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What Are the Biggest Threats Facing US Banks and Credit Unions?

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“Uber moment” for financial industry in the US: The top 3 challenges facing banks and financial institutions (c) Life.SREDA VC

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What Are the Biggest Threats Facing US Banks and Credit Unions?

  1. 1. www.ariv.al American market is on the way to the next wave of digital banks. The way we bank is changing: www.ariv.alwww.sreda.vc
  2. 2. What are the biggest threats facing US banks? “Just 1 in 4 Americans trust their bank” Gallup poll “Many people said they would trust Amazon to manage their money as they would trust a traditional bank” Bain & Co. report “62% of millennials in North America use products from fintech companies” World Retail Banking Report “42% of millennials want to manage their bank relationship exclusively online” The 2016 Millennial Money Mindset Report by iQuantifi Carlos Torres Vila, CEO at BBVA “The real value of money has changed, while the banking business model has not” “Of the people who switched banks in 2016, 11% chose an online or virtual bank” Accenture Consulting, the North America Consumer Digital Banking Survey “tech companies could wipe out as much as 60 percent of profits on some of banks' financial products” McKinsey “55% of small, community and regional [American] bank executives had not set up any meetings or presentations with potential fintech partners” “Until banks start rethinking that basic premise, they’ll continue to iterate on their current business model while customers pass them by” “Any industry that lacks competition will begin to stagnate” “Business models of traditional banks are increasingly comping under pressure” “The bigger effect from the fintech revolution will be to force flabby incumbents to cut costs and improve the quality of their service. That will change finance as profoundly as any regulator has. ” “A lot of the startups choose one very thin slice of what a bank does. But there’s just so many of them that they encompass everything we do. In every little slice, you have like 10 companies that just do it better. They do it cheaper and they do it with better value for the customer.” “Never mind if fintech fails to take over the world, or even the current account: its emergence is changing the face of finance. “ “Banks’ innovation labs haven’t necessarily been successful. Most of the cool new products and truly disruptive technology still comes out of fintech firms.” “fintech firms are growing fast by questioning status quo of the very traditional and highly regulated industry” “these [banks’ innovation labs and] corporate startup programs are driven by either hope, fear or a herd effect. Traditional banks battling against digital disruption openly admit that they're willing to try just about anything to help them win and retain customers.” “The fintech firms are not about to kill off traditional banks. Nonetheless, the fintech revolution will reshape finance — and improve it” “the banking industry in the U.S. continues to lag other regions of the world in the development of meaningful digital innovation” “Ask what’s wrong with America’s banks, and you’re likely to hear that they’re just too complicated, too opaque” “40% of financial services executives are worried that their firm and industry is at risk of major disruption in the next decade” Venture Beat's survey Big Data Business Impact “Only about 1% of North American [traditional] consumer banking revenue has moved to new digital models” 02
  3. 3. According to a recent Bain & Co. report 1 , almost as many people said they would trust Amazon to manage their money as they would trust a traditional bank. This is likely why an Amazon-branded checking account may have banks worried. For years, security and trust have been the banking industry's selling points for the services they offer, and now that's being threatened. Banks' problem is much bigger than whether or not Amazon becomes more of a threat in financial services or not. While it’s intriguing to think about how Amazon might change the banking industry, the news feels more like window dressing to cover the fact that there is a larger disruption affecting banks today: The real value of money has changed, while the banking business model has not. 2 In other words, customers want to use their money to pay for everything from groceries to rent — and they want to do it quickly and easily. But in order for banks to make money, they have to hold onto that money. Since the days of the stagecoach, people have paid a bank a fee to safely store and transport their cash. As consumers became more uncomfortable with fees over the years, banks have tried to add value to what they are paying for by opening branches and offering ATMs, money market accounts and free checking. These days, they offer digital banking. These services, while valuable to the consumer, are ancillary to a bank’s core value proposition: holding your money. However, that core value proposition is not nearly as important as it used to be. Today, the real value of money is based on what it can do. And if people no longer need banks to hold their money, the business model is fatally flawed. Banks should plan for an overhaul on the value their industry provides to customers. To be fair, banks are paying attention. Some have made significant investments into their mobile banking apps and have begun to leverage new technology to help customers invest and manage their money. For instance, Bank of America created erica, an AI-fueled chatbot that will help customers identify ways they can save money or pay bills easier. Ally Bank launched Ally Skill on Amazon’s voice-activated devices so that account holders can ask Alexa what their balance is and easily transfer funds between accounts. And yet, there is still a fundamental flaw: These innovations are built upon the ancillary services banks have always provided around their core value proposition of holding people’s money. In other words, for you to experience a bank’s innovations, you have to have your money in said bank. Until banks start rethinking that basic premise, they’ll continue to iterate on their current business model while customers pass them by. Banks need to figure out how to translate the trust they’ve earned over decades into something valuable outside of holding money. The sooner financial institutions can get out of their comfort zones, the sooner everyone can start planning for a very real and very different future. The top 3 challenges facing banks and financial institutions: 1. Not making enough money. Despite all of the headlines about banking profitability, banks and financial institutions still are not making enough return on investment, or the return on equity, that shareholders require. 2. Consumer expectations. These days it’s all about the customer experience, and many banks are feeling pressure because they are not delivering the level of service that consumers are demanding, especially in regards to technology. 3. Increasing competition from financial technology companies. Financial technology (FinTech) companies are usually start-up companies based on using software to provide financial services. The increasing popularity of FinTech companies is disrupting the way traditional banking has been done. This creates a big challenge for traditional banks because they are not able to adjust quickly to the changes – not just in technology, but also in operations, culture, and other facets of the industry. What Are the Biggest Threats Facing US Banks and Credit Unions? 03 1 http://www.bain.com/publications/articles/bankings-amazon-moment.aspx 2 https://www.americanbanker.com/opinion/amazon-is-the-least-of-bankings-problems 3 http://www.the-future-of-commerce.com/2017/07/21/challenges-facing-banking-industry
