Becoming a Digital Bank: the how and why

I recently had a chat with Monica Murthy of Empire Startups. Here's the low-down.

It would be incorrect to call Chris Skinner an industry old hat, since despite his 10+ years in the FinTech industry, he’s known for being on the cutting edge, and doling out opinions on the latest technology. After the successful launch of this third book, I sat down with Chris to pick his brains on all things FinTech and the future.

Let’s start out with an easy one: how did you get your start in FinTech?

I started out working in tech in financial markets, but with large companies delivering mainframes and large computing power into the banks. In 2002, I was made redundant, and whilst looking for a proper job, my hobbies became my job. I started blogging every day, and the my blog, The Finanser, led to being known as the FinTech guy, since I was blogging about technology and finance. I still remember the moment FinTech landed on the map. It was 2005 when cloud based services took off.

You work across a variety of stakeholders in the industry, from banks to government organizations. What is the biggest thing happening in the industry right now – the biggest change or trend? And no, you cannot say crypto!

Looking at use of AI for different areas of financial services. A lot of banks are using AI mainly for compliance and risk, and automating areas that were difficult to automate before such as best execution of equities and trades. I think AI is much more interesting when used to understand customer intimacies, and their financial lifestyles.

The other area that intrigues me is Distributed Ledger Technology and blockchain, which does embrace cryptocurrencies, also creates new shared ledgers that everyone can trust that replaces old infrastructure. Also on my radar recently is quantum computing. In 10 years there will be a revolution in how we think about compute power. Some people say that when quantum hits the main street it will replace everything, including DLT. I don’t agree with that, I stumbled across a small company called the Quantum Resistant Ledger, which is a DLT startup that built a ledger that will work just as happily with quantum computing as it does with today’s computing.

Let’s backpedal to AI for a moment. Every January, Empire hosts a VC event, in NY and in SF. In Jan 2018, we heard from one of our panelists that he thinks FinTech is being held back by the lack of fit for purpose technology. In other verticals, and especially in Silicon Valley, you see a lot of companies building tech expressly for Google or another tech giant, so there are more exits, and tech is getting to market at a faster rate. What are some of the barriers to integrating AI with FinServ?

What we’re seeing right now is big banks using AI for risk, compliance, and automating trading. My fave example right now is what JP Morgan is doing with their investment markets in the US. They’re using AI for best execution. Best execution is when if you receive an instruction to request the purchase or sale a stock, then the bank must guarantee that they will do that at the best cost at the right price with the best speed, which is incredibly difficult for humans to do, but becomes incredibly easy if you can use AI to do it. It’s a huge differentiation for JP Morgan as a bank. I am seeing a lot more of it going on with the big tech giants though. In my book, Digital Human, a third of the book is dedicated to a case study on Alipay and Ant Financial. What they were showing me, is that they are handling an average of 125,000 transactions per second, using AI to ensure that every transaction is bona fide, and all the risk, compliance, and fraud issues are built into their technologies through artificial intelligence to monitor all these transactions taking place. On Single’s Day last year, Alipay processed over $2 billion worth of transactions in the first 2 min. It averaged out to about 256,000 transactions a second, and for context, Visa handles about 2000 per second, so Alipay’s scale is incredible.

That’s the vision of the future and it’s why I looked so deep into Ant Financial. They are the only company in the world that has a vision of Financial Inclusion and not just a vision, but an implementation of that vision.

Something I picked up when reading your book, is that Chinese tech companies are moving at a different pace than American tech companies, that far outstrips the progress we’re making. What do you think we’re lacking?

Well, I think both European and American tech firms are constrained by their existing parameters of vision, and a lot of that is based on a legacy infrastructure of cards and checkbooks. We have this constraint of thinking “how do we take what we’ve got and make it cheaper and faster with technology,” rather than the countries in the southern hemisphere who are starting from scratch. They’re saying “we didn’t have most of our citizens using plastic, so as a result, we can take this technology and do this super cheap, fast and capable, and roll is out there to create a whole new way of doing things.”For example, in 2016 the Chinese transacted 5 trillion dollars through mobile wallets, mainly WeChat Pay and AliPay. In 2017 they transacted 15 trillion dollars. And the US, in the meantime, has just about gotten to 150 billion dollars in 2017 through Zelle and Venmo. The scale is because China doesn’t get plastic. When I last visited China, I went to the convenience store to pick up a few things, and when I showed them my Western credit card, they looked at me like I’m an idiot. They don’t take contact payments or chip and pin. What they do take, is QR codes from a mobile phone, or as a last resort, cash. You don’t see that anywhere else in the world right now, except in Africa and Latin America. And it’s because they can leapfrog ahead to use these inclusive technologies.

