Banking 5.

0: How Fintech Will Change

Traditional Banks in the 'New Normal'
Post Pandemic Bernardo Nicoletti
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PALGRAVE STUDIES IN
FINANCIAL SERVICES TECHNOLOGY

Banking 5.0
How Fintech Will Change
Traditional Banks
in the ‘New Normal’
Post Pandemic
Bernardo Nicoletti
Palgrave Studies in Financial Services Technology

Series Editor
Bernardo Nicoletti, Rome, Roma, Italy
The Palgrave Studies in Financial Services Technology series features orig-
inal research from leading and emerging scholars on contemporary issues
and developments in financial services technology. Falling into 4 broad
categories: channels, payments, credit, and governance; topics covered
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data, risk, compliance, and business intelligence to support consumer and
commercial financial services. Covering all topics within the life cycle of
financial services, from channels to risk management, from security to
advanced applications, from information systems to automation, the series
also covers the full range of sectors: retail banking, private banking, corpo-
rate banking, custody and brokerage, wholesale banking, and insurance
companies. Titles within the series will be of value to both academics and
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 Bernardo Nicoletti

Banking 5.0
How Fintech Will Change Traditional Banks
in the ‘New Normal’ Post Pandemic
Bernardo Nicoletti
Temple University
Rome, Italy

ISSN 2662-5083 ISSN 2662-5091 (electronic)

Palgrave Studies in Financial Services Technology
ISBN 978-3-030-75870-7 ISBN 978-3-030-75871-4 (eBook)
https://doi.org/10.1007/978-3-030-75871-4

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 Foreword

I have known Bernardo for quite a long time now—we have worked
together in many countries, across many professional roles. Some years
ago, he wrote another inspiring book, The Future of Fintech. I consider
this book to be an outstanding sequel. Bernardo now tackles a new,
yet connected, topic—how to push and support digital transformation
in banking.
It was about time for such a book. The beginning of the so-called
“Fourth Industrial Revolution” goes back to 2012. In 2021, however,
many financial institutions continue to operate almost unchanged and
seemingly unaware of what is happening around them. A few of them
launched new companies and business models. Others failed, some-
times dramatically. The digital world has disrupted entire sectors, such
as publishing, media recording, commerce, and manufacturing, among
others. The financial services sector is not being spared.
“Digital transformation” has been on the agenda of many executives
and board rooms for quite a long time. But beyond the buzzword, it
is often not clear what “digital transformation” means. Financial services
have often interpreted “digital transformation” only as a means to provide
access to some products via digital channels, online or mobile, or, alter-
natively, as a pure cost reduction initiative. Digital transformation is much
more than that: it is an entire change in the company’s business model.
It involves putting the customer at the center and using digital platforms
to build a new business and operating model around that, using both

v
vi FOREWORD

own or external products and services. Such a transformation involves all

dimensions such as products, processes, people, partners, and platforms.
In the last few years, we have heard statements such as: “banking
is necessary, but banks are not.” This approach has spurred a number
of studies to understand what digital transformation means for banks.
Surprisingly, some financial institutions have yet to embrace the change.
Bernardo advocates putting the customer and their needs at the center
and building on that using three steps: intuition, demonstration, and
experiment. He also introduces certain exciting ideas about how “bank-
ing” should change, emphasizing the evolution from offering “products”
to “services,” and the fundamental importance of “platforms.” The text
is also full of insightful cases in which digital transformation has been
experimented with and implemented.
The book also stresses another critical aspect: the increasing importance
for financial institutions of data and data management. The crisis caused
by the pandemic has underscored this point by not only giving it a new
sense of urgency, but also by showing that banking can operate in a much
more digital and agile way than we thought.
To date, bankers must use all available tools to grow, protect them-
selves, and better plan for the future. The most effective way to do this is
through the strategic use of data, artificial intelligence, and robotic process
applications in symbiosis with our talents. These solutions are essential in
order to understand the customer and protect the institutions from expo-
sure, as well as mitigate the associated risks. Unfortunately, in some cases,
the probability of fraudulent transactions, dictated by despair, increases as
well.
At the same time, bankers must do responsible banking, taking into
account the ESG—Environment, Society, and Governance.
Analysis tools will play an essential role in this recovery, providing
bankers with all the information they need to limit their exposure,
promote new offers, and enrich their services.
It is fascinating to go through the various chapters of this book because
the financial institutions that have started implementing the digital trans-
formation state that their work is only the beginning of what is to come.
There is a need for a continuous digital transformation.
 FOREWORD vii

