Niels Bohr, the Danish, Nobel-prize winning physicist once said “prediction is very difficult, especially if it’s about the future”. However, there is something about human nature that compels us to make predictions, and there is something else about our nature that seems to delight when those predictions turn out to be incorrect.
The IT industry is replete with predictions and forecasts – remember the paperless office, the predictions in the 1950s that within 10 years we would be commuting by flying saucers from our houses in the country to our offices in the city. Bill Gates is often singled out for his famous quote “we need banking but we don’t need banks anymore”. He said this in 1997 and despite tremendous transformation, banks are still a vital driver in financial services.
However, bankers shouldn’t be complacent. Amara’s law – which states, “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run” – seems to occur a lot in the IT industry. Gartner, the advisory firm that uses this to great effect in their hype cycle, have recently predicted that 80% of banks will go out of business, become commoditized or become irrelevant by 2030.
Gartner believes that digitization is a key driver, and that most financial services CEOs do not view digital as a firm transforming mechanism but rather a mere channel and automation play. Faced with these bleak projections what can banks do?
Firstly, they should recognize that they provide important products and services to customers but they must not become complacent. Today’s customers are offered more choice. There are ever increasing examples of traditionally bank-only products being offered by non-banking companies which include – payment firms, P2P lenders, robo advisors, investment managers, digital lenders, marketplace lenders, personal financers – the list is nearly endless.
Little wonder then that so many banks have jumped on the fintech bandwagon – investing in them, acquiring them and launching incubators – looking for that silver bullet. The IT industry is constantly proclaiming to have created the silver bullet or invented a better mouse trap. The latest one is referred to as platformification.
Platformification, the technology, is based on platformification, the business model. While a vast oversimplification, we can consider this business model as one based on an ecosystem where many different companies come together in order to solve a business problem for a customer. These companies could be traditional partners, correspondent banks, fintechs and even competitor banks. It is likely that the companies in this ecosystem will change rapidly, with new players entering the market and others leaving the market.
While we can see strong examples of platformification in other industries, such as Amazon and Apple, early examples also exist in financial services, including neo banks and marketplace lenders, for instance. Regulators are also pushing this agenda by driving open banking.
Platformification, the business model is still evolving but banks need to move fast with platformification, the technology, in order to capitalize on the opportunities and perhaps more importantly to deal with the challenges and threats:
- Fast, seamless integration – as the ecosystem changes quickly, it will become important for banks to be able to connect with new partners quickly, easily and securely.
- Business flow management – the technology needs to be able to support true business flows – controlling what data goes where and what happens to it. While flexible and adaptable technology is needed to support this, it must not be forgotten that these business flows exist to serve customers and hence the business flow must reflect their needs.
- Rapid development capabilities – fast changing business requirements require rapid development capabilities, in hours and not months. The platform must be able to support this and it must be resilient enough to handle the resulting complexity – for example, rolling out new capabilities as pilot projects, handling multi-segment testing scenarios etc.
- Data sharing and protection – while today’s customers do seem to be more willing to share personal details, data privacy, fraud and data theft are bringing the microscope to bear on data security. As ecosystems become more and more digital, so do those challenges.
- Augmented automation – automation will be vital for banks to streamline their operations, maximizing efficiencies and minimizing costs. However, banks need to move beyond simple automation, adding intelligence to their processes. While AI will provide part of the answer here, merely replacing human intelligence with artificial intelligence won’t be sufficient. A combination of both is required – hence the automation needs to be augmented to be more intelligent.
Banks have expected to be solid, dependable and reliable – after all, it is where we put our money and we expect it to be secure. This could imply that banks are expected to be dull and boring, but if you look at the history of banking, you’ll see that banks have been innovative; they have been early adopters of technology.
And from a business model perspective, they have found interesting ways to solve difficult problems. The challenge facing banks today is that new technology is removing some of the main barriers to entry, and this is leading customers to question whether they really need banks. Clearly, people need banking but do they need banks?
Yes, they do, but only if banks do what they have been good at in the past – looking at what their customers want and delivering it to them with the most appropriate balance of convenience and security. Platformification – the business model, and platformification – the technology can help banks deliver exactly that.