So, I’ve been summarising other people’s views of the year ahead from a variety of sources, but I also wrote two outline pieces for my friends at The Banker magazine and Jim Marous’s The Financial Brand. Just to finish off my week’s blogs about this year, here’s what I wrote.
From The Banker:
Why ‘real time’ will become a reality in 2019
The ongoing collaboration between banks and fintechs presents an opportunity for financial institutions to rethink and update their offerings in 2019, by bringing them into real time – as innovators in the southern hemisphere are already doing, says Chris Skinner.
What can we expect in 2019? More of the same? More news about fintech start-ups becoming unicorns and threatening to take the bank’s lunch? Or more news about big banks going digital and starting to work effectively with fintech start-ups?
In my view, it will be both, and is a continuation of a trend that has been emerging over the past few years.
But perhaps the most interesting development over the past five years is how fast things are changing. What was a rally cry from the fintech start-up community to destroy and disrupt the banks has matured into ‘let’s collaborate and co-create with the banks’. What was a regulatory structure that prohibited new entrants has become a nurturing structure to encourage innovation through regulatory sandboxes. And what was a closed and proprietary industry that kept to itself has become an open banking community, ready to partner with anyone who can help.
What will be particularly interesting in 2019 is to see the new things that banks and start-ups can do together. There are already a few examples, although they are far and few between. We have seen JPMorgan Chase working with and acquiring several innovative companies such as WePay, while in the Nordic region Nordea Bank has teamed up with Spiff to encourage saving and investing for the mobile era.
This year we will see much more of this activity, with banks actively seeking out start-ups to partner with before their competition does, and start-ups wanting to see such partnerships as it gives them respectability. I often say that if you were starting a new firm focused on finance, the first thing you want to do is get a regulator’s endorsement as that brings you trust. If you get a bank’s endorsement, it brings you more trust as well as customers. This is why this collaborative world makes so much sense. For a bank, it brings innovation and ideas fast to their slow-to-change legacy structures; and for a start-up, it brings credibility and reputation, things that are hard to gain when you are a young firm.
The only thing that concerns me is whether there are too many firms doing what they have always done, but now doing it cheaper and faster with technology. I have a strong feeling that most of the European and American fintech developments are creating faster banks but not different banking. A little like Henry Ford’s age-old quote about if you asked the customer what they wanted, they would have asked for faster horses.
A rethink not a retread
Faster banks are good, but digital is far more transformative than doing what we have always done cheaper and faster with technology. It is a chance to rethink everything we have always done.
This is why 2019 will become interesting, as we may see a very new development. That would be the reimagining of traditional financial products based on the developments appearing in Asia, Africa and Latin America. In these regions, there are large swathes of unbanked and underbanked people, and there have been many developments in financial inclusion that could easily spread into mainstream financial products for everyone.
A good example I often use is Alipay. The financial product offers payments, but when you’re not using your balance to pay for something it can automove your money to savings and back again, dynamically in real time. The system can offer you a loan of a dollar for the next 60 minutes or $5000 for the next 24 hours.
This is what’s interesting for me, as the core of most financial products stem from the industrial age, where physical distribution was high cost and high overhead. It led to offering annualised products as more frequent contact and service would just make the products unworkable – which is why we have annuity-based loans and insurances.
Moving to the new digital world and looking at what is developing out of the Southern Hemisphere leads to a far more dynamic and real-time financial structure. In this new world, products are priced for now, usable for now and serviced for now. If you want insurance for the next two hours on your iPhone and Mac, then it is 50 cents. Swipe to accept.
This is the new world of banking and finance and I fully expect 2019 to leverage open banking and application programming interfaces to create a real-time connected world of money fit for 2020.