  4. 4. JPMorgan Chase & Co and Bank of America Corp have said recently they will build branches as they spread into more cities.4 Bank of America is expanding this year into Pittsburgh. JPMorgan intends to add as many as 400 branches over five years as it moves into cities such as Boston and Washington, D.C. More U.S. customers might be willing to open primary accounts online if traditional banks were able to better show that they can handle problems remotely. But some banks still will not even change a home address for a customer without a personal visit. What do financial executives say are their biggest threats, challenges and opportunities? An annual study 5 from Computer Services Inc. (CSI) examines the priorities, initiatives and areas of focus that will define the strategies for community-based institutions in the coming year. The report includes survey data and industry-specific analysis on the issues commanding attention from banks and credit unions. Looking at the top three challenges cited by financial institutions, it seems they will be busy focusing on little more than internal issues — compliance, security and the bottom line — leaving little room for new customer-facing initiatives that could improve the experience. How can banks and credit unions innovate, develop new products and build out their digital capabilities when they have to expend so much of their time, energy and resources just treading water? The average consumer has little to no trust in their bank, they just use the cheapest option they can find. Combine that with a total lack of competition at the top-level of the industry and what you're left with is an industry in desperate need of change. People don't trust banks:6 Just 1 in 4 Americans trust their bank according to the most recent Gallup poll. While that is a bit higher than it was during the 2008 crisis, the number is still at a historical low. That mistrust shines brightest when you examine alternative currencies. The way we bank is changing: If you're a millennial, chances are you already do the majority of your banking online. Basically, if you're under 30 chances are you visit your branch as little as possible. It's not just the youth though, people of all ages are becoming increasingly comfortable with using an app or website to handle all of their banking needs, not just the simple stuff. Accenture Consulting released the North America Consumer Digital Banking Survey last year. It showed that of the people who switched banks in 2016, 11% chose an online or virtual bank. A large part of the operating expenses traditional banks face is the upkeep of their brick-and-mortar locations. Completely branchless banks might have a smaller market to work with at the moment, but the savings made on physical locations can translate directly into R&D on new services that will further cement their place in the banking industry. Banks are still getting bigger: We all know by now that one of the leading factors that caused the ‘08 financial crisis was a lack of competition and regulation in the financial services industry. Years of consolidation and "shotgun mergers" led to a group of "too big to fail" banks - and the real loser was the American people. Currently, the six largest banks in the US control 70% of the country's assets. That would be a 40% increase in control over the past decade despite an actual asset growth of just 8%. The idea of competition amongst the largest banks is a sham, their rates are virtually identical, they just offer their "sales" at different times. Any industry that lacks competition will begin to stagnate and lose the motivation that drives innovation. The major banks are long overdue for some serious competition. According to Venture Beat's new survey, Big Data Business Impact: Achieving Business Results Through Innovation And Disruption, 40% of financial services executives are worried that their firm and industry is at risk of major disruption in the next decade. The way we bank is changing, but the banks themselves are sticking to old habits wherever they can. Despite increased investment, the banking industry in the U.S. continues to lag other regions of the world in the development of meaningful digital innovation.7 This impacts customer experience, cost structures, as well as revenue opportunities. Historically, the banking industry in the U.S. has been slow to innovate compared to other industries. Over the years, multiple global trade organizations like EFMA and BAI have sponsored innovation competitions. With very few exceptions, banks from the US have been absent from the winners’ circle and even when they do win, it is usually for improvements to traditional distribution networks or completely new banking organizations like Simple, Moven or BankMobile. Conspicuously absent are the big five banking organizations in most cases. 04 4 https://www.reuters.com/article/us-usa-banks-branches/americans-prefer-bank-branches-over-mobile-apps-for-opening-new-accounts-idUSKCN1G52DN 5 https://thefinancialbrand.com/56872/banking-strategy-threats-priorities 6 https://www.inc.com/james-paine/why-the-banking-industry-is-ripe-for-disruption.html 7 https://thefinancialbrand.com/65069/america-us-banking-digital-innovation-trends/
  5. 5. Some non-U.S. institutions are recognized regularly for their efforts, with select regions being hotbeds for new ideas and innovation. Regions with ‘newer’ financial economies seem to be over-represented, with firms like CaixaBank, DenizBank, Fidor Bank, Idea Bank, mBank, and Nedbank being consistent winners. Soon, fintech firms outside the U.S., such as Atom, Monzo, Starling and N26 will also take the stage. Outside the awards designation, there is some innovation occurring in the U.S., but the majority appears to come from U.S. organizations with overseas ownership (BBVA and Santander), smaller digital banking organizations (Simple, Moven and Bank Mobile) and U.S. based fintech firms. So why is it that in the USA, where more banks and some of the largest banks in the world exist, is true innovation so difficult to find? “Many U.S. banks are so invested in their legacy business models that it makes it very hard to undertake truly disruptive innovation projects,” says JP Nicols, Managing Director of FinTech Forge. “Banks in emerging markets have to be innovative to reach their customers, many of whom don’t have access to the broad range of choices that Americans have.” Bradley Leimer, former head of fintech strategy and innovation at Santander US says: “While there are many reasons US banks are innovation laggards, I think legacy technology, regulation, compliance, and risk aversion have to top the list of reasons why we’re not seeing more movement.” In contrast to the other regions, the main barrier to innovation for the Americas seems to be culture rather than IT systems or lack of funding. “Innovation is simply not in the DNA of most bankers,” explains Nicols. “They’ve been trained throughout their whole career to identify and avoid risks, and innovation is about taking small risks and failing fast and cheaply and learning from those mistakes to get to the right answer quickly.” Nicols continues, “Another challenge is analysis paralysis. Most banks have too many silos with conflicting agendas, and that makes it hard to actually put new ideas into action. Consequently, those few innovators who do exist in banks find themselves surrounded by the ‘business prevention department’.” Chris Skinner adds, “Lethargy and lack of competitiveness plagues the majority of the banking industry. Lethargy embraces everything from ‘oh, the regulators won’t allow it’ to ‘if ain’t broke, don’t fix it’ to ‘but the legacy, the legacy, the legacy’. There is more perceived risk in changing what is already in place than the risk surrounding doing nothing at most organizations.” One banker admitted, “Our innovation lab looks great for the investor public, but in reality, the best ideas are coming from the front line and from our test branches. The digital banking areas of the bank think completely different than the legacy banking departments and even the innovation lab … they get ideas to the consumer faster.” 05 Summary–Key areas for development in a traditional retail bank Key Areas for Retail Banks (Development areas) ! " $% Mobile and Digital - Digital customers are already there - Technology is accessible to all - Focus is to attract new young generation Value Added Services (New revenues) Services based on customer behavior: - prior to payment transaction (predictive) - at the moment of transaction (instant) - after payment transaction P&L – Internal Processes - Operational excellence and digitalization - Cost reduction and optimization - Areas of synergy Data monetization & analytics Data-rich solutions: - Dynamic business steering - Behavior-driven marketing - Data-rich consumer and enterprise applications New Business Models - Partnering with Big-tech? - Partnering with Schemes? - Partnering with Fin-Tech? - Joint venture with GP &