A financial institution’s question is not “if” to do it, it is “when” to do

it. The time is now, and the success will be with the hard work pioneers.

Madrid, Spain Ramon Billordo

March 2021 Senior Global Banking Executive, Financial
Services, Digital Transformation, Global
Fintech
 Contents

1 Introduction 1
2 Industry 5.0 and Banking 5.0 13
Introduction 13
Banking 5.0 15
First Industrial Revolution: Banking 1.0 17
Second Industrial Revolution: Banking 2.0 19
Third Industrial Revolution: Banking 3.0 20
Fourth Industrial Revolution: Banking 4.0 22
Fifth Industrial Revolution: Banking 5.0 25
Business Model 27
Business Model Architecture 30
Business Models Philosophy 33
Value Propositions 36
Customer Proximity 38
Customer Partitions 41
Place or Accesses 42
Platforms and Resources 43
Essential Processes and Activities 44
Partnerships and Collaboration 45
Pricing and Revenues 47
Payments for Costs and Investments 48
Protection 49
Business Model and Banking 5.0 49

ix
x CONTENTS

Benefits and Challenges of Business Model 51

Conclusions 53
3 Business Model Philosophy in Banking 5.0 55
Introduction 55
Digital Transformation 57
Digital Transformation Architecture 59
Digital Transformation in Banking 5.0 63
Benefits and Challenges of the Digital Transformations 65
Innovation Roadmaps 68
Roadmap for a Digital Transformation 68
Critical Success Factors 73
Critical Success Factors for Industry 5.0 74
Collaboration 76
Confidence 77
Creativity 78
Competence 78
Content 79
Customization 79
Cognition 80
Conservation 80
Contribution 81
Significant Challenges 82
Innovation Acceptance Model 83
Conclusions 86
4 Proposition of Value and Fintech Organizations
in Banking 5.0 91
Introduction 91
Banking 5.0 and Value Network 94
Value Network Architecture 95
Value Network in Banking 5.0 97
Benefits and Challenges in Value Network 98
New Banking Business Models 100
Challenger Banks 101
Neobanks 102
Digital Payment Instruments 105
Fintech Organizations 107
Fintech Architecture 111
Fintech and Banking 5.0 115
 CONTENTS xi

Evolution of Fintech Organizations 116

Collaboration Between Fintech Organizations
and Traditional Financial Institutions 119
Benefits and Challenges of Fintech 125
New Products to Add Value 127
New Banking Products for Cost Leadership 127
New Banking Products for Differentiation 128
Open Banking 129
Instant Payments 130
Digital Wallet or e-Wallet 131
Request to Pay 133
P2P Banking 134
Other Services 134
Sustainability 139
Sustainability Architecture 140
Sustainability in Banking 5.0 143
Benefits and Challenges of Sustainability 149
Conclusions 150
5 Artificial Intelligence in Support of Customer
Proximity in Banking 5.0 153
Introduction 153
Value Proposition and Customer Proximity 156
Customer Proximity Architecture 159
Customer Proximity in Banking 5.0 159
Benefits and Challenges of Customer Proximity 160
Customer Relationships Management 161
Architecture of Customer Relationship Management 163
Customer Relationship Management in Banking 5.0 165
Customer Delight Management 166
Customer Contact Management 167
Customer Profitability Management 168
Benefits and Challenges of Customer Relationship
Management 170
Conclusions 171
6 Customer Partition in Banking 5.0 173
Introduction 173
Customer Partition 174
Millennials and Generation Z 175
xii CONTENTS