For Jim Marous:
Banking in 2019: a world of change
Reflecting on how the world of finance and banking has developed over this decade is interesting. We began the 2010s still in recovery mode, with a reboot of the banking industry still reeling from the global financial crisis. Slightly overlooked back then was the launch of so many start-ups that, by the time they were noticed, were suddenly billion-dollar unicorns. Square, Stripe, SoFi, Nutmeg, Zopa and more were changing the world of finance.
Ten years later, we now accept that things have and are changing. However, we have equally seen banks rising to the challenge. When Jamie Dimon wrote to shareholders in 2014 saying “Silicon Valley is coming to eat our lunch”, he wasn’t joking and, unlike the naïve views of many, JPMorgan Chase responded. Banks aren’t stupid and aren’t ignoring the FinTech wave; rather, many are fully awake to the new wave of technology start-ups and actively seeking to work with them.
I think that is the most striking change in recent times. Banks have moved from doing nothing to talking about doing something to actually doing something. Banks are now working actively to partner with, collaborate with and co-create with the FinTech community.
This, for me, is going to be one of the biggest themes of the next year: banks actively creating new structures, products and services with start-ups.
Another big theme is the continuing discussion of Open Banking and what that means. Open Banking was spawned in Europe out of the payments regulation PSD2 (Payment Services Directive 2). PSD2 demands that banks open customer data to third parties, with permissions. What that means in reality is still to be seen, but the opening of data for third party access is likely to result in many new innovations. A great example is that Trip Advisor could tell you where the best places are to go today and which are busiest, based on point of sale activities and transactions; Facebook could pay your restaurant bill and split the bill between you and your three friends, without having to leave the app; and Amazon could leverage your digital footprint to more accurately target your shopping habits based upon purchases you’ve made outside Amazon. I fully expect more of this innovation ideas to be delivered in 2019.
Equally, there’s lots and lots of talk about machine learning and artificial intelligence, but there are few real examples of what that is doing in finance. My list is currently about five major use cases, but I would expect that by the end of 2020 I’ll have 100. Many banks are focusing upon machine learning as it’s delivering short term gains. It’s the low hanging fruit. An example that is my favourite is from JPMorgan Chase, again, who are using AI to analyse the wordings of their commercial contracts with their corporate customers. The software performs legal work in one second that previously took 360,000 hours of lawyers time. We can sack all the lawyers!
On this note, you may wonder why I’ve mentioned JPMorgan Chase (JPMC) twice in my 2019 outlook? The reason is that they are one of the few banks doing digital, not just talking about it. By way of example, in October 2016, JPMC had 245,000 employees and was worth $235 billion in market capitalisation; in October 2018, the bank has 165,000 employees and is worth $385 billion. The bank has shed a third of their workforce and increased their market valuation by 50% in two years. That is radical.
And it is that radical program of automating everything that can be automated; laying off all the jobs that can be automated; and leveraging digital insights for more fruitful customer relationships through machine learning that I expect to see more of in 2019.
Finally, no forecast for the future is complete without mentioning blockchain. There. Done it.
But seriously, I really hope we will see more real-world implementations of distributed ledger systems in the next eighteen months. Note that I mention blockchain and distributed ledger, which are not the same things. For example R3, the bank-owned consortia, has developed a financial distributed ledger system that has no blockchain. In other words, we have seen the massive hype cycle of blockchain and its associated hangers-on, but we haven’t seen much delivery of real change yet. This year, I think we will, and it’s about time.
In summary, 2019-2020 will see banks sharpen their focus on efficiency through technology, reducing the workforce and increasing their customer insights. This will be achieved by partnering with start-ups, offering open banking services and leveraging machine learning. These are the critical developments that will impact all in the next eighteen months. It’s going to be a good year.
About Chris Skinner
Chris Skinner is known as the most influential person in technology in the UK, and known as an independent commentator on the financial markets and fintech through his blog, the Finanser.com. He chairs the Financial Services Club and Nordic Finance Innovate, is a non-executive director of 11:FS and on the advisory boards of various firms including B-Hive, Moven and Meniga.