I had a realisation this week. The realisation is that banks have always been hot on technology and innovation. If you don’t think so, then just checkout this blog from April 2008 – eight years ago – where I talk about the rise of innovation in banking. The context was talking about how banks had created a new role – Chief Innovation Officer – and had pumped up the innovation ratchet massively since 2001. It goes back even further than this however, as I’ve spent all my life in technology in finance, starting a long time ago – don’t go there – and there’s never been a time where banks have not been hot on tech. By way of example, a quote I often use is from Walter Wriston, former CEO of Citibank, who in the 1970s bet the bank on technology based on his belief that “information about money is becoming more important than money itself”.
So tech and finance is not new at all, which makes me ask why Fintech is so cool. I guess Fintech is cool because we are moving from banks using proprietary tech to cut costs, build efficiency and create straight through processing to placing all of this on the internet. In so doing, it is creating a challenge for our banks – how to move from legacy proprietary physical structures to open internet-based digital structures – but it is an augmentation and refreshment of the bank, rather than a disintermediation and replacement.
This is why I continually smile when people talk about bringing down the big bad banks with technology. I smile when they say this is disruptive, banks are dinosaurs and the roof is about to cave in on their legacy system. I smile when people talk about Google, Apple, Facebook and Amazon, along with Alibaba, Tencent, Baidu and more decimating the bank system.
NO THEY’RE NOT.
They are all having an impact for sure, but nothing is decimating, disrupting or disintermediating the system. They are augmenting it.
Augmented finance is very different to disrupted finance. Augmented finance – the theme of Brett King’s next book – is all about adding to the financial system not replacing it, although Brett doesn’t necessarily agree with that assertion. I make this assertion because disruption and change has been around all of my life, working in banking and technology, and today is no different. It is the banks that adapt to these changes that will win out and lead, and that is why banks are investing in the change. They are not ignoring it. Ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese. The mouse knows that the cheese moves every day, which is why it always looks for food everywhere, and the bank knows that technology changes very day, which is why they are always tracking IT.
So technologies of today are changing banks – blockchain, cloud, analytics, APIs – as well as augmenting it. Augmented finance is why things like bitcoin and mobile wallets get interesting, as they add a dimension to a system that could not cater for the people who were historically outside the system. For example, most Africans who have a mobile subscription are opening a mobile wallet, because they didn’t have access to finance before. The big bet is that if you combine a mobile wallet with a cryptocurrency, you could create a huge opportunity for financial inclusion. Bill Gates is taking that bet, by investing in creating a mobile financial inclusion program for Africa and other developing economies, to ensure that the five billion people who are unbanked or underbanked can be served by a networked financial system that is cheap and pervasive. In other words, a new financial system that includes those who were previously too poor to serve.
Augmented finance also sees new players focusing on segments that banks underserved before, like students (SoFi) and SMEs (Funding Circle). The new players add to the systems and complement it. This is also true of offering more ubiquitous points of sale (Square), checkouts (Stripe) and transactions (PayPal), all creating internet-based complementary structures on top of the historical structures (Visa, MasterCard and AMEX).
Where there is replacement of the system from proprietary to open, banks are actively engaged. IT is why so many are running hackathons, Open API days, startup challenges and more. Why would banks invest in startups if they thought the upstarts were going to bring them down? That would be stupid. They are investing because they get early learning on the startup’s ideas, have a stake in a future business model and, if successful, have a lead in absorbing that startup’s idea into their own operations.
Therefore, being brutally honest, banks have never shirked from the technology challenge. They’ve always been up for it. Some banks don’t have the leadership to deal with it, which is another story. In fact, I could point to many banks that are failing to step up to the plate when it comes to transforming their operations to the internet open sourced world of 2016, but I would rather point to the ones who are stepping up to the plate, and would probably cite Bank of America, Barclays, BBVA, BNP Paribas, BNY Mellon, Commonwealth Bank of Australia, Citi, Credit Suisse, Danske, Deutsche, Intesa Sanpaolo, J.P. Morgan, Nordea, Santander and Wells Fargo to name just a few. Funnily enough, that’s the names of just a few of the banks who have joined the R3CEV consortium. And there’s the rub. Just as in the past, when technology has created challenge, banks create consortium to rise to the challenge – SWIFT, Visa, EBA. This is no different.
So, the net:net is that Fintech is cool because it is creating the internet of value, the ValueWeb, and the ValueWeb is based upon augmented finance to serve markets that were historically underserved or overlooked.