The 90s called, they want their banks back
When people say China is painted with QR Codes, it is as true as it can be. It is a land where virtually everyone pays using either Alipay or WeChat Pay. China is the fintech laboratory of the world where answers to the big questions in fintech are constantly being sought.
We’re nearly there with UPI. My colleague Anna wrote a brilliant piece on the QR-driven credit revolution afoot in India - you can read it here.
Nearly five donzen UPI apps, and virtually everyone is using either PhonePe or Gpay. Of course, this makes lawmakers jittery, but it’s obvious why these two players have a duopoly - They’re not just payment apps, you can pay electricity bills, pay insurance premiums, get a BNPL loan too.
Much like Alipay, their utility goes beyond payments. The playbook for Alipay is to create an ecosystem of interconnected services that is so convenient for its users that it continually attracts customers and third-party providers -
Source: CB Insights
Ant Financial’s flywheel is really beginning to spin — eight out of every ten Ant Financial customers use at least three of its five primary services and four out of every ten customers use all five.
In a hyper-digitized world, we’re constantly seeking low friction at every corner and immediacy. In that framework of immediacy, banking cannot only be about integrating APIs or several layers of technology. It has continually proven to be about creative solutions attached to a purpose. It has been about utility.
The first piece of banking technology was born in 1955 - ERMA. The electronic recording machine and accounting system, banking’s first automated cheque processing system, was designed out of the American post-war-booming economy's demand for more from their banks.
This revolutionary system digitized checking for the Bank of America by creating a computer-readable font. A special scanner read account numbers preprinted on checks in magnetic ink. It reduced check processing time by 80%. It made banking faster.
Then came ATM machines in the 1980s, which made banking self-serviceable.
With the internet revolution in the 90s (up until now) internet banking, mobile apps and the fintech scaffolding we have now have made banks available all day, every day, and everywhere.
To think about it, the financial services industry has been a pioneer in digital transformation - the credit card was introduced in the 1960s, and digital trading at Nasdaq was already possible in the 1970s. But customers expect a Netflix-like experience from an industry with strong risk awareness and where mistakes tend to cost a lot of money. So how do we keep up when customer expectations shift every few years?
What was good 10 years ago is already irrelevant.
When we think about the next generation of technology that will gain traction - voice-based AI, personal smart assistants or even augmented reality smart glasses that could pull all the data you need to make a decision in your field of view - we need to think about how technology can the overarching mechanism to embed banking into everyday life.
That means designing the bank of the future will need a re-think from the ground up.
Output v outcome
Banks and financial institutions, largely, are neither entirely platforms or ecosystems. They’re linear value chains. Think about the automotive industry - every part of the car is manufactured by different suppliers but packaged into a standard product. The consumer knows the end product - the car - the output of the process.
Even with banking, customers are oblivious to the complexity of fund management or the regulatory compliance required to “manufacture” loans, mortgages, investments etc - they consume the final product or output.
In order to truly be the invisible layer, banks need to focus on the outcome and values and understand how these fit into their customers’ lives.
First principles thinking
But the human brain treats money as a finite resource and therefore makes dealing with money a rather complex problem.
Some of the most successful entrepreneurs, investors, scientists and philosophers in the world often credit ‘first principles’ thinking as having been critical to their success.
They’ve used it to solve complex problems.
At its core, think about it as a deconstruction to get to the base layer - the atomic unit. Boil it down to the most fundamental truth, and ask questions from there on up.
The human brain treats money as a finite resource - that’s a fundamental truth. First principle thinking would require you to build on up from there with some questions -
Why do I believe these "truths" to be true? How do I know they are true?
Is there real evidence to support these beliefs?
Are my emotions clouding my judgment and reasoning?
What alternative beliefs or viewpoints might exist
The success of AliPay, and the broader context of what makes China the fintech laboratory of the world is an exercise in first principles thinking. The QR code reduced the need for credit/debit cards in China - it was not a payment product, it was enabling you the utility of a payment product.
The typical Chinese consumer’s appetite for convenience (much like everyone else) appears insatiable - so what was good a few years ago (paying via smartphones, for e.g.) is already irrelevant. Now, facial recognition technology allows customers to pay in stores with just their faces. Of course, facial recognition has been gaining ubiquity in China thanks to regulation, but it goes to show that consumers’ needs are constantly changing to demand less friction and more immediate immediacy.
The bottom line for banks
There’s no doubt that the bank v fintech debate will persist - they’re competitors and collaborators. In the "there's an app for that"age (Apple’s slogan that’s so catchy that it's endlessly parroted), everyone is ultimately competing for the customers’ attention.
So, the What and How of surviving the next generation for banks is about solving a problem (the WHAT) and providing a superior experience ( the HOW).
Think about it, out of the 6,000 odd thoughts an average person has in a day, banking may or may not figure in them. But it surfaces at pivotal moments in our lives: Shopping, getting a job, moving home, retirement.
So how can banking pop up in these pivotal moments without sticking out like a sore thumb?
From being hidden to being completely invisible, the bank will be buried within a super app or a face scanner, even.
To thrive invisibly, banks can accept the financial services market the way it stands and continue on their path; they can extend their reach via partnerships with fintechs and/or big tech to stay relevant, or they can compete head-to-head with super apps and launch their own ecosystems.
But innovation for the sake of innovation makes no business sense. The question is no longer whether to invest in design research, but how to best leverage it. The business strategy should go beyond ‘make things look pretty’ to utility.
Imagine the face recognition technology equivalent in India, it could be a thumb scanner instead. Convenient, right? The same could have more utility - thumb scanners in areas of low internet connectivity to make payments and access credit.
Smart banks will have AI advisors that are more intuitive and prompt than human beings; By 2030 Robo advisors will manage nearly $100 Trillion AUM, which will be half of all AUM globally.
The possibilities are endless.
In 2022, we’re probably only 10% into banking’s metamorphosis. We can only guess where we go from here, and the invisible bank is one possibility. There could be several other scenarios.
Super apps like Alipay are successful because they thrive on a seamless flow of information between entities. Banks that survive will rethink traditional models. APIs, cloud-based services, Artificial Intelligence and hyper-personalisation at scale are the foundation layer. To really thrive, technology cannot be used in peripheral systems or as the only value add -there needs to be a shift in the core architecture and being acutely perceptive of what your customers want.
See you next week.
Cheers,
Rajat