Digital Transformation of

Banking Services

Embedded Banking:
Friction isn’t valuable in new world
Advice, when and where you need it
 Introduction

 Many of the approximately 700 million users of WeChat Pay in China,

don’t have a debit card to use regularly—their primary value store or
payment vehicle is either cash or their phone.

 Increasingly in urban China it is only their phone, and even if people

do have a bank account, they’re not using it other than for transfers,
top-ups and withdrawing cash.

 The primary challenge for banks is that once money goes into the
WeChat or Alipay ecosystem, it rarely leaves—and banks have zero
visibility of it once that happens.
 By 2030, the bank account itself is likely to be just a value store
on the phone for the vast majority of consumers who have come
into the banking system in the 21st century.

 In 2000, financial inclusion in Bangladesh was just 14 percent;

today almost 40 percent of the adult population is on bKash and
doing their day to-day payments via mobile1, and increasingly
people are simply getting paid to their mobile phone.

 When the central bank put restrictions on mobile financial service

(MFS) providers, then people in Bangladesh just got more SIM
cards so they could continue to store cash on their phones.
 Consider the way Uber, Alibaba and Amazon are innovating
around banking.

 Uber launched its own debit card, not to become a bank, but
so that they could onboard drivers faster to grow their
business

 By embedding banking in the driver onboarding process they

circumvented the friction of having to have an unbanked
driver visit a bank branch to get a piece of plastic.
 Today, Uber can pay their drivers up to three times per day using their
new “instant pay” capability, which is only possible through the Uber
driver debit card

 Alibaba and Amazon have increasingly started to offer business

banking services to entrepreneurs on their platform. Whether that is a
store front through their platform, small business loans, foreign
exchange, capital management, taxation and other operational
elements,

 Increasingly these platforms will enable business users to do more of

their banking and finance integrated into their platforms.
 They want businesses running all of their operations on their
platform and not needing to go to a bank branch for functions they
can provide.

 The 21st century bank account is not a physical artifact that

consumers or small businesses will need to get from a branch, it’s
just a piece of utility that will be engineered into their world through
technology.

 The physical card, books and statements of the 19th century

banking system will be relics of a time long past when it comes to
banking for our children and their children.
 The developing world will get there first, because these
newly “banked” consumers don’t have legacy behaviour built
around traditional banking and commerce.

 Behaviour is switching to mobile and digital payments globally,

and will be almost exclusively digital by 2030.
 The nature of the bank account will have to change significantly in
this environment to stay relevant.

 In the 19th and 20th centuries the value of a bank account was
primarily that

 it “kept your money safe”, that you could save money securely

 you could pay for stuff based on the authority of the bank
when you wrote a cheque people would trust it as a
mechanism of value exchange because a bank was behind it.
 The value in a 21st century bank account will be in how it provides
utility in context, how it adapts to your financial life and your
behaviour.

 Let’s examine the principles behind a 21st century embedded, smart

bank account and how it will change the way you live with your
money.
Friction isn’t valuable in the new world

Look at the messages:

Get Moven with Smart Banking and take control of your finances. Whether you’re
buying groceries, dining out, or saving for something on your wish-list, Moven
automatically analyzes your spending and gives you instant receipts and insights so
you can spend, save & live smarter.
— Moven

Life doesn’t have boundaries, so why should your banking? We’re making banking
easier, intuitive and there whenever you need it, all on your mobile.
—Atom Bank
 For incumbent banks, the message consistently promoted when
you visit a bank is essentially
“our bank has the best product”.

 At the core of the difference between challenger/FinTech banks

and incumbents is their mission:

 challenger/FinTechs want to radically simplify the banking

experience

 incumbents seem much more intent on wanting you to choose

their bank products over their competitors.
 Friction is the antithesis of the design premise for FinTech banks.
Every FinTech is trying to take friction out of the experience,
making it faster, easier and sexier.

 Incumbents are admittedly iterating on the friction, but have to butt

up against compliance, legal and risk departments constantly trying
to retain as much of the friction as possible. It takes a really strong
CEO and executive team to reform that systemic thinking
 New experiences don’t start in the branch

 When banks launched the first automated teller machines in the

1960s and 70s there were an attempt at just that, automating the
function of the in-branch teller that could help you with a cash
withdrawal.

 When the internet came along, unlike most retail businesses,

banking didn’t start with building e-commerce applications; it started
with transactional functions straight out of the branch.

 When banks did introduce e-commerce, they simply took

application forms from the branch and put them online.
 When banks built early versions of “internet banking” they just
tried to do simple transactions—stuff they would normally ask
the tellers at the branch to do.

 When Wells Fargo launched “on-line” banking in 1995, all

you could do was get an account balance. After that banks
just put virtual bank statements online.

