I didn't say that banks are "too big to be disrupted" but "too regulated to be disrupted"

Quite often, with attribution, I let other websites cut and paste this blog onto their own.  American Banker did that recently but changed the title of the blog from  The reports of my bank’s death are greatly exaggerated to Like Airlines and Pharma, Banking’s Too Big to Disrupt*.  In so doing, the intent of the original became slightly distorted and has led to some interesting responses.   For example, JP Nicols responded with Banks better watch out for geeks in the garage and Brett King noted that Pharma is being disrupted as much as banking.

As I stated in the original piece, it stemmed from a debate on twitter between Brett and Michal Panowicz (summarised here by Jim Marous) and, as a result of the slight distortion of my original message, I need to reiterate exactly the point I am making.

First, banking is not being disrupted. 

It is being evolved.  I have made this point before, and stated that the evolution is in the architecture of banking to be a core digital play rather than a physical one.  Like books, music, entertainment, travel agents and more, banking is something that can be done through devices with no physical need for service.  You cannot have that in airlines (you need to physically travel) or gas stations (you need to put gas in your engine physically) but you can have some services, like banking and music and travel orders, made through a pure digital play.

However, unlike music, books and travel agents, banking will not be wiped out by a new player creating a new way of doing things.  There will be no iTunes, Uber, Amazon or Expedia of banking.  The reason for this is that, unlike all those other lines of business, banking is regulated.  Banking is integrated with government policy; is a political instrument; is used as the government’s control mechanism for social order; and is core to a country’s economic success or failure.  For this reason, it is in government’s interest to licence value stores and value exchanges.  This controls monetary supply and economic stability.  For this reason, banks are given the luxury of time to adapt that book stores, travel agents and music shops didn’t have.

Equally, we get a lot of folks saying that a new giant will emerge from the Fintech community to displace banks.  There will be a new JPMorgan or HSBC, which might be an Apple or Kabbage.

I don’t think so. First the P2P community are being given securitised funds from the banking community, so banks win whether they do the lending or the crowdfunders do it for them.  In fact, it cuts costs and displaces risk to the P2P platform, so it’s more efficient in many ways.  A win:win for the banks in other words.

Cryptocurrencies have proven they can’t be trusted – Mt.Gox, Bitstamp, the Bitcoin Foundation – and so the technology is moving from the Wild West of the Web to the Ripples of the banking fraternity.  Again, from chaos comes control, and banks keep their status of being transactors and stores of value.

Mobile will take banking to the masses and the millions of unbanked.  Yes, what’s interesting then is that the unbanked become banked because they build mobile money credit histories that can be trusted.  When M-PESA launched in Kenya in 2007, there were only 2.5 million adults with bank accounts; eight years later, over 15 million Kenyans have bank accounts, thanks to mobile credit histories.  The banks win again.

Meanwhile, as all this so called disruption is happening, the banks can live with the threats and opportunities therein because they know they have time to evolve due to their regulatory requirements.  As Transferwise and Holvi bathe in the misguided belief that the regulator doesn’t care about them, there will come a day when they do.  Come that day, the Transferwise’s and Holvi’s will either be acquired, merged or moved into the banking control ecosystem or shut down.  Full stop.

The only other industry that works this way is probably pharma, where inventing the next big drug product is the focus. That is because the pharma industry works on having patents, just as banks work as an industry based upon licences.

Without patents or licences, what have you got?  A sexy front end distribution system or app that sits like a cherry on a cake.  Very pretty, but changes nothing in the core ingredients of the system.

Nice try y’all.

Meantime, I am not saying that banks will not need to change.  They crucially must adapt to survive.  Their survival being determined by how quickly they can step up to the new model challenge of being digital and not physical.  The ones who work out their digital core architecture, infrastructure and organisational evolution strategy (along their branch closure and staff redeployment strategy) first will be the ones that will lead the rapid change from physical to digital.  The ones who wait will either be beaten by competitive forces or a shadow of their former selves.  Meantime, the ones who create new models through Fintech, will be the ones funded and also acquired by the early digital leaders of the traditional system.  Either way, they all get evolved into the new model army of the digital financial market and, give it ten years, I fundamentally believe the that biggest banks in the world will still be in the list of the biggest and that there will not be one new name in that list, other than an existing bank we haven’t seen arise yet (maybe an African one for example).  It’ll be a bank that create an Uber-style version of their banking offer maybe, but it won’t be an Uber of banking.

Thoughts?

 

* someone mentioned that my original title seemed remarkably English which is why the American Banker switched it to something more snazzy.  For the record, the original title is a play on the American author Mark Twain’s comment: “The report of my death was an exaggeration”

 

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Banks without a digital core will fail

Building on the discussion of data being key to disruption, I often use the phrase ‘digital core’ in this context.  Therefore, I was intrigued when someone asked for a definition of a ‘digital core’ and one of the replies was there isn’t a core anymore. 

