I don’t know how you guys are holding up, but I’m finding myself on lots of videoconferences, even delivering a keynote in Tokyo the other day from my home office in Poland. The event was recorded and so I thought I’d share the video and transcript with you. This, btw, is all summarised in full in the new book Doing Digital, which is released this week.
The other thing I’m making available this week is a bookable facility on my calendar for anyone to book a videoconference with me 1:1. The slots are allocated for 30 minutes and you can book via my calendar here: https://calendly.com/chris_skinner/30min
And, if you want more than 30 minutes, obviously book more than one slot!
Doing Digital: How Big Banks Are Meeting The Digital Transformation Challenge [VIDEO, 35 MINUTES]
Doing Digital: How Big Banks Are Meeting The Digital Transformation Challenge [42 SLIDES]
Doing Digital: How Big Banks Are Meeting The Digital Transformation Challenge [5,000 WORDS TRANSCRIPT]
Shibata-san, thank you so much for inviting me to Finolab 2020 and I’m so sorry that I cannot be there. I was so looking forward to the cherry blossom in Tokyo but, as I think many of you will know, the Coronavirus has hit Europe badly and all of our borders are closed, flights are cancelled and I’m here at home talking to you from Poland.
Konichiwa, and it would have been very nice to have actually met everybody there. Hopefully next year.
Some of you may know me. My name is Chris Skinner. I’ve written quite a lot of books about FinTech and Banking. I also write a blog every day at TheFinanser.com about FinTech and Banking and I’ve been doing that for a long time, mainly because my passion is FinTech and Banking.
Having said that, a long time ago, when I started blogging and writing, it wasn’t FinTech. It was technology and finance. It became merged about the beginning of the last decade, mainly because we were seeing so many companies with ideas and fresh new thinking, much of which came out of the global financial crisis. It’s interesting for me right now, as I think we will see a lot of fresh new ideas and thinking coming out of the Coronavirus crisis around: how to do payments, how to do money, how to deal with each other digitally and remotely, as is evidenced by this presentation. A lot of people now are learning how to work from home, remote work, social distance, use video and communicate from points around earth that are no longer physical connections but now digital connections.
Most of you will know that I talk a lot about digital. I’ve written several books about digital banking; digital connectivity and I have a new booking coming out around actually how to do digital.
To begin with, I think we need to put things in context, which is the way in which the world has changed with FinTech. FinTech as I say, emerged about ten years ago, and was driven by Cloud computing and the Smartphone.
The Smartphone appeared in 2007. Cloud computing was also emerging about then, and the two of those have driven us to what today is called Open-Banking and Open-Finance. The Open world is one full of APIs, provided as downloads on the internet through Cloud.
Because of these technologies, there has been a massive rise in companies that are exploiting that opportunity. There are more than 12.000 start-ups around the world that are focusing upon FinTech, and the funding of these companies is immense. $111.8 billion doubled the previous years investments in 2018. Last year, 2019, it increased again to $135 billion, although it did slightly plateau, as a lot of that $111 billion in 2018 was driven by China, and specifically by the funding round of Ant Financial, which was $14 billion. So, we’re not seeing these numbers double every year, but we have seen them double every year until 2019. That’s quite phenomenal.
This amount of investment is fuelling a major change to the way we think, and a lot of it is around peer-to-peer connectivity which, in the current climate, is proving to be incredibly valuable because we can now connect directly one-on-one, whether we’re sitting in an office, in our home, in Poland, or in a conference in Tokyo. Because of that connectivity, and the change of thinking it brings with it, there’s many new companies that are growing very quickly. I’m just picking a few of them as an example. Many of these are close to my heart over here in Europe, but in Asia, Japan and worldwide we are seeing massive changes.
In Europe, one of the biggest changes is with companies like Monzo, a challenger bank. Even the idea of a challenger bank ten years ago would have been stupid but, today, is accepted because there are many of them, in every country, and more and more every day. One of the things that a lot of the traditional banks say about challenger banks is that they’re not real banks, because they don’t get the customers’ salary cheque paid in every month. That’s rather silly because Monzo is a lifestyle bank. It’s not anything like traditional banking. What’s actually happening is we are seeing this dichotomy between traditional banking, which get the salary payment and that salary payment goes towards paying ‘boring old bills’ like the mortgage and electricity, and then Monzo gets the lifestyle banking of what we do daily in our lives such as catching the subway, buying a Starbucks coffee and going for lunch. So, Monzo knows our life and our lifestyle and the old bank knows our boring old bills and our boring old way of doing things.
