A banker recently asked me if I really believe FinTech can change the banking business. I told him, “Let’s think about a typical bank account – its user gets one salary payment, pays a few bills and handles some card transactions each month. Do you really need a billion-dollar IT system, 10,000 people and hundreds of branches to handle that nowadays?”
He replied, “Now I am scared.”
We can still say that a bank needs 200 persons to handle regulatory compliance and other things that are mandatory for that business, but the reality is that basic services are very simple to do with current digital technology, and a lot of layers in financial institutions are sophisticated window dressing. The fundamental problem with industry disruption for incumbent companies is that they think about services based on their existing organization, IT systems, and processes. They forget to think about what the customer actually needs. When we talk about lessons from other industries like retail and media, we hear how the finance industry still sees itself as ‘special’, and what happened elsewhere cannot happen to them.
It has been said time and again in FinTech discussions that people don’t need a bank account, they need a place to keep their money and use it; they don’t need a credit card, they need credit to pay; and they don’t need investment advisors, they need help to make investments. Now with ICOs, we can probably add that people don’t need stock exchanges, they need tools to buy and trade securities.
Many banks now have set up innovation or digital concept divisions that focus on developing and finding novel solutions, and working with innovative startups. Typically, however, these innovation units lead their own lives inside a bank, keeping themselves busy with their own processes and fancy events so that they have no time to actually work with startups. And operative units couldn’t care less what the innovation people do. They live inside the bank group, but are in effect on life support.
I was recently in a meeting with a leading consulting firm. We talked about a new cloud-based IT solution to build finance back-office services for maybe 1/1000th of the cost of legacy systems. A senior management consultant said that this might be okay for Tier 2 or 3 banks and some newcomers, but why would the main banks change anything when they have excellent existing solutions? It’s a very similar comment that someone would have said 15 years ago why would a newspaper company use internet publishing platforms when they already have the best printing presses in the world?
A few weeks ago, I had to transfer money from country A to country B. Country A uses IBAN, but country B doesn’t. So, I only had their local bank account number and the SWIFT code. But banking system in country A didn’t recognize that SWIFT code for some reason. Those codes have variations and different formats – they are not really like one standard. I could have made the transfer based only on the bank name and address, but it sounded risky.
Then I found out that my bank in country C recognized the bank codes of country B, and country C had also IBAN, so I was able to transfer from country A to C by IBAN and then with other codes from C to B.
I used almost two hours to set up these transfers. I also had to estimate, when the money would be in country C so I could then schedule a transfer to country B for that day. This kind of money transfer with current technology should take one minute of my time and then one second to transfer the money. Instead I spent two hours of my time and the money took four days to arrive where I wanted it to go.
All the banks I used in this process were Tier 1 banks in their countries or world leading banks. I would like to have another discussion with that management consultant about whether these banks are really using state of the art technology and models and don’t need anything new. Of course, I would get many explanations – how it is not only about the technology and there are many other things that cause this user experience. I agree – there are many reasons. But now I’m talking about what the users need and want, and what can be done with the current technology. It will soon be relevant also for these leading banks when modern technology, models and users intersect.
I have seen banks do new things and change their business and technology. But like all transformation projects, this requires top management contribution. The top brass must make it happen and follow its progress. Otherwise it’s left to the innovation guys hanging around at conferences, internal brainstorming sessions with no concrete action, and the operative team shooting down all new ideas – all while customers start to use digital services that actually do what they want and give them what they need.