally savvy and it also intrigues that we think millennials are where it’s at, whilst banks like Fidor say no, it’s the over 40s.  Digital is not an age thing so much as a mentality thing.  How do you look at the world and how smart are you with tech?  Often grandpas and grandmas are the ones with the headphones on at the dinner table these days, and you have to tell them to stop texting.  It’s not always the kids.  However, the real point of this question is what are the incentives to use digital?  That’s easier to answer: it’s giving people control of their money 24*7.  That’s what is really driving adoption.  That people can see where it’s at, what they are doing with their lives financially, and can control that in real-time.   That’s the incentive.

Given the regulatory environment, what will happen to the digital disrupters when the CFPB (Consumer Financial Protection Bureau) look at them?

Great question.  Many think that digital disrupters are liked by the regulators as they are creating more competition.  Of course, they are; but are they also creating more risk?  If all the SMEs getting loans through Kabbage and Funding Circle on the basis that they don’t meet the risk criteria at the banks, what risk criteria are Kabbage and Funding Circle using?  That’s going to be an interesting development over time.  Maybe it means that all the upstarts gradually feel the pinch of the regulator’s hand on their collar and, over time, start behaving just like banks.  As they do so however, they’ll have stolen a good portion of current bank business.

Many of the success stories for digital finance are in the consumer retail side of things.  What impact will digital have in other areas?

To be honest, digital is mainly discussed in consumer lending and payments right now, but it’s impacting just as much, if not more, elsewhere in commercial and investment banking.  Looking at things like Holvi, eToro, Betterment, Personal Capital, Currency Cloud, Ripple and more, you can really start to see a digital rearchitecting of the system.  Some banks are part of the rearchitecting, such as Deutsche Bank with their Autobahn App Store, but most are still going Digital What? I feel sorry for those ones as they won’t be around in a few years.

Can you point to anyone who’s doing this digital bank strategy right?

I always point to a small few like mBank in Poland, Fidor Bank in Germany, ICICI Bank in India, Commonwealth Bank in Australia, Deniz Bank and Akbank in Turkey and even USAA and Bank of America.  The reason why I pick on these is that they have all embraced digital fully and taken significant steps to adapt and adopt.  For example, ICICI place all their customer service in Facebook communities, as does Fidor and Deniz Bank.  USAA is investing in cryptocurrencies and are renowned for great digital remote service, but you cannot ignore what Bank of America is achieving with mobile digital services for the masses such as location-based loyalty discounts using Cardlytics.  CBA transformed the bank through cloud and mBank threw away the mother ship – BRE Bank – to become truly digital.  All of these deserve credit.  There are more out there too btw, but these are the top of mind examples.

What advice would you give to a bank that needs to transform to digital?

Make sure the CEO is committed and, by that, I mean the old chicken and pig breakfast sort of commitment (the chicken participates, but the pig is committed).  Does the CEO believe I this and are they aware and knowledgeable of what digital means to the bank?   Are they leading the change or delegating it? These are critical questions as you won’t succeed otherwise.

There were lots other questions but maybe the last one was key:

Is Fintech going to destroy banks or will banks adapt and survive as Fintech reformed?

I’ve been playing this question on the blog for the past week, with the argument that we’re adapting winning over being destroyed.  Nevertheless, it’s easy to argue either way.   The net: net is that banks will be destroyed if they ignore Fintech and the digital reform it is introducing to finance.  That’s the only thing you really need to focus upon. 

More on this later …


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What is Chris smoking? Of course, we’re being disrupted!

Just to finish off my contention that banking is not being disrupted, just evolved or adapted if you prefer, it’s worth a thought about what would it take to cause a disruption.

First, I don’t think of disruption in a dictionary sense but in the sense that Clayton Christensen meant it in the book The Innovator’s Dilemma. This definition goes as follows:

Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.

And the question today is whether the Klarna, Holvi, Zopa, Lending Club and brethren are doing the above or not?

To a certain extent, it seems clear that they are.  According to Foundation Capital, P2P lending and crowdfunding will be worth over $1 trillion by 2025 and companies like Apple are taking over the customer wallet.  The counter-argument is that there are banks that sit behind all of these movements, with wholesale markets moving heavily into support of the likes of Lending Club.  Equally, others see markets expanding.  For example, many banks won’t lend to high risk projects r companies.  A new start-up small business will always find it hard to get unsecured lending from the bank, unless they have a robust business plan.  But companies like Kabbage and Funding Circle have stepped into this space and are helping to widen markets.   According to today’s Telegraph, small businesses are getting access to over £2 billion of new funding through alternative lenders.  But then, Funding Circle does partner with banks like Santander to do this, so they’re basically picking up business that banks don’t want.  Is that the disruption?

Possibly.  Today, banks don’t want this business. Tomorrow, it’s their core business that’s gone.  Equally, bank are not helping themselves. Today’s Financial Times“UK banks are charging businesses that need short-term finance £425m a year in “hidden” extra fees, according to research.”

Surely, by giving away future business with one hand whilst sticking two fingers up at existing business with the other, banks are trying to destroy their futures rather than build them?

This should be a concern, but is P2P going to be the massive disruption that some believe is happening, or will banks partner and then merge and acquire with P2P lendersa and crowdfunders.  Maybe the latter is likely if these firms become mainstream.

After yesterday’s blog, Holvi made clear that they have regulation and are also operating in a bank-like manner. 

If it looks like a bank, walks like a bank, smells like a bank, surely it’s a bank?

No.  It’s a payment services provider.  However, if payment service providers started offering core deposits and loans as well as payment services, then yes, they’re a bank and would need a bank licence.  And have Transferwise, Holvi, Funding Circle and their brethren yet really made a mainstream impact on core bank business, or just built around that business?  I would contend the latter today.

But, and here’s the real point of all this, tomorrow.  Tomorrow is the question.  Are these companies that are small beans today relentlessly going to move up market to displace the established firms?

Will the largest financial institutions of tomorrow be a Lending Club or Alibaba?  Over the past few weeks I’ve been arguing no, but maybe you should be asking: does Chris believe this?

The reason I’ve been arguing against the Fintech tide is that many banks will say to me: “we have over X million customers today, and we know what we are doing.  The regulations protect us from competition and the technology we can incorporate over time.”

Which side do you believe and where are you placing your bet as, in ten years, one of the other will probably be true.  Most bankers I talk to believe they have time to adapt and that they are adapting.  Most technologists I talk to claim that banks are too slow to adapt, their cultures are too traditional and their leadership too weak.

Which do you believe?

I claimed that the size and regulatory structure of banking is too much of a barrier to allow some upstart to take over their core business, but disruptive innovation is “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

Are we seeing this today?

Finally, I recently asked Where is the Uber of Banking? that sparked a really interesting twitter debate:

@Chris_Skinner it’s cheaper to build the uber of banking than it is to explain it to banks. Why spend the money to explain it?

— Ian Grigg (@iang_fc) March 31, 2015

@iang_fc @Chris_Skinner is financial services, unlike taxis, un-Uber-able? I.e. B/c “Beg forgiveness vs ask permission” lands you in jail…

— Carl Marc Forcestein (@MarcHochstein) March 31, 2015

@Chris_Skinner banks operate as closed processing and distribution networks. If 1 opens up BPaaS/APIs we may see many ‘Uber of banking’

— Kevin Simback (@KSimback) March 31, 2015

Along with comments from many others.

So now it’s back to Chris believing that disruption is where it’s at whether you like it or not, and arguing that banks must act now.  Some are but many are not taking this seriously, and they’re the ones that will be disrupted if they don’t watch out.


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