  6. 6. Most importantly, the biggest adjustment that will be needed in the U.S. is a much stronger culture of innovation and acceptance of tolerable risk. If the U.S. banking organizations continue to be complacent, eventually the digital consumer will notice that the grass is truly greener across the street and they will switch providers. Why can’t banks and credit unions master innovation?8 Financial institutions have a few strikes against them. For starters, the culture of banking isn’t conducive to new ideas. The second reason financial services institutions struggle with innovation is a serious lack of talent. Banks and credit unions aren’t just competing amongst themselves for employees who have the drive and technical skills to be innovation engineers; they are competing against big tech and fintech firms. Most folks gravitate towards a sexy option like Amazon before they even consider working for a financial institution, even one with a household name like Bank of America, HSBC or Goldman Sachs. Banks and credit unions — with their risk averse cultures, aging technology, stodgy brands and bureaucratic hierarchies — simply aren’t attractive landing pads for top talent. The embedded hierarchy is not only distasteful to young technology talent, but it also hampers innovation. In a typical bank or credit union culture, ideas come from the top and flow downward, and not vice versa. Not only are financial institutions missing out on some really good ideas, but their employees become frustrated and send their resume over to Amazon. Even though most banks and credit unions are far from cutting edge, they still believe that they are innovators. A scant 2.8% of financial institutions in the PYMNTS.com survey said they have not focused on innovation in the past three years. More than one-third (37.9%) say that they generally roll out new products before others. But some financial institutions are pretty adroit innovators. They generate ideas quickly and then they test them out in a timely fashion. Others seem to be operating in dog years. Futurion asked bankers how long a “typical” large scale innovation effort takes — from ideation to roll out—and the average was 21.5 months — just slightly under two years. The longest? At these banks and credit unions, today’s great idea won’t see the light of day until 2023. Ask what’s wrong with America’s banks9 , and you’re likely to hear that they’re just too complicated, too opaque. And so we get calls for banks to simplify their operations—to go back to what’s often called “plain vanilla” banking—and to disclose more about what they’re doing. This quest for simplicity and transparency is understandable in a world of collateralized-debt obligations and endlessly proliferating derivatives. Only about 1% of North American consumer banking revenue has moved to new digital models10 (in China, the picture is very different: internet giants have moved into financial services and gained considerable market share in e-commerce and third-party payments). 06 8 https://thefinancialbrand.com/70631/innovation-ideas-banking-culture-trends 9 https://www.newyorker.com/news/daily-comment/the-real-problem-with-the-big-banks 10 https://www.weforum.org/agenda/2016/04/what-does-the-rise-of-fintech-mean-for-banking Overall trend In order to achieve leading positions on the market, banks should shift a strategy from «competitive with Fintech» to «collaborate with Fintech» Increasing customer requirements for banking services along with growing pressure from the Fintech startups will shift bank’s strategy to «if you can’t beat them, join them» approach. Collaborative Fintech investments vs Competitive Fintech investments ($ Bln) The expectations of clients are higher than ever, and are broadly consistent across various sectors and contexts Efficient. Users want processes to be streamlined and cohesive, with key functions ‘bundled’ for user convenience. Real-time. The trajectory of digitalization has led to near-instant transactions and up-to-the-second visibility over cash-flows. Integrated and flexible. Users expect a one-stop portal with seamless reconciliation across their user profiles. Accessible. Users expect channel convergence and access to services on multiple devices through a user-friendly and instinctive interface. Individualized and contextually relevant. Users expect advisory services, information and suggestions reflecting their transaction and activity history and other user-specific data. 1 2 71% 56% 29% 2014 Collaborative Competetive 0.0 4.0 8.0 12.0 16.0 20.0 2015 44% +15%
  7. 7. Online banks seem to have it all:11 relatively high interest rates, stellar customer service, low fees, and the added bonus of 24/7 access to your finances with the click of a button. Online banks are friendlier to smaller depositors because they typically require lower monthly balances. Online banks typically have better interest rates than traditional banks because they don't need to take any funds to operate brick-and-mortar buildings. If you like to deal with the people managing your money via email or over the phone, go digital. The opportunity for fintech companies to disrupt traditional financial institutions is best observed today in millennials' habits.12 Millennials have a clear preference for accomplishing tasks through digital applications and services — something fintech companies are better at providing than banks in terms of speed and personalization. Already, 62% of millennials in North America use products from fintech companies, according to the 2016 World Retail Banking Report. The 2016 Millennial Money Mindset Report, released by iQuantifi, reported that nearly 42 percent of millennials want to manage their bank relationship exclusively online. More disturbing, Gen Y customers are far less loyal to their banks: only 45% of North American millennials said they plan to stick with their current bank. While banks have steadily built up their online and mobile channels — in part to appeal to millennials — the products and services they offer in those channels are built on top of legacy systems and fail to provide the level of speed and personalization millennials expect. Smaller traditional firms find themselves struggling against new online banks too.13 Wall Street institutions' adoption of online financial services products outpaced regional and community banks for years. Smaller banks have limited access to pioneering entrepreneurs. US small town banks are prodding regulators to get tough on “fintech” companies14 , in a move that betrays traditional lenders’ fears of the young upstarts taking their business. In a no-holds-barred letter to bank regulators, Independent Community Bankers of America, a trade group for more than 6,000 small banks, raised questions over the solidity of some fintech businesses and called for them to be fully regulated. Finance is where they built their careers. Now some of banking’s former stars are pouring millions of dollars — and in some cases staking their careers — into new technologies that are shaking up everything from lending to payments to investing. A whopping 55 percent of small, community and regional bank executives had not set up any meetings or presentations with potential fintech partners, despite aspiring to do so. Economic growth and predictions regarding the Federal Reserve's upcoming decisions on interest rates will be felt acutely by smaller firms in the industry. Because smaller banks focus more on interest-sensitive products such as mortgages, prolonged low rates by the Fed will hurt them disproportionately. Banks face shifting consumer tastes, and may be compelled to act quickly. In the years after the global financial crisis smaller banks were brokering mergers just to survive. From 2008 until early March, the number of FDIC-backed banks in the U.S. plummeted 25 percent. Time is not on their side. Part of regional and community banks' motivation to take on new online initiatives is also owed to a growing number of online-only competitors relying on new technology to cut out overhead legacy costs banks still face. 07 11 http://www.businessinsider.com/online-bank-vs-traditional-banks-2013-5 12 https://www.americanbanker.com/opinion/fintech-has-forced-banks-hand-on-blockchain-ai-adoption 13 https://www.cnbc.com/2016/03/09/community-banks-clamor-for-fintech-partners.html 14 http://www.ft.com/intl/cms/s/0/518095b8-2adc-11e6-bf8d-26294ad519fc.html#axzz4AnfOy97L APAC South Korea permits for banks to invest in Fintechs Current financial laws indicate that financial institutions are allowed to buy stakes only from companies in the same business sector. The FSC have included fintech companies in the scope of the financial industry. #banks #2016 SouthKorea MAS establishes a dedicated Fintech Office MAS and the National Research Foundation opened a dedicated FinTech Office to serve as a one-stop virtual entity for all FinTech matters and to promote Singapore as a FinTech hub.  #opportunity Singapore MAS established a regulatory sandbox. To allow more flexible application of the regulations, while maintaining safeguards to protect consumers and the wider financial system. Singapore Financial Sector Technology & Innovation scheme MAS committed $225M ($166.48M USD) under the “FSTI” scheme to provide support for the creation of a vibrant ecosystem for innovation. Singapore 6 P2P Lending Licenses Granted in Malaysia Six P2P lending licenses were granted in Malaysia recently, making them the first authorized platforms in the ASEAN region. #p2p lending #license #2016 SouthKoreaMalaysia Korea has launched a platform for banks The platform allows financial institutions to build services that automatically populate financial information for new customers. #banking #2016 HongKong Hong Kong to launch banking fintech 'sandbox' HongKong Hong Kong establishes a Facilitation Office HK Monetary Authority established the FinTech Facilitation Office to facilitate the healthy development of the FinTech ecosystem in Hong Kong and to promote Hong Kong as a FinTech hub in Asia. #opportunity #2016 P2P Firms Regulation in Indonesia The draft regulation proposed that a Fintech company is required to have Rp. 2 billion in working capital and is required to show Rp. 2.5 billion applying for a business license. To help maintain Hong Kong's competitiveness as a financial hub by supporting the development of fintech in the banking sector Indonesia Malaysia issues the Fintech Regulatory Sandbox To experiment with FinTech solutions in a live controlled environment which is accompanied by the appropriate safeguards #opportunity Malaysia Establishing an infrastructure Source:Fintechranking.com
