Beyond simple disruption

You will never be disappointed by the knowledge and forward-thinking ideals presented by Chris Skinner in his books. And in his latest work, Skinner has issued a ten-year warning that bankers must seriously consider: Get the hang of evolution or prepare to face your institution’s end.

Skinner wrote Digital Bank, where he explored the disruption in the banking sector due to rapidly changing technology and what banks need to do to become a digital bank. In his latest, ValueWeb, Chris looks at the value added by new technology and the way it is changing not only how we value things in trade and finance, but also in life and relationships. He portrays a time when much of what enables banks to charge for services could change, which will demand fresh thinking if institutions are still to have a business.

Two-pronged examination of tomorrow—and today

Skinner builds his case as he explores what’s been going on and what’s coming. ValueWeb’s first half explores two questions:

• Mobile connectivity: The first concerns the impact of enabling every person on the planet to use an electronic network and the impact that will have on values globally.

• Blockchain’s promise: The second concerns how to build an instantaneous and nearly free value exchange system that can be used by everyone. Skinner believes the blockchain technology provided by bitcoin is the answer.

Skinner acknowledges that bitcoin has received much adverse publicity. However, he notes that that’s been as a result of the actions of some bad players, not due to a failure in the technology behind bitcoin.

“Thinking that bitcoin as a currency is suspect because of Mt. Gox and Bitstamp’s issues is a bit like saying the UK Pound is flaky because of the collapse of Northern Rock and Bradford & Bingley,” writes Skinner.

In fact, Skinner refers to blockchain technology as the “Uber of Finance,” in his words, “a globally connected marketplace for trusted exchange.”

The second half of the book consists of interviews with individuals knowledgeable about blockchain technology and the benefits of bitcoin. Additional interviews with founders of fintech startups and digital bank startups are also featured. In conclusion there is an interview with Kosta Peric of the Bill and Melinda Gates Foundation. The foundation has focused on eradicating poverty by creating financial inclusion through the mobile network, and has focused on obtaining financial tools for the poorest people in the world.

All of these interviews are enlightening and show the impact these fintech startups are having as well as their vision for the future. At the back of the book is a listing of the largest fintech “unicorns.” A unicorn is a tech startup that has achieved $1  billion in value. Skinner defines “fintech” as a hybrid of the traditional processes of finance—working capital, supply chain, payments processing, and so on—and a replacement of those traditional structures with a new tech-based product that incorporates the mobile internet, cryptocurrencies, gamification, and social networking.

Rebuilding the planet on a digital blueprint

In Skinner’s view, the greatest driver of the transformation to a digital world is access to the internet via a mobile network. In July 2015 more than half of the people living on earth were using a mobile phone to connect to the internet.

This includes many individuals in developing countries who for the first time have access to a bank account, via their mobile phone. Their inclusion in the financial system is having a profound impact on eradicating poverty.

The mobile phone can also be used for authentication of the user. As biometrics become more sophisticated, the phone combined with geo-locating capabilities will be used to identify the mobile user, which is expected to take a great deal of fraud out of the payment system.

Impressive. But one of the questions that Skinner airs is whether banks are failing to grasp mobile opportunities.

His answer: “No.” But this isn’t the usual fintech bank bashing.

Banks are oftentimes leading in the adoption of new mobile technology, as Skinner portrays things. As an example, BankAmeriDeals targets customers with real-time offers for stores based upon the customer’s proximity to the store. As the customer nears the store they will hear a ping on their mobile device that will display a coupon for immediate use in the store. Many banks, including my own, are using thumbprint biometrics for mobile banking authentication.

However, in other countries the banks have jointly developed mobile platforms for real-time money transfers created through the bank clearing system. The ability to do this has failed in the U.S. and thus there are players such as PayPal to fill this role for the consumer. U.S. banks have also failed to collectively create a mobile wallet, which opened the door for Apple Pay and now the banks have to pay to be a part of this service.

For the reader to ponder: Does the number of banks in the U.S. factor negatively into the lack of coordination of services?

Blockchain’s potential disruptive influences

One of the biggest challenges in the digital world is creating trust in a digital transaction.

Authentication has been an issue especially when the purchaser isn’t present. However, the blockchain can provide both the technology for transactions and the authentication.

The bitcoin protocol is a ledger where anyone can see the exchange of transactions, because every exchange of bitcoins is recorded on the blockchain in a public domain. Not only are the details of the transaction recorded, but also the fact the transaction took place. The time and place of the transaction can never be revoked or erased.

The blockchain can record financial transactions but it also can record contracts. One couple even recorded their marriage on the blockchain. All of this is done at a very nominal or at no cost to both parties.

Currently there are more people globally in the financial system than anytime in history, but the transfer of money from one country to the next is still an arduous, expensive, and lengthy process.

The Swift system is based upon a platform established by banks to perform international money transfers, but could bitcoin be used for these international transactions? Skinner believes it is possible and that with time, the support systems surrounding bitcoin will develop and be more user friendly.  He devotes an entire to an explanation of bitcoin. (This chapter, “Reinventing Value Exchange With The Blockchain,” is available as a free download on this website.)

Even if bitcoin specifically doesn’t survive, the technology has been established and a cryptocurrency will emerge, in the Skinner’s opinion. He suggests the cryptocurrency with the blockchain technology will provide a real-time, cost efficient method for moving money across borders.

