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The Future Of Banking Industry

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In the future, digital will enable us to be in perfect sync with the world around us. Synchronizing services and products with the data cloud around customers enable them to prosper anytime, anywhere. When the financial crisis shook the world, around ten years ago and pulverized the stock market values of the banks, many journalists and experts believed that the banks were doomed. Demands for nationalizing banks were suddenly back in business. Subsequent regulatory changes transformed the way banks could operate, but overall they seemed to have weathered turmoil.

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Today, ten years later, an even greater specter seems to be at work: digitization. Now it is no longer just about the survival of individual banks, but the future design of a whole business with all its structures, processes and habits. Unlike a few years ago, however, this time it is not the legislature, but technological change that is the main driver of change: FinTechs attack the once-mighty large financial institutions in their fields of business; The Blockchain is on everyone’s lips and promises no less than a revolution in the coordination of barter and trade; and cryptocurrencies like Bitcoin are no longer just fascinating freaks and criminals. In short, there are increasing signs that technological change is fundamentally changing the way banks operate, that it offers great opportunities to new players, and raises the question of how to envision the future of this industry. This issue is of major societal relevance, as banks in particular and the financial sector in general play a fundamental role in our economic system.

As a future oriented bank, the Johnson Bank cannot just look at what’s going to happen in the future, but at analogies for what might happen, based on what has occurred in the past. You have to be a good “pastiest”, understanding the past, to understand the future. When we look at isolated technologies like blockchain or the smartphone, for example, we might think of these as a data solution for the bank. Or we might think of mobile like a channel for the bank. But if we step back from those specific technologies and look at what is happening in the world, we notice, something is changing. The world is digitizing! And the world is digitizing because we are seeking low friction and immediacy. We want immediate responses; we want stronger commerce connections that can scale up more rapidly. These are the systems that are changing globally. So within that framework, we cannot expect banking and financial services to stay the same as they have been, because ultimately it has to shift. So when we look at these phases of development of banking and overlay technology on this, we understand that it is not just about inserting technology into banking. Part of the shift is around trust and the utility of the bank.

When we focus on the Bank 1. 0 world, the foundational elements of banking, going back to the time of the Medicis and Florence and Firenze and places like that, banking was very simple: you would go to the bank because that was the safe place to store money. But transactionally, as our demands on the banking system increased, we needed to put technology in place to keep up with the demands of utility. This is the first bank mainframe called ERMA – Electronic Recoding Machine for Accounting. This was where acronyms were introduced into banking through technology. It was build by MIT for Bank of America in 1953 and it was primarily designed to do check processing back then. So technology started to change the banking sector. Prior to the introduction of ERMA and mainframes, we never had bank account numbers. You would go to a bank and fill out a card, they would put your name on it and that was your account record and your customer record. Your name and address was on a physical card in a bank branch. This was why, for 30 years after this some banks would not actually let you move from one branch to another without opening another account. But Erma could not sort customer information by name, so they had to give each customer and each account a unique number to sort it in the computer system.

The computers were not very sophisticated back then. This was the first use of bank account numbers, due to the mainframe. In the mid- 80s we started to look at ways to extend the platform of banking and make it self-service. We had the Internet come along in the 90s, but self-service banking really started with the introduction of the ATM machine. We were trying to extend the bank as a platform. But our reliance on the bank as a building, the bank as a place was becoming less and less important. Now we can bank 24/7. When bank 3. 0 came along, we extended that analogy to say banking was possible anywhere, any time. The trust was changing from where your money was safe, to now a set of bank platform technologies that would enable us to do banking. Today it is not a bank charter that makes someone trust in you as a bank brand. It is the utility of your bank. If your technology stops working for 10 days, you can not access internet banking, point-of-sale systems are down, branch systems are not working, how much trust would people have in that bank for those 10 days…? So utility and trust become wrapped up, and technology now becomes the overarching mechanism for delivery of that utility. But something else changed… We started to rethink the way financial services should work. “Yuebao” is the most successful investment or savings product on the planet today. It is built in China on top of Alibaba’s system to capture deposits from merchants and customers working on Alibaba and Taobao, putting that aside and giving them some high-yield interest rate. We classify this in the West as a money market fund. Jack Ma does not see it as that, which is why he called it Yuebao, “hidden treasures”. He saw it as a behavioral model for savings with 180 billion Dollars in assets under management. No branches or humans were involved in the sale of this product. In the past you may have heard an argument that we need bank branches and face-to-face interaction, because how else are we going to engage customers to take deposits or assets? And yet the most successful deposit product in the world today does not involve humans, it is completely automated. Alipay, Ant Financial, the parent company of Alipay in China, has a higher trust rating in China than most of the banks there. Why? It could be argued that it is because of utility. The next generation of technology will most likely be voice-based artificial intelligence, personal smart assistants built into our home and telephone and augmented reality smart glasses that can give you data in your field of view so you can make decisions. These technologies will increasingly embed banking in our world. The design of a banking system to fit into this world, requires us to rethink banking from the ground up around utility. Not just around the products or channels we are using. When we look for evidence of changes in the way economics work and technology has impacted – the biggest changes historically in the world have happened with what we call “first principles design thinking”. This is when a new piece of technology comes along that is so different from the way things were done before, that it requires everyone to reset their thinking and change their behavior. The automobile was an example of that. It got rid of all the people working in London and New York who were shoveling the horse dung off the streets. It changed employment patterns; it changed the architecture of cities. It created the middle class in the United States. The model T production line is credited with creating the middle class in the United States. We don’t need a faster horse; we need to rethink the way we get from point A to point B. Another great example of this is the iPhone.

When Steve Jobs worked on the iPhone and the iPod he did not take a Nokia Banana Phone or the Motorola Flip or the BlackBerry RIM and tried to iterate on that. He said, “If we are going to take a touchscreen device, a mobile phone, internet access, software apps and combine them into a device, how would that work?” –This is what we call “first principles thinking”. So, we end up with two competing design themes, in terms of how we incorporate technology into the world. We have first principles thinking, which says: we have had a major leap in technology – it changes everything. Or the other approach: we take technology and we gradually improve upon it. This is what is happening in banking today. We have taken technologies like the mainframe, the ATM machine, Internet, mobile and we have iterated on the traditional banking model, like branch banking and investment advisors.

So, when the iPhone came along, instead of saying, “There is an opportunity to completely rethink the way financial services fits into people’s lives,” we took the primary artifact, the bank account and we stuck a representation of that in the phone. This is what is called “Design-by-Analogy”. Remember, historically speaking, the biggest leaps and the world’s biggest changes have occurred through first principles thinking. So how do we think about the acquisition of customers in the first-principle world? Let us look at, what Jack Ma had to say about competing with Walmart. It does not matter that he is talking about the retail business here, because he is using the same strategy in financial services in China today, making him one of the fastest growing financial services organizations in the world (Ant Financial).

Jack Ma said Alibaba is going to be bigger than Walmart in a couple of years because of this reason: In order for Walmart to acquire 10,000 new customers it needs new warehouses, where as for him it only takes two servers. In the world that Jack Ma thinks of, financial services being embedded in people’s lives, the ultimate, low friction financial services engagement means you can execute everything you need to cross-digital channels. What we have today, compared with first principles players in this ecosystem, all of the challenger banks of the world and the new behavioral investment platforms and so forth, are all about digital onboarding. And yet less than 5% of the banks in the world today offer complete digital onboarding of customers. We are already starting to see the world diverge around this very simple engagement principle: how you acquire customers in the digital age.

15 July 2020

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