I wondered what they meant and, in explanation, they referred to the idea of a central point of systems – a mainframe – is no longer the way the markets operate.  Systems should instead be spread across server farms in the cloud so there is no single point of failure.  I totally agree, and therefore felt it worth a little more explanation of digital core as so many misinterpret what this means.

First, I have defined my terms several times before:

But it does no harm to reiterate some points, such as this one.

So a digital core is, in essence, the removal of all bank data into a single structured system in the cloud.  The data is cleansed, integrated and provides a single, consistent view of the customer as a result. 

That’s a big ask, and most banks tell me it’s not achievable.  Silo structures and line of business empires protect data sharing and lock client information in their product focused empires; creating a single, cleansed store of cloud-based data is too insecure, creating the opportunity for any cyberattacker to bring down the bank; a single data store would not be good for risk management purposes; etc, etc.

I understand all these concerns, but don’t agree with them.

The product-focused empires are the problem.  You cannot have customer-centric operations if your organisation is product aligned.

Cyberattackers also find it far easier to steal from fragmented systems than one that can track digital entries in real-time across the enterprise.

Equally, banks are pretty darn poor at risk management in their fragmented, product-focused structures, as evidenced by two meetings with my bank recently.  The first meeting is with my business relationship manager, who tells me all the ins and outs of the banks’ SME operations.  I then, for the first time in living memory, allowed my new personal relationship manager to visit.  He had printed and read very carefully all my information and wanted to complete an up-to-date fact find for KYC and sales purposes.  That was fine.

Halfway through the conversation he asks: “what do you do for a living?”  I said that I thought he would know as I talk to my relationship manager often.  “Oh”, he says, “that doesn’t show on our records.  Who did you talk to?”  I explained that it was Paul, my SME manager, as I have my business account with the bank.  “Oh”, he says, “I didn’t know that”.

This is fairly typical of all banks I talk to – their corporate, commercial and retail bank systems are separated and never the twain meet – but it’s not the way a digital bank would work.

A digital bank with a digital core would immediately create the inter-relationship profiles of the digital footprints of all individuals who touch the bank.  That is the way you can drive contextual relationships and offers to those who touch the bank.  It is also the only way you can drive a consistent, augmented and informed approach to clients who touch the bank.

Equally, a digital bank has a single digital core of data in the cloud that can then be accessed by any form.  The digital core is independent of the processors, and hence you can take out a server or a system at any point and replace it with a new processor, because you have no reliance on the engines.  Your reliance is on the data being clean and consistent.

For me, it is a critical factor in developing the digital bank and yet whenever I get into a conversation about this with a bank, I’m told it’s too difficult.

It may be too difficult but I suspect that if banks don’t bite this bullet, the fintech specialists who do get the data structures right will eat their lunch,

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Bank Fintech worries are obvious … solutions are not as clear

I just finished presenting on Digital Bank strategies and Fintech, and was asked a wide range of questions:

  • How do we transform our legacy structures?
  • What is the biggest obstacle to becoming a digital bank
  • You mention partnerships but all cooperative structures failed in the past, how can we succeed in the future?
  • Can you show us someone who is doing this right and making it work?
  • What should a bank do when we have millions of customers who trust us?

… and more.

I kinda realised something at this point that hadn’t struck me before or, rather, it had struck me but not as visibly.  Banks are worried about the future, not complacent. 

I guess that is why I am being paid to talk, consult and write about this stuff, but it didn’t hit me as noticeably as it did today (probably because at most conferences, no-one asks any questions).

One lady came up to me afterwards and said: the problem is we all know we need to do something, we just don’t know what to do.

I said it’s pretty easy, and started re-iterating my underscores about digital needs to be seen as core, not periphery; it needs to be invested as a continuum, not a project; it needs to be seen as foundations of the bank, not a channel of the bank; it needs to be articulated clearly about what it means to the bank and led from the top; etc, etc.

She intervened fast and said: I hear you, I hear you, I hear you Chris, but you don’t get it.

What?

It was then I got the message: Our bank is led by someone who doesn’t get it.  He’s assigned digital under the leadership programs but, when it comes up, you can see he switches off.  All he’s concerned about is regulation and compliance.  Digital is on the back of the bank’s envelope, but it’s not key.

It was then I realised I was talking to the head of digital at the bank.  Oh dear.

I must admit that I encounter this frustration more and more often.  The frustration is that the bank is worried about fintech, has woken up to digital and are thinking about what to do.  They’ve invested in apps and APIs, restructured services, trying to get off legacy and doing the things that should be done.  But the problem is the CEO doesn’t get it.  The CEO has grown up in the bank, understands the bank, loves the bank but has no idea what this digital stuff is all about.

A great example was another conference attendee who runs a group that represents bank thinking.  He said they had created a fintech focus area but were struggling as no-one in the group knew anything about fintech or digitalisation.  Sure, they all knew about bank risk, compliance, counterparty systems and mandates and such like but digital?  Fintech?  Oh no!  Bring in the nerd.