That dichotomy is growing in every economy because, when we are seeing the emerging new banks, the reason why people like them so much is that they are doing great analytics around our lifestyle. And the more analytics they do around our daily life, the more we use them in our daily life. That’s a fundamental switch.
Another change is a company like TransferWise, who I didn’t really understand until I had to make more and more payments overseas. I moved to Poland two years ago and I discovered it is very difficult to make payments here from my bank account but, from TransferWise, it’s real-time and it informs me in real-time about what’s happening with my account.
So, by way of example, I recently had to get my car fixed in Warsaw in Poland and the bill was for more than I had on my TransferWise debit card. Literally, as I sat in the reception of the repair shop, I moved $1,000 to my card and paid the bill within a few minutes. That real-time connectivity is another major factor driving the new world of financial services.
We also have people like Vitalik Buterin creating technologies that are dramatically transforming financial services. You probably all now know about Ethereum. You may have different views about Blockchain and distributed ledger technology (DLT) but, whatever your view is, it is still a critical technology for the future of commerce and transactions and governance because it enables us to created shared databases that are completely automated and trustworthy. We never had that before. Because we have that ability using technology, we don’t need to have a central authority managing a central database. We can have decentralised structures.
The difficulty with DLT is that it is a very controversial technology, not because of the technology itself, but because of its use cases which are predominantly in areas that are very difficult to deal with. These are not areas that require technological solutions, but require standards and agreements between counterparties.
A great example of one of the best use cases for Blockchain is in digital identity. Digital identity is very difficult, because you must have an agreement between a government, an industry and financial institutions to use that digital identity. That’s very difficult.
The areas where permissioned ledger and Blockchain will have the greatest breakthroughs are in areas like clearing and settlement and digital identity but, to implement those areas, requires a lot of agreements and harmonisation and standards between counterparties, which is why it’s taking so long.
Nevertheless, the reason I pick on Vitalik Buterin is that he was 19 years old when he wrote the Ethereum code. This is a critical factor for me, which is that children are inventing the new structures of finance.
It’s even better illustrated by this young lady from Thailand, Kaede Takenaka, who is running a currency, the KIDLetcoin, which is actually a Blockchain cryptocurrency to educate children on money. When Kaede created the company, she was nine years old. Admittedly, it helps that her mother is heavily involved in DLT and Blockchain but, what I’m getting at, is that no matter who you are and what age – you could be nine or ninety years old – using APIs and Cloud and today’s technologies, you can create a new way of thinking about finance and creating new ways of doing finance.
We’re seeing this happening worldwide and a lot of it coming from very young people – 19 years old, nine years old or take Nikolay Storonsky here, who is the founder of Revolut and is in his thirties. One of the interesting things about Revolut, which is the largest FinTech unicorn in Europe just valued recently at $5.5 billion, is that it came out of disillusionment with the traditional financial markets. Nikolay worked for Lehman Brothers in September 2008. Obviously he lost his job, but he is a former financial markets authority. He has that experience. He knows how financial markets work.
There are many, many people who are creating new APIs, Cloud based services, Apps and Analytics, who have been around financial services in their early twenties and thirties, and now are recreating financial services using technology.
My favourite FinTech company is Stripe. The reason it’s my favourite is because it is the biggest FinTech unicorn in the world, created by these two brothers – John and Patrick Collison – when they were nineteen and twenty-one years old. As I said earlier, teenagers, children are recreating financial services using code. This is a critical factor as it is not traditional financial people who are recreating and have vision around finance. It’s kids.
In particular John and Patrick Collison had this idea that it was very difficult to do checkout online. So they launched seven lines of code in 2011 as an API, to make it simple to do online checkout. By 2016, their seven lines of code were worth $9.2 billion. That’s just in five years! Five years! Seven lines of code! Worth $9.2 billion! What’s even more amazing is that just a couple of years later their net valuation is over $20 billion after seven years. $35 billion after eight years.
FinTech is changing the game.
It’s a radical change with technology based around Cloud and the Smartphone and Open-Banking APIs. This creates a big, big, big challenge for traditional financial firms.
To put it in context, Stripe in September 2019 is worth more than seven Commerzbank’s, one of the biggest banks in Germany. It’s worth more than two-and-a-half Deutsche Banks, one of the biggest banks in the world. It’s worth more than BBVA, one of the most innovative FinTech banks in the world. It’s worth almost as much as ING, one of the most innovative global banks using technology. This brings home a lot of what’s changing: that it’s actually about new companies doing new and innovative things and changing the game.
Banks are responding to this changing of the game. If you take Barclays Bank, they’re not hanging around. They’re not just saying: “I’ll let FinTech take over”.