Segmentation with AI 176

Robo Advisors 177
Robo-Advisor Architecture 178
Robo-Advisors in Banking 5.0 181
Benefits and Challenges of Robo-Advisors 185
Conclusions 187
7 Place or Accesses in Banking 5.0 189
Introduction 189
Banking 5.0 and Distribution 190
Distribution Models Architecture 194
Distribution Models in Banking 5.0 196
Distribution Models Challenges and Benefits 203
Customer Proximity Center 205
Customer Proximity Center Architecture 208
Customer Proximity Center in Banking 5.0 210
Persons 214
Processes 214
Structure 214
Platforms 216
Benefits and Challenges of a Customer Proximity Center 222
Conclusions 228
8 Platforms for Banking 5.0 231
Introduction 231
Platforms 235
Architecture for the Platforms 235
Platforms in Banking 5.0 237
Benefits and Challenges of Banking 5.0 Platforms 239
ABN Amro 240
Artificial Intelligence 240
Artificial Intelligence Architecture 243
The Five Waves of Artificial Intelligence 244
Artificial Intelligence in Banking 5.0 251
Benefits and Challenges of Artificial Intelligence 259
Components of Artificial Intelligence 264
Machine Learning 266
Cognitive Solutions 273
Natural Language Processing 281
Neural Networks 285
 CONTENTS xiii

Rule-Based Reasoning or Expert Systems 288

Computer Vision 289
Big Data Analytics 289
Conclusions 299
9 Processes in Banking 5.0 303
Introduction 303
Basic Banking Processes 304
Development Process 306
Digital Marketing 307
Onboarding Process 310
Other Processes 311
Design Thinking 311
Design Thinking Method 312
Design Thinking in Banking 5.0 313
Benefits and Challenges of Design Thinking 317
Lean and Digitize Banking 5.0 318
Conclusions 325
10 Persons in Banking 5.0 327
Introduction 327
New Working Models 331
Remote Working 332
Person Contribution to Banking 5.0 334
New Competencies 335
Leadership in Banking 335
New Competencies in Banking 5.0 336
Risk Scorer 336
Machine Learning Engineer 338
Data Scientist 339
Process Architect 339
Technologist 339
Banking in Team 340
Persons and Organization 340
Processes 341
Platforms 341
Protection or Security 342
Education 5.0 342
Robotic Process Automation 346
Robotic Process Automation Architecture 346
xiv CONTENTS

Human–Machine Collaboration 348

Robotic Process Automation in Banking 5.0 351
Benefits and Challenges of Robotic Process Automation 352
Conclusions 356
11 Partnerships in Banking 5.0 359
Introduction 359
Uber 361
Banking 5.0 and Partnerships 361
Ecosystems 362
Intermediaries for Banking 367
Conclusions 368
12 Artificial Intelligence and Pricing in Banking 5.0 369
Introduction 369
Revenue in Banking 370
Pricing 5.0 371
Pricing Architecture 372
Information Collection 373
Risk Analysis 374
Credit Rating 374
Decision 375
Pricing 375
Implementation 376
Monitoring of Risks and Lessons Learned 376
Pricing in Banking 5.0 376
Benefits and Challenges of Pricing 382
Conclusions 383
13 Payments for Costs and Investments in Banking 5.0 385
Introduction 385
Contracts Life Cycle Management 386
Smart Contracts Architecture 388
Smart Contracts in Banking 5.0 392
Benefits and Challenges of Smart Contracts 395
Conclusions 399
14 Protection of Banking 5.0 401
Introduction 401
Cyber Security 402
Cyber Security Architecture 405
 CONTENTS xv

