Richard Johnson: in anticipation of a “banking Uber”
Why do banks go to FinTech? Can FinTech services claim global reach? These and other questions were addressed by the PLUS Journal to Richard Johnson, a consultant of the FinTech start-ups in Europe, former strategy director of Monitise and head of the digital technology department at RBS.
- Why banks are so much occupied by the whole fintech thing? How different it is from the financial service innovation talk we have had years ago (1 cycle ago).
What is your opinion on what fintech services have good chances to stay in this world and is there a secret recipe to become a successful startup?
The most important advice for any start-up is to thoroughly think through your proposition – what problem are you solving, and why is your solution better than the ways people are using to solve the this problem today?
There is an awful lot of ‘clever technology in search of a problem’ today. Whilst this mindset can occasionally find success through an early sale of technical expertise to someone else, sustainable long-term value only comes from a properly thought through proposition.
What can we expect from the next tide of FS innovation, should we see a 4.0 bank that is a platform as much as a service? Talking about banks reinventing themselves for the well off world, what about the developing countries? Who is to success best promoting financial services?
This is really a question about what role banks should play in the so-called ‘API economy’. The ‘API economy’ refers to the use of APIs – connectors which make it easy for one piece of software to access the capabilities of another, such as putting Google Maps in your website. Banks will certainly want to benefit from the API economy as a way to access advanced software from other companies, but this ‘bank as a platform’ question asks whether banks themselves might want make their own capabilities available via APIs.
I think the answer is Yes: if a bank has internal capabilities (such a payment processing) which would provide value to third parties then it makes sense to make it as easy as possible for third parties to access, and APIs are a good solution for that. There are two caveats though: firstly, are you giving away your competitive advantage? And secondly, are your systems robust and scable enough to deal with the volumes of traffic that might result?
Turning to developing countries, you are right that the dynamics are in amny ways very different. Whilst in developed markets the ‘first world problem’ is whether there are even better alternatives for people to bank and pay, in emerging markets the opportunity is much more profound, it is to give access to secure financial services for the first time with benefits at a societal level (reduce crime and corruption, enhance economic growth) as well as for individuals.
The first wave of the fintech revolution – though that name didn’t exist then! – was really the use of basic featurephones to enable people to send money across Kenya using mpesa in 2007. This was led by the local mobile network, Safaricom, who used their network of airtime agents as cash-in/cash-out points. mPesa has now developed into a wider range of financial services products (such as savings and loans) showing how technology can leapfrog the limitations of physical distribution.
I believe we are on the cusp of a second wave of fintech in emerging markets as the proliferation of low-cost smartphones brings internet access to the next billion people on earth – leapfrogging the PC phase – and gives them access to eCommerce. This brings the global giants like Facebook and Google into play in these regions for the first time, and creates many opportunities. It is interesting in this context to see Alipay, the Chinese payments giant, bidding for MoneyGram, the global remittance network, which would give them access to a global network of cash-in/cash-out agents.
From your perspective, should fintechs focus on real problems and understand how these are seen through the eyes of banks (for cooperation sake?). Should banks be all in for the flavour of fintech innovation or should they keep sober heads investing pragmatically?
As I have said earlier, I definitely think banks need to be aware of, and understand, the latest fintech developments. Unfortunately, for many banks this need has resulted in what in sometimes referred to as ‘innovation theatre’, giving the appearance of being involved in fintech by setting up innovation labs, and going to lots of conferences, but not really resulting (at least yet) in actual new services that impact the customer proposition and create value.
Can we hope that certain fintechs will propagate and become universal and what is currently blocking them? Is it only the patchy network of banking systems and country differences that does not allow them to scale faster?
How solid is the biometics authentication movement in Europe at the moment? There has been a number of startups in this space and yet recently the market hype fizzed up? What is your take on this?
Historically, increased security and customer experience have been in conflict – so when a bank needed tighter security it required the customer to go through additional procedures (like one-time passwords, or token generators, or card readers) that impaired the customer experience.
The great opportunity now with the prevalence of smartphones is that this changes and instead we can have a win-win where by clever use of a mobile phone’s biometric capabilities (voice, location, fingerprint, photo….) one can both increase security and improve the customer experience. Apple’s TouchID is a great example.
