The future has arrived! Every major consulting firm, futurist, influencer and market research firm worth their salt changed their benchmark year to 2020 after Y2K came and went. It’s now 2020 and it’s going to be a big year!
Based on the last two decades of projections, we’ll have colonies on the moon, flights to Jupiter, robot butlers serving around the house, and nanobots fixing our broken bones. I, for one, can’t wait, especially the broken bone repair (thanks to a holiday mishap this is being typed with only 8 operative digits). Users of financial services should expect checkbooks (and even physical cash) are only found in museums, we all use digital wallets and cryptocurrencies, our financial advisor was replaced by an AI bot and rather than visiting the branch, we slip on a pair of VR goggles. Our businesses will run on blockchain, robots and robotic process automation will eliminate up to 45% of jobs, our infrastructure will securely migrate to the cloud, and commerce will become nearly frictionless thanks to the Internet of Things and smart apps. Total digitization has arrived. 2020 is amazing!
Before you consider donating your checkbook to the local museum, let’s have a reality check. Over the holidays, I visited a branch to verify a digital transaction (they assured my three-year-old that thought we were going to Frozen 2 that it was for our convenience). Imagine my confusion when a human asked me to present a physical form of identification. What’s more, I had to pay the plow guy by check later that day and call two lawyers, my accountant and my financial advisor to figure out a year-end tax issue; at least the babysitter took Venmo. I scrambled to follow up on unpaid invoices (you know who you are) and resubmitted W9’s with inked rather than digital signatures to make the end of their fiscal year.
Don’t be fooled by the fact that total disruption to life and business is not quite here yet.
This is the calm before the storm. The hype of displacement seems like over-hype. It is easy to be lulled back into our comfort zones. That zone, after all, is, well, comfortable. While we sit back and applaud ourselves for not panicking, we’re about to come face-to-face with the unfulfilled prophecies and misguided timelines about the transformation. The comfort zone is about to be the danger zone.
The coming decade will be the most transformative decade in the history of financial services — more transformative than the move from the gold standard or the creation of regulatory bodies. It will change the lives of consumers more than the advent of the HELOC, ATM and digital banking. It will have a greater global scope than 2008. Challenger banks, blockchain and AI combined are nothing more than the first drops of rain.
2020 is the year it begins to storm.
We would all be wise to heed the advice of Bill Gates:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”
This year kicks off the decade of the great flood. Why now? The entire ecosystem has been morphing, shifting, and consolidating. Underlying market drivers have quietly transformed the landscape like the subtle erosion of water on rock. It often takes a cataclysmic event like a flood before the impacts of these micro shifts become readily visible. By then, it’s usually too late. Like a flood, the precise when and where are impossible to predict but the fact the rain is falling and the forecast carries buckets more means it is inevitable.
The New Landscape, Exposed
Throw away your outdated roadmap. Here’s how the topography changed:
1. Shifted Customer Expectations
The shift in customer expectations is extreme. It is more than than the pretty user interface, mobile-first, and the streamlined user experience built by fintech challengers. These are important elements to be sure, but there is something much deeper happening. It started with the iPhone. Yes, the iPhone has a beautiful design and a perpetually upgraded interface. The real sea change, however, lies in the way the smartphone conditioned customers away from needing a single source for solutions. Today’s customers can pick and choose from various point providers to create a smartphone (and experience) as unique as their individual fingerprint.
Customers can easily choose and discard applications to build a custom toolset for their unique needs. I can get my mortgage from an online provider, maintain a bank account at my local branch for quick access to money, have multiple high-yield or other feature optimized online accounts, and hold several credit and debit cards with different benefits. Our investments are in a variety of vehicles including robo-advisors, traditional ETFs / funds, and 529 plans. The set of financial services I use are as unique to me as my DNA; they are tailored to my needs at any moment. The range of products we use extend far beyond the five options for checking, 2 options for savings on the laminated sheet the big branch banker slid across his desk when I opened my account.
By decentralization, I do not mean the idea that cryptocurrency will usurp Central Banks. Rather, we are now witnessing the decentralization of each customer’s financial identity. As our desire to tailor our customer experience proliferated the number of products we use, so have the number of companies that serve us. Instead of a single bank serving as a customer’s financial universe, dozens of point solutions, each delivering something tailored to a specific need, are coming from a variety of sources. We’ve become product- rather than provider-first. Customers pick and choose the products and solutions that suit them, regardless of the companies that create them.
