The early days of the browser-based Internet were a chaotic mess of excitement, expectation, and discovery. Portals with names like Excite, AltaVista, and Yahoo! jumped in to help users make sense of it all. They organized sites into subject area and lists so people could find their way through the labyrinth of pages and options. Then Google came along. Rather than create subject- and list-based clickstreams, it took users straight to the pages they most likely needed. It shifted everyone's approach. Instead of asking if something was on the net, Google assumed it was. And it made getting there much easier.
The move from portal to search was a profound paradigm shift. It fundamentally altered how people think about the Internet. Yet, like the music industry before it, the portal industry waited too long to try and replicate the approach; and Google walked away with the market. Today, banking is facing multiple and simultaneous paradigm shifts. Mobility, cloud, artificial intelligence (AI), blockchains, platforms, edge computing, the Internet of Things (IoT), new regulatory frameworks, the API economy, and other technologies are fundamentally altering how people interact and think. While most banks know they must "digitally transform," it is not always clear what they should be transforming into. Fortunately, close examination of key paradigm shifts points to a potential medium-term goal for banks wrestling with their destination. The combination of cumulative small shifts (think payment automation) and massive shifts (think restructured architectures that enable new business models) suggests a bank that serves customers in the same way a self-driving vehicle serves passengers.
Asked the Bankers What They Wanted to Be
Two major trends are changing the direction of classic banking and its business models. The first is open banking. The core concept is straightforward: Bank customers will be allowed to share their banking data — account information, balance details, payment histories, loans and other debt instruments, the products and services they use, and credit card information — with any third party they authorize. The bank essentially becomes a warehouse for money, debt, and data, which can then be shipped to whatever company the account holder wishes to do business with. Given the nature of banking, most of those third parties are likely to be connected to cashflow, payment systems, wealth management, insurance, loans, and other services built around financial transactions.
Open banking is largely driven by regulatory imperatives in Europe, which are designed to increase competition, and the emergence of APIs. For the first, the European Union's Payments Services Directive 2 (PSD2) has provided a framework within which member countries develop specific rules related to the sharing of account data. The practical result enables third-party fintechs to step into what was once a closed market and bypass traditional payment providers by working directly with relevant banks. For the second point, PSD2 has largely been enabled by APIs and the so-called "API economy." By allowing a diverse array of applications, databases, platforms, and systems to communicate and initiate tasks and processes, APIs have essentially introduced to banking (and other industries) a previously unseen level of flexibility. Once disparate digital tools can now be brought together to build any service package a bank, insurance company, government office, retailer, social media provider, or computer savvy person can dream up.
For banking, the expectation is that the level playing field will lead to a broader and more customer-oriented ecosystem. In places like China, Poland, Sweden, the U.K., and Germany the banking ecosystem has already gained considerable momentum, with scores of fintechs already in place and offering services. For those unfamiliar with how this situation is likely to develop, travel and hospitality ecosystems provide a flavor of what a truly open banking and finance system might look like. When you book a flight, for example, depending on the site you use, it may offer multiple combinations of car rental, accommodation, insurance, shopping, tours, spas, adventures, and entertainment services.
A similar collection of offers and services can (and will) be aggregated and presented to customers by banking or third-party service providers. To give an example, a bank may partner with (or replicate the services of) firms such as Centralway Numbrs (a Swiss company with a large presence in Germany), which gives its users access to all their accounts through a single app and enables single-click transactions. The bank in question could also work with fintechs such as UK-based Aire, which uses data-driven algorithms (based on a mix of financial, professional, and personal histories) to generate a fair credit score, and Essentia Analytics (also U.K.-based), which uses AI to improve investment decisions. Banks can subsequently use analyses of payment histories, debt levels, and personal assets (e.g., a car or house) to personalize combinations of services related to account access, alerts, insurance, investment opportunities, payment systems, credit card offers, and cash-flow control tools.
Prospects Are Good and Expectations Understood
The second major trend pushing banking toward a self-driving model is the way technology is impacting customer expectations. The shift from portals to search stemmed from people knowing that what they needed was somewhere on the Internet. For services, the rise of smartphones and app stores has led to the idea that there is an app for everything. With banking and financial services, even if we cannot articulate it, many of us now expect banks to be able to do anything and everything related to our accounts, money, and data. This applies to simple tasks, like making payments, to more complex ones, like layering risk management tools and hedging complex transactions related to imports and exports.
