When I grow up I will run my own bank. The Future of Banking.
Revolt! stand up for your banking rights.
Banking is certainly one of the oldest industries since the birth of civilisation. For centuries, since the manufacturing of coins started, and after that when paper money was invented, the banking role was about keeping physical money safe and making money from lending it. And then suddenly, one day, money started to become invisible, it went digital. The first bank cards were introduced in the 1960s in the UK and in the U.S. This was the big innovation that essentially made money invisible to the public. You could now use a piece of plastic to pay everywhere.
Who’s money should I bet on?
Considering the imperative role banks have played during the Industrial Revolution it’s interesting to see how they are responding to the most disruptive revolution so far because this time it seems it’s the banks that might get disrupted themselves.
Computers and software provided new possibilities, new ways to become innovative and that triggered enthusiasm. Now there is a new ‘revolutionary’ change almost every single day. This disruptive innovation has accustomed people to engagement and constant change. The traditional is seen as old, boring, and ineffective, while everything ‘new’ is associated with technology and Internet and is perceived as exciting and revolutionary.
Fin and Tech.
FinTech is actually much older than most of us think. The term can be traced back to the invention of the printing press. Then in 1886 came the telegraph which later on allowed the Federal Reserve Banks to create a communication system in 1918 to transfer funds between 12 Reserve Banks, the basis of the Fedwire Funds Service. Later on, the 1950 and 60s was the era of credit cards and ATMs. Money was now seriously starting to go digital between banks.
Although the current FinTech investments promise many good things to come, banks are slow to respond and lacking groundbreaking innovation and transformation when compared to other tech-based industries that have been disrupted only recently. Industries like music, video, books, retail, you could fill up an e-reader with everything that has changed immensely over the last couple of decades…
But when we think about how banks function it actually makes sense why they are stuck; why they can’t just reinvent themselves. The financial industry has always been highly regulated and controlled by strong authorities.
The 2008 financial crisis showed a different, darker side of banking and that caused a major breach of trust. And trust was always the competitive advantage of banks. When trust evaporated it left the banks highly vulnerable. This forced a change in regulations such as borrowing limits, reserve and capital requirements, major investments in risk and compliance systems, etc. which in turn resulted in a serious decrease in revenue. The loss of public trust wasn’t helpful, or perhaps it was… for us!
The opportunity was there and many new players took advantage of it. After all, it is only logical that digital-only banks started to erupt.
Hi Goliath, you’ve got $5 from David.
During a disruption it’s the establishment that fails, that gets replaced with something newer, a better fit with the times.
Those who still believe that brand and tradition will overcome the new digital world should be reminded what happened to comparative tech invasions. Blockbuster videos, Encyclopedia Britannica, Kodak, and many more. All of them failed or even refused to see what was coming straight at them, and when they realised that it’s time to change, it was too late.
Netflix offered Blockbuster Videos to work together, but they refused. A couple of years later, the situation simply reversed.
We should expect to start seeing cooperation between traditional banks and the new emerging digital-only banks. The traditional ones have the leverage of a known brand, whilst the new ones are innovative and hold the knowledge. That’s what most startups count on, steal market share and then get bought. It’s only a few exceptions that managed to become the new norm, Paypal being the most famous one of those of course.
A New and Shiny Old Thing.
Mobile Banking, isn’t that the coolest new tech?
With the Internet use currently being the highest on mobile devices the shift to managing bank accounts was inevitable. But honestly, that’s nothing groundbreakingly new… it just “Internet banking” with the interface adapted to work on the mobile. It is the same ‘old’ stuff that already existed. Today most if not all traditional bank have apps. But have they been too late to stop the disruption of their industry?
A new kind of bank started to emerge, digital-only banks were started and funded in the tech industry. Bank Ally is one of the first digital-only banks, created during the early days of the FinTech industry in the U.S.A. in 2008. The competition has grown fiercely since then, and there are many digital-only banks today such Fidor, Monzo, Tandem, etc.