So, I know now something I’ve known before but can articulate better than ever before.  If your CEO is not leading change and articulating a digital vision, then what are they doing?  If they have a team delivering digital change but appear to have delegated their responsibility to be part of that change, thn what are they doing?  If you are seeing inertia and complacency about fintech and digital in your bank, then show them Jamie Dimon’s shareholder letter and scream: WHY?  If you are in a bank that needs to wake up to digital and fintech, then make sure that the CEO is awake first.  Finally, if you are in a bank that has not even got this in their agenda … leave.

 

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Data personalisation strikes to the heart of bank disruption

I’ve heard a lot of talk this morning about Big Data at a conference here in Barcelona, and had a realisation half way through.  The conversation was all about the move from mass markets and customer segmentation to the market of one and peer-to-peer personalisation.  In other words the deep data mining demanded by Don Peppers and Martha Rogers in 1:1 marketing in the 1990s is finally here.  It took twenty years, but here it is.  Yet this is the heart of the debate about digital disruption, fintech startups and bank responses. 

The reason why banks are being accused of being old and stale and slow, is that they are finding it very hard to adapt from product selling to mass markets through traditional media engaged via channels to offering contextual services to individuals via social media that provides digital access.  This is all part of the evolution, or revolution if you prefer, of banking and the heart of this is that the fintech startups are focusing upon putting control in the hands of one.

For example, at a recent US conference, there was a lot of talk about Venmo.  Venmo is a social payments app that acts as both a way of ensuring bills are paid between mates and also being a social share.  We all go out at the weekend and Dave pays so Chris, John and Erin send money via Venmo a few minutes/hours later.  The next time we go into Venmo, where’s Brett’s payment?  Hmmmm …

What’s Big Data got to do with that?

Not a lot.

What’s that got to do with the new market of one?

A lot.

The market of one is all about making the individual the centre of control and supporting them in controlling their lives.  The market of one can only be served by apps that leverage data and personalise it.  So Venmo’s secret is not deep data mining but allowing deep data sharing.

It’s also interesting that Venmo came through Braintree into PayPal, and PayPal now have one of the hottest apps out there.  For example, Venmo processed $141 in payments in 2013 increasing four0-fold to $700 million last year.  Could PayPal have created Venmo?  Not really.  PayPal are already being called an incumbent legacy, as they’re over a decade old.  Ten year old firms find it hard to stay fresh, as even Facebook demonstrated.  That’s why the new tech firms are acquiring and investing fast to keep up.  It is why Braintree acquired Venmo and PayPal acquired Braintree in a similar way to Facebook acquiring WhatsApp and Instagram. 

PayPal would not be able to create Venmo anyway as Venmo came out of an idea of two mates in their 20s who owed each other money after a long weekend.  A bit like Facebook, Tinder, Snapchat and more, these apps come from people seeing context and then looking at how to use new tools from Big Data through Cloud to Apps to provide real-time sharing and sourcing of needs.

And this is where we do see the banks struggle, as they cannot create these new apps as they don’t have the structure, capability or organisation to do so.  But what they can do is seed fund these apps, buy their companies, partner with the founders and more.  And that’s what Jamie Dimon is alluding to in his shareholder’s note, and it’s what banks need to wake up to in the new landscape.

The new landscape demands that banks work 1:1 with relevance to the individual’s needs.  If the bank cannot deliver this through their archaic systems and structures, then they have to rebuild the bank through working with the new systems and structures. 

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What keeps Jamie Dimon awake at night? (clue: Fintech)

I’ve written a lot about incumbents versus startups lately and noted with interest that Jamie Dimon’s annual letter to JPMorgan shareholders picks up on this theme (not as a direct result I’m sure?).  He talks about “hundreds of startups with a lot of brains and money working on various alternatives to traditional banking” and that “the ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting.”

These are the ones of concern?

Yes, because “they are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks.”

Interesting.  Why does it take banks weeks?  He doesn’t say.  The answer is because banks are laden with sedentary processes built in the last century for the physical distribution of paper in a localised network called the branch.  The branch was filled with human automatons who could manage transactions but not assess risk.  Risk is a Head Office function managed by specialists, who are trusted not to lend to idiots (hence the reason why we avoided a credit crisis!).  The hand off of fact-finding papers by automatons to enable specialists to work out whether the applicant was an idiot or not would take weeks.  Now, self-service forms online have replaced the automatons and automated systems have replaced the specialists.  That’s why the new P2P providers can replace banks with instantaneous decision-making services at a fraction of the cost.  After all, a server for $1,000 is far cheaper than a specialist Head Office credit risk manager costing tens of $1,000s.

As I blogged a while ago, this is the reason why banks should fear the replacement startup companies more than the wrapper services.  It is also why Jamie Dimon not only underscores that the banks is “going to work hard to make our services as seamless and competitive as theirs” but, in a step further towards bank as value systems integrator, he states that JPMorgan “also are completely comfortable with partnering where it makes sense.”