  8. 8. Generally, all large banks are prone to make fuss over themselves at the start and then barely provide any information on their activities. American and European players are still on a previous stage of market “probation” and strategy formation – they launch accelerators (“too many innovation labs – too few innovations”15 ) and hackathons and partner with others. Asian banks are more of announcing their grandiose plans, then implementing them – even Australian and African banks seem to be more pragmatic in comparison. Banks’ area of interest is currently very limited. Most of deals and internal activities are focused on investments (online trading, robo-advisory, wealth management, PFM/PFP) and online lending. In mobile remittances and e-wallets/e-banking their activities are more restrained. Many segments and niches haven’t been exploited yet. Big potential lies in banks’ “openness” to collaboration with startups from any area, ability to engage with them vie open APIs and bank-as-a-service platforms. 15 http://fintechnews.sg/4766/fintech/dances-with-drums-by-fintech-hubs-and-banks ~30% banks invested via their own venture instruments – VCs, accelerators, incubators Banks are getting more and more active in FinTech Barclays, Goldman, CITI, Santander and BBVA are leading the show Major Bank Investments to VC-backed Fintech Companies -2015 -2016 more companies funded by banks in 2016 +60% Top South-Asian banks are starting to follow Chinese/HK/Japanese/Korean megabanks with playing active role in FinTech: DBS, OCBC, UOB, Siam Commer- cial Bank, Mandiri, RHB, MayBank, CIMB, KasikornBank and others laucnehd a bunch of initiatives related to fintech Leaders are mainly from developed fintech regions US, UK, Europe. Note/source:Source:Mattermark, Life.SREDAVCanalysis,Crunchb 23 15 13 8 3 3 3 3 3 2 2 1 1 1 1 1 1 1 17 9 7 6 4 6 6 5 5 5 4 4 4 4 4 3 3 3 2 1 1 2 1 1 1 1 2 Barclays GoldmanSachs CitiGroup Santander BBVA WellsFargo Commerzbank MorganStanley HSBC CreditSuisse BNPParibas MitsubishiUFJ Mizuho JPMorgan CapitalOne China DevelopmentBank UBS Sberbank China ConstructionBank CreditAgricole SocieteGenerale ICICI SiamCommercialBank OCBC MandiriBank Last year was marked by an active “flirting” of traditional banks with fintech. American (Goldman Sachs, Bank of America, JP Morgan, Wells Fargo, BNY Mellon, First National Bank) and European (Unicredit, Barclays, HSBC, BBVA, Deutsche bank, BNP Paribas, Societe Generale, ABN Amro, IdeaBank, ING, Nordea) banks were more proactive in their work with fintech, than Asian (DBS, OCBC, UOB, Mandiri, Maybank, China Bank Savings, Mizuho, Siam Commercial Bank, KBank, BBL, State Bank of India, Airtel bank), Australian (ANZ, KIWI) and African (Africa's First National bank) banks. Middle East banks are currently just eyeing the industry and have not been seen acting. 08 «Uber moment» for financial industry
  9. 9. Traditional banks across the world finally realized the upcoming big changes in the whole financial and banking industry and are clearly getting more and more active in the fintech space. Partnerships and product integrations, accelerators and innovative labs, direct investments and venture debts, corporate VCs and fund-of-fund investments—banks started to use all available mechanisms in order not to lose in the digital war with the new hungry players. Business models of traditional banks are increasingly comping under pressure. There are more than 5000 fintech startups in the world now16 . Fintech, the home of the fabled unicorn, is hot. There are now about 50 fintech-unicorns in the wild. Along with many established players becoming larger, new startups are launched monthly, if not weekly.17 While some have expanded quickly, others have taken longer to evolve. This staggering growth is a reflection of the hype around fintech, where a plethora of startups are using technology to compete against or collaborate with established financial players. 09 16 http://www.disruptivefinance.co.uk/?p=354 17 http://www.bloomberg.com/news/articles/2015-12-17/banks-cozy-up-to-online-lending-upstarts 18 http://www.economist.com/news/leaders/21650546-wave-startups-changing-financefor-better-fintech-revolution The magical combination of geeks in T-shirts and venture capital that has disrupted other industries has put financial services in its sights.18 From payments to wealth management, from peer-to-peer lending to crowdfunding, a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion. Like other disrupters from Silicon Valley, “fintech” firms are growing fast by questioning status quo of the very traditional and highly regulated industry. The fintech firms are not about to kill off traditional banks. Nonetheless, the fintech revolution will reshape finance—and improve it—in three fundamental ways. First, the fintech disrupters will cut costs and improve the quality of financial services. Second, the insurgents have clever new ways of assessing and innovating around risks. Third, the fintech newcomers will create a more diverse, and hence stable, credit landscape. If fintech platforms were ever to become the main sources of capital for households and firms, the established industry would be transformed into something akin to “narrow banking”. Traditional banks would take deposits and hold only safe, liquid assets, while fintech platforms would match borrowers and savers. Economies would operate with much less leverage than today. But long before then, upstarts will force banks to accept lower margins. Conventional lenders will charge more for the services that the newcomers cannot easily replicate, including the payments infrastructure and the provision of an insured current account. The bigger effect from the fintech revolution will be to force flabby incumbents to cut costs and improve the quality of their service. That will change finance as profoundly as any regulator has. EMEA UK sets out open banking API framework Aimed for the creation of an open banking standard that makes it easy to share and use financial data, arguing that the move would improve choice for customers, promote competition; #regulation #bank #UK OpenBanking The cohort of the regulatory sandbox closed 69 firms from a diverse range of sectors, geographies and sizes have been accepted. 24 applications met the sandbox eligibility criteria and were accepted to develop towards testing #regulation #opportunities #UK Sandbox A specially created “Fintech” licence  Plans to encourage crowdfunding and the market testing of new technologies. FinTech firms, with a minimum of $300k in capital, are allowed to accept funds from clients, up to $99m, which remain outside the depositor protection scheme and are not subject to the same regulations, auditing and the capital requirements applied to banks.  #Implementation #Switzerland #EU #2016 Banking Standardized mobile and internet payments (PSD2) in EU PSD2 enables bank customers, both consumers and businesses, to use third-party providers to manage their finances. In the near future, customers may be using Facebook or Google to pay bills, making P2P transfers and analyse spending, while still having money safely placed in current bank account. #Announcement #Payments #Global #2017 Payments Solvency II is a programme for insurance regime It introduced a new, harmonised EU-wide insurance regulatory regime. The Solvency II programme is divided into three areas, known as pillars: Financial Requirements (Capital Requirement and etc), Governance & Supervision (Own Risk & Solvency Assessment) and Reporting & Disclosure (Insurers required to publish details of the risks facing them). #Implementation #Insurance #EU #2016 Insurance Controlling & Regulation Source:Fintechranking.com Introducing a European Standard for e-Invoicing The European Commission announced the e-invoicing directive require all 28 EU member states to use specific e-invoicing standards for all B2G e-invoices by November 27, 2018. Europe’s current e-invoicing adoption rate of 24 percent is expected to rise to 95 percent by 2024 and accrue savings of approximately 64.5 billion euros ($72 billion) per year for businesses. #Announcement #e-invoicing #EU #2018 e-Invoicing