An example is given of a bitcoin transaction that occurred on Dec. 6, 2014, for $81 million. It happened in real time and cost just 4 cents to process. If bitcoin survives, it will provide a fundamental disruption to banking and payments since the transaction can be done entirely outside of the banking and payment networks.

Skinner writes of the possibilities:

“Let’s say that … the blockchain becomes our fundamental method of authenticating machine-to-machine transactions. When my fridge, TV or car orders stuff, there is no biometric so my blockchain registration of these devices becomes the authentication.

“In other words, the bank sees a request of payment to Tesco of £35.12 for groceries, requested by Chris Skinner’s refrigerator. How do they know it is Chris Skinner’s refrigerator? There’s just an automated check of the last transfer of serial number XY12-FFDC-90LT-DPP1 (my fridge’s serial number) on the blockchain. Yes, according to that record, the last transfer of XY12-FFDC-90LT-DPP1 was a purchase made by Chris Skinner, who owns this bank account, on 1^st December 2014 and there has been no transfer since, so the bank authorises the payment to be made.

“So I now have no role in this process, except to authorize transactions. Then, when I do, the bank checks I’m breathing, using my heartbeat for authentication.

“This is a world away from where we are today, but a world that will be with us within a few years—so we’d better get ready.”

Fintech’s impact on customers

Fintech is a new emerging market and frequently fintech developments are not coming from the research subsidiaries of financial institutions. The products being developed by fintech companies will make it easy for the consumer to do business with fintech firms because the products are being developed with all focus on the consumer and they will be delivered in a digital world void of paper.

Skinner defines digital banks this way: “First and foremost, it is a bank built with a vision to reach out to customers through digital augmentation. It is built specifically to offer the customer the service of their choice through their access point of choice. The bank therefore has to be designed and created upon a digital core infrastructure. The digital core is a consistent enterprise-wide, cleansed data store that is accessible internally and externally through a strata of access layers.” 

By contrast, typically traditional banks are bogged down with legacy processing systems, and although the banks are innovating in certain areas such as mobile banking, these new innovations are being layered on top of their existing core banking systems.

Skinner describes the ValueWeb as being the alternate system to traditional banking that is being built by fintech. He characterizes fintech players as being one of three types: wrappers—wrapping themselves around the existing system, like Moven, Simple, and Apple Pay; replacers—firms which aim to replace traditional bank services with software and servers, such as P2P lending models being adopted around the world; and reformers—firms using mobile and digital currencies to dramatically evolve financial services.

Skinner believes banks have about ten years to retool their systems to become totally digital banks with the customer’s needs at the center.

However, he also maintains that banks won’t be replaced, but evolved.

“There will be no iTunes, Uber, Amazon or Expedia revolutionizing banking,” Skinner writes. He maintains this is because banking and its regulation are too close to the purposes of government to be thrown completely to the market.

“Consequently,” writes Skinner, “banks are given the luxury of time to adapt that book stores, travel agents and music shops didn’t.”

But he insists that banks will have to adapt, to survive.

Old advantages go, new ones must be built

Skinner predicts that the transactions performed by banks will be free, so banks will have to find ways to add value to the customer experience to make money.

This is the foundation of the ValueWeb. Adding value in the form of a product the customer is willing to pay for beyond the free transactions.

So what would these types of added value services look like?

It could be helping the customer manage their money so they don’t overspend or knowing they are looking for a car and connecting with them over their social media account with an offer for a car loan.

Such things will be possible because the digital bank will use the big data it has about a customer, combined with monitoring their social media, to know exactly what the customer requires before they ask.

As a traditional banker, this feels like a tremendous invasion of the customer privacy I have spent a great deal of my career trying to protect. This brings up another point. Skinner indicates that traditional CEOs will find it difficult to provide the leadership to transform their bank into a digital bank.

There may be truth to that: Most CEOs haven’t even heard of the fintech companies that are going to be major disruptors of the banking industry, even though many of them are those successful “unicorns” I described earlier.

How to apply ValueWeb

So what are some of the key takeaways for bankers from this book?

• Weighing the branch. Interestingly enough, those banks that have been founded as purely digital banks have had to open branches to gain relevance and trust with their customers. They don’t have many branches and they are very technology driven. Yet I think that provides some insight into the continuing need for some level of bank branches. (Skinner discusses CheBanca!, an Italian digital bank that has around 50 branches, and interviews CEO Robert Ferrari in part 2.)

• Improve service using what you know about customers. Currently banks have great value in the customer information they have stored. They are going to have to figure out a way to better use that information to provide better customer service.

• Give up being generalists. Community banks will need to capitalize on what they do best and stop trying to be all things to all customers. The generation we could do that for is passing.

• Reinvent your reason for being. Future transactions will be free—in some ways I think they already are free—so banks will need to understand how they can add value for which the customer is willing to pay.

• Rethink your digital insides. The legacy core processing systems can’t be reworked to become a digital bank. A whole new digital core needs to be developed.

This can’t be a project for the IT department. Ultimately, having read Skinner’s ValueWeb, I am convinced that the leadership for change must come from the CEO.

Read an excerpt from Chris Skinner's ValueWeb now