Digital-only banks have lots of advantages over traditional banks. They can offer better rates and fees because they don’t have any of the burdens of the legacy infrastructure. The law helps them by allowing them with access to customer data from existing banks. Innovation is in their DNA, their service is engineered to meet the needs of customers and change with them while they grow. Their hurdle is trust. Although people did lose faith in the old banking system handing over your money to a startup requires a leap of faith. But with so many startups out there the shift is bound to happen soon.
Making money by starting a money startup.
The current focus on FinTech sort of started in 2008 after the financial crisis. Banks were facing serious legal regulations, and with the massive adoption of smartphones, high-speed Internet, social media and the rise if the Millennials (that focus on transparency, mobility, and instant access) the market started to change.
The term FinTech includes all of the possible technological innovations in the financial sector. This includes lending technology, personal finance or wealth management, money transfers and remittance, Crypto-currency (Blockchain, Bitcoin), InsurTech, capital markets tech, equity crowdfunding, it’s huge.
According to estimations, there are currently around six thousand companies working in the FinTech. Some focus on payments and transactions, some on lending, and some just do it all. During 2014, $1.5 billion was invested in FinTech, with most of the investments going to London, Amsterdam, and Stockholm, putting them in pole positions for new technologies.
Investing in disruptive technology always has its risks, but there are ways to avoid these risks and maximise the revenues. The co-founder and CEO of Twitter, Jack Dorsey, is also a CEO of Square, a FinTech company that started in 2009. Square is a ‘digital full-service bank’, with services ranging from credit cards to financing business loans.
FinTech Startups are popping up like mushrooms. Their offerings range from technology-enabled payments, crowdfunding, currency exchange, to lending. Many of the more innovative ‘former bankers’ switched and are now working with tech teams that include growth hackers, experience and UX designers to come up with the next big thing.
The new FinTech startups have adopted a new more agile culture that avoids the formalities of banks and provides efficiency, engagement of customers, and meeting their needs at lower rates.
Traditional banks have started to invest heavily in FinTech by now. Nowadays the North American banks invest more than a quarter of their IT budgets to digitalization and the realisation that a brand is no longer sufficient to stay at the top has come. Change is required, the implementation of a new innovative and dynamic culture.
On a personal banknote.
Personally, I have worked on a bunch of FinTech startups as well. For example, in 2008 I was responsible for the creation of a visionary technology banking security tech that went under the name GOOSE S.I.B. (Secure Internet Technology). It’s a product that makes internet banking completely safe and secure.
The problem that led to the development of this product was the boom in cybercrime. Internet banking was being adopted rapidly but the consumers were oblivious to the real threats out there. Everyone was focussed on Anti-Virus but most of them really had no idea how easy it was and still is for a hacker to steal their data from their PC.
When the transition to mobile banking started, it became even easier for hackers to acquire their data. Mobile phones simply have no protection at all. All the data that is transmitted is just out in the open for anyone to steal.
We believed a solution had to be possible and we set out to solve this problem. At that time I had just finished a disruptive project consumerizing VPN connections. This technology proved to be the perfect foundation to encrypt the Internet connection directly from phone to the banking servers, using a unique 2-factor authentication system.
The bank knew it was truly their client that was connecting and the client was guaranteed to be communicating with the bank, eliminating the man in the middle attack. Our biggest challenge at that time was getting the banks to admit the existence of a problem, because admitting it would mean potentially losing their Internet banking clients, reversing all the progress that was made.
Another example of a solution where I was responsible for was a mobile E-payment platform for a trading facilitator that handled escrow payments.
The problem we solved here was that people who do trading basically don’t trust the other party to either release the goods or the payment. Our mobile E-payment platform which essentially could be compared to a modern digital bank included governance through an escrow system. The money would not be released on the parties internal accounts until there was physical proof the goods were shipped. The system included all functionality to manage money flows between the business accounts.
The hippest stuff in programming money.
The banking industry is changing, and almost every corporate bank is now investing in FinTech startups. Furthermore, the mobile deposits possibility is increasing with every passing day. Most of the banks have realised the necessity of going with the pace of technology, and more and more branches are going digital. Customers can now chat with bankers via tablets or Video kiosks. Logically, fewer people go to branches, because that is a loss of time and efforts. Banking is moving towards mobile, online, and ATMs. However, the experience of the ‘old’ bankers is still needed, as the merger of branches and the digital is happening.
Banks still haven’t found the right approach, they seem to lack focus or at least a clear strategy. They are buying and investing in various FinTech startups from cryptocurrencies to mobile payment applications, etc.
It almost seems they can’t choose and just buy whatever they can’t to try and get lucky, but maybe I am wrong.
Blockchain Cryptocurrency. Sorry, what’s that?
The most prominent innovation currently leading to disruption in the financial sector is probably bitcoins and the blockchain.
The blockchain is based on a public ledger system. The ledger keeps all the records of every possible transaction ever done using a bitcoin. Each page of the ledger is a block and each block is connected forming the “blockchain” using something called a hash. Bitcoins are in fact a record that contains the information about an account that at a specific point in time has received that bitcoin. I am not going to bother further explaining the system, there is enough written about that, but what is important to mention is that once data is entered into the blockchain, it can never be changed or erased. This makes the blockchain authentic, transparent, and anonymous.
Pay here, pay there, pay everywhere. Use a mobile.
Currently, mobile payment applications are certainly receiving most of the attention. Three technology giants have created payments options of their own, all sort of similar. They are Apple Pay, Samsung Pay, and Android Pay.
Apple and Samsung Pay allow people to purchase things in physical stores via their phones (latest models only). But systems are quite similar in the way they work and based on fingerprint authentication. Apple Pay was launched in October 2014 almost one year before Samsung Pay. What is interesting is that neither of these systems has access to purchase data, what was bought or how much was it paid.
Google, however, owns Google Wallet and Android Pay. Android Pay is a platform (not a product) that is used for powering in-app and in-store mobile payments. This too is a technology that was only launched recently (Sept. 2015). Android Pay is likely not only to be powering Google Wallet but also Apple Pay, Samsung Pay and many other new future systems.
Google’s vision for Android Pay is the ultimate, encompassing platform for payments for the billion of Android phones’ users all over the world. And just for your info, Google does store what was bought and how much was paid!
From Marketplace to bank, who would have guessed.
Ebay, Amazon and Aliexpress opened the doors of digital consumerism. In the meantime, Paypal has grown into a leader in digital payments in both Europe and the U.S. under the direction of eBay that bought Paypal in 2002 and spun it off in 2014.
Just to give you a sense of the scope of their operations. Paypal purchased a startup called Paydiant. Paydiant powers Apple Pay, CurrentC, and Samsung Pay. And CurrentC is a mobile wallet of giant retailers like Target, Walmart, and 7-Eleven.
Paypal is not only certainly one of the biggest Internet electronic payment systems for customers, they are likely to become a big player in B2B as well. In 2013 Paypal bought Braintree, a back-end payment processing technology used by many applications and services ranging from Airbnb, Uber, Pinterest, OpenTable and many more.
The first digital remittance Xoom is also owned by Paypal. This digital money transfer service makes more revenue in the electronic world than MoneyGram, one of the oldest and largest remittance companies in the world.
Setting the stage for the future of banking.
The application centred ecosystem.
It is very likely Banking will further transform into an intelligent individualised digital money management service. An application centred ecosystem in which traditional banking services, new and third-party services are combined through APIs and open platforms. It becomes personal again, but this time through smart automation and artificial intelligence. The bank maintains a crucial role in the relationship by managing money by providing a multilayered experience and a unique personalised customer service.
The technology will become smarter helping the client to manage, save, and spend their money in real time most effectively. The client can define how he or she would like their new trusted electronic banking friend to behave, which actions to take and when. This will be possible in any currency, including new proprietary digital currencies – providing them with full control and flexibility while the banking tech helps them plan and run their financial lives. Security and trust are paramount and will be overcome through the use of blockchain technology and other innovations.
The underlying technology will be focused on efficiency for customer growth and retention strategies because we are entering a new era with increased customer expectations. Those that place the user needs as central and understand the dynamics of digital growth through experience design and agile personalised technology are likely to be among the winners.
The challenges of FinTech startups.
The universal ‘laws’ of money.
The problem for some FinTech startups will surely be to expand globally and introduce themselves internationally, mostly because of the regulations that differ from country to country. Every company needs to follow certain regulations, and this can be quite costly. Now imagine the cost of going global. This problem can be avoided with good marketing that will attract investors, or cooperate with traditional banks for mutual benefit. It’s not easy to expand in the FinTech market, but with the right mind (creativity, familiar with marketing, strategies, etc.) it can be done. In the process of expansion it is of the utmost importance to pitch your idea in the most brilliant way to the regulators, because even if you have a great brand, funds, and an amazing innovation, if they decide to show you the red light, all of this goes under and the growth is stopped.
Who is that guy walking out of the safe?
The next issue facing FinTech startups is surely the risk of cyber attacks. Startups usually have limited funding, and they can’t afford to establish huge levels of protection. Many don’t even a Chief Information Security Officer. An enormous problem and risk of course. The more successful they are the more likely they are to be attacked.
Let’s start our own bank.
I believe that the future of banking, whether or not a bank is successful is actually not determined by technology. Rather, it depends on how the bank can nest itself into the social environment of its target group. What I mean by this is that you need to give them compelling reasons to switch over and to stay with you. The best experts for these findings are growth hackers and experience designers. This is an example of how that could work.
Think of the kids, they have no cool way to manage their money now. A bank savings account is boring and old-fashioned, and this new generation is all about hype, flow, and tech. It’s cool if it’s new, related to internet and technology, and nicely designed. What if there was a cash wallet for kids? An E-wallet that allows them to manage their pocket money and savings. Pay in shops, at school, just small things. (Parents would have a sense of control, e.g. limits could be set and “parental” access is provided, but those are technical details)
The wallet would have a gaming aspect incorporated, setting goals for earnings such as grades at school, a task list for little jobs around the house, and perhaps washing cars for all the neighbours. The application would help kids to achieve saving goals by visualising it. For example, when they want to buy a new computer or when exactly their phone will be two years old and the contract allows them to go out and get a new one.
The social aspect would be incorporated via options such as the task lists for jobs around the house. For an example, a kid that washes the car will earn a tenner. He or she finishes the job on Wednesday afternoon, then proudly sends a picture of the shining car directly using the banking application to his dad (who went to work by train).
A message pops up on dad’s phone: “Look, dad, as good as new”.
Dad smiles and presses the accept task delivered button. His kid instantly receives a customised message: “You’ve got Money” Great job, love you!”
Next, the kid who is proud makes a funny selfie of him and the car. With one click he adds a shiny icon stating “Future Millionaire” to the photo and writes a caption: “another car done, only 99.943 cars to go! He then posts directly on Facebook to show off to his friends.
The banking application is no longer just one application, it exists of building blocks, modules that are glued together to create the ultimate one.
The future of banking revolves around design and customer experience. The users need to be engaged and satisfied, and even the most tedious of things (like banking for kids) can be presented in a manner that will make them stick with it, and even share it.
I am starting a bank, who’s in?
When we look at big disruptions that happen in the tech industry we see that almost every disruption was driven by innovators that came from outside of the industry. When you are not limited on your thinking it allows you to freely reinvent and come up with unique solutions, truly making things better.
What makes the current revolution so intangible is the fact that it offers possibilities for many small startups in what was once an almost impossible market to penetrate.
The technological platforms in banks are unconnected and based on legacy models. This is the reason that banks invest heavily in maintenance instead of innovation, and it is a crucial mistake. Because, if funds were to be allocated towards innovation this would result in better platforms and fewer costs for maintenance. Most people spend more time on the Internet than they do watching television, thus, the Internet is the new advertising and business platform.
Banks, just like any other business today, have to rethink how to sustain customers by refocusing on new needs and desires. A serious transformation is required. The change must be qualitative and not quantitative, and in my opinion, soon traditional banking will completely cease to exist.
The new bank is tech focussed, it’s smart, it’s agile, it understands digital and redesigns its service around the client’s needs.