Barclays Bank increased its value by a third in two years and decreased its staff by a third. This is a trend we will see in a lot of traditional financial institutions going-forward. They’re going to change and reduce their numbers dramatically by automating everything they can using data-analytics, artificial intelligence, machine learning, and reducing branch footprint, reducing physical footprint. They will become technology companies, they will become FinTechs.
We’re seeing this already. Companies like JPMorgan Chase (JPMC) are investing massive amounts of money in technology, to make transformation happen. $11 billion a year. In fact this is rising every year, and a lot of that investment is going into engineers. One in five people who work for JPMC today are in technology. They have more technologists than Facebook and Twitter combined, and this is because they want to be the disruptor and not the disrupted.
How rapidly a bank makes that change is the challenge. How quickly can a large bank change from being a physical infrastructure to being a digital platform?
Can banks – built for the physical distribution of paper through a localised network of buildings with humans – become technology firms – built for the digital distribution of data through a globalised network of software and servers?
This is the radical change and crisis in many traditional companies: how can we quickly make things different? In JPMC they’re doing amazing things with technology. Are they changing fast enough?
It’s a good question. The reason I say it’s a good question is that a big bank like JPMC tries to do everything everywhere all around the world on their own and yet today’s world is all about partnering between new and old companies.
When I talk about FinTech, I see it as a partnership between a parent and a child.
The children are these FinTech companies run by these teenagers, with vision, who can code. They have amazing ideas, but they have no idea why banks are structured the way they are or why financial markets work the way they work.
The parent understands compliance, regulation, audit, and the whole reason why we have financial markets structured the way that we are structured, but they don’t have that vision and drive and innovation around technology.
How do we bring these two together?
The parent wants everything stable and secure and the child wants to change everything and make it all different.
Deutsche Bank articulated this very well recently. They said, in their strategy around their future, that finance is what they do but technology is how they do it. The parent knows what to do and the child knows how to do it.
We are seeing this evolution of finance and technology. A decade ago, a lot of it was around banks being dinosaurs and people saying they would be disrupted and destroyed by technology. Then it became banks saying we want to support innovation and they created innovation hackathons and workshops, but a lot of it was just corporate theatre, jazz hands, it wasn’t actually bringing it into their organisations.
Today, we are seeing a lot of people taking about cocreation, collaboration, partnering between start-ups and traditional financial institutions and, over the next few years, we’ll see the integration of these start-ups with these financial institutions.
By the end of this decade, we won’t even talk about FinTech. We will just talk about finance that runs on technology which will be all banks, all asset managers, all fund managers, all insurance companies. Everyone will just run on technology. It will just be finance on technology.
I’ve talked a lot about the impact of the new start-up companies and the way in which they think. The fact that they have a huge amount of vision and drive, from kids who can code, who think differently, who don’t understand why banks and financial firms work the way they work. They’ve seized the opportunity of Cloud and Open-Banking, APIs and Analytics, to change financial services and come up with radically different and new ideas.
How does the bank respond?
I got fed up with people saying that banks would be destroyed and disrupted by technology. Banks are very challenged by technology but they’re not going to be destroyed by technology. We’ve had that discussion for a long time. It is not going to happen. As I say, banks are now integrating and collaborating with new technologies, to integrate those into their structures and become something different, to become digital banks.
I spent the last couple of years travelling around the world meeting with banks and talking to them in-depth about how they are doing their own digital transformation, which is incredibly hard because a bank is based around a physical structure. Most banks were created one hundred or two hundred years ago, to distribute paper through a physical localised network of branches with humans and now we’re talking about digital distribution of data through software and servers. It’s a completely different business model. It’s a completely different way of doing things. Again, if you have heard me present before, you will know what I mean about those things.
So, two years ago, I picked five banks from the top fifty that I thought were doing digital really well. These five banks were JPMorgan Chase (USA), DBS (Singapore), BBVA (Spain), China Merchants Bank (China) and ING (Netherlands). What I wanted to do is to meet banks who I thought were doing digital well, such as these five banks, and interview them, talk to them in-depth, understand what and how they are doing digital transformation, and then combine that with my own experience of doing this for decades to really identify the lessons we could all learn from these leaders around how to do digital transformation.
That’s what I’ve been doing for the past two years and the result is a new book called Doing Digital.
To produce the book, I visited these five banks and spent a long time interviewing them, and all the interviews were recorded. The interviews are not reproduced in the books verbatim. Instead, there are quotes and comments from each of these five banks around what I feel is relevant to doing digital transformation. However, out of those interviews, I found around thirty or more lessons that they have implemented that I share in the book. These thirty lessons are not the ABC or 123 of doing digital transformation, but it’s actually a guide to the things you have to bear in mind when you’re trying to change your bank to be a digital bank, working with collaborative and open partnerships within the FinTech community. These thirty or more lessons ended up falling into four big buckets: what do to; how to do it; do it; and do it better forever.