The push to enhance the banking experience is part of a larger trend affecting multiple industries. As laid out in their seminal 1988 article "The Experience Economy," by B. Joseph Pine and James Gilmore, in open markets, industries and entire economies eventually progress up a customization ladder as enterprises fight for competitive advantage (see Figure 1). For example, several hundred years ago, growing the most wheat was enough to make someone rich, give them economic power, and create economic value. Once new technology and improved supply chains leveled the playing field and turned wheat into a commodity, baking bread became the core source of economic value and power. Centuries later, sandwiches followed. Technology, management practices, and processes then improved once more, turning bread and sandwiches into the commodity and reducing margins to near zero (or worse). Service became the core differentiator, with waitstaff, delivery, lines of credit, and custom orders providing the value add. The competition then emulated successful best practices, commoditizing service and forcing food providers to up their game and provide experiences. Impeccable service is now a given. Ambience, attitude, brand values, sandwich design, use of fair trade commodities, and providing the feeling that the customer is part of something important or chic have all become differentiators and value generators. In 2011, Pine and Gilmore added "Transformations" as the top level. As experiences become commodities, value will derive from the ability of goods and service to change how people think and behave — hopefully, for the better. To deviate from our baking example, the instant fuel consumption gauge on cars has changed many people's driving behavior. Accelerating while driving up a hill is one of the least fuel-efficient things drivers do. By showing this to drivers, it caused many to alter their behavior and wait for flat or downhill grades to speed up or pass others.
Figure 1: Pine and Gilmore Commoditization ProgressionSource: Pine and Gilmore, 2011
Banking services are already far into the commodity stage. For retail banks in particular, no real difference exists between what they can provide. They all offer daily-use accounts, savings accounts, payment cards, various loan and credit options, and investment services. Banks have been rapidly waking up to this reality and advancing their value propositions. I have seen this with my two banks (which shall remain nameless for obvious reasons). One of them still requires customers to take a number and wait their turn for various in-person services. Agents are often stiff, sit behind a counter and glass shield, and lack the jovial friendliness of the local Starbucks baristas. (The Starbucks near our office is packed with gregarious and cheerful staff.) The online banking user interface (UI) is clunky and can be slow. Sure, service possibilities are broad, but the experience is dismal. By contrast, my other bank has redesigned both its offices and its online UI. Clerks are friendly and welcoming; they meet customers at open desks and treat each one as a valued client — regardless of asset level. The online and mobile UIs are (almost) intuitive and therefore easy to use. The bank has essentially redesigned the customer journey, optimized key touchpoints, and overhauled its brand, all with the aim of maintaining a loyal customer base. (That said, the experience can be inconsistent, and the mobile app needs a little more development, so they still have some work to do.)
Baby, You Can Drive My Bank
My other bank has started to follow suit and has already redesigned its branch offices in shopping malls. And if they want to maintain their market share, so will all other banks in the country. As each gets better, it will push the others to get better, and the entire market will progress up the commoditization value chain. For retail banking and SMB banking, that will mean creating fluid "driverless" experiences in which customers barely notice the bank's presence. The first step is systems integration and core banking integration, which have been or are being undertaken at banks already. Then comes the automation of IT and of back- and front-office processes and UIs — something also well underway at many banks. (A 2017 McKinsey report estimates that 30% of the work in banks could be automated, while other studies put it as high as 70%.) After that comes the aggregation of various automated processes into cohesive service bundles and the overhauling of UIs and customer onboarding (many banks should probably overhaul onboarding for their current systems as an intermediate step).
By way of illustration, consider the life event of buying a car, a major purchase for most people. In the world of self-driving banking, it can also be a relatively easy and painless one. After deciding on a car, the buyer tells the dealer their intentions. The dealer and the buyer authenticate each other (with a provider such as Averon) through a couple of taps on their smartphones and the exchange of an encrypted key to alert the buyer's bank. The identity of both is then checked with micro-location, analytics, and (perhaps) two-factor authentication. The bank then uses various analytics, partner apps, and APIs to automatically assess what the buyer can afford upfront, the size of the required car loan, a reasonable and competitive interest rate on the loan, a realistic repayment schedule and loan payment size, and a competitive insurance package through a fintech partner. After a quick "Yes, I approve" from the buyer, the bank then automatically transfers payment to the dealer's account and sets up regular automated payments to the bank and the insurance company. Finally, in countries where it is allowed, it could electronically register the vehicle in the buyer's name.
To make a painless car buying experience happen, banks can either assemble their own solutions or partner with fintechs such as AutoFi and AutoGravity in the U.S. and CU Direct in Canada. All three have already taken significant steps toward self-driving, with services designed to digitize and automate the car loan process. Banks can also partner with companies such as the U.S.-based Envestnet-Yodlee to be sure a person can actually afford the loan. And banks can work with insurance clearing houses that deploy AI to identify best-fit packages, such as UK-based Instanda.