Will JPMorgan integrate Lending Club and Prosper into their credit risk operations and structures, and what does this to do margin, process and operations?  Good question and one that JPMorgan along with other banks are all trying to assess, as they have to face it: the day of stand-alone vertically integrated banking is over.

That’s demonstrated well in the payments world, that also gets a note in the letter.

“You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us — and we are quite good at it, but there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and ‘pain points’ for customers.”

Learning is a good thing to focus upon, and JPM along with their counterparties are doing just that.  It is why UBS, BBVA, NYSE, Intesa, Barclays and several other banks are investing in cryptocurrency startups and supporting new payments models.  The thing is that they cannot do this effectively if banks are hamstrung by heritage.  As Dimon states:  “some payments systems, particularly the ACH system controlled by NACHA, cannot function in real time and, worse, are continuously misused by free riders on the system.”

Free riders? Who could they be?  “PayPal and PayPal look-alikes”?

So what are you going to do about JD?

Well, I answered that a while ago  but, in case you missed, it JPMorgan has been hiring a whole host of Silicon Valley talent.  They have to do this to compete with the new startups, free riders: wrappers, replacers and reformers.  As Jamie Dimon puts it:  “We move $10 trillion a day.  We’re one of the largest payments systems in the world. We’re going to have competition from Google and Facebook and somebody else … when I go to Silicon Valley… they all want to eat our lunch.”

So, although banks have a system designed to protect them through licences, it’s not completely protected from margin squeeze and fee contraction through new players.  And we may say that this is just something to be concerned about in the retail space, but I suspect that the likes of Jamie Dimon don’t see it that way as most of the upstarts don’t.

So, the bank of the near future will be value systems integrator of best-in-class apps, APIs and analytics that enable them to deliver the ultimate delivery of value aggregation for their clients.  If they don’t move to this model, then their failure to adapt will have been proof of being ignorant of the change that is going on around them and, as noted by Roberto Ferrari who I interviewed the other day, if leadership teams are unable to lead change then they are not a leadership team anymore.

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It's not the end of banking as we know it, but …

I’m intrigued by how often I hear the line: “banks are stuck in the past”.  Most upstarts and startups are saying that banks have their heads up their rears, aren’t focused upon the future, don’t think out of the box, cannot change, blah blah blah.  Do they really believe this?  Apparently yes.  Such arrogance is impressive and is the reason why so many new companies are entering the industry to change it.  The question is: will they?   My answer is: a little.

Some of us have been around this industry a long time and have heard this mantra – banks are going to be disintermediated – a long time too.  I first heard this mantra en masse in 1995, when the internet was a game changer, and nothing happened.   I remember hearing a great intellectual presenting at a conference in 1996 and stating that banking will change more in the next five years than in the last fifty.  Banking didn’t.  I remember hearing lots of presentations in 1997 about Microsoft, Wal*Mart and Virgin disintermediating banks.  They didn’t.  Equally, I remember hearing many talking of banks becoming a utility function and just ‘dumb pipes’ in the late 1990s.  They aren’t.

Now some might say: ‘yet’.

What goes around, comes around, and some might think that the fact this hasn’t happened yet is just due to timing.  It will come.  A bit like technology is yet to have its day, it will come.  We all knew that mobile was coming to banking, but it took Apple to turn the phone into a computer and make it mainstream.  We all know that biometrics is coming to banking, but it took apps to allow this to work intuitively with payments and make it mainstream.  We all know that visual call centres will displace audio call centres, but it took Skype to make it mainstream.

In other words, we all know a lot of things are happening or coming, but it takes a game changer to incorporate and develop the capability before it becomes mainstream.  And, when that game changer appears, banks adapt and change.

So what is the game changer that will make disintermediated banking mainstream?

Cryptocurrencies?  Mobile?  Wearables?

These are interesting but the underlying ecosystem for all of these is still banking.   The same is true of the leading names in the startup world such as Prosper, Lending Club, Moven, Simple, Currency Cloud and more.  In other words, the backbone of most of the startups are banks.  Similarly when we talk about Apple Pay or Samsung Pay or PayPal or Square, they all sit on top of the banking infrastructure.  They don’t change it.

Someone asked me the other day about the landscape for banking disruption and who all these new companies used for their financial system.  The answer: banks.  All of the new startups have to operate through a system today and that system today is the bank system.  This is because the bank system is regulated, licenced and has high compliance, capital and governance requirements as blogged the other day.

So what will change this?

OK, so don’t get me wrong, the newco’s are changing this.  P2P, crowdfunding, cryptocurrencies, mobile apps, APIs, cloud and data analytics are all impacting bank structures, products, services, margins and operations.  But what I find irritating is that most of the upstarts think that banks aren’t bothered about this, aren’t responding, don’t care and, in some cases, are just stuck in the past.