The PSD2 regulation, that I mentioned earlier, requires stronger customer authentication for transactions so it is understandable that there is a high degree of interest in the opportunity to use biometric authentication. This is also an area where it can be relatively easy to integrate third part capabilities.
I think one of the potential challenges however is that the phone manufacturers, such as Apple and Samsung, embed the necessary capabilities in handsets (as with TouchID) meaning that there is less opportunity for third parties.
How should banks address the unemployment problem for front-line employees given the advent of robo advice and other algorythms cracking simple tasks? Will banks follow the luddite approach and how would they adapt?
Should banks try setting up their own marketplaces, soliciting services from others (fintechs, partners) or should they rather integrate in services of others
There will definitely be aspects of fintech innovation that banks will want to build into their own offerings. The question is whether they do that by partnering with fintechs, or acquiring them, or just poach the staff and build it themselves.
Peer-to-peer (one Marketplace) Lending is an interesting example. There are undoubtedly aspects of this fintech market that banks can learn from, including the use of technology and the product positioning. On the whole, the banks’ capital advantage should mean that if they adopted the same approach as the Marketplace Lenders, they could under-cut them on price. I think it is therefore interesting to see the emergence of Lending-as-a-Service, where some Marketplace Lenders are making their capabilities available for banks to incorporate in their own offerings. I suspect that many parts of fintech will move in a similar direction.
I’m afraid I am not close enough to the detail of the following subjects to offer an expert view:
-Seeing how many people are today talking about the revolutionary role blockchain would play, why banks are so quickly to leave prominent consortiums like R3. Is is a natural migratory flow or can be there any other reasons prompting banks to set other user groups etc.? Is it about the tech part or the commerce part
-What is the core driver for digital fiat currency? What major advantages the creation of such asset could bring to banks / users / regulators?
It is a very good question to ask, ‘what has changed?’, ‘why is it different now?’ and indeed, ‘what exactly is fintech?!’
The answer is that several things have changed:
-Firstly, the widespread adoption of powerful digital devices (especially smartphones) creates a new way for businesses to present themselves to consumers, to intermediate in business value chains that were previously closed
-Secondly and equally as important, the advent of cloud computing means that technology previously only viable at huge cost to the biggest corporations can now be rented on pay-as-you-use basis by the smallest start-up
-Thirdly, there has been a major supply of investment capital available as investors see the opportunity for spectacular returns (in contrast to the performance of traditional markets) if they can pick the next Facebook!
These factors combined have led to dramatic disruption of several markets – such as taxis, accommodation, travel, music. To me, ‘fintech’ refers to the application of these disruptive factors to the financial services market.
So banks definitely need to be focussed on fintech for several different reasons:
-To explore how can they leverage the factors above to improve their own efficiency (for example by transitioning to the cloud, or replacing expensive branch interactions with much cheaper digital ones)
-To work out how they can leverage digital in their customer propositions, to protect against the disruption threats from more agile, ‘digital-native’ competitors.
The stakes are very, very high for banks. It is not hard to envisage an ‘Uber of Banking’ where some smart new digital app gives you access to all your bank accounts, and uses machine learning to give you really useful advice on how to improve your finances, leaving the banks as just a ‘dumb pipe’ in the background.
Certainly the local variations in banking and payment systems (and associated regulations) is a constraint on the emergence of global ‘over-the-top’ players, but I definitely see the possibility that global players – the equivalents of Uber or Airbnb – could emerge. Financial Services is such a huge sector globally, and there are so many frictions that exist today because of historical constraints, that make it ripe for digital disruption. In Europe, the forthcoming Payments Servcies Directive II (“PSD2”) regulation requires banks to open up access to account information and payment initiation. This sort of regulatory intervention clearly makes it easier for new entrants to access the market.
This is a wider, and indeed global, societal challenge. Historically, waves of automation have tended to result in workers simply moving to different jobs. The big question is whether it is different this time: if robots (or, in less dramatic language, software) can replace a large number of low and even moderately skilled jobs, will there be ‘new economy’ jobs for the displaced workers to move to? And if not, what are the impacts on society? Further, should these considerations be taken into account when planning technological change? In a free-market environment, how could measures beyond just profit be incorporated? I see little sign of real change at present, and therefore my guess is that shareholders will continue to reward cost reduction without any wider context.
Journal: PLUS Journal 3 (238) 2017
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