  10. 10. Most fintechers do not feel half as warmly towards their incumbent rivals. One dismisses them as “the Kodaks of the 21st century”, another as “financial vacuum-tube makers in the age of the transistor”. They see banks as tomorrow’s telephone copper wires, vestiges of an earlier age, and believe that in essence banks cannot adapt. “How often have you seen an incumbent really reinvent themselves?” a startup founder asks. The best thing anyone can say about banks is that they will always be around. “People like to whine about them but they will never leave,” says Neil Rimer of Index Ventures, a fintech investor. Bankers are well aware of this. They are keeping a close eye on how their products compare with those of the newcomers, and many of them understand their limitations when it comes to innovating. “If you want to come up with a new product in a bank, any one of 50 people internally can shoot it down. If you’re a startup, you can go visit 50 venture capitalists and you only need one of them to give it a green light,” says Tonny Thierry Andersen, head of retail at Danske Bank. Even so, the startup ethos is changing the way bankers think about their profession. One common refrain among incumbents is that they need to become less product-focused and more customer-focused, which is true but easier said than done. They also note that customers value transparency. And all of this requires new business models. Never mind if fintech fails to take over the world, or even the current account: its emergence is changing the face of finance. Almost 1000 distinct venture capital investors have participated in the fintech feeding frenzy that has gripped the financial services sector over the past three years.19 It is no secret, that innovation momentum is not spread equally around the world. There are certainly well-known hubs where innovative solutions are being born the most and find their way up. Barriers to innovation across the world are coming down. Some of the reasons for that are related to the nature of technological innovation itself, which is quickly adoptable. APIs offered by fintechs can allow businesses to jump to another level of efficiency and experience relatively easily. Moreover, since technological advancements allow companies to operate globally even while being physically located in one country, it increases competition for local companies that did not achieve that stage of technological improvement. However, the concept is true for a startup that has already reached a certain level and has resources and network to go borderless. For those who seek to fly or fail quickly, there are certain places in the world that will foster the process. It would almost be a crime to not mention the Asian region as emerging in the outstanding speed innovation hub. China, India, Singapore and Hong Kong are fueling Asian fintech and emerging as significant competition globally. Many big banks, which are embracing tech to reduce costs and attract new kinds of customers, look at startups as future partners or acquisition targets, rather than as lucrative investments. Barclays, Wells Fargo, and Bank of America host or sponsor finance-tech accelerators, awarding cash and guidance in exchange for a small stake in the companies and an ongoing relationship. Banks may be feeling a newfound sense of urgency. 10 19 http://www.finextra.com/news/fullstory.aspx?newsitemid=28274 USA In May, the third and final part of the 2012 JOBS Act, Regulation Crowdfunding, went into effect Regulation Crowdfunding allows any American startup or small business to raise up to $1 million from friends, family, and followers on debt and equity crowdfunding platforms registered with the Securities & Exchange Commission (SEC). During the course of the year: 21 debt and equity crowdfunding platforms were launched and one, Ufunding Portal, shut down by the SEC because it seemed to be missing some of the statutory requirements required of a funding portal. Investors committed $19 million to the 186 campaigns and transfered $17.9 million to the 79 funded campaigns. Over 21,000 individual investments were recorded for 2016. The average investment was $833, and the average number of investors in a funded campaign was 331 The average valuation for a funded campaign was $5.3 million. #crowdinvesting #results #USA #2016 Crowdfunding Financial technology start-ups to get a license to bank The Office of the Comptroller of the Currency are planning to create a new type of banking license (for example, trust banks and credit card banks) that will allow upstart financial technology companies to expand more quickly across the country. A special purpose national bank must conduct at least one of the following functions: fiduciary activities, receiving deposits or lending money. The licenses from the Office of the Comptroller of the Currency, which oversees many national banks, will be available to companies like Square and Lending Club that accept deposits, facilitate electronic payments or lend money. Many technology firms have been pushing for some sort of new regulatory system that would allow them to cut through the patchwork of state and federal laws that govern financial activities and make it hard to expand nationally. The OCC acknowledged that Fintech companies’ business models vary widely and that therefore each application should be reviewed individually. #p2p #license #USA #2016 Banking Shaping certain sectors Source: Fintechranking.com
  11. 11. According to a report by McKinsey, tech companies could wipe out as much as 60 percent of profits on some of banks' financial products. That would come from a mix of decreasing margins and increasing competition. Banks are already seeing a drop in margins, the report said. Truly, if traditional banks don’t reinvent their own business models then other players will do it for them, and it will not be pretty. Why big banks won’t be able to join the fintech boom? Corporate investors participated in 1 in 4 U.S. fintech deals, according to a joint report by KPMG and CB Insights. "While corporate investors will likely continue to invest in fintech in order to drive their own internal innovation and ability to compete with non-traditional market entrants, some institutional investors may shift away from fintech investing in the short term due to lower perceived rates of return," the report said. According to a recent report from Accenture, big banks should view fintech startups as enablers rather than competitors.20 Accenture encouraged banks to strategically integrate these fintech start-ups into their current frameworks. As a result, banks will be in a better position to compete in the ever-evolving finance industry. Banks that are still futilely providing platform services, instead of sourcing them from the better and more efficient providers, will struggle to compete in the long run. Perhaps slightly late in the day, the major banks have woken up to that threat, and have started to respond, either trying to create their own platforms, or else partner with one of the fast-growing new challengers.21 The existing players are too big, too burdened down by costs, have operated in an over-regulated market for too long, and are unlikely to pick the winners anyway. In reality, the major banks are in more trouble than either they or their investors yet realize. It is not hard to see why so many entrepreneurs and venture capitalists are rushing into the space. The internet is very good at ripping out the middlemen, and there is probably no industry with more of those, and better paid ones, than finance. When your industry is being turned upside down, it makes sense to try to invest in the future. And yet it is going to be far harder than it looks – for three reasons: 1. First, the traditional banks are weighed down by down by huge costs accumulated over decades. All those branches on the High Street are horribly expensive compared to running a simple website. They have tens of thousands of staff, and even bigger pension funds, and layers of management that were built up in a different era. 2. Second, banking has for a long time been so heavily regulated that it is virtually an oligopoly. 