Some believe that banks are dinosaurs, sleeping on the job, ignoring the threat and believing that they don’t need to respond.

Wrong.

I haven’t met one bank in the last year that isn’t taking digital disruption seriously.  In fact, I’ve been surprised at how many grey haired, fusty old bankers are talking to me about what they need to do.  They know they need to change, they see the issue and they are concerned about the disruption.  The most critical element here is more about what to do than the need to do something.

Most banks and bankers are aware of the challenges and are concerned about their strategies to respond.  They are aware of the legacy systems and structures, the fact that they may be disintermediated and the challenge of change.

In other words, a little like twenty years ago, they hear the rallying calls for change and are changing.  This means that banks are adapting to survive and, as in Darwin’s advisory note of 1859, “it is not the strongest of the species that survives, but the most adaptable”.

And there’s the rub: adapting to change.  Some banks are making it happen, some are trying to make it happen and some have no idea how to make it happen.   That’s the real challenge here.  Not the end of banking as we know it, but the end of some banks as we know them.

 

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Why Fintech Banks Will Rule The World

Whilst debating whether new fintech startups would eat the banker’s lunch yesterday, I stumbled across a really interesting read by Philippe Gelis, co-founder and CEO of FX firm Kantox.  It was so good that I asked Philippe if I could put it on the blog and he kindly agreed.  Read and enjoy …

Why Fintech Banks Will Rule The World, by Philippe Gelis

Last week, I had the opportunity to present Kantox and my vision of Fintech in front of around 150 bank executives from Northern Europe. After my pitch, we had a Q&A round, and one more time I had proof that bankers are not expecting at all what will happen in the next 10 years.

The financial industry is one of the last large industries that have not been already really disrupted. Nevertheless, it seems that bankers do not have much of a different approach to the people who ran the press, hospitality and airline industries some years ago.

Every industry will be “uberized”, but it seems that most bankers still think it will be different in their case, probably because they consider that the heavy regulation will protect them and limit the growth of Fintech at some point. Bankers simply do not understand that tech companies are agile enough to take advantage of any piece of regulation.

They also still believe that customers still trust banks, while since the 2008 financial crisis and due to the never-ending financial scandals (Libor-gate, the FX fixing scandal, etc.) customers (both individuals and businesses) have a huge appetite for alternative finance. Banks are not seen any more as partners, but rather as pure providers only looking after their own interests and short-term profits.

It is a first step for banks to open incubators or to create VC funds to invest in start-ups, some of them Fintech, but it is definitely not enough. Most banks look to fund fintech start-ups that create products to be added on top of banks products, that will make the user experience better, but they almost never invest in products that directly compete with them, that cannibalize them.

Let me explain why I think bankers are completely wrong.

We are now experimenting with the first wave of fintech, which sees companies competing with banks on specific products:

  • Loans and credit
  • Payments
  • Foreign exchange and remittance
  • Wealth management
  • and many more

Lending Club is far and away the global flagship fintech company. The success of its IPO has been a game changer for the entire fintech sector.

So, banks are getting pressured by newcomers but –and the “but” is really important– these disrupters are relying on old-school banks for banking services and banking infrastructure (bank accounts, payments, compliance, brokerage, etc.). In other words, they are re-inventing the user experience, the user interface or the business model but not “the whole thing” (to steal a quote from Marc Andreessen). And by relying on banks to do business, fintech companies are clients and so generate revenue for the bank. Let’s say it is a co-petition (co-operative competition) model in which fintech stays at the mercy of banks, they disrupt banks on one side but they bring them business on the other side. In the end, banks still win.

It is important to note that many fintech businesses have evolved from pure “P2P models” to “marketplace models” where the liquidity can come from peers or from financial institutions.

Lending Club is known for getting up to 80% of its liquidity from financial institutions and not from peers. Here we have a clear example of banks considering it to be more efficient and therefore more profitable for them to lend money through Lending Club than through their outdated branches. Anyway, the challenge is more in having deep liquidity than in locating the liquidity.

The second wave of fintech, to come in two to five years’ time, will be “marketplace banking” (or “fintech banks”). This will be a type of bank based on five simple elements:

  1. A core banking platform built from scratch.
  2. An API layer to connect to third parties.
  3. A compliance/KYC infrastructure and processes.
  4. A banking license, to be independent from other banks and the ability to hold client funds without restrictions.
  5. A customer base/CRM, meaning that the fintech bank will have the customers, and a customer support team.

 The products directly offered by the fintech bank will be limited to “funds holding”, comprised of:

  1. Bank accounts (multi-currency).
  2. Credit and debit cards (multi-currency).
  3. eWallet (multi-currency).

All other services (investing, trading & brokerage; wealth management; loans, credit & mortgages; crowdfunding (equity and social); insurance; crypto-currencies; payments; remittances & FX; this list is not exhaustive) will be provided by third parties through the API, including old-school banks, financial institutions and fintech companies.

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Imagine that you are a client of this “marketplace bank” and that you need a loan. You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest interest rate possible.

So, through the API, the “marketplace bank” will consult all its third parties and offer you the loan that best suits you.

We can imagine both a process in which conditions offered by third parties are non-negotiable but we can also imagine a competitive bidding process to get the best offer for each client at any point in time.

I have been asked several times about this business model and I think it is a no-brainer. It is a simple mix between an access fee to the “marketplace bank” and a revenue sharing model with the third parties providing additional services.

Here we have a completely different approach regarding the relationship with incumbents. Fintech banks, thanks to their banking licence, will not rely any more on any bank to be and stay in business, and so will not be at the mercy of incumbents. What is even more powerful, through the marketplace, incumbents will become “clients” of fintech banks, so the system will be completely reversed.

We will see banks pay a commission to Fintech banks to serve their customers!

The beauty of “marketplace banking” is that it competes directly with banks on core banking services without the need to build all the products.

Now the question is, what is really needed to launch a “marketplace bank”?

Technology/API/Compliance/KYC: building the technology is a complex part but many people have the skills to do so. So it is definitely not the main barrier.

Banking license: in Europe, the budget to get a banking license is estimated at approximately €20 million, though it could cost less or more, depending on the country. But it is not only about money.

To be in business you need strong and experienced board members, without them regulators will probably not give you the green light. So this means that you need to be able to convince investors and board members to trust you based on a Powerpoint presentation and to bet big on you. I think that we need the first wave of fintech to be successful, with some exits and big returns, to have people betting a lot of money on “marketplace banking”.

As an entrepreneur you need to have demonstrated that you are able to execute and scale a fintech business to lead that kind of new venture.

Customer base/CRM: here is the most complex part. How do you attract a critical mass of customers based on a simple offering (accounts + cards + eWallet) that relies on third parties for additional services? You cannot only rely on marketing and having a cool brand to attract hundreds of thousands of new customers if you have nothing really different to offer.

You also need some kind of focus: will you target individuals or businesses? Lower end or high net worth individuals? Small, medium or large businesses? Will you focus on one single country or several ones?

As always, it is all about customers and revenues, so you need a clear sales and marketing plan to quickly scale the customer base. I have some ideas how to do it but I will keep it for another post.

I have been asked several times if the first “marketplace bank” will be launched by an old-school bank (an incumbent) or a fintech startup? I definitely think the latter. It is too disruptive and the risk of cannibalization is too high to see a bank assuming the risk.

Anyway, most bankers are not already worried enough by fintech to react to its coming second wave. I remember a pool during a fintech panel where almost 90% of people answered that a fintech bank was improbable and, if it happens, it would be build by an incumbent.  This creates a fantastic “window” for us fintech entrepreneurs, to build it, and once it’s done, it will be too late for them to react.

Fintech banks are inevitable!

This is just a blueprint. To pull it off requires a lot of hard work. But given that the elements are all already available, it’s not a question of if but when the first pure fintech banks appear. They will be lean, flexible, and unhindered with legacy systems and a bad reputation due to never-ending scandals. 

They will eat the lunch of the current bank dinosaurs and could well eventually rule the banking world. 

 

About Philippe Gelis

Philippe Gelis is co-founder and CEO of the foreign exchange marketplace, Kantox.  Philippe has led Kantox’s growth to serve over 1,500 corporate clients from over 15 countries, carrying out over $1 billion in total trades.  Kantox was founded in 2011 with the goal of bringing transparency, efficiency and fairness to the FX market for SMEs and mid-cap companies.  Philippe is a regular columnist and commentator in the financial press, and has appeared in Forbes, the Financial Times and Business Insider, among many other publications.

 

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Where is the Uber of banking?

The smartphone revolution has radically restructured every industry from booking a trip (TripAdvisor), a room (Airbnb) or a taxi (Uber), but where’s the Uber of banking? There isn’t one yet and consumers will soon defect to new players unless high street banks wake up, says Chris Skinner, chairman of the Financial Services Club

Technology is changing every aspect of our daily lives and its march is getting louder, faster and stronger as each day goes by. You only have to look at the total immersion of people in their smartphone screens on the train or street to see the impact of consumer technologies. The imminent arrival of wearables, such as Apple iWatch and the Volvo helmet  to keep cyclists safe, will have even more impact this year.

However, it is not these technologies themselves that make them so immersive and persuasive, but the apps that run on them. If you have not used Uber yet, it is the usual app focused upon by innovators as the gold standard of disruptive innovation. The reason it is cited so often is because it has emerged from nowhere as the app everyone loves. This app finds your nearest taxi, tells them you need picking up and where you want to go, and pays them, all within the app. That takes away two big barriers to people with a busy city life: finding a taxi and paying them. The app does it all. It takes away the friction.