It sounds easy. It’s not. Working out what to do could take maybe two years. Working out how to do it maybe takes another two years. Doing it takes another three or four years. Then doing it better is forever. We’re talking about a ten-year cycle of change. A decade of change in just these four phases in this one slide.
One of the comments that was made by one of my interviewees really hit home. She said to me that the previous Chief Executive and Chairman knew the bank had to change to be digital, but they didn’t know what to do or how to do it. The reason that strikes home hard for me is a quote that I have used for many years by Charles Darwin about from The Origin of Species.
“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”
It’s not the survival of the fittest, the strongest, the fastest, the most intelligent; it’s the survival of the ones who adapt to change the best. But if you don’t know what to change or how to change, then you will not survive. Even if you do change, if you are not changing in the right way, in the right direction, then you won’t survive. Are you doing the right things?
What’s interesting for the banks that I interviewed is that they all began with trying to work out what to change by visiting the digital leaders that they respected the most: the Amazon’s, the Tesla’s, the Spotify’s, the Netflix’s, the Ping An’s, the Baidu’s and the Alibaba’s. They went and visited with them all. They went to find out: How do you do what you do? How do you structure? How do you manage your people? How do you communicate? How do you deal with rewards and remuneration?
It’s not rocket science. It’s very much that these organisations, because they were born on the internet, are completely different. They were born digital. They didn’t have the physical legacy. They still have to adapt to change all the time – to embrace the mobile revolution, for example – but they do things differently.
A good example of doing things differently is that they organise in a radically different way. For example, with Amazon they organise around two-pizza teams. That’s the whole spirit of agile and flat organisations. That you have a team that’s organised around being small. If it needs to have more than two pizzas delivered to the team for lunch, the team is too big. That’s the idea of the two-pizza team. That’s how Amazon thinks.
In fact, it was quite funny that one of the banks said to me that every time they make a decision now, they would say: “What would Jeff do?” I asked: “Who’s Jeff?”, and they said “Jeff Bezos, of course”.
Always ask: What would Amazon do? What would Alibaba do? every time there is a need to change the organisation to do something differently.
Working out what to do is to benchmark the people who you respect the most as digital leaders, and then work out how to internalise that to your own organisation. Internalising it is not easy. It needs a board mandate and this board mandate is incredibly important. Again, I didn’t realise this until it was in one my conversations with the Chief Executives of one of the banks, who said to me that the Chairman and the Chief Executive were told to focus upon the digital transformation and not on business as usual. Forget shareholder return, forget profit, forget the metrics that you dealt with in the past. Focus on the change.
This was incredibly important because when you are dealing with transformation, you can’t do business as usual. You need to delegate that and let others deal with that. To do digital transformation, you need to do business as usual. You need to focus on changing the business, not doing the business.
In the case of the banks successfully transforming, their Board’s said to the CEO and Chairman:
“We will deal with the shareholders. We will deal with any issues with business as usual. You focus on business as unusual. Make transformation happen.”
That mandate was very important for the leaders of the bank to focus on change. The big thing to do with change is that, if you have 25,000 or 250,000 people in the institution, how do you fire them up to do things differently?
First of all, you need to have a burning platform. You need to make them wake up and worry about the fact that things are going to be different. In every institution, they had this burning platform. They had a moment where the Chief Executive and Chairman announced things were no longer going to be the way they were.
Equally, you can’t let people worry without giving them direction. You can’t just say things are going to change or you have to change without giving somewhere to change to, to work out where we have to go. You need to have a vision of the future. You need to give a direction, a vision, and communication of that vision around how people need to change and where they need to go. This is another incredibly important part of communication of how the bank needed to change, not just why it had to change.
Everything about the way forward was focused upon customer. In all five banks, customer obsession was something that came through vividly and strongly in every interview and you’ll see that in the book.
I think this is an incredibly important thing, which is that most banks have been traditionally focused around pushing products through channels to customers. The new banks focus on engaging customers digitally. They follow and deliver customer journeys, not products. They want customer inclusion and for customers to be part of their platform via their technology with relationships that are digital. It’s a very different way of thinking.
It all started with the customer journey. How does the customer feel? How are we interacting with the customer? Do we actually give them an experience? More than that, do we actually understand how they think?
These are all the phases of designing a new bank, from learning what to do from digital leaders who you benchmarked and met, to working out how to internalise that and deliver that within your own institution.
