Why banks (and PayPal) don't simplify

As the internet reinvents commerce on this planet, it’s interesting to see the two things that enter the innovation mix: simplicity combined with connectivity.  When you think about the Uber, Airbnb, Facebook, Google, Amazon and more, you realise that they have all simplified some complex things from sharing to finding.  Google’s home page has stayed pretty much the same since day one.


Clear, clean and simple, it’s a SEARCH engine.  It helps you find stuff.  It’s easy.

You don’t think about the complexity of the thousands of servers that are indexing everything non-stop.  That’s the complex stuff that sits behind the simple home page.  You don’t think about the connectivity needed to do this.  The fact that Google is linked into every server on the planet to index the internet.  You just assume the homepage is there and will find stuff. 

It’s all simplified through global connectivity.

The same is true with Facebook.  You share your life with your friends, from links to funny videos of cats and babies to pictures of your own cats and babies.  You don’t think about the complexity of the thousands of algorithms required to tag, link, upload, organise, store and manage all your stuff.  You just want to share stuff.  You don’t realise how Facebook is getting smarter and smarter.  You just want to connect with your friends and family.

Amazon is the same.  Again, you’re just buying things you like.  It’s simple and easy.  You don’t think about how Amazon has created a global store of everything through connectivity to every sales outlet.  You just buy things.  You don’t think about how Amazon can read your mind and predict the next things you want to buy through indexing all purchases through meta-tags.  You just enjoy the fact that it has suggested that you might want that next book by Anna North.  You just like the fact that it can read your mind and your tastes.

Uber and Airbnb are doing something different however.  Rather than simplifying how you find, share and buy things, they have simplified marketplaces.  The taxi market was fragmented and disorganised.  Uber organised it.  In this case, the simplification is through connectivity rather than complexity.  Uber’s purely connecting people with cars through an app with people who need driving.

Airbnb saw a similar opportunity to sell spare space by connecting people with rooms to people who need rooms.  It’s the P2P connectivity that provides the simplification of markets (transport, lodging), rather than purely simplifying activities (finding, sharing, buying).

Which brings us around to banking.  What activities can we simplify in banking and which marketplaces could be simplified through connectivity?

These questions have already been answered in some areas.  PayPal and Alipay simplified the activity of paying by providing a layer over the traditional complexity, called an email.  Prosper and Lending Club have simplified the credit markets by providing connectivity between those who have money and those who need it.

Paying and enabling credit are the narrow areas of finance being attacked by simplification, but what else could be flattened by connectivity.  I must admit that when I look at this chart from CB Insights (doubleclick image to see a larger version):

Unbundling of a Bank

It really makes me take note, as any financial activity can be levelled by technology.  Any financial activity can be simplified.  Any financial marketplace can be flattened by connectivity, peer-to-peer, person-to-person.

This is why banks must change tack, and become integrators and aggregators of components of finance.  A bank cannot compete with a specialist who is simplifying a marketplace or financial activity.  Instead, they need to work with the simplifiers and incorporate their best practices into their own.  This is why the likes of Moven and Fidor are being brought into bank operations as partners.   This is why the likes of Venmo and Braintree are brought by PayPal.

Any incumbent player who tries to resist the onslaught of the simplifiers is going to fail, because the simplifiers are reinventing activities and markets overnight.  My favourite current example in fact, is Venmo.

If you don’t know the story, Venmo was invented by two mates during a long weekend.   The whole story is here, but the gist of the story goes like this:

One of the weekends we were getting together to work on this idea, Iqram was visiting me in NYC and left his wallet in Philly. I covered him for the whole weekend, and he ended up writing me a check to pay me back. It was annoying for him to have to find a checkbook to do this, and annoying for me to have to go to the bank if I wanted to cash it (I never did). We thought, “Why are we still doing this? We do everything else with our phones. We should definitely be using PayPal to pay each other back. But we don’t, and none of our friends do.”  So we decided, let’s just try to solve this problem, and build a way to pay each other back that feels consistent with all of the other experiences we have in apps we use with our friends.

After four years, Venmo is now processing almost $4 billion in social payments a year and was acquired first by Braintree in 2012 (for $26 million) who were then, subsequently, acquired by PayPal.


Could PayPal invent Venmo?


Did PayPal invest Venmo?

No way.

Why didn’t PayPal invent Venmo?

Because simplification comes from kids and complexity comes from incumbents.

The incumbents are too dogged in their own complexity to see simplicity in too many cases.  That’s why banks spend all their time talking about regulations, regulations, regulations, whist Fintech start-ups talk about innovations, innovations, innovations.

The startup has the excitement of simplifying complexity; the incumbent has the weariness of dealing with complexity.

That’s why Fintech is so hot – because it’s reinventing financial activities and simplifying markets.  Watch this space for more.


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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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Technologies have hardly touched our world yet …

We think we’ve come a long way with technology, but we haven’t really.  Sure we can now ping a message between a router in Hong Kong and London at the rate of 0.239 seconds speed; we can wear a watch that not only tells the time but takes photos, keeps our diary and tells us to stand up every two hours; we can store 1,000s of photos and keep a lifetime of memories on a drive that costs less than $100; we can travel around the world and back as easily as our forefathers travelled the next nearest town; and so on.  But it’s nothing yet.

I realised this as I stood forlornly at Heathrow security this morning (my usual hangout area) and watched as the security guards forensically analysed the bags of many weary passengers.  My first thought was how archaic a system we live in that cannot work out you’re not a terrorist.  A system that requires every passenger to strip all metal items into bins, and take out their laptops and drinking water to ensure it won’t explode.

My second thought was even clearer, as the security guard came to search my bag and dragged out charger after charger, for my many battery operated gadgets.  Then there were the USB Cables (about 10) to support the charging of the gadgets from the chargers.  Then there were the electricity cables for the laptops I carry (one big and one small).  As I looked at all these wires and cables, I’m thinking: why are we still so reliant on such old technologies.

I want to live in a world where technology is self-charging via solar panels through the air.  A world where you never see this …

Iphone battery

or this …

Busy cursor

or this …

Windows update

In fact, it fascinates me to think of where all this is going. 

In a talk last year, Larry Page of Google touched on this and said that we ain’t seen nuthin’ yet.

His example was the Google deep learning project that had so far educated a computer to recognise a cat just from analysing YouTube videos.  Larry talks about how Google’s Deep Mind project “ran machine learning on YouTube and it discovered cats, just by itself. Now, that’s an important concept. And we realized there’s really something here. If we can learn what cats are, that must be really important.”

Hmmm … and then you realize what Deep Mind sees as a cat.


It’s impressive, but not so impressive.

It’s impressive that we can land a space craft on an Asteroid, half a century after landing on the Moon, but we still haven’t reached Mars yet.  I’m not deriding our successes so far but, when you look at the world forecast back in the 1960s, it was Star Trek and The Jetsons.  Fifty years later, we don’t have space packs and still stack ourselves into tiny tins with hundreds of other steaming bodies to get to and from work.

So, when we look at this networked revolution; this digital transformation; this connected world; we can pat ourselves on the back for pushing the boundaries so far … and then wonder what will happen when we have pushed them to their conclusion.


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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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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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