Cyber Security in Banking 5.0 408

Benefits and Challenges of Cyber Security 412
Regulation Compliance 413
Regulations 413
Data Privacy 414
PSD2 415
Money Laundering 417
AI Regulations 417
Regtech 421
Resilient Solutions 426
Conclusions 427
15 Future of Banking 5.0 431
Introduction 431
Scenarios 432
Future Business Model Components 433
Proposition of Value 433
Proximity 436
Partition 437
Place 440
Platforms 441
Platforms Development 441
Multi-Sided Platforms 442
Multi-Sided Platforms Architecture 443
Multi-Sided Platforms in Banking 5.0 446
Benefits and Challenges of Multi-Sided Platforms 448
Processes 448
Persons 449
Partnerships 450
Bigtech 451
Bigtech Organizations Architecture 452
Bigtech Organizations and Banking 5.0 453
Benefits and Challenges of Bigtech Organizations 456
Conclusions 456
16 Conclusions 459

Glossary 467
References 517
xvi CONTENTS

Sitography (Accessed 20 March 2021) 521

Web Places of Banking Cases (Accessed 20 March 2021) 525
Index 527
 Acronyms, Abbreviations,
and Currencies

3P Planet, Persons, Profit

ABA American Banking Association
ADA American with Disabilities Act
ADAS Advanced Driver Assistance Systems
AGI Artificial General Intelligence
AI Artificial Intelligence
AIFM Alternative Investment Fund Managers
AMA American Marketing Association and American Management Asso-
ciation
AML Anti-Money Laundering
ANN Artificial Neural Network
API Application Programming Interface
AR Augmented Reality
ATI Attitude Toward Innovation
ATM Automatic Teller Machine
AUM Assets Under Management
AVR Automatic Voice Recorder
B2B Business-to-Business
B2C Business-to-Customer
BaaP Banking as a Platform
BaaS Bank as a Service
BC Behavioral Control, Before Christ, or Business Continuity
BCP Business Continuity Plan
BI Business Intelligence or Business Interruption
BPaaS Business Process as a Service
BPI Business Process Intelligence

xvii
xviii ACRONYMS, ABBREVIATIONS, AND CURRENCIES

BPM Business Process Modeling

BPO Business Process Outsourcing or Business Process Optimization
CAGR Compounded Annual Growth Rate
CBDC Central Bank Digital Currency
CBR Case-Based Reasoning
CC Cognitive Computing
CCPA California Customer Privacy Act
CDO Chief Digital Officer
CEO Chief Executive Officer
CERT Computer Emergency Response Team
CES Customer Engagement Score
CEV Customer Engagement Value
CIC Contract Inconsistency Checking
CIO Chief Information Officer
CLM Contract Lifecycle Management
CNN Convolutional Neural Network
CNY Chinese Yuan Renminbi
Cobot Collaborative Robot
CPC Customer Proximity Center
CPS Cyber-Physical System
CR.AA.M Compliance Risk & Audit Activity Management
CRM Customer Relationship Management
CSAT Customer Satisfaction Score
CSF Critical Success Factor
CSR Corporate Social Responsibility or Customer Service Representa-
tive
CTO Chief Solutions Officer
CtQ Critical to Quality
CTR Click-Through Rate
CX Customer Experience
DB Data Base
DFS Digital Finance Services
DM Data Management
DNN Deep Neural Network
DPI Digital Performance Index
DR Disaster Recovery
DRP Disaster Recovery Plan
DRS Disaster Recovery Site
DT Design Thinking
EC European Commission
ECB European Central Bank
EDI Electronic Data Interchange
EESC European Economic and Social Committee
 ACRONYMS, ABBREVIATIONS, AND CURRENCIES xix

