Approaching the 'Uber Moment' in Financial Services: How Technology Will Radically Disrupt the Sector
This is a guest post by Antony Jenkins, ex Group CEO of Barclays Bank.
Antony has had a glittering career to date as one of the world's pre-eminent bankers.
[Wikipedia: Antony Jenkins began his career in finance at Barclays as a graduate in 1983, but subsequently moved to Citigroup and rose to head the company's branded credit card business. In 2006, he returned to Barclays to take over the company's Barclaycard division. In 2009, Jenkins was promoted to chief executive of the retail and business banking group and asked to join the executive committee.
Jenkins was appointed as the group chief executive of Barclays on 30 August 2012. In February 2014, Jenkins announced he would be declining his bonus for 2013 following a series of scandals. On 8 July 2015 it was announced that he had been sacked by Barclays after a dispute with the board over the size of the investment bank and the pace of cost cutting]
We've been fortunate to spend time with Antony talking about the future of Fintech and specifically about some of the more exciting developments. Antony's view is that we are the very beginnings of a revolution some of which is taking place right here in London.
The post below is a speech which Antony delivered at Chatham House, London on 24. Nov. 2015. Extracts received wide coverage in the UK press - here it is published unabridged.
It is an honour to be here tonight at Chatham House, an institution dedicated to building a sustainable, peaceful and just world.
I have worked in financial services for over 30 years, in many different businesses and places around the world, and have been privileged to observe first hand the impact of technology on financial services.
When I began my career fax machines and electronic typewriters were the order of the day. Portable computers weighed 20 pounds and were called “luggables.” And mobile phones were the size of bricks.
Email arrived in the late 80s and it was provided to senior executives who of course had their PAs print them out so the boss could hand write a response. Which was then typed into an email by the long-suffering PA.
And I remember in the mid 90s building a business for corporate customers to electronically display certain financial documents. The business case hinged on whether the economics would support two so-called T1 lines, which are lines to carry data and phone conversations. Today those lines would only cost somewhere between $200 and $1200 per month, a fraction of the price back then.
But I also experienced how new technologies started to make consumers’ lives easier. I remember how in the mid 2000s, contact-less payment systems started to transform the way we all travel on the tube and bus.
And during my time at Barclays, we launched Pingit, a market leading system to send and receive money via mobile phones.
All these experiences have made me a passionate believer in the transformative power of technology. It is an unstoppable force which often has a hugely positive impact on the way we live, work, consume and learn.
Many wonder how these new technologies will transform the financial services industry, a sector which is already being reshaped by current and prospective macro economic weakness as well as regulatory change. You might ask who the winners and losers will be.10. It’s an important question, as an effective, fair and transparent financial services sector is vital for economic growth and also for a functioning and healthy society. That’s especially true as the industry itself has not always delivered its side of the bargain.
I’m predicting that over the next 10 years we will see a number of very significant disruptions in financial services -- let’s call them “Uber moments’’ -- driven by companies in the so-called Fin Tech sector, the world where financial services and new technologies link together.
We will see massive pressure on incumbent banks which will struggle to implement new technologies at the same pace as their new rivals. And that will make it increasingly challenging for them to deliver the returns and profitability their shareholders demand.
Ultimately, those forces will compel large banks to significantly automate their businesses. I predict that the number of branches and people employed in the financial services sector may decline by as much as 50 percent. Even in a less harsh scenario, I expect a decline of at least 20 percent.
HOW NEW TECHNOLOGIES DISRUPT INDUSTRIES
So what exactly is an Uber moment?
I know that most of you will be familiar with Uber and some may even have travelled with them here tonight.
Uber is typical of what I saw when I recently spent a week in Silicon Valley meeting venture capitalists, technology companies and entrepreneurs in the Fin Tech sector.
If you analyse how technology has already disrupted many industries – ranging from publishing, telecoms and music to retail and even transport – you can detect a similar pattern.
It starts with a small group of founders using new technologies such as mobile phones and fast data networks to dramatically improve or "disrupt" a so-called vertical, a market that is focused on a single niche.
In Uber’s case, it was as simple as providing a car and driver in San Francisco, available via a touch on your smartphone.
And once a company dominates a vertical, the service gets rolled out across the globe to the point where many of us have the Uber app installed on our mobiles today.
This demonstrates how the digital revolution is making many aspects of life easier. And services that used to be out of reach for many, can now be made available to nearly all, globally.
