If you think it’s evolution and not revolution, think again

Another regular argument I’m having is whether digital is a revolution or evolution. I firmly believe it is revolutionary. When industries are being rebuilt from the ground-up with new technologies and new business models, then it is a revolution. When we are living in an age where every human on earth can be connected through technology, it is a revolution. But I’ve blogged about this before:

• The Origins of Moneykind, Part One: Shared Beliefs
• The Origins of Moneykind, Part Two: The Invention of Money
• The Origins of Moneykind, Part Three: Banking
• The Origins of Moneykind, Part Four: The ValueWeb
• The Next Age of Moneykind: The Future

And the full story is in my new book Digital Human which, I suspect, has not been read by those who think we’re going through an evolution.

When you have a reinvention of humanity, you have a reinvention of everything that goes with it. It is a revolution. It’s not the fourth industrial revolution, but a revolution of everything that humans do in relationship, commerce and trade. Simple as that.

The only part that is evolution is how you deal with the revolution. How you adapt to survive. As Charles Darwin’s Origin of Species is all about evolution dealing with revolution, it is clear that only the most adaptable survive. If you are not adapting, you don’t survive.

But what does adapting mean and how fast do you need to adapt?

Well, if it’s a slow change evolution of everything we’ve always done, then it just means keeping up. It’s making banking more efficient, cheaper and better with technology. Like a faster horse, as Henry Ford would say, it just means having a faster bank. That’s evolution, and it focuses on always doing what we’ve always done.

However, if it’s revolution, then it means taking drastic action and taking that action fast. It’s not about keeping up but about rethinking the business. It’s not making a faster bank, but reinventing the business model from the ground up for a new world.

This is why I sit firmly in the revolutionary camp, as I can see whole new ways of things happening right now. A good example is real-time financial services from firms like Trov, who insure by the hour, not the year. A good example is Ant Financial who can provide Taobao sellers loans that are miniscule for minutes rather than lump-sums over a year or two. A good example is mobile wallets in Africa that is making many of their nations cashless and enabling the whole of countries like Zimbabwe to run on the mobile network.

These are not products that make better version of what we had before; rather, they are re-investing finance with technology. As Jack Ma called it (shortly after me), it’s TechFin: starting with technology, let’s see how we can trade and transact; rather than FinTech which starts with today’s financial services and sees how technology can improve it. TechFin is about automobiles; FinTech is about faster horses.

Now there are some banks that get this https://finansernextjs.wpengine.com/2018/09/banks-think-get/ is a radical rather than incremental change. Radical means dramatic action to deal with a revolution; incremental means small changes to deal with an evolution.

I trust that clarifies the point and, just to illustrate it well, I’ll share with you something that stunned me the other day.

I often quote Stripe’s $9.2 billion valuation from October 2016 to show how new firms providing platforms for digital connectivity are smashing old firms providing finance through physical connectivity. In this case, I pick on comparing Stripe and JPMorgan Chase (JPMC), and show that the average Stripe employee is generating twenty-two times more value, by market capitalisation, than a JPMC employee.

Figures from October 2016

But then I got an update of Stripe’s valuation last week and they’re now valued at $20 billion. That’s a doubling of value in two years. So, I decided I need to update my chart from 2016 and went through the numbers.

Figures from October 2018

What’s interesting is that Stripe has gone from generating twenty-two times more value to ten-times more value. Stripe hasn’t changed. JPMC has. In fact, just in case you missed it, JPMC shed a third of their workforce and increased their valuation by a half in two years. That’s down to some drastic action, not an evolution.

In fact, JPMorgan illustrate the radical change policy well, as it is clear they are betting the bank on digital. To achieve that, you have to eat the elephant. That’s the old adage that it’s difficult to eat an elephant as it’s so big, so you have to start one bite at a time. I use that analogy when discussing changing core systems, one piece at a time. But you can also talk about that when it comes to spending a monster of a budget on FinTech bets. How do you spend $11 billion on FinTech? One dollar at a time.

This piece from the Financial Times last week articulates the radical change of JPMorgan Chase well.

JPMorgan’s $11 billion fintech bazooka

How do you sign off on an $11 billion fintech budget? According to JPMorgan Chase’s chief financial officer Marianne Lake, you do it one dollar at a time.

In an interview with the FT, the finance boss of the bank with the greatest technology spending power on Wall Street, said she doesn’t sign off on the bumper package in one go. Instead, she said: “We sign off at the first dollar and every dollar thereafter.”

The resulting $10.8 billion tally for this year — which is roughly split 50/50 between “change the bank” and “run the bank” spend — has helped JPMorgan position itself at the vanguard of innovation and to instil awe and envy in many rivals.

“We have never felt constrained by dollars on budgets,” said Ms Lake. “Our budget is set by the opportunity to derive shareholder value.”

JPMorgan’s fintech spend has to, of course, be viewed in the context of its size. Only the big Chinese banks and HSBC — which recently announced plans to spend $15-$17 billion over three years mostly on technology — can match JPMorgan’s $2.6 trillion of assets.

“$11 billion is a lot in dollar terms, but it is about 10 per cent of revenues, which is what large and complex institutions like JPMorgan are spending on technology,” said Betsy Graseck, a banks analyst at Morgan Stanley. “It is table stakes in an extremely competitive market.”

Still, the scale of the spending has spooked some rivals which can never hope to deploy similar resources.

Spending on technology by banks in the Americas, Europe and Asia-Pacific is forecast to increase 4.2 per cent this year to just over $261 billion, of which 45 per cent is in North America and only 32 per cent in Europe, according to research group Celent.

Banks in Europe are particularly attuned to how heavily they are being outspent; Deutsche Bank’s entire non interest cost base last year was less than $30 million, UBS’s 2017 operating expenses were less than $25 million, Credit Suisse’s were below $18.5 million of which about $3 billion is spent on technology.

Executives at Deutsche and Credit Suisse in particular, where cost cutting programmes are still in full swing, can scarcely remember a time when they were “not constrained by budget” much less imagine one in the future.

There is an argument about the value of being first — with all the costs that entails — versus being a fast follower or even a later adopter. Executives at some banks argue that novelty isn’t worth the mammoth cost, and that big spends can lead to profligacy.

“People are not fast and loose with our money,” said Ms Lake. “There is a lot of judgment and discipline and approval processes around these investments that serve as a decent safety net.’

JPMorgan employs 50,000 technology specialists — or a fifth of its total workforce — and has claimed some eye-catching firsts, including using artificial intelligence to execute securities trades. Ms Lake described AI as “an important part of our spend” but “not large in the context of the overall investments we’re making”.

Investments in technology allowed the bank to launch a low cost digital share trading platform last month, which is helping it counter the threat from online brokerages like Charles Schwab and commission-free upstarts like Robinhood.

JPMorgan is also one of the three founding members of the Interbank Information Network, a pilot that uses distributed ledger technology — aka blockchain — to facilitate more efficient payments between banks and across borders — aiming to keep pace with the onward march of payments start-ups.

David Hudson, who heads up digital transformation at JPMorgan’s corporate and investment bank, said the bank wanted to deliver solutions “regardless of whether we build them internally or deliver them through partnerships” and that the key was to make sure that JPMorgan can serve clients “wherever and whenever they want to transact”.

“It’s not about having the biggest technology spend on Wall Street, that’s not what we think about,” said Ms Lake. “It’s about identifying what is strategically important to our clients . . . It’s never about bigger is better, it’s about constantly driving our long term strategy.”