EP Equator Principle
EPC European Payments Council
ERP Enterprise Resource Planning
ERPB Euro Retail Payments Board
ESG Environmental, Social, and Governance
ETF Exchange-Traded Fund
EU European Union
EUR Euro
FC Financial Crime
FCR First Call Resolution
FDS Fraud Detection System
FICO Originally Fair, Isaac and Company
Fintech Financial Solutions
FSB Financial Stability Board
FTE Full-Time Equivalent
G20 Group of Twenty
GAFAM Google, Amazon, Facebook, Apple, and Microsoft
GBP British Pound Sterling
GDP Gross Domestic Product
GDPR General Data Protection Regulation
GPT-3 Generative Pre-Trained Transformer
GPU Graphics Processing Unit
GUI Graphical User Interface
HCI Human Computer Interaction
HFT High Frequency Trading
HITL Human-in-the-Loop
HNW High Net Worth
HPC High Performance Computing
HR Human Resources (Department)
HRM Human Resource Management
IA Integrated Analytics or Intelligent Automation
IaaS Infrastructure as a Service
IAM Identity and Access Management and Innovation Acceptance
Model
ICT Information and Telecommunication Solutions
IDS Intrusion Detection System
IEC International Electrotechnical Commission
IEEE Institute for Electrical and Electronics Engineers
IoC Indicator of Compromise
IoT Internet of Things
IP Internet Protocol or Intellectual Property
IPS Intrusion Prevention System
ISO International Standard Organization
xx ACRONYMS, ABBREVIATIONS, AND CURRENCIES

IVR Interactive Voice Response

JPEG Joint Photographic Experts Group
KPI Key Performance (or Process) Indicators
KYC Know Your Customer
LOC Loan on blockchain Contract or Line of Credit or Line of Code
M&A Merger and Acquisitions
MCD Mortgage Credit Directive
MFA Multi Factor Authentication
MICR Magnetic-Ink Character Recognition
MIFID Markets in Financial Instruments Directive
MIS Management Information Systems
MIT Massachusetts Institute of Solutions
MNO Mobile Network Operator. And Maintenance and Operations
MP3 Moving Picture 3
MPC Secure multi-party computation
MSMEs Micro, Small, and Medium Enterprises
MSP Multi-Sided Platform
NBO Next Best Offer
NFC Near Field Communication
NGFW Next-generation Firewall
NGW Next Generation Web
NIST National Institute of Standards and Solution
NLG Natural Language Generation
NLL Natural Language Understanding
NLP Natural Language Processing
NPS Net Promoter Score
ODA Operational Data Analytics
OECD Organization for Economic Co-operation and Development
OT Operations Solution
P&C Property and Casualty
PaaS Platform as a Service
PEF Perceived Economic Factor
PROU Perceived Ease of Use
PSP Payment Service Provider
PSU Payment Service User
PT Perceived Trust
PU Perceived Usefulness
R&D Research and Development
RATER Reliability, Assurance, Tangibles, Empathy, and Responsiveness
RBI Reserve Bank of India
RE Real Estate or Reputation
Regtech Regulatory Solutions Organization
RFM Recency, Frequency, and Monetary Value
 ACRONYMS, ABBREVIATIONS, AND CURRENCIES xxi

RMB Yuan renminbi

ROI Return on Investment
ROPO Research Online, Purchase Offline
RPA Robotic Process Automation
RRSP Registered Retirement Savings Plan
SCT SEPA Credit Transfer
SCT inst SEPA Instant Credit Transfer
SDG United Nations Sustainable Development Goals.
SEC Securities and Exchange Commission
SEPA Single European Payment Area
SIEM Security Information and Event Management
SLA Service Level Agreement
SME Small and Medium Enterprises
SMS Short Message Service
SOC Security Operations Center
SP Social Pressures
STEM Science, Solution, Engineering, Mathematics
STP Straight Through Processing
Swift Society for Worldwide Interbank Financial Telecommunication
SWOT Strengths-Weaknesses-Opportunities-Threats
TAM Solution Acceptance Model
TCM Total Cost Management
TEG Technical Expert Group
TIPS TARGET Instant Payment Settlement
TQM Total Quality Management
UCITS Undertakings for Collective Investment in Transferable Securities
UD Universal Design
UGAI Universal Guidelines on Artificial Intelligence
UI User Interface
UK The United Kingdom
UMTS Universal Mobile Telecommunications System
UN United Nations
UNEP-FI United Nations Environment Programme—Finance Initiative
UNICEF United Nations Children’s Emergency Fund
UPS Uninterruptible Power Supply
US or USA United States of America
USD United States Dollar
UX User Experience
VoC Voice of the Customer
VR Virtual Reality
VUCA Volatile, Unpredictable, Complex, and Ambiguous
 List of Figures