Let’s look at that vein of inclusivity. You’ve spoken about diversity in the industry before, or lack thereof. What should FinTechs and Western organizations be doing to set the stage for diversity?

When I talk about FinTech, I tend to talk about it being a parent-child relationship. The financial markets are full of older people who want to keep everything as it is, whilst the child, the tech, wants to reinvent everything, reimagine everything, and to start all over again. How those two come together is quite the challenge. What we see with FinTechs is a lot of imagination with code, that you don’t  see coming out of the banks. When I look at the best examples of FinTechs, people like John and Patrick Collison who created Stripe in 2011 when they were 21 and 19 years old, the average age of the people who founded those companies is in their 20s. If you know code, and you know how to develop the vision around code, then you can create a hugely differentiated offer, overnight. So the challenge for the parents, for financial markets and banks, is how to work with these visionary young coders, who see a radically different world, and how to bring them in as partners with equal stature. It’s very hard for a bank to do that when it’s run by bankers. The statistic I always like to point to is one that Accenture put out after analyzing the biggest banks in the world. 94% of the leaders of the banks of the world, are bankers who have never had any technology experience in their life. How can you create a bank when you’ve only got bankers and not digital people? This is the reason why most banks think that “going digital” is just rolling out an app, when in fact digital is reinventing the fabric and foundation of the bank from the ground up. There are not many banking leaders who get that, although Lloyd Blankenfeld at Goldman Sachs and Jamie Dimon from JP Morgan do. There aren’t many banks I would point to like that but I can see their commitment.

Right, so an emerging theme we’ve seen at Empire, and a huge thread of conversation at the last NY FinTech Week, is that there is a huge difference between offering a digital version of your current product, and creating a truly digitized (and mobile first) product offering. You’ve mentioned a couple incumbents that are making good strides. What are they doing to set themselves up for success that some others might not be doing?

Most bank are doing what I call “innovation theater”, so they do a hackathon, or a startup demo day, and blow their marketing budgets. But it’s just that, a marketing plan. It’s not a commitment to change the bank. The difference with Goldman Sachs and JP Morgan is not only that they are spending a lot, but that they are creating a marketplace of partners whose services you can use. They’re bundling FinTechs for consumption. That’s the difference, this marketplace of apps, APIs, and analytics that these banks have sought to create for their customers. They brought together and did the due diligence on these partners to put together the best experience possible. The best banks will lead by curating the due diligence on thousands of specialist companies to bring to their customers.

Additionally, 25% of the job advertisements for Goldman in the last year was for engineers. They’re not hiring bankers anymore, they’re hiring coders, and this is the critical difference.

So your first book, released in 2007, was a bit prescient. You wrote about the need for digitization and quick iteration on financial products, and today we see that you were right. Where does your next book take us? Give us the quick 411.

My new book goes a step further than my previous 2 books, and looks at what’s happening in the southern hemisphere. As we were discussing before, many countries in the southern hemisphere had significant numbers in their populations who did not have access to financial services, and now they do, thanks to technology. I build on the AliPay story. They’re partnering worldwide for inclusion in other countries. They have partnerships with Ascend Money in Thailand, with Globe Telecom in the Philippines, with Kakao Bank in South Korea, and specifically the one that is quite incredible, is with PayTM in India. PayTM is one of the largest and most successful mobile wallets in India, run by Vijay Shekhar Sharma, who had this vision of taking what Alibaba do into India. Not to create the Indian Alibaba, but to create the Indian PayTM. When I met with Vijay, and I felt similarly when I met Jack Ma, Founder of Alibaba, I thought, “here are 2 men, who just a few years ago would have been unemployed”. Jack Ma tried to get a job at Kentucky Fried Chicken and was rejected. Vijay Shekhar Sharma, 10 years ago, was homeless and had to choose between eating and walking to a job interview, or getting a bus to the interview and starving. He was sofa surfing with his friends because he had gone bankrupt and yet now he’s one of the youngest billionaires in India. He’s 39 years old and worth near 10 billion dollars, thanks to PayTM and the vision of technology for inclusion.

And that’s where the world is dramatically changing with digitalization, which is what the book focuses on. This is not doing what we’ve done before cheaper and faster with new technology. It’s reimaging everything we do in our lives with technology, and building a new world that is digitalized. And that’s where, in America, I feel a lot of banks and FinTechs are doing business cheaper and faster with technology as an evolution, rather than saying, this is actually a revolution. Let’s start again and rethink the whole thing.