Subsequently, a broad slate of new providers has emerged. As customers increasingly move away from the central financial hub model, they are establishing a new kind of relationship with point providers. These more intimate relationships can be found at the intersection of provider transparency and the customer’s need for convenience. In many ways, customers have come to rely on their new ability to cherry-pick providers, and it’s not unusual for customers to have as many providers as products they use.
The iPhone changed the customer psyche. Digitization changed the experience. Ron Shevlin writes frequently about “platformication” (not to be confused with Californication), or banking as a platform. The variety of digital banking formats offers innate portability like never before. Access through mobile, tablet, or desktop transforms the browser — or the device itself — into a highly-capable integration platform. APIs enable a much deeper level of integrated experiences.
The era of lengthy and expensive integration projects is coming to a close. With a few lines of code, companies like CurrencyCloud (disclosure: I’m a shareholder), Paypal, Stripe or Transferwise can extend the functionality of a platform without owning or developing the existing platform themselves. I use all these services and tap Xero, an online accounting tool, as my single point of entry to manage and access each of them.
The customer, not the provider, is determining what functionality is integrated. Remember the all-powerful cellular companies that determined what could be loaded on their handsets or into their NOCs? The cellular companies built walled gardens and dug moats, only allowing those “partners” that paid a hefty toll to be available and then charging customers for good measure. A great profit-maximizing strategy to be sure. That is until the walls came tumbling down.
Banks and Core Service providers should look to the West and take heed of what’s happening with Open Banking in Europe. It might not be legislated into existence here, but it is coming. Consumers are already making it work by using the browser as the point of integration. Kludge? Yes. Require more effort? Yes. Just the first iteration? Yes. The next volley is being delivered by incumbents, startups and adjacent players willing to open up and provide customers an alternative.
Those walls are going to come down.
4. Embedded Experiences
Bill Gates also said, “We need banking but we don't need banks anymore.” For a tech guru, he sure is enlightened about the future of fintech. Those in the banking world are quick to forget that our customers aren’t thinking about us — the bank. We are simply a means to an end.
The small business owner that accepts an offer from Square Capital isn’t thinking, “I wonder if Square will give me a loan secured against my payment stream.” That customer’s time is better spent selling and growing their business. Square answers the pressing questions on every small business owner’s mind: how do I get more inventory? How do I buy more ads? How do I open another store? Even better, that answer comes in the form of a one-click solution for SMBs to accept an offer for working capital.
On the consumer side of the equation, the payments experience no longer exists — or at least it shouldn’t. The transaction and the experience are no longer separate. Rideshare services are a perfect illustration: the customer experience rides shotgun while the payment itself takes a back seat. I don’t need to fuss with a physical or digital wallet. I just know I can get from Point A to Point B with the few taps of a finger.
Customers are no longer burdened with figuring out how to pay. The banking service is below the surface. Matt Harris wrote a great blogpost on Fintech as the Fourth Platform in Forbes. The debate rages on about whether fintech is truly a platform like the Internet (connectivity), Cloud (intelligence) and Mobile (ubiquity). Platform or not, one indisputable fact remains: fintech has become a utility. Financial technology is essential but just as hidden as the electrical lines and pipes under your house.
Battening Down the Hatches
It’s rarely advisable to bring a raincoat to a hurricane. The tide is changing and those left unprepared will soon have to swallow some unpleasant truths (and possibly, water).
How do you prepare?
Shift to Customer-Centricity
The winds have already shifted here. It is time to rethink your business through the lens of what your customers’ needs rather than the services you provide. In reality, no one wakes up one day and says, “I need a mortgage.” The need for a mortgage is just one point on a much larger story arc. It’s the next falling domino after one gets a new job in a new city, or has a baby on the way, or finds themselves amid an empty nest.
Businesses have their own narratives, too. The need for a loan doesn’t originate out of thin air. The larger storyline is that a small business owner is growing and needs new equipment or to expand to another location. More importantly, the distinction between a term loan and an installment loan is not top of mind for that small business owner who is simply looking to fund growth — until the difference becomes painfully obvious down the road.
Fintech companies are ahead of the storm because they are solving both problems the customer has: they provide the ends (funding) rather than the means (complicated products) in a convenient, expedient way. Banks must move from a product and service orientation toward a customer-centric perspective that efficiently connects customers with the solutions they need most.
Not too long ago, I was served an ad for a bamboo infinity pillow. My immediate response? “Oooooh, I really want that. I didn't even know this was a thing that existed!” It’s an elegant solution for someone who travels frequently and aims to maximize redeye on flights. This personalized ad was a welcome interruption to the article I was perusing.
Personalization is a powerful tool.
Relationship-driven businesses (hint: banking) often miss the difference between personalized and personable. Personalization goes hand-in-hand with putting your customers’ needs first. Amazon has dominated this arena in the ecommerce world, consistently delivering product recommendations based on my purchase and browsing history. Companies that excel at personalization may even be able to address wants and needs I haven’t even surfaced myself. Others are missing the boat and simply serving up a person-able offering. Bad news on that front: one-size-fits-all actually fits no one.
When we talk to banks, they often say their greatest strength is their relationships with customers. On the one hand, human touch can be very powerful. On the other hand, it’s no match for delivering highly tailored products and services that a customer needs in a frictionless, convenient manner. The technology available today — algorithms, artificial intelligence, and real-time delivery — can supplement a bank’s personability with true personalization.
My visit to the branch last week illustrated the gap between personable and personalized nearly perfectly. Was the banker personable? Yes. Did the personable banker offer me something I needed? No. It marked the fifteenth time I had to turn down an unnecessary line of credit. I did, however, enjoy the free coffee and the lollipop was token compensation for missing Frozen 2.
Learn to Sail
We often hear banks say they are fast followers. They don't want to be the first to take a risk only to have things not pan out. My partner, JP, is fond of saying that it only works if you are really fast. Speed, much like your new New Year's resolution, must be earned through hard work. If an organization expects to be agile in adapting to quickly changing market conditions, it must develop the organizational muscle of moving quickly. Want to know the worst time to learn how to sail? When you’re on a boat in the middle of a gale.
Banks are the great resistors, tempering sudden moves with the strategy that protected safety and soundness through upcycles and downcycles: don’t depart too dramatically from what worked in the past and approach new things methodically. Building new products or implementing innovative new solutions can be a years-long process. What ultimately succeeds is rarely the original design on the drawing board. Here’s the catch — not getting started now just pushes out the timeline for fixing product gaps and improving the customer experience. Both will be critical to surviving the tides of innovation and digitalization that are shaping the new banking landscape.
A sea change is happening now, though the new direction proves difficult to forecast. Meteorologists use buoys to detect significant wave activity and to track changes in swells, wind speed, and more. This data allows them to make real-time forecasts about what is to come, based on data from existing models and predictions. Banks are in the same boat. Armed with market models and predictions, banks must make educated guesses about what will happen next. A bias toward action may be the differentiator between those that stay afloat and those that wash up on shore before the end of the next decade.
Banks don't need to go all-in on a single idea. They need to place a number of small bets that may or may not pan out, but that will be sure to give them real insights into how the markets are changing. These small bets look like partnerships, new products, and evolved messaging. In short, banks must extend beyond existing lines of business (and comfort zones) into new areas that can drive novel insights, allow them to find their bearings, and find the new true north, based on where the market is going.
Rarely does a flood cause devastating damage in the place city planners are looking. That’s where sandbags are stacked, civilians evacuated and conditions carefully monitored. All the prognostications made for 2020? Start stacking sandbags bags against those known threats but recognize that is not enough to weather the coming storm.
Did You Feel a Drop?
Storms are an integral part of keeping an ecosystem vibrant. Floods wash out deadwood, reshape landscapes and deposit fresh soil. For the unprepared, the storm is terrifying and potentially deadly. It is not the strong that survive but the prepared. Preparation is equal parts planning and knowing not everything can be planned for.
Banks better keep an eye on conditions this year, lest they find themselves in the eye of the storm — without the right vessel, without an effective navigation system, and without a reliable team to keep the vessel afloat. Don’t get stuck in the coming storm with only an umbrella. If you haven’t already, ask yourself this important question: When the water subsides, where will your bank be?