Fig. 1.1 Impacts of transformation on banking (simplified) 4

Fig. 1.2 Business model canvas 8
Fig. 2.1 Industry 5.0 framework 16
Fig. 2.2 Traditional business model canvas 31
Fig. 2.3 Modified business model canvas 32
Fig. 2.4 Porter’s five forces of competitive advantage for insurance 35
Fig. 2.5 Business model in a fintech organizations (example) 50
Fig. 2.6 Traditional financial institutions issues 52
Fig. 3.1 Digital banking evolution 62
Fig. 3.2 Innovation types (Source Iansiti, M., & Lakhani, K. R.
[2017]. The truth about blockchain. Harvard Business
Review, 95[1], 118–127) 69
Fig. 3.3 Innovation types in banking 70
Fig. 3.4 Digital transformation stages (Adapted by the author
from https://www.slideshare.net/briansolis/the-six-sta
ges-of-digital-transformation-by-brian-solis) 71
Fig. 3.5 Innovation acceptance model 85
Fig. 4.1 Porter’s generic strategies 96
Fig. 4.2 Business model canvas in a fintech organization 111
Fig. 4.3 Partnership components 117
Fig. 4.4 Waves of fintech organizations (Adapted from https://
www.digitalinsuranceagenda.com/thought-leadership/
the-four-waves-of-insurtech/) 119
Fig. 4.5 From banks to banking 127
Fig. 7.1 Modified Chandler-Leavitt model 211

xxiii
xxiv LIST OF FIGURES

Fig. 7.2 Interaction with the customer in the proximity

center (Adapted by the Author from Bicheno, J., &
Catherwood, P. (2005). Six sigma and the quality toolbox
(rev. ed.). Picsie Books, Buckingham, UK) 215
Fig. 7.3 Example of RATER assessment 222
Fig. 8.1 Digital banking transformation 232
Fig. 8.2 Banking 5.0 234
Fig. 8.3 Types of intelligence 244
Fig. 8.4 Five AI generations 245
Fig. 8.5 Artificial intelligence in banking 252
Fig. 8.6 Social media benefits 258
Fig. 8.7 Machine learning vs. traditional computing 267
Fig. 8.8 AI, ML, and big data analytics 269
Fig. 8.9 Classification of machine learning 270
Fig. 8.10 Cognitive solutions 276
Fig. 8.11 Cognitive solution life cycle (Elaboration of the author
on the AIGO framework) 282
Fig. 8.12 Types of big data analytics 292
Fig. 9.1 The banking value network (Source Stabell, C., &
Fjeldstad, Ø. (1998). Configuring value for competitive
advantage: On chains, shops, and networks. John Wiley &
Sons, Hoboken, NJ) 305
Fig. 9.2 Lean and digitize method 319
Fig. 9.3 The lean and digitize innovation process and its seven
stages, or the “7 Ds” 320
Fig. 10.1 New roles in insurance 4.0 336
Fig. 10.2 Customer Facing Jobs in Banking 5.0 337
Fig. 11.1 Banking 5.0 ecosystem 363
Fig. 11.2 Ecosystem coordination 366
Fig. 12.1 Phases of risk scoring 373
Fig. 12.2 Credit scoring process 380
Fig. 12.3 Artificial intelligence in credit scoring 380
Fig. 13.1 Schema for smart contracts 388
Fig. 13.2 Smart contracts process 391
Fig. 13.3 Smart contracts in banking 5.0 396
Fig. 14.1 Cyber security generations 428
Fig. 14.2 Basic aspects of resilience 429
Fig. 15.1 Future banking 434
Fig. 15.2 Multi-sided platforms 444
Fig. 15.3 Tools for remote working 450
 List of Tables

Table 1.1 Banking 5.0 model 11

Table 2.1 Industry and banking generations 17
Table 4.1 Fintech activities 114
Table 7.1 Evolution of the call center 212
Table 8.1 State of AI in financial services 251
Table 12.1 Risk management maturity levels 377

xxv
 CHAