Turning the Banking Business Model Upside Down

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We talked to Finxact co-founder Dan McKinney about the changing service industry, the ever-growing importance of customer experience and all the implications for banks today. And what came first, the chicken or the egg?

How has the service industry changed in the past ten years and who are the drivers behind this shift?

Over the past decade, the service industry has really become more like the “self-service” industry. One of the first self-service examples was when FedEx allowed customers to track their own packages online. Fedex became a case study in how their own customers could reduce their customer service costs. Today, self-service is less about reducing costs and more about customer convenience. Amazon continues to set the bar around service with unimaginable use cases like asking alexa to order a bag of dog food, which someone puts into your garage that afternoon.

Today, we see forward thinking banks tapping into the same cloud-based technologies that made Uber and Alexa uniquely valuable. Modern banking architectures are leveraging advancements in voice recognition, image capture, biometric authentication, mobile, and cloud banking. Today, it is infinitely faster, easier, and yes – cheaper, to perform nearly any banking transaction on one’s mobile phone, than it was ten years ago.

Do you define CX differently today?

Most banking systems were designed in an era where being “user friendly” was state of the art. Today, customer experience is measured by how much friction is removed. The new benchmark is asking Alexa to order an Uber, which arrives in near real-time and the transaction is completely automated and digital. For banks to evolve their business models, the focus needs to shift from just the experience, to also the customer’s desire. CD is the new CX. Here is where big data, AI, and real time biometrics play into a customer’s intent. The path towards this future starts with capturing more information and enabling richer transaction data in real time. This means modernizing not just end-to-end, but also the heart of the bank.

Who is in the driver’s seat? Are consumers consciously changing behavior or are the Ubers of different industries changing customer expectations?

Consumer behavior is driven by fear and desire. Steve Jobs was famous for never asking what customers wanted, because he understood that desire is more powerful than want, and people don’t always know what they desire until they see it. Think about this: If every bank settled on meeting customer’s expectations the industry would be left with one commoditized experience. Leadership comes from banks that transcend customer’s expectations and focus on desire. This requires a modern banking architecture, one that is innovative, agile, and permits banks to evolve their entire business model – not just a customer experience.

The other side of the fear/desire coin is fear, and this is where banks are uniquely well positioned. Banks are where people and companies place their liquid assets and execute their financial transactions. Here is a little experiment to demonstrate that trust matters. Search for a random “online bank” using Google search. Go to the 5th or 6th page of results. Now, randomly pick a bank in the middle of the page, open an account, and transfer 90% of your checking and savings from all of your current accounts – to this new unknown bank. If you really go through this exercise, then ask yourself - how nervous does that make you feel? Is the bank secure, how long will it take to get my money back out, are there hidden fees? I did this very experiment and although the ‘random bank’ wasn’t completely random, it was small and unproven. Now, imagine doing this same exercise, moving all of your liquid assets – to a completely new non-bank.

Can banks really change their business models soon enough to avoid getting left behind regarding this development? In a highly regulated environment, can Airbnb, Alibaba and Uber be their role models?

Banks can rapidly evolve their business models. The world is executing at a sprint pace and banks can separate themselves from their legacy business models. The technology costs to launch a startup is literally 1/10th what it was when even the most modern core banking systems were developed. A core bank instance ready for configuration can be created in literally minutes, not weeks or months. Having spent nearly two decades as a partner in a venture capital firm, I get excited when I meet banks with Intrapreneurs who are running skunk works and innovation labs. These banks understand that moving quickly into unproven territory often runs counter to a traditional banking culture.

The reduction in cost, time and reputational risk that modern cloud based banking architectures provide banks means banks of all sizes can rapidly launch new parallel initiatives. These new parallel “innovation platforms” can serve as standalone test-beds, or they can be used to grow a full-scale banking operation. In fact, the economics and flexibility are so compelling that many banks will eventually migrate their entire legacy product and customer base to this new platform, once its proven. In the future, big-bang conversions will become more like a series of switches being flipped off. Banks that start with a simple digital only parallel banking initiative can begin evolving their business model immediately and change their entire legacy bank at their own pace.

Which are their (banks’) most valuable assets to achieve sufficient change in service quality/strategy?

 Banks have a number of assets, including assets (pun intended). The custody function and capital requirements provide security to customers unlike any other money-holding institution. Another asset is the current regulatory environment which provides a window of opportunity for banks to maintain their position as the trusted custodian of our liquid assets. Until regulations change, the capital and regulatory requirements provide banks with a wide moat. The greatest asset banks have is a bond of trust with their customers that will be difficult to break by non-banks and neo-banks who can cross this moat. For anyone who questions this bond, try my experiment of moving your liquid assets to a non-bank if and when that ever becomes possible.

What is holding banks back? Is it legacy core systems or legacy mindsets? 

 The answer to whether it is mindset or technology that holds a bank back depends on whether you believe the chicken, or the egg came first. A bank’s mindset is limited by the reality of its core systems, and the state of bank’s core systems is dependent on a bank’s mindset. But this endless do-loop makes banks like the frog who boils to death in a pot of warming water. It also doesn’t help the industry when those with the most to lose are telling banks that it is too dangerous to jump out of the boiling pot.

The catalyst needed to shock the system will come from outside the industry. New entrants are not focusing on improving mobile experiences, transaction capabilities, and branch accessibility. New entrants come to market with an entirely different value proposition such as streaming any music every produced, when you want it, where you want it, for pennies a song. Companies like Netflix, Slack, and Dropbox did not start with bloated systems at their core. But yet, many banks plan to compete with one. It is like trying to compete with Netflix’ billion hours of video per week with a core system made up of one billion VCRs. The analogy is not far off considering the cost to maintain, operate, and upgrade a billion VCRs versus the real time digital world of the cloud.

What will the banking industry look like in 2030? 

It is likely that in just ten or fifteen years, banking will look completely different. The hindsight of how technology enables disruption of entire industries shows us that transformation can happen quickly. Never before has survival of the fittest been more important. The most fit banks will adapt the fastest with new business models that are agile and drive operating efficiencies at any scale. Depending on how regulations change, particularly as it relates to capital requirements, we may see the uberization of banking where micro banks launch to satisfy narrow use cases. Certainly, we will see existing banks launch more parallel initiatives into increasingly targeted micro niches.

We may also see a barbell separation between banks that have modernized their core so they can invest into innovation and banks who struggle to maintain their bloated operations. Europe is setting a pace for plug-and-play app-like store selection of banking services. We will see platforms evolve where banks have pre-integrated banking capabilities in the cloud. But because nothing is tightly coupled technologically or commercially, banks will have the freedom to choose as needed. Banks that begin evolving their business model now will be the most agile and have the highest operating leverage to continue innovating, and further outdistance their peers. Today my phone, my TV, even my lights know more about my behavior than my bank. In ten years, that will not be the case.