 Later banks added transfers between accounts.

 Every step of the way banks added more and more of the stuff a
teller did and simply put it online. In fact, for most banks you had
to visit the branch even to “register” for online banking.
 When mobile came along, banks simply took what they had built
for internet banking and tried to shrink it down to fit on a smaller
screen.
There’s virtually no innovative thinking here.

 From a design perspective, banks did have to learn new tools

like interaction design and usability testing, but they weren’t
designing new systems on top of mobile or the web, they were
iterating on the old.

 Whether web or mobile, the thinking was still very much based
on the branch and this is perhaps the hardest thing to displace
from a design perspective.
There are a number of reasons for this.

 Firstly, legacy systems have evolved to encode branch operations

on mainframe systems.
 When you have to adapt legacy systems to the new digital layer, it is
easier to just enable a digital version of the branch product and
process rather than start from scratch with something new.

 Secondly, regulation inhibits innovation, often by enforcing branch-

based product structures and processes.
 Indeed, the greatest challenge many face around mobile today is
getting permission from the regulator to allow someone to sign up for
a new product or service without a signature.
 Lastly, legacy customer behaviour, and the ability to change that
behaviour, such as the use of cheques in the United States, is often
just as difcult.

 It is why markets like Africa and China are getting much faster rates
of mobile payments adoption than the US—they generally don’t
have to move people off legacy behaviour.
 Advice, when and where you need it

 For a long time, bankers believe that advice from a human would
continue to differentiate the branch experience from technologies
like web and mobile, especially in the areas of investment or what
bankers like to call “complex products”.

 That core belief is being tested today as more and more robo-
advisor and chat-bot style advisory capabilities become embedded
in day-to-day banking experiences.

 The reality is, however, the advice you’re likely to get from your
bank through technologies like voice and AI in the future will be
very different from the advice you get today.
 Today if you visit a bank to get advice on buying a home, it inevitably
is really about positioning which mortgage is right for you.

 If you visit a bank to get investing advice or talk about retirement

planning, the inevitable advice is which asset class or investment
product you should be investing in.

 If you go into a bank to get advice on just everyday banking, you’ll

walk out with a bank account, not advice on using your money more
effectively.
 The advice we get today is rarely just “advice”; it’s typically product
selling or position couched as advice

 This sort of advice is not very sticky—it doesn’t engender long-term

loyalty, it is more about short-term selling for the bank.

 Questions to ponder:

 whether or not that advice is better off coming from a human in a bank

versus an AI ?

 Will humans remain competitive in this space for much longer

considering information asymmetry and quickness in decision making?
Information asymmetry and AI

 Advisors in investing, private banking, mortgage-lending and

other disciplines in financial services have traditionally justified
themselves by asserting that you need an advisor because they
know more about the subject than you do.

 Let’s use an emerging AI technology as an example of information

asymmetry in automobiles.
Example: Self-driven cars

Emerging technology in self-driving cars includes sensors such as cameras, lidar (light
detection and ranging), point mapping, sonar, radar, lasers and so forth.

A human eye can see about 250 feet (76 metres) at night assisted by headlights, but
a robocar’s radar can see about 820 feet (250 metres) today, and across 360 degrees.

Machines can react to a potential obstacle on a dry road in about 0.5 seconds,
compared with the typical human who takes on average 1.6 seconds.

Some autonomous vehicles today are capturing around 1,000 times more
information than your visual cortexis capable of processing.

All this suggests that in 10–20 years, when this technology is truly mature, no human
driver will be as safe as an AI-driven automobile.

Why? Information asymmetry.

 A self-driving car can process more data much faster than a human
brain. Once mature, no human will match an autonomous vehicle for
safety alone because of this ability.

 Is it really that hard to imagine an algorithm in banking that might be

able to recommend a mortgage product or an investment strategy
better, faster and based on more data than a human advisor?
AIs that are better at budgeting than your accountant

 However, the advice our AI smart assistant won’t be like the

advice we get from a banker today.

 The real benefit of a smart bank account of the future is that once
we’ve established a basic set of parameters, we’ll get
personalized advice that will be like having a money coach in
your back pocket full-time.

 This won’t be product advice like “buy this mortgage versus that
mortgage”

 It will be simple stuff like “Hey, Siri, can I afford to go out for
dinner tonight?
 The reason our smart bank account, or AI smart assistant that is linked to
our smart bank account, will be great at advice is that it will stop us from
making stupid decisions that today our bank allows us to do.

 Think of how banks promote debit cards and credit cards today.
Cash back, airline miles, discounts on shopping are all used as
methods of stimulating card usage in banking

 They inevitably lead to increases in spending (by design), which

lead to debt.

 But imagine an AI with smart banking that you’ve tasked with

helping curb your spending.