Doing it is then the next piece and this takes an awful lot of work because, in changing the organisation, the hardest part is changing the people. All of these companies spent a long time working out how to get their people to be part of the change.
The biggest resistance to change is in the middle. The people in the middle of the organisation are the ones who feel most threatened by digital transformation. They think that they’re going to lose their jobs, that they’re going to lose their powerbase, that they’re going to lose their promotions, that they’re going to lose their career. They really really don’t want things to change.
How do you get them to engage and how do you get them to change?
It’s the most challenging piece of the implementation phase of doing digital transformation but really, it’s all about communication, engagement, support, participation and offering the chance for people to reskill. You can’t just say to a branch manager with a traditional bank structure that there will no longer be physical distribution structures that you’re part of, if you don’t offer them a chance to reskill, to become coders, to learn Python, to get involved in innovation teams, to get involved in new agile structures.
In fact, it’s quite interesting that all of these institutions are based around Agile. A lot of us talk about agile, but do we really do agile? It amazed me how often I would meet teams where the audit, compliance, regulatory, credit and risk teams are engaged in ideation with designers and developers. These small two-pizza teams would have these risk, compliance and credit people sitting side-by-side with designers and developers, doing ideas around how to create new and better experiences for customers. Everything is based on the customer journey and the customer experience.
What that really demands is a very different organisational structure.
I call it the Synchronised Swimming Structure, which is that you have all these teams that need synchronisation. How do you synchronise lots and lots of small two-pizza teams? What that really comes down to is communication.
One of the key things about all of these banks is they are flattening their structures by being agile, and having lots of small teams. ING described it best. They said that they have 30,000 people that, ten years ago, were 30,000 individuals but are now 3,000 ten-people teams. Those 3,000 ten-people teams can get to the Chief Executive that day, if they need to get a decision that day. The communication between the teams and the management is immediate and real-time. You cannot have monthly reviews and decision making. It has to be same day. That’s a critical part of how these organisations work. Their decision making is immediate.
One of the companies I dealt with, a FinTech start-up actually, said to me that they did a deal with Alibaba’s Ant Financial to support Alipay in Europe, and from the first communications to implementation took less than six months, which is about the time it had taken him historically to try and get a meeting with a bank’s Senior Vice President. You can’t have six- or twelve- month cycles of decision-making. It has to be real-time.
In fact, one of the key things about all of these institutions is that their management metrics and benchmarks are run in real-time on dashboards. Every manager in every company I met, is making decisions based on real-time communication globally with every individual in the institution. The CEO of BBVA can drill down to exactly how a person is performing in an office in Mexico right here, right now, in real-time. You can’t have decisions made on past performance, reported in annual documents. It has to be immediate.
A digital bank runs on a digital dashboard in a real-time digitally connected world, and it takes years to get to this stage of implementation. Then, once you have done all of that, you can’t just leave it there. You have to continue. You have to do it better forever.
I love this comment from DBS: Data is Air. A lot of people talk about data as oil. Oil is a fossil fuel and it’s limited. It’s running out. It’s scarce. Air is all around us, as is data. We need air to breathe, but we need clean air to breathe. If you have dirty air, you’ll die. If you have polluted air, you’ll die.
Data is air.
The banks that run effectively in an Open-Banking world with APIs, Apps and Analytics from partners in the FinTech community, will have clean data that’s consolidated, rationalised and gives an enterprise view of everything that’s happening in real-time. That is the only way for financial firms to survive from today onwards: to have good, clean data. Good, clean air.
That’s why you have to do this better forever, because if your data is locked into a system that starts to rot, then you die. In fact, that is the real issue around most banks: that they have let their data rot in old systems. You have to get the data clean and fresh, and then do it better forever.
These are the four massive phases that the big banks are going through to become digital banks and to be able to work in open banking with the FinTech community. Working out:
- What to do;
- How to do it;
- Doing it; and then
- Doing it better forever.
We are seeing a radical change in our world through technology, and we will see even more radical changes in the next decade. The fact that I am presenting here to you from my home office in Poland is something that might become standard. It’s certainly going to change the way we think about relationships. We will still be globally connected, but we may not globally travel. We will certainly move away from cash and from physical paper structures, because they carry germs.
Even bigger changes are coming in the next decade than what we have seen in the last decade. Bearing in mind that the last decade has seen over 12,000 new companies start up new ideas in using technology with finance, radically changing the way banks do their own thing, that says something.
I’m really pleased to have been able to present to you this morning from my remote office over here. I’m so disappointed that I’m not with you face-to-face, but I’m fairly sure the world will change pretty soon, and we’ll all be back together again in the not too distant future
Thank you very much.
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...