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The state of digital, fintech and the future bank

I was recently interviewed by Emerging Markets Review just before travelling to Korea in July.  The interview lasted a while, but stunned me when they produced the magazine with yours truly front page and centre.  Rather than saying anything more, here's the interview which you can download as a PDF if you prefer.

Emreging markets review1


The global financial industry is experiencing new innovation and Fin-tech is taking its center recently. Could you define Fin-tech in your own words? It must be much more complicated than simply saying ‘payment by mobile phone’.

Fintech is the integration of finance and technology.  For most, it means making the financial markets internet-ready, as many bank and insurance systems were built before the internet was invented or without a consideration of customers accessing those systems directly through the internet 24*7.

IT companies used to be providers (or supporters) of technical method for financial companies, such as e-banking and mobile-banking for banks. Now more IT companies are entering the financial business on their own to meet customer’s needs directly. What triggers do you think have made the IT companies to change? What differentiations and strengths do you think IT companies have in financial business in this new era?

Financial companies are becoming IT companies and IT companies are becoming financial companies.  This is exactly due to the answer before – Fintech integrates finance and technology.  But there’s more to this than that basic statement as two specific technologies are changing the game, and I call this the internet of value or the ValueWeb if you prefer (the title of my next book).  The ValueWeb allows anyone, anywhere to exchange value with anyone else, anywhere else, in real-time for almost free.  Historically, banks have created systems that are slow.  An international payment takes days to process for that reason.  But mobile has changed all of this.  Mobile technologies and specifically the mobile internet, are allowing all of us to connect directly through the network one-to-one with each other.  In other words, seven billion people living on Earth can create electronic connections with each other today.  Once you do that, you can exchange information and build relationships and, most importantly, trade.  However, you cannot trade if it is expensive to pay, and so the ValueWeb creates new ways to pay.  In particular, it needs to have a way to pay that is cheap and real-time, not expensive and slow.  That is why the development of bitcoin and the blockchain has been transformational.  The blockchain will allow anyone, anywhere to transfer value globally to someone else for almost free, in real-time, because it is an internet ledger of transactions that is trusted and free.  This technology is now being built into the banking system by companies like Ripple, Eris and Erethreum, and will soon be the de facto way to pay.

This is why the two technologies of mobile and blockchain are the drivers for the Fintech revolution.  By way of example, in 2014 $13.2 billion was invested in Fintech startups by venture capital funds.  In 2013, it was $4 billion and before less than a billion.  Why would VCs invest so much?  Because they can see the returns.   In 2014, there were 36 new Fintech startups like Lending Club, Stripe, Funding Circle and Square, with over a billion dollar valuations.  The year before, only 12 and next year probably over 100.  These new companies are using the mobile internet to create new peer-to-peer connections for crowdfunding and lending and new payments systems through technologies from APIs (Application Program Interfaces) to the blockchain.  In fact, a third of the Fintech firms are focused upon P2P value connections like Zopa and TransferWise whilst a third are focused upon payments like Klarna and Traxpay.  These firms are really changing the game and the result is that banks will lose money.  A Goldman Sachs report on the future of finance published in the first quarter estimates that banks will lose over $10 billion of profitability – about 20% of the market – in the credit line of business alone over the next few years as customers defect to peer-to-peer lenders like ppdai and Alibaba, so this is critical changes to the financial system.


Then what kind of future are the traditional financial companies facing? As stated in your book <Digital Bank: Strategies to Launch or Become a Digital Bank>, it can be not only crisis but also opportunity for them. What differentiated strengths can they exert under the new circumstance that digitized financial services are deeply into our everyday lives? What new format of financial service can they provide to customers?

Traditional financial firms have a problem, in that they were built in the last century and focused upon the physical distribution of paper through a localised network focused upon buildings and human hands; the new players are focused upon the digital distribution of data through a globalised network focused upon software and servers.  The difference is that the new players can transact the same services – loans, mortgages, insurance, wealth management, investments, payments – at a fraction of the cost of the old, as a result.  The old companies cannot compete with the new if their cost models are ten times more expensive because of their many buildings and staff structures.   So they have to move rapidly from physical to digital. 

Moving to digital is not simple however.  For many financial firms it means ripping out their current systems that were built for physical operations and replacing them with digital structures that are internet-enabled.  Even if that is done, it means going one step further and changing management and leadership to get digital.  I often say that banks are led by leaders who delegate digital to function or person – the Head of Digital.  How can you delegate the future of the bank?  You can’t is the answer.  So the leadership team must start with digital as their focal area, and the change management to become digital at their core.