THE FINANCE INDUSTRY’S UBER MOMENT
In other sectors, we have seen how fast-growing companies with an entrepreneurial mindset led to the demise of once powerful brands such as Nokia or Kodak.
Now, thinking about an Uber moment in Financial Services, we can see from the example I have given what such a moment would look like.
Firstly, and most importantly, it must be disruptive. That is to say, it needs to dramatically improve the customer experience. Some people say it must be at least 10 times better. Or it can create a whole new customer experience that didn't even exist before, as in the case of Facebook.
Secondly, technology must power the service and be at its core.
Thirdly, there must be a ubiquity to it. Uber is now in 300 cities in 58 countries
Finally, while there may be others doing the same thing, there is usually a dominant leader.
HOW SILICON VALLEY’S VALUES WILL SHAPE THE FIN TECH REVOLUTION
Of course, much of this activity is based in Silicon Valley. The moment you arrive in Silicon Valley, it’s impossible not to feel the incredible energy and be impressed by the vibrant and mutually supporting ecosystem of investors, venture capital, founders and academia.
In every coffee shop or restaurant it seems, there are 20-something founders talking to 30-something investors about seed funding.
But while it appears to be casual and laid back, it is at the same time a ruthless meritocracy where the best ideas win. It’s a unique place.
There is a massive wave of capital going into start-ups. One of the people I’ve met even expressed a strong view that there was maybe even too much money around at the moment, which could lead to poor businesses being started.
The efficiency and ruthlessness of Silicon Valley is mirrored in its clear start-up model.
It goes like this: pick your niche. Figure out how to transform it through technology. Prototype it. Scale it. Make it profitable. Finally, IPO it.
THE STATE OF PLAY IN FIN TECH
In Silicon Valley, I got a real sense of how the next wave of transformation is targeted at more complex markets such as financial services, health-care and education.
In the finance industry, we already have seen the emergence of peer-to-peer lending sites such as Lending Club, Prosper and Ratesetter that allow individuals or institutions to lend directly to others without involving a bank. And exchange platforms such as Kantox allow customers to trade foreign exchange directly. Start-ups such as TransferWise charge less than some traditional banks to send money across borders.
In the payment sector, the activities of many start-ups are still extensions of the traditional system, such as Square, an application that allows small merchants to plug credit card readers into a smartphone.
The wealth-management industry is another sector waiting to be transformed, with a whole range of start-ups such as Nutmeg and Wealthfront using algorithms to help you manage your money.
However, I view much of this activity as Version 1.0 of the Fin Tech revolution. Some would even argue there’s really not that much Tech so far in many Fin Tech companies.
For example, some of the lenders in the U.S. make extensive use of that twentieth century marketing channel, direct mail. Most payment activity rides on top of the traditional banking systems and no one has yet cracked the code in wealth management.
Most start-ups so far struggle with the challenges of winning customers in a cost effective way and scaling their business to the next level.
The same is also true for this side of the Atlantic. While there is a burgeoning start- up scene in the U.K., we’re still waiting for the really transformative projects, the ideas that will revolutionise financial services.
But with the Tsunami of capital and talent working in this sector we cannot be far away from truly disruptive breakthroughs, from the versions 2.0 and 3.0. of the Fin Tech revolution.
KEY DRIVERS OF THE FIN TECH TRANSFORMATION
You can already see the big digital drivers that will disrupt the finance sector.
In the future, new companies will deliver financial services at a fraction of the cost. Truly digital banks will be able to spend most of their resources on the development and deployment of technologies, and won’t need to sustain a network of physical branches and offices.
The deluge of available data in today’s world will lead to much more personalised financial products and services.
Just imagine for a moment how much information is actually hidden in a bank statement. The data about how much we spend each month on groceries, rent, school fees or mortgage payments reveals a lot about how we live our lives.
Smart digital companies will use this data to advise us on the best mortgage deals or wealth management services tailored to our individual needs. And then allow us to manage our finances with easy-to-use apps on our phones and tablets.
Also, the long-term demographic changes mean huge parts of the world are becoming more affluent. Just look to Africa, where new services allow consumers and businesses to use mobile phones to pay bills, make purchases or manage savings.
Relatively few consumers in those markets have traditional bank accounts while most now own a mobile phone.
HOW CUSTOMERS LEARN HOW TO EMBRACE NEW TECHNOLOGIES
Of course, we need the right regulatory framework to make sure that our data is used with our permission.