Figure 2: The Automation and Integration of Self-Driving BankingSource: IDC, 2018
A similar process could also boost efficiency for small businesses. For example, independent booksellers have made a comeback in many developed countries. Most require revolving lines of short-term credit to stock their shelves. Using either a bank-run small business accounting suite or a solution with APIs connected to bank systems, the bookstore proprietor can place an order and let the bank do the rest — approve the short-term loan, transfer funds to the right accounts, pay the publishers (or wholesalers) directly, set up a loan payment schedule, enter the appropriate receivables and asset numbers into the balance sheet and cash-flow statements, and handle shipping and asset insurance. And this is exactly the direction in which New Zealand software firm Xero is moving. In addition to being integrated with each other, Xero's broad range of accounting and financial management tools can be integrated with third-party applications to facilitate and automate payments and accounting updates. One online retailer I spoke with said it made finance management a breeze, allowing him and his team to focus on building relations with partners and optimizing supply and delivery chains.
Corporate banking will probably be the last subsector to become driverless. Processes, financial tools, forecasting, accounting, cash flows, treasury management, FX effects, swaps and other hedges, legacy systems, silos, governance procedures, and a score of other factors make corporate banking orders of magnitude more complex than personal and SMB banking. Still, considerable activity suggests it, too, could become, at least partially, a self-driving experience. IDC forecasts that corporate banks will invest $2.20 billion this year into analytics to shift from transaction models to real-time "insight as a service" models. Various studies suggest around two-thirds of companies with global operations plan to automate some (or even most) of their finance-related tasks over the next three years or so. Norwegian energy firm Statoil, for example, uses an AI (which it has named Roberta) to help with treasury management. Enterprises such as Orange and Royal Dutch Shell are following suit, with their own versions. Large banks have multiple analytics tools that they sell as a service to automate fraud detection and balance sheet quality control (suggesting the self-driving corporate banking experience could be built around the paradigm of banking as a platform). And, of course, back-office processes are increasingly automated. Organizations such as SAP and Microsoft are deploying machine learning and AI on their respective platforms to create flexible automation tools that can be applied to digital business assistants, financial planning and analysis, finance operations, and enterprise governance, risk, and compliance, all of which can free up resources for creating better customer experiences. It is important to note that much of this enables human decision makers to be involved at every level, from vision and strategy development to the lowest levels of quality control.
We Have a Plan to Get Us There
Just like the self-driving car, self-driving banking will develop incrementally, with occasional leaps forward. False starts, setbacks, and failures will happen. Banks are inherently conservative when it comes to management and change (as they probably should be), which could dampen their commitment to true transformation. It will not help that, globally, revenue from digital banking is likely to be disappointing in the near term.
Still, the writing is on the proverbial wall. If incumbent banks do not lead the change, "upstart" banks and fintechs will. BBVA is a case in point. Although different units of the Spanish bank have been around since the mid-19th century, it has essentially acted like a start-up in its approach to innovation (it is not afraid to fail fast), with its laser focus on customer service, its use of cloud and mobility for back-end management and service delivery, its hiring practices, and its development of new business models.
Fortunately, the lesson of BBVA and other banks, such as Axa and its mobile-first Soon experience, remind us that innovation in banking, as with autonomous vehicles, is an ongoing process. To accelerate progress in the open-banking era, banks need to do the following:
Answer the Big Questions First
Open banking means banks will soon be in the same position as telcos were a few years ago. They must decide where they wish to be on the continuum between dumb data pipe — where third parties provide all the services — and full-service agency. The first step is a careful assessment of target markets, the long-term revenue possibilities, and technology's potential impact on them (see Figure 3). While such a decision should not be set in stone, as market forces and unexpected opportunities may warrant a reevaluation of priorities on some version of an Ansoff matrix, it will provide a clear direction when rearchitecting systems, setting up partnership teams, setting key performance indicators (KPIs) and long-term targets, rethinking organizational structures, and outlining the portfolio of necessary skills. (Tied up with this decision is the concept of banking as a platform, but that is beyond the scope of this study.)
Figure 3: The Continuum of Banking TypesSource: Deloitte, 2017
Assess the Market and Yourself
Launching a set of services too soon can eat away at margins and strain both resources and morale. Launching too late gives competitors a head start that may be insurmountable. Before taking the onramp to self-driving experiences, banks need to carry out a systematic maturity assessment of the market, then map their own capabilities to current industry expectations. As with autonomous vehicles, a fully self-driving experience is probably 5–10 years away, even in the most advanced markets. However, imperfect self-driving experiences are already emerging. Moreover, the appearance of new self-driving services will accelerate as banking ecosystems and banking-as-a-platform models mature. As a first step, IDC suggests keeping it simple by focusing on the market and oneself. Start by breaking the market down into five broad areas — leadership, omni-experience, WorkSource/skills, operating model, and information management — then divide each of those into component parts. In doing the analysis, it is important to make predictions about how rapidly each component will progress and about the technology, skills, management, partners, and processes that will be needed to develop it over one, three, and five years. The self-analysis follows the same approach, identifying the areas that need immediate attention and those that can be pushed back a few months or even years. (Given the accelerating pace of change, it is best to conduct such an analysis every quarter; if that is not practical, then at least every six months.)