That is tough, as it means a key understanding of building financial systems and structures where digital internet services are the core of the firm, and humans and buildings sit upon those digital foundations. Too often, I hear firms that talk about channels and functions, and realise that their thinking is that digital is being added to their buildings and humans as an overlay.  It is completely wrong thinking, as digital firms think digital first and then work out what buildings and humans need to sit upon that digital structure.

This is the reason that I can only name a few firms that think this way.  Digital titans are obvious – Alibaba, TenCent.  Digital financial firms are not so obvious but a few are out there – mBank in Poland, Commonwealth Bank of Australia, ICICI Bank in India – but they are few and far between, and even these banks are not truly digital yet, e.g. do they have internet-enabled core systems that are enterprise wide and can provide a single view of the customer?  Not all of them, and this is key in the digital age where customers expect and demand one-to-one personalised digital service. 

For China, Eastern Europe and Africa, it is said that low rates in credit card use and underdevelopment of financial service infrastructure naturally lead to the successful development and growth of Fin-tech in the region. However, in Korea, general people use credit cards to pay and have easy access to ATMs, and internet banking and stock investment are more common. Do you believe the expansion of Fin-tech and digitized technology is still an inevitable path in the countries like Korea, where financial service infrastructure is already well established?

Well Fintech is going to adapt and change everything everywhere, based upon the mobile and value exchange technology of the blockchain I’ve described.  In developed markets like Korea, you will see similar changes to those I see in Japan, Europe and America vis-à-vis direct peer-to-peer payments, funding and credit.  More intriguing in some ways, are the developments we are seeing in China, Eastern Europe and Africa.  These economies are still developing, as you mention, and a key here is financial inclusion.  There are five billion people who have no banking or are underbanked today.  They have been excluded from the system in the past because to service them was too expensive.  Building branches in areas where people are poor and there’s no profit to be made didn’t’ make sense.  However now, through the mobile internet and blockchain, seven billion people are being connected to an electronic system that is cheap, easy and real-time.  That means that the whole planet will be able to communicate and trade one-to-one.  Goat farmers in Ethiopia will be able to sell goat products – leather hides or crafts made from goat hide – to Korean buyers via QQ pages, Wechat photos, text messaged payments and Alipay logistics.  That is an amazing new world and amazing new concept.  Everyone on this planet can buy and sell anything with anyone, anywhere.

So the whole concept of how we live on this planet changes with it.  That will be as transformational in Seoul, where people will be connected to things they never thought of connecting with before, as it is in London, Paris, Mumbai, New York, Tokyo and Shanghai.

Welcoming gestures from individual customer and investor are more triggering the popularity of Fin-tech. What factors and aspects of the Fin-tech do you think are attracting people? What kind of merits and values can people expect from it, from the perspective of the customer, and investor?

There are three fundamental pieces to Fintech which the firms that are winning understand: connectivity, simplification and personalisation.

Connectivity allows anyone to trade with anyone, anywhere.  Simplification takes away the old complexities of markets and makes them easy by dealing with just a small part of that market.  For example, for many Fintech companies they are just taking one process – lending, paying, buying, investing – and making that one piece simple.  That is what is different is that they are simplifying the basics of finance, not trying to be all things to all people which is what traditional firms have been.  It’s a little like the Uber’s or Alibaba’s who provide platforms to connect people who need to get from A to B or who need to buy something with people who have a car or the product you need.  These middle ground intermediaries act as the global or regional or national data hubs to connect the person who needs something with the person who has it, direct, one-to-one through software and servers.  That’s what the simplification game is all about.

Finally, there’s personalisation which then becomes the differentiation.  Personalisation is all about making sure you remember what the individual did last time to make it easier for them to do next time and, for the data intermediary, that’s easy as they’ve got the data.  Airbnb, Facebook, Google or whoever, know where you stayed, what you posted or searched for last time, and therefore just make it easier and easier each time you touch their service by repeated and simplifying that process on a personalised basis.  That’s what banks and insurers need to do: connect, simplify and repeat by making it personal.  These are the basics of attracting and retaining the customer in the digital age, and are the reasons why you and I always go back to Tencent and Alibaba.

What changes in individual’s investment behavior and practice do you think would be made by the development of Fin-tech (or digitized financial services)?

We are already seeing massive changes in customer behaviour.  Just look at the Tencent versus Wechat battle over red letter messages at Chinese New Year.  If you’re not aware, the incentivisation to exchange small gifts of money via mobile led to STATS.  Similarly, when Alibaba launched their investment fund, millions of dollars flowed from other accounts into the fund because Alibaba is trusted, prolific and believed.