3. Third, the weight of history is against them. All the evidence of industrial innovation suggests that legacy companies can virtually never transform themselves. Railway companies didn’t make successful cars. Film companies didn’t create the giants of the TV industry. It wasn’t the established electronics manufacturers that thrived in personal computers. The real disruptors are always new companies. They start with a clean slate, and a new way of thinking, and that is a big advantage. McKinsey wrote:22 “Here's how banks should respond.” “Fintech companies are undoubtedly having a moment.” “We believe the attackers best positioned to create this kind of impact will be distinguished by the following six markers”: 1, Advantaged modes of customer acquisition; 2, Step-function reduction in the cost to serve; 3, Innovative uses of data; 4, Segment-specific propositions; 5, Leveraging existing infrastructure; 6, Managing risk and regulatory stakeholders. When it comes to the battle for top young talent, Silicon Valley is shaping the conversation. Bright-eyed business school grads are increasingly looking to build careers as entrepreneurs, rather than on Wall Street — and investment banks are sitting up and paying attention. Long seen as a highly technical, highly regulated industry dominated by giant banks that resist disruption - other than the occasional global meltdown - finance is now riding an entrepreneurial wave. Demand for upstarts' services is strong, piqued by widespread frustration with big banks; supply is growing, fueled in part by financial types itching to do something other than toil inside those same megacorporations. And low interest rates have made capital, the raw material for many money-related startups, cheap and plentiful. In some respects fintech is being revolutionized by entrepreneurs for entrepreneurs. The future of financial industry is here: are you ready? 11 20 https://e27.co/banks-react-fintech-revolution-accenture-report-20160509/ 21 http://www.telegraph.co.uk/business/2016/04/18/why-big-banks-wont-be-able-to-join-the-fintech-boom 22 https://www.mckinsey.it/idee/cutting-through-the-noise-around-financial-technology
  12. 12. So Many Bank Innovation Labs, So Little Innovation These days most banks seem to have an innovation lab, accelerator or a venture capital fund to encourage tech experimentation.23 But these corporate startup programs are driven by either hope, fear or a herd effect. That is, if their banking competitors have a vehicle to promote innovation, they need one too. Traditional banks battling against digital disruption openly admit that they're willing to try just about anything to help them win and retain customers. They've heard the fairy-tale success stories of accelerators, both those that are started by incumbents or that launch independently. The success of a standalone accelerator like Y Combinator is in part because it has funded more than 500 startups since 2005. By comparison, the innovation labs at some of the biggest banks house no more than a handful of startups at any given time. The energy and expense required to run a full-scale startup program are difficult to justify for most banks, especially if the outcomes are so uncertain. This struggle will ultimately cause banks to abandon their innovation labs. As Saul Kaplan wrote,24 “Innovation labs will launch with lofty rhetoric from CEOs about transformation and thinking out-of-the-box. But as soon as line executives and business unit leaders get control of the lab’s agenda, it is destined to produce only tweaks. This shouldn’t be a surprise.” Nine reasons why corporate innovation labs produce only tweaks: 1. Innovation lab mandates aren’t clear. Incremental versus transformational innovation require very different organizational approaches and support. 2. CEOs must own the transformational agenda. Instead they cede authority to line executives who are accountable for the performance of today’s business model. 3. Innovation labs overemphasize the production of a better mousetrap, as opposed to a better business model. Potential innovation projects that may cannibalize current business are taken off the table, severely limiting the innovation lab’s scope. 4. Requiring a financial forecast for an innovation project—before exploring it in the real world—only works for tweaks, never for transformation. 5. Corporate innovation labs see emerging technologies through the lens of today’s business model, as opposed to a catalyst for an entirely new model. 6. Corporate innovation labs have difficulty shifting their perspective to see opportunities through the lens of customer experience and jobs-to-be-done. 7. Corporate venture funds are not innovation labs. They may provide startup capital to entrepreneurs, but withhold the company’s most important assets: scalable capabilities and market access. 8. Innovation labs aren’t organized as a connected adjacency to the core, a sandbox where capabilities can be combined and recombined, to change how customer value is created, delivered and captured. 9. Companies lack the talent systems to develop future leaders with experience working both in the core and in the innovation lab. At least two dozen accelerators and incubators have been launched in the past two years by banks looking to identify and co-opt future disruptors and engage with innovative startups.25 The energy and expense entailed in running a full-scale accelerator programme is misplaced. "A fully fledged, multi-startup incubator is expensive to run. The cost of searching, selecting, and providing seed investment for startups could easily reach $1 million a year. And yet many incubators aren’t focused enough on customer problems and business objectives to deliver return on that investment." BBVA, one of the 50 biggest banks in the world, knows it’s facing a potentially devastating upheaval — technological “disruption.” “What’s happening is the way we relate to our customers is changing, it’s changing very fast, and it’s happening because of the innovation technology allows and the way people embrace it,” CEO Carlos Torres Vila told.26 Consumers are reinventing the way they interact with banks thanks to the smartphone. And a surge of new fintech — financial technology — startups are making use of cloud computing, APIs, and other technology advances that reduce costs to offer leaner and meaner services to consumers. Torres Vila has seen the changes in the industry first hand. He was head of BBVA’s digital banking operations prior to being appointed CEO. He says: “A lot of the startups choose one very thin slice of what a bank does. But there’s just so many of them that they encompass everything we do. In every little slice, you have like 10 companies that just do it better. They do it cheaper and they do it with better value for the customer.” 23 http://www.americanbanker.com/bankthink/bank-fintech-accelerators-are-destined-to-die-1079063-1.html 24 https://www.linkedin.com/pulse/so-many-corporate-innovation-labs-little-saul-kaplan 25 https://www.finextra.com/newsarticle/28323/financial-accelerators-to-wind-down-as-digital-ecosystem-evolves---forrester/startups 26 http://www.businessinsider.com/bbva-ceo-carlos-torres-vila-embracing-fintech-2016-4/#.VxvG-kyLS70 12
  13. 13. 13 Bank venture arms, despite the clout they carry by having the brand of a major global bank in their name, are often hamstrung by the complexities of being part of such an institution. Those complexities include the bureaucracy of any large organization, the limits put in place by regulation and the trepidation entrepreneurs may have about pairing with an incumbent they are looking to displace. "This makes us a much more attractive investor," said Jay Reinemann, a managing partner of Propel, who also co-managed BBVA Ventures. Indeed, some startups are worried about becoming intertwined with a bank, said Oliwia Berdak, a senior analyst at Forrester Research. Some startups see having big banks invest in them as limiting other investments in future. They worry "no one will touch them" if they are seen as associated with a bank, said Berdak. "Most startups are really worried about independence". Innovation labs in the banking industry have been trending for at least five years, and their numbers are growing. According to Capgemini, 87% of financial services firms say they either have an innovation lab or have at least carved out some real estate for innovations. This represents a 27% increase in the number of innovation centers in the past year. But are innovation labs falling out of favor? Some bankers aren’t convinced that these innovation labs pay off. Perhaps they are just flashy PR stunts intended to generate some positive buzz about dull companies often seen as “stuck in the mud”? Even those banks and credits unions that have opened — and spent lots of money on — innovation labs haven’t necessarily been successful. Most of the cool new products and truly disruptive technology still comes out of fintech firms. There are so many innovation labs and too few innovations. I regularly meet with bankers worldwide and the first phrase I hear from those who decided to invest in fintech (there are few of them so far, and we should be grateful to them) is, "We want to invest only in those startups that will be synergic with our current business." In other words, "we want to invest only in those alternative energy sectors that would keep oil prices high and our oil business profitable." Ok. There is a huge difference between Simple mobile bank and even the world's cutest mobile bank, which you may open only after you visit the banking branch and sign all documents. I will not list here all accelerators and hackathons built by banks recently, simply because they failed to create even a single star and generated no deals or following rounds. Clayton M. Christensen in The Innovator's Dilemma and other authors addressing the development of large and successful corporations able to innovate (read, for example, Jony Ive on Apple by Leander Kahney), note: first, you have to separate the team that makes a new business for you, their office and KPIs form your core business. Then join your old business (if able to integrate) to the new one, no other way round. Banking models There are 8 independent strategies that banks undertake and developing towards working with digital units Just a front-end, based on existing core. No own license Core banking products offered to businesses, fintechs, telcos. No B2C. Banks open APIs for 3rd party developers, in order to focus only on core products Front-ends with own modern core banking, own products and license Independent bank with own modern core, products are own and 3rd party provided Banks develop new digital brands with new modern core and develop products together with 3rd parties Banks develop new front-end solution on existing core and own products Banks develop new digital brands with new modern core and own products Independent digital bank-platform Digital bank-platform subsidiary Independent digital subsidiary Open API marketplaces Bank -as-a-service Neobanks linked with banks Independent digital bank Neo / Challenger banks
  14. 14. 14 The same is true for fintech hubs worldwide. In fact, their developers prove to be "advocates of traditional banks", rather than those of "fintech startups". In other words, their KPIs are not focused on bringing about more new startups and making them more and more successful, they are aimed at preventing them from causing a disturbance (God forbid!) to peace and success of existing banks. I should say, banks set up no startups and make no investments in them (historically). Startups are, therefore, put in some kinds of "cages" to have their digital revolution under control and prevent them from disturbing the "big guys". Putting aside the number of released articles, set-up hackathons, accelerators and bonuses, only the UK can boast any real achievements. Historically, the USA can too. For example, neo- and challenger banks existed previously only in US, and have got second wind and a new growth phase with the support of the British regulator. Many countries have joined the rush for fintech development this year, in Europe (France, Switzerland, Austria, Sweden, Denmark, etc.), Asia (Singapore, Hong Kong, South Korea, Japan, Thailand, India and Taiwan), Australia and Canada; the only question is: where are simplified licenses for fintech startups to give them an opportunity to operate without banks? Where are hundreds of transactions and dozens outputs? I don't mean articles and accelerators here, I mean real business, where is it? In fact, the explosive growth in Asia accounts for only a few China's giants, take them away and there is no growth in Asia. It is impossible to build fintech in a single country, as all entrepreneurs may live any place, they move around easily and intend to build international businesses, rather than local ones. Expansion to Asia, Africa and Middle East is curbed by the fact that they have no BaaS-platforms and banks have no open APIs.27 On the contrary, we can take as an example two countries that do not hold so many fintech conferences, awards, hackathons, and accelerators, but are much more successful in fintech achievements – these are India and Sweden. Let's start with opportunities for independent existence of fintech companies. Two years ago, India following the UK example launched new licenses for digital banks, which allow new players to exist independently of traditional banks.28 Several others have chosen a way of creating “sandboxes”. But “you can't put a wild thing in a sandbox” – this is not the solution. The play in “friendship with fintechs” clearly shows who “advocates for banks” and who really wants to change something. As Ricky Knox, founder and CEO of UK-based neobank Tandem, said to me: “If you want to create sandboxes – maybe it will be better to work in a kindergarten?” 27 http://www.forbes.com/sites/vladislavsolodkiy/2016/08/03/what-asian-banks-can-learn-from-amazon-about-working-for-fintech 28 https://www.bloomberg.com/news/articles/2015-09-09/it-s-like-paypal-but-pays-interest-and-india-s-banks-are-afraid What have banks been doing in the space of Open Banking? Most Recent examples Case Banks are getting ready towards new API-powered emerging business models BBVA – API Market This Spanish bank has grabbed the bull by the horns and exposed a range of APIs to approved developers well ahead of the regulatory timescales in their home market. Customer profile data Key account data Money transfer services Aggregated card purchase data Pre-approved loans Launched a financial API market to fuel innovative 3rd party businesses Exploring collaboration with a number of innovative start-ups through API sharing Shares variety of APIs from bank to help developers create real world innovations The first UK bank to satisfy the requirements for publishing APIs for public, launched a portal in 2016 Has 4 APIs open to developers on Dev Exchange, including rewards, credit card offers, and a security API The first traditional bank to release a public API offering, 84 apps built by 3rd party developers Test-drive its API at a three-day hackathon in Berlin with 750 applicants and 70 participants The first bank in SEA to launch an open Application Programming Interface (API) platform with 4 APIs APIs are available for:
  15. 15. The second ground for comparison is the presence of BaaS-platforms and open APIs. Integration with a bank is a nightmare in most countries (in contrast to the US and the UK). Meanwhile, the Indian government has rapidly implemented a unique project “India.Stack”, which allows29 startups to launch faster, cheaper and more efficiently than before (the platform’s single drawback it that it doesn’t let you scale to other markets). Next is the availability of capital. Indian Prime Minister Narendra Modi launched30 a number of initiatives to support the country’s startups, including USD1,5B fund and a string of tax breaks for both the companies and VCs too. In the fourth place is the influence of fintech on shaping a cashless society. One can talk about innovation, give hugs, kisses and awards: but look how effectively Sweden is struggling with cash.31 The Swedish Government has started32 to gradually prohibit cash, thus, stimulating the development of fintech startups in turn. There is a lot of hype around fintech, but also a lot of rubbish33 . In this situation, some countries (or territories) can successfully take into account the mistakes of some countries and achievements of the others and quickly become the new real fintech hubs, instead of PR-hubs. Only one year ago, Asian fintech was twice smaller than the US and 2016 became the first year when the US lost its dominant global leadership34 in the fintech. Maybe, because of central banks of Asia became the most active regulators in the fintech space globally: Singapore, Hong Kong, India, China, Malaysia, South Korea, Japan launched dozens of useful initiatives (licenses, guidelines, sandboxes, incentives, etc.) to help fintech industry to mature within the regulated environment. 15 29 https://yourstory.com/2016/07/india-stack 30 http://in.reuters.com/article/india-tech-idINKCN0UU0PZ 31 http://www.newyorker.com/magazine/2016/10/10/imagining-a-cashless-world 32 https://www.fastcoexist.com/3052540/will-sweden-be-the-first-country-to-get-rid-of-cash 33 https://e27.co/bullshit-people-dont-go-deep-fintech-still-make-loud-titles-big-numbers-around-life-sredas-vladislav-solodkiy-20160823/ 34 https://thenextweb.com/guests/investments-fintech-industry-not-grown The US fintech market is quite mature and regulated, however several initiatives happen there as well, mainly aimed on shaping certain sectors within an industry (for example, crowdfunding). However the UK and Europe regulators are still the benchmark for the whole world: Open Banking Standard, PSD2, new fintech licenses for neobanks are the most notable regulation changes in the global fintech industry. 1. 3. 4. 5. 6. 7. 8.2. Banks’ Approach to work with Financial technologies What do banks make of all this activity around Fintech? Banks are deploying a range of strategies – from strategic transformation and industry collaboration to “if you can’t beat them, join them” approaches. Internal / Deep Maturity of Ideas Complexity Impact Creating an internal product roadmap Internal R&D Internal / Deep Maturity of Ideas Complexity Impact Acquisition of developed companies with existing business M&A Internal / Deep Maturity of Ideas Complexity Impact Partnership with focus in additional revenues for business unit Partnership Internal / Deep Maturity of Ideas Complexity Impact Support and cooperation with startups in early stages Accelerate / Incubate Internal / Deep Maturity of Ideas Complexity Impact Equity investments to assess and access new growth opportunities Investments Internal / Deep Maturity of Ideas Complexity Impact Banks open their APIs for third-party players FinTechs Bank-as- a-Service Internal / Deep Maturity of Ideas Complexity Impact Internal innovation unit with organizational decoupling Hub / Lab Internal / Deep Maturity of Ideas Complexity Impact Launching banking offerings under separate brand Transforming