Figure 4: Maturity Gap AnalysisSource: IDC, 2018
Put the Customer First
Every decision, from how to train frontline staff and when to deploy mobile banking apps to what type of cars to give managers, should be run through the filter of "How does this help the customer?" Even the type of soap used in workplace bathrooms can make an incremental difference by influencing staff mood and thus how employees interact with each other and with clients. To begin with, banks must optimize their customer journeys, turning the touchpoints most relevant to their brands and desired customer actions into potentially transformative experiences. Given most touchpoints are owned by different lines of business, which often compete for chunks of the same market as well as for product development resources and IT budgets, a C-level leader should be the project champion. They must work closely with other C-level leaders to breakdown silos, set cross-functional KPIs, unite disparate budgets, and prioritize optimization phases, which almost always start with failing-touchpoints triage. The process can take months, but it is extraordinarily valuable, giving everyone a clear picture of how customers learn about and engage with the bank, where and why they leave the journey, what works and what needs to be fixed, and the technologies that need to be in place to make it all work.
Go Modular With IT and Assemble Rather Than Build
Ten years ago, the specific needs and emergent complexity of core banking — especially the reconciliation process — meant banks more or less had to build everything themselves. But today's integrated platforms mean that such an approach is no longer necessary. What once took quarters, or even years, to build can now be pieced together in a few months on platforms such as Microsoft's Azure, SAP's HANA, and Oracle's Banking Platform. For straightforward accounting, borrowing, lending, and payment services, these platforms often have greater ROI than building or working with in-house built systems. Having said that, off-the-shelf systems do have their challenges. A large bank dealing with multiple lines of business, a wide variety of customer types and groups, and a multitude of locations may find off-the-shelf platforms need a great deal of (often expensive) customization to make things work right. Furthermore, the initial migration from an in-house system can be a painful process while the different components are transitioned over. Still, the accelerated pace of platform advances and the concomitant possibilities of easy scaling and rapid development could soon outweigh the costs and risks. Moreover, the DevOp environments of different platforms are increasingly equipped to turn cutting-edge ideas into viable products and services.
Put a Governance Task Force in Place (and Governance Automation Tools)
While multiple software and services providers have added phrases like "GDPR compliant" to sales scripts and marketing campaigns, it is important to remember that software can never be truly GDPR compliant. It is software. Just a tool. Rather, it can help an organization fulfill regulatory requirements, which still need to be checked by compliance officers and legal teams to ensure it is aligned with all the necessary rules and restrictions. More broadly, as banks transform, each change needs to be checked against international, national, state, and sometimes city-level rules. Regulatory permissions already in place must be scrutinized for compliance with planned activity. Incident reporting procedures, information security, and continuity protocols must be up to date. Policies governing the use of sensitive data must be current at all times, and regular tests and reviews of compliance procedures need to be part of business as usual. In this respect, an ounce of prevention is worth a pound of cure. Setting up a task force that can rapidly check each change as it is being planned will likely prevent costly corrections and fines down the road.
Final Word on Big Tech: Not Starting from Zero and Nothing to Lose
There is one final reason that banks need to accelerate their transformation programs and start setting goals related to self-driving experiences. Big Tech. According to an Accenture survey released early last year, one in three people would happily switch their bank accounts to Facebook, Google, or Amazon if they started offering banking services. As might be expected, that number is highest among younger age groups, which represent the future client base of banks. Based on nearly 33,000 respondents in 18 countries, the survey should serve as a forewarning to banks around the globe.
The tech giants all dominate their respective fields and are looking for new lands to conquer. They are also masters of extracting value from data, piloting new products, and using innovative AI and a dozen other technologies applicable to the holding and handling of money. Alibaba and Tencent already have basic online banking services. Ant Financial, an Alibaba-owned payment service, had roughly half a billion customers as of August last year, while Amazon Lending has already advanced billions of dollars in small business loans. The tech giants all have massive reach, strong brands, and extensive experience with service integration and customer experience management.
Fortunately, at least in the short term, regulations will likely keep the tech giants at bay (at least in banking if not other areas). Even if they plan to take advantage of the introduction of PSD2 in Europe, providing a full-set of lending and investment services still requires navigating a labyrinth of rules and restrictions. But then they have the talent and resources to do so, and the opportunities for new revenue are tantalizing. If the banks wait too long to act, they could easily find themselves losing customers to another paradigm shift and alternative route to the self-driving banking experience.