These are the factors that are changing people’s behaviours incredibly fast.  I mean, banks believe they are trusted, but what about the internet giants?  Are they not trusted?  Do we not trust Google to find us the right search results?   Do we not trust Facebook to store our memories?  Do we not trust Alibaba to deliver the goods?

We trust these brands because they deliver, consistently and right first time, every time.  And if they don’t deliver, they say sorry; a word we rarely hear from a bank.

So behaviours are changing real fast and if a bank or insurance company believes they can rely on trust then they are seriously delusional.

There are worries on the bubble and risk that Fin-tech might bring. Crowd-funding and P2P lending service, for example, have negative potential that could damage the participant’s asset and security when regulation and supervision process are incomplete and they are not well-managed. What is your view on the side effects, negative potential and risk that the digitized financial technology would bring?

Right now, there’s a lot of downside to the Fintech bubble. People are starting to trust brands that are unregulated and are not aware of the risks.  MtGox is a great example.  MtGox was viewed as  a store of value by many, and they assumed that their value store was guaranteed.  It wasn’t, and when MtGox went under, thousands of bitcoin investors went bust.  MtGox lost $500 million in investments with no recourse, guarantee or reimbursement.

That’s just plain wrong, and it’s why financial markets are regulated.  Banks and insurance companies work hard at compliance, audit and regulation because it is compliance, audit and regulation that gives them their licence to provide a store of value.  I find it hard to believe that consumers don’t understand this, but maybe because it is not clear and underscored.  If you store your savings in an internet brand, because you like that brand, you have zero guarantee of your money being safe.  If it’s lost, screw you.  Tough.  It was your fault for being stupid and storing it there.

This is a criticality in understanding the difference between the Fintech guys who claim you don’t need banks and insurers anymore, and the reality.  You need the financial system to provide stability and confidence.  Without it, you have nothing.

For emerging countries, I am wondering if you would agree to when the convenience of fintech  is combined with the increase of the middle – income bracket, it would lead to substantial growth in consumption and investment into the region. If so, what kind of technology and business capability should be ready for companies that plan to penetrate emerging markets or local companies in the region to be benefited from the consumption and investment growth?

For emerging economies, the two technologies that are transformational are mobile and blockchain.  Mobile provides inclusion for everyone cheaply and easily.  Blockchain provides the transmittance of value cheaply and easily via mobile in real-time.  This is why these two technologies will rapidly upscale these economies because suddenly those who have no access to financial transactions or markets, can transact and play.  A person who has an idea, a craft, an ability, anything can transact now with anyone and sell that idea, craft or ability.  You could never do this before because that idea, craft or ability was limited to the locality of your community.  Many people in that locality would know about that idea, craft or ability.  They might even buy it once, but that was seriously limiting, as the idea, craft or ability could be sold many times … if only people knew about it.  That is the transformation of mobile and blockchain.  Anyone, anywhere now has the ability to sell any idea, craft or ability to anyone else, anywhere else on this planet.  That is incredible and amazing and is unlimited by the banking system or even the governance system. It is why Dee Hock, the founder or Visa, describes the blockchain as the future of not only payments, but of governance.  This is it.  It is here and now.  We have connected the planet.  This is amazing, so get with the program and work out how your institution, company, competency and capability can play a part in this transformation or be excluded and die.

Could you propose ‘three keywords’ that financial market player facing digital industrial revolution bear in mind to be the market leader?

Core, humans and culture.   I would stop there but that is not clear. Financial Services institutions must first create a digital core.  They then need to work out what role people play in supporting that core by, for example, engaging in customer relationships through remote digital outreach via social media.  Then, if they are using social media, they must have a culture whereby the humans understand how to build relationships through digital outreach.  Can you really be relevant to your target audience on their QQ page?  That’s the key.  Core, humans and culture.

What are your thoughts on physical-digital coexistence?

Let's start answering this question by saying that most people are not talking physical and digital, but physical and digital channels. It depresses me that we still talk about channels, as I’ve blogged often, as surely it’s now just physical and digital.  Channels implies multiple digital services, rather than just digital and physical.  That’s why I hate the word or thought or focus upon channels in discussing Fintech.  Channels means multiple, separate digital structures.

So then we get into physical and digital coexistence and, for the next ten years, we will be working more and more on making these things seamlessly integrated and easy.  The internet of things and robots, infomediaries and robo-advisers, will make life simpler and easier from a financial perspective.  As these things develop, we will be paying and transacting seamlessly and easily everywhere, all the time.

The result of these activities is that, over time, we will not even be thinking physical and digital, just life.  Life augmented by digital platforms that make our lives easier.  Our physical existence is simplified as we no longer have to consider paying for anything.  We just live and consume and receive by exchanging debits and credits occur through the air.