That is what disruptive innovators have achieved in travel and related markets, but what is happening in banking? Not a lot. Most large banks have just taken their internet services to a mobile screen or, as I like to think of it, they’ve taken a big-screen banking system and converted it to a small screen. That is not particularly innovative thinking. For example, when the French insurance group AXA launched their mobile banking app, they invested in specifically making it a mobile-app-oriented experience. Similarly, new startups overseas, such as Moven in American, are creating new bank services with easy sign-on, touch-screen navigation, integration with other mobile apps and using fingerprints for authentication.

SMELL THE COFFEE

These are things we are not seeing from most mainstream banks, as most mainstream banks have to evolve their old systems to keep up with these innovations, rather than innovating themselves. In fact, it may surprise you to find that the most innovative financial app out there comes from Starbucks, the coffee company. Starbucks chief executive Howard Schultz, speaking about mobile payments during the company’s January 22 investors’ update, said: “Today, in the US alone, over 13 million customers were actively using our mobile apps and we are now averaging more than seven million mobile transactions in our stores each week, representing 16 per cent of total tender. That’s more than any other bricks-and-mortar retailer in the marketplace.”

And it’s also more than most banks, although in Britain we have seen a strong take-up of mobile banking apps. According to the It’s In Your Hands report, released last summer by the banking industry’s representative body, the British Bankers’ Association, we are downloading more than 15,000 banking apps a day and making almost £1 billion in payments per day via mobile and internet.

That is all well and good, but do you see your bank as an innovator?  Are their apps as cool as Songkick or as informative as Flipboard? Have you found the Uber of banking: the one that removes all the friction from dealing with your money and makes it easy and fun to keep up with your spending? I’m guessing the answer is probably not, but two startups will address this challenge during 2015.

The first is founded by a team that comprises the former chief executive of First Direct and the co-founder of Metro Bank. It’s called Atom Bank, based in Durham, and launching as a pure-play digital bank. What this means is that the bank is geared for mobile-first access. There is no call centre, apart from one for technical support, as you should not need to call a call centre for financial queries. Those are all answered by the app.

The other is Starling Bank that describes itself as the “Facebook for finance”. Embedding its service in a cool structure that is social as well as financial, Starling expects to be one of the killer players in UK banking this year.

A third player that already exists is Fidor Bank which has been operating since 2009 in Germany and plans to open its UK service in 2015 too. What is interesting about this bank – and you should note that all three of these new startups will be proper banks with proper bank licences – is it specifically wants to appeal to the post-2008 disaffected customer. It will bank money, commodities, investments, and even bitcoins and World of Warcraft Gold. This bank is different and very social.

SOCIAL MEDIA

They are proper banks that are community focused first. Their community is primarily in the social media world of Facebook and they become relevant to that community by firstly offering preferential interest rates based upon the number of Facebook likes they receive.

By way of example, last year they ran a promotion where the bank would lower interest rates on loans by 0.1 per cent and increase interest on savings by 0.1 per cent based upon gaining an extra 2,000 likes.

Why would Fidor do this? Because it builds community. They get 2,000 Facebook likes and that translates to 670,000 friends and family influencing the Facebook community to also like Fidor. That is because, according to Pew Research, the average Facebook user has 338 friends. So every like gets 338 people influenced to be aware of and engage with Fidor, and those influencers are friends and family.

The result is that Fidor is being exposed to thousands of people every day, and what they hear and see is that Fidor is a cool bank, engaged with their community in a social conversation about money and finance. It is the reason why Fidor spends just $20 to gain a fully KYC (know your client) on-boarded customer, compared with $1,500 for the average traditional bank.

In other words, traditional banks spend a fortune pushing products through channels by shouting at clients in the media; new banks spend a minimal amount talking to people about money through their communities of interest.

This is the key to the Uber of banking. The Uber of banking will be social, cool, transparent, trustworthy, simple, secure and reliable. There are some new ones out there today that are specifically trying to embrace these values and, if your bank is not one of them, but you want to be with one of them, then you may wish to consider taking a look at the launch plans of others soon in 2015.

 

This was originally published in the Sunday Times’ Raconteur supplement in February 2015.

 

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It's about behaviours, not technology

So I visit a tradeshow last week focused upon the future of payments, and everyone is presenting their latest mobile apps and designs.  “That’s not the future of money”, I fume silently at the back.  Then we had a mention of bitcoin and my ears pricked up.  Oh, it’s a bitcoin mobile app.

Hmmmm.

I guess I get wound up about these things for no darn good reason other than my own frustrations.

You see mobile, tablet, bitcoin, contactless and all that good stuff is not really what the future is about.  The future is about humanity.  The future of payments is about designing great and engaging human experiences, enabled by technology but not focused upon the technology.

That sounds a bit wacky: how can you design a great human experience with a technology if you’re not focused upon the technology, but that’s the point.  It was illustrated well by one speaker who said that their rollout of contactless mobile was a waste of money.  No-one used it.