  16. 16. How Traditional Players Could React to Innovations Most fintechs do not feel half as warmly towards their incumbent rivals. One dismisses them as “the Kodaks of the 21st century”, another as “financial vacuum-tube makers in the age of the transistor”. They see banks as tomorrow’s telephone copper wires, vestiges of an earlier age, and believe that in essence banks cannot adapt. “How often have you seen an incumbent really reinvent themselves?” a startup founder asks. The best thing anyone can say about banks is that they will always be around. “People like to whine about them but they will never leave.” But the weight of history is against them. All the evidence of industrial innovation suggests that legacy companies can virtually never transform themselves. Railway companies didn’t make successful cars. Film companies didn’t create the giants of the TV industry. It wasn’t the established electronics manufacturers that thrived in personal computers. The real disruptors are always new companies. They start with a clean slate, and a new way of thinking, and that is a big advantage. 1. “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” Western Union internal memo dated 1876.35 2. “I do not believe the introduction of motor-cars will ever affect the riding of horses” Mr. Scott-Montague, MP, in the United Kingdom in 1903.36 3. “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” David Sarnoff’s Associates rejecting a proposal for investment in the radio in the 1920s. 4. “Who the hell wants to hear actors talk?” H.M. Warner (Warner Brothers) before rejecting a proposal for movies with sound in 1927. 5. “This is typical Berlin hot air. The product is worthless.” Letter sent by Heinrich Dreser, head of Bayer’s Pharmacological Institute, rejecting Felix Hoffmann’s invention of aspirin. At that point, Bayer was standing by its ‘star’ painkiller diacetylmorphine. This alternative drug reportedly made factory workers feel animated and ‘heroic’, which is why Bayer decided to aptly name it ‘heroin’. Later on, due to its ‘funny’ side effects, it was decided to take heroin off the market. Bayer’s chairman eventually intervened to overrule Dreser’s decision and accept aspirin as Bayer’s main painkiller. More than 10 billion tablets of aspirin are swallowed annually. 6. “Who the hell wants to copy a document on plain paper???!!!” Rejection letter in 1940 to Chester Carlson, inventor of the XEROX machine. In fact, over 20 companies rejected his “useless” idea between 1939 and 1944. Even the National Inventors Council dismissed it. Today, the Rank Xerox Corporation has an annual revenue in the range of one billion dollars. 7. “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible.” A Yale university professor in response to Fred Smith’s paper proposing reliable overnight delivery service. Smith went on to found FedEx. 8. “There is no reason anyone would want a computer in their home.” Ken Olsen (President, Chairman, and founder of Digital Equipment Corp) in 1977. 9. “So we went to Atari and said, ‘Hey, we’ve got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we’ll give it to you. We just want to do it. Pay our salary, we’ll come work for you.’ And they said, ‘No.’ So then we went to Hewlett-Packard, and they said, ‘Hey we don’t need you. You haven’t got through college yet.” Apple Computer Inc. founder Steve Jobs on attempts to get Atari and HP interested in his and Steve Wozniak’s personal computer. 10. Bitcoin is a fraud that will ultimately blow up, according37 to JP Morgan boss Jamie Dimon, who said the digital currency was only fit for use by drug dealers, murderers and people living in places such as North Korea. Dimon says 'stupid' bitcoin investors will pay the price.38 Speaking at a conference in New York, the boss of America’s biggest bank said he would fire “in a second” anyone at the investment bank found to be trading in bitcoin. “For two reasons: it’s against our rules, and they’re stupid. And both are dangerous.” “The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart.” “If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than US dollars”. “So there may be a market for that, but it would be a limited market.” "It's worse than tulip bulbs. 35 http://www.rinkworks.com/said/predictions.shtml 36 http://innovationexcellence.com/blog/2016/12/19/10-great-ideas-that-were-originally-rejected/ 37 https://www.theguardian.com/technology/2017/sep/13/bitcoin-fraud-jp-morgan-cryptocurrency-drug-dealers 38 https://www.bloomberg.com/news/videos/2017-10-13/dimon-stupid-bitcoin-investors-will-pay-price-video 16
  17. 17. Investment banking giant Goldman Sachs has cited its connection to cryptocurrencies and blockchain as a potential business risk, public records show.40 According to the Feb. 26 filing, which constitutes its annual report for the fiscal year 2017, Goldman believes that it might be impacted because of its work with clients and the companies it has invested in. The company wrote: "We may be, or may become, exposed to risks related to distributed ledger technology through our facilitation of clients' activities involving financial products linked to distributed ledger technology, such as blockchain or cryptocurrencies, our investments in companies that seek to develop platforms based on distributed ledger technology, and the use of distributed ledger technology by third-party vendors, clients, counterparties, clearing houses and other financial intermediaries." Bank of America has cited cryptocurrency as a material risk to its business, too.41 The technology could hamper the second-largest U.S. bank's ability to comply with anti-money-laundering regulations, pose a competitive threat and force the company to spend more money to keep up with the times, the bank said in its annual filing with the Securities and Exchange Commission. "Cryptocurrency" is mentioned three times in the annual report, all in the section on risk factors. Yet perhaps more notable is the acknowledgement that cryptocurrency poses competitive risks to the bank. In a passage about new competitors in the financial services industry, Bank of America expressed caution about how client preferences could lead them to use products like cryptocurrencies - for which, as it stands, the bank does not offer any support. Bank of America notes in the filing: "Clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies." Indeed, the mention of cryptocurrency as an outside risk is taken one step further, with Bank of America stating that rising adoption would result in it having to dedicate more resources - that is, spending money - to stay competitive. "The widespread adoption of new technologies, including internet services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services," the bank said. It won't end well. Someone is going to get killed," Dimon said39 at a banking industry conference organized by Barclays. "Currencies have legal support. It will blow up." Bitcoin fell to its session lows after Dimon's comments: bitcoin traded at $4,106.23, down 2 percent. (Earlier, Dimon warned about further declines in trading revenue for the banking giant. Dimon said third-quarter trading revenue will drop about 20 percent on a year-over-year basis. Dimon also said the bank may not give intra-quarter guidance in the future. JPMorgan's stock fell off its session highs on the comments.) Global financial services company JPMorgan Chase has become42 the latest bank to label the rise of cryptocurrencies as a threat to its business. In its annual 10-K filing with the U.S. Securities and Exchange Commission, the bank noted the potential impact that cryptocurrencies could have on payment processing under its "risk factors" section, saying the institution could be disrupted by the still nascent technology. The bank wrote: "Furthermore, both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation. New technologies have required and could require JPMorgan Chase to spend more to modify or adapt its products to attract and retain clients and customers or to match products and services offered by its competitors, including technology companies." 39 https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html 40 https://www.coindesk.com/goldman-sachs-latest-bank-label-crypto-business-risk 41 https://www.coindesk.com/bank-of-america-cryptocurrency-risk-factor-annual-report-10-k 17

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