Also, cyber-security will become an even bigger issue and a key element to win customers’ trust. The coverage of the TalkTalk hack in October has shown how the public can get rightly and highly concerned by hacking scares and talk of their bank accounts being emptied by electronic thieves.
But the overwhelming majority will embrace those new services where there are significant and compelling benefits over the status quo. But those services cannot only be incrementally better -- they will need to be at least 10 times better.
This is exactly the pattern we have seen with other digital services, be it Facebook, WhatsApp, Twitter, Uber or services that allow us to store our family pictures in the cloud.
THE CHALLENGE FOR THE INCUMBENTS
Financial service companies face the same challenges as their counterparts in other industries. Earlier this year, I visited a large retailer in North America, and in a meeting with the CEO it become crystal clear how difficult it is to come up with the right strategy.
For example, would you make an acquisition of brick and mortar stores when the rise in online orders could slash the value of those assets? Or should you abandon your traditional business, even if it’s profitable, to focus on the digital business side?
You might actually believe that many in the banking sector have fully embraced new technologies and are well prepared. You just need to read some of the recent headlines in the financial press:
• Banks desert high street for the digital superhighway.
• European Banks Use Online Platforms to Find Borrowers.
• Banks to allow account access using fingerprint tech.
But the impression that we get from these headlines is misleading.
Despite the appearance of change, the incumbents will need to undergo the transformation seen in so many other parts of the economy. According to McKinsey, the digital revolution is set to wipe out almost two-thirds of earnings on some financial products.
For example, the consultancy estimates that profits from retail lending, including offerings such as car loans and credit cards, could shrink by as much as 60 percent in the next 10 years.
The boom in online banking is already forcing banks to change the way they conduct business.
Last year, U.S. banks closed a record number of branches. And in the U.K., the use of bank branches fell by 6 percent. As a result, the financial service sector will employ fewer people.
Some of Europe’s biggest banks -- including Standard Chartered, Deutsche Bank and Credit Suisse – have in recent weeks unveiled plans to cut more than 30,000 jobs, partly because stricter capital rules are eroding profitability. And the forces of the digital revolution will put even more pressure on banks to slash costs.
The unique set of skills needed to succeed in the digital world represents a huge challenge for the incumbents. Many of them have been touring Silicon Valley looking for inspiration for their management teams. But all seem to struggle with the different culture and skills that are needed to be successful in the new digital world.
There is obviously already a lot of technology used in financial services today, much more than it used to be. I remember filing paper statements at the South Kensington branch in my first job at Barclays. If you walk into that bank branch in London today, you will see a plethora of technology, from ATMs and Cash and Deposit Machines to iPads for digital banking
But incumbents must ask themselves how much of it has been truly "disruptive" or transformational as opposed to merely substituting capital for labour.
Just take ATMs, or cash machines. While they made our lives much easier and allowed us get cash abroad out of a domestic account -- a brilliant innovation -- they didn’t transform the existing system and hierarchy of the banking world. They only made it easier to use. And call centres and Internet banking may have helped to improve customer service. But they are only used about twice a month on average. These are not transformative services.
On the other hand, customers on average use their mobile banking applications up to 30 times a month – indicating how smartphones have the potential to clearly transform the customer experience.
But we have to keep in mind that not all technologies are a force for good. In the institutional banking sector, new technologies facilitated the creation of the complex derivatives that contributed to the financial crisis of 2008. That was clearly disruptive, but not in a good way.
While it’s clear that incumbent banks are vulnerable to the disrupters, we shouldn’t ignore that the incumbents also have some real advantages. They have well-known powerful brands that many customers trust, a large number of customers and a wealth of marketing expertise. They understand and can navigate the regulatory landscape and have enormous financial resources to take on new rivals.
FROM BARCLAYS TO SILICON VALLEY
You may have noticed that my time as CEO of Barclays recently came to an end. But I’m very proud of what we achieved.
My team and I always saw digital innovation as a way to improve services for our customers. And it helped us to simultaneously reduce costs, improve control, and enhance customer experience.
I’m passionate about technology. To the point where I often tested the patience of my colleagues around the user experience, down to how many digits we should have in the log on code. I argued 4 was better than 5, a battle I ultimately lost!
I realised early that financial services need to embrace new technologies, and not reject them. During my time at Barclays, we mentored new Fin Tech companies through our Accelerator programme and we introduced the Digital Driving License, a free service where people can teach themselves new skills.