Reason: it was not easier than using a contactless card, so they used the card instead.  Customers could not see the added benefit of touching a payment point with their mobile versus with a card. 

In fact, we have seen a lot of rollouts of a lot of technology in banking and I’m not so sure that many think it through.  This is the point of my presentations, which is not to devalue mobile and bitcoin developments as these are fundamental and important, but to change the focus from these current forms of technology across to what these form factors represent and where they might be going next.

The core of these form factors is that one works for an engaging human experience, whilst the other does not.  Mobile smartphones represent the final, intuitive outcome of years of technology.  Going back to the original Univac computers and their brethren in the 1950s, technology form factors have moved from mainframe to PC to mobile and, in that process, from very difficult to very easy to use.  That is why you don’t need a manual to use a smartphone.

Bitcoin is unfortunately stuck in the challenging mode today.  Give it a few years and it will be as intuitive to use as a smartphone, and then it will be pervasive and persuasive.  But it won’t take off with the general mass of the populous in its current form.

Which brings me back to the form factors of consumer behaviour in the future.  Today it is smartphone and apps.  Tomorrow it will be chips in everything and a connected economy through the internet of things.

So how will consumer behaviours change when anything can make a payment from a shoe to a wall to wig to a car? What designs would your bank rollout if you could engage a human experience anywhere with anything? And will you be talking about a payment in the future or an exchange of value? That final question is a really fundamental one as we focus today on mobile payments but tomorrow we should consider connected value, as that’s what Bitcoin really represents.

A virtual store that represents a unitised amount for the digital exchange of value.

Not the easiest thing to say but, what I mean by value exchange, is that if we were designing systems for tomorrow that focused upon the connected economy where value can be exchanged in many form factors – money, bitcoins, World of Warcraft gold, a share of an iTune, a gift of an amazon book, an idea – then you would change your whole mind-set of bank thinking.

We would not think about payments and devices at all, but the behaviours of humans who are enabled by the digital world to have the connection with anything to exchange anything that represents a value to the receiver.

Is anyone even thinking this way?

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It's about behaviours, not technology

So I visit a tradeshow last week focused upon the future of payments, and everyone is presenting their latest mobile apps and designs.  “That’s not the future of money”, I fume silently at the back.  Then we had a mention of bitcoin and my ears pricked up.  Oh, it’s a bitcoin mobile app.

Hmmmm.

I guess I get wound up about these things for no darn good reason other than my own frustrations.

You see mobile, tablet, bitcoin, contactless and all that good stuff is not really what the future is about.  The future is about humanity.  The future of payments is about designing great and engaging human experiences, enabled by technology but not focused upon the technology.

That sounds a bit wacky: how can you design a great human experience with a technology if you’re not focused upon the technology, but that’s the point.  It was illustrated well by one speaker who said that their rollout of contactless mobile was a waste of money.  No-one used it.

Reason: it was not easier than using a contactless card, so they used the card instead.  Customers could not see the added benefit of touching a payment point with their mobile versus with a card. 

In fact, we have seen a lot of rollouts of a lot of technology in banking and I’m not so sure that many think it through.  This is the point of my presentations, which is not to devalue mobile and bitcoin developments as these are fundamental and important, but to change the focus from these current forms of technology across to what these form factors represent and where they might be going next.

The core of these form factors is that one works for an engaging human experience, whilst the other does not.  Mobile smartphones represent the final, intuitive outcome of years of technology.  Going back to the original Univac computers and their brethren in the 1950s, technology form factors have moved from mainframe to PC to mobile and, in that process, from very difficult to very easy to use.  That is why you don’t need a manual to use a smartphone.

Bitcoin is unfortunately stuck in the challenging mode today.  Give it a few years and it will be as intuitive to use as a smartphone, and then it will be pervasive and persuasive.  But it won’t take off with the general mass of the populous in its current form.

Which brings me back to the form factors of consumer behaviour in the future.  Today it is smartphone and apps.  Tomorrow it will be chips in everything and a connected economy through the internet of things.

So how will consumer behaviours change when anything can make a payment from a shoe to a wall to wig to a car? What designs would your bank rollout if you could engage a human experience anywhere with anything? And will you be talking about a payment in the future or an exchange of value? That final question is a really fundamental one as we focus today on mobile payments but tomorrow we should consider connected value, as that’s what Bitcoin really represents.

A virtual store that represents a unitised amount for the digital exchange of value.

Not the easiest thing to say but, what I mean by value exchange, is that if we were designing systems for tomorrow that focused upon the connected economy where value can be exchanged in many form factors – money, bitcoins, World of Warcraft gold, a share of an iTune, a gift of an amazon book, an idea – then you would change your whole mind-set of bank thinking.

We would not think about payments and devices at all, but the behaviours of humans who are enabled by the digital world to have the connection with anything to exchange anything that represents a value to the receiver.

Is anyone even thinking this way?

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