How do you reconcile emerging, disruptive financial services players with an environment of increased governance and regulatory oversight?

Governance and regulation is intriguing, and always a subject that is high on the agenda of financiers, as they have so much governance and regulatory oversight.   The emerging, disruptive players have no oversight, as they are creating new value exchange models.  However, as those models evolve, the regulators get involved.  We’re seeing this right now with bitcoin and the blockchain, and we’ve seen it before in any market that involves financial exchange.  A great example is peer-to-peer lending, where most governments are learning. As they learn, they understand and, as they understand, they work out that these markets need their own specific style of regulatory oversight and governance.   In the UK for example, we now have P2P regulations and P2P governance through the Financial Conduct Authority.  So the idea of financial services without regulation is plain stupid.  Financial services, and therefore all the disruptive new financial players, will always be regulated or shut down.

Are we going through a Fintech bubble and when will it burst?

Yes, we are going through a bubble but it won’t burst for some time, as there’s a long way to go.  We are seeing just a few players emerge with new models so far.  In payments, the likes of Square, Klarna, Stripe, Currency Cloud and TransferWise have emerged as potentially major and massive heavyweights in transferring value.   In lending, Lending Club, Prosper, Kabbage, Zopa, Funding Circle and more are all emerging as major new credit companies.  In fact, of the $13.2 billion invested in Fintech startups last year ($4 billion the year before, under a billion in 2012), two-thirds is being invested in payments and lending.  As a result, Goldman Sachs have forecast a fifth of bank profits disappearing in these areas to the new players within five years.  That’s the reason why VC’s are investing and it’s not so much a bubble as building a new Fintech marketplace.

Many of the success stories for digital financial services are consumer/retail oriented. How are will digital impact institutional business outside of improved risk and compliance capabilities?

It’s a false illusion to think it’s just consumer and retail, but the media and commentators, including myself, focus on these areas as they are easier to digest and discuss.  However, if you look at commercial and investment banking then everything from Traxpay to eToro to Colored Coins to Ripple to Betterment to Nutmeg to Secondmarket and more are ripping through those markets.  In fact, Fintech and cryptocurrencies is as if not more transformational in investment markets than in retail.  Just look at low latency, high frequency trading and BATS Chi-X, if you want to see the impact there.

Which segment should be a focus for digital for traditional financial players: wealth, business or consumer markets?

This is a question for your own company, not for me.  You need to work out where your core competency lies, and then leverage and focus upon it.  The problem most banks and financial firms have is that they’ve been trying to grow for the past twenty years from being monoline players to being universal financial firms.   That trend is reversing fast as Fintech companies are predominantly very narrow.   They’re not even monoline, as they don’t cover the whole line; they’re more monoparts.  You cannot compete as a universal player against a specialist monopart, so you have to integrate the parts that are better than yours and combine that part with your core competency.  Is your core competency wealth, business   or retail focused?  That will then answer this question, as the other parts that you’re not good at, you need to partner or purchase.

Is there an institution you see doing many things right? Who are they and how are they moving where others aren't?

Well the one I keep coming back to because it showed commitment is mBank in Poland.  What is commitment?  The chicken participates in breakfast, the pig is committed.  That’s commitment.  Most institutions participate and play with the idea of digital.  They are not committed.  They run pilot programs and tests.  They don’t bet the bank but mBank did just that.

mBank is actually a company called BRE Bank, a bank that had operated in Poland since 1985.  BRE Bank launched the first internet banking platform, which they called mBank, in 2000.  They were seen as the market leader for innovation back then, and gained a lot of popularity.  Then, in 2009, Alior Bank launched Alior Bank Sync, a cool social mobile app.  BRE Bank looked old and slow, and lost customers to Alior Bank as a result, bearing in mind that BRE Bank had been the technology market leader as the first internet bank in Poland.  So the CEO took a really brave decision and decided to relaunch BRE Bank as a digital bank.  He brought in a new digital leader from Microsoft, invested heavily in a development of a new mobile, social bank platform and launched this platform in summer 2013.

Now, the reason this impresses me most is not because the bank launched a digital bank service but because they threw away their 30 year old bank brand.  They got rid of the BRE Bank brand and launched anew as mBank.  All the branches were rebranded – the ones they kept – and the new mBank became seriously cool.  As a result, they’ve one global awards for innovation everywhere but, when it comes to it, all they did is create a mobile, social bank fit for the internet age.  Every financial firm has to do this but, unlike mBank, most banks don’t have the guts to make the change.  That’s the thing.  Does the leader of the firm – the CEO – have the guts to commit to digital 100%?  If they don’t, does the firm have a future?  I doubt it.


About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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