Other initiatives included Code Playground, a program that helps children learn coding, and our Digital Eagles - 28,000 specially trained colleagues who advise clients on technology.
My aim was to make Barclays the most technology-savvy and automated bank in the world and this was never about replacing colleagues with robots. My goal always has been to deploy technology effectively to free up people to do what they do best.
In doing this work and engaging with other CEOs around the world, it became clear to me that the incumbents will have to address three significant issues.
Firstly, boards need to accept that we live in a discontinuous world and they should ask executives to take significant but calculated risks by working on initiatives that no one else is working on. Looking for simple linear progression just won't cut it today.
Secondly, there should not be a technology strategy, there should only be a strategy with technology at its core. There is a crucial difference.
And thirdly, executives need to lead differently. In my experience, leaders become more risk adverse the more senior they become. In fact doing the same old a bit better is infinitely more risky than being bold and seeking true transformation.
THE FIN TECH TRANSFORMATION NEEDS TO BE BASED ON VALUES
But this leadership in the digital age needs to be based on a set of values. The current controversy about Uber and the way it disrupts taxi markets across the world highlights that values need to be at the heart of the debate.
In the 80s and 90s, the emphasis of the business community shifted - to create as much shareholder value as possible.
Long-standing business practices that prioritise customer and colleagues and had a positive impact on local communities and societies were suddenly cast aside.83. But the key lesson from the financial crisis of 2008 is that business and finance need to be based on values that balance the long and the short term
Banks were too aggressive, too self-serving and too focused on the short term. The impact of these mistakes is still being felt and we have seen public trust and confidence in the industry sink to an all time low.
But this is as much as commercial imperative as a moral one. For example, in my experience the branches with the highest level of customer satisfaction had the highest level of colleague engagement -- and were actually also the most profitable.
My absolute conviction is that there can be no choice between doing well financially and behaving responsibly in business.
In Silicon Valley I was struck by a similar ethos of innovation and business creation, as they’re driven by building the best possible product to help customers improve their lives. It may surprise you to know that no one I talked to woke up in the morning wanting to be the next billionaire, but they all wanted to change the world.
Many of the fast-growing technology companies have a sense of citizenship. They see wealth creation as a by-product, not an end in itself.
CONCLUSION: A SERIES OF UBER MOMENTS
We have a great opportunity to build a more sustainable and just finance industry that will enable consumers and businesses to experience banking in a radically new and better way.
Considering the whole range of powerful forces that already support and feed each other, I have no doubt that the financial industry will face a series of Uber moments.
Firstly, the global financial services market is huge and provides large profits. That guarantees that many smart people and lots of capital will try to disrupt and transform it.
The huge influx of capital might create some interim bubbles but that won’t change the final outcome.
Secondly, the cost of new technologies will continue to decline and new cloud and storage systems will make it even easier for new players to enter the financial services market and then aggressively scale their business.
Thirdly, there’s tremendous work being done in the Artificial Intelligence space.
Those software applications allow robots, computers and smartphones to recognize patterns and learn on their own, allowing them to make increasingly better predictions about our behaviour and financial needs.
There are already virtual assistants such as Apple's Siri and Google Now, but the future will bring us much more intelligent applications that will use natural language to interact with human beings.
This is going to have huge implications for the nature of work and our lives.
Fourthly, the incumbents are already under considerable pressure from a relatively weak macro economic environment and regulatory change causing poor returns on equity.
Customer expectations and the need to respond to the disrupters will exacerbate this return problem.
The incumbents risk ending up as mere capital-providing utilities that operates in a highly regulated, less profitable and capital-intensive market segment, a situation unlikely to be tolerated by shareholders.
However, in my view only a few will have the courage and decisiveness to win in this new world.
In conclusion, as I stated at the start of my speech, I predict that over the next 10 years we will see a number of “Uber moments” driven by Fin Tech companies.
Initially I expect the first Uber moments will be in payments and lending, two key areas for many incumbents. For the traditional banks and service providers, already under pressure from lower growth and regulation, profits and returns will be harder to come by.
And inevitably, customers will demand more automated and cheaper products and services. Incumbents will struggle to respond, leading to a 20 to 50% reduction in branches and people employed in the traditional sector of the industry over the next decade.
Ladies and gentlemen, the Uber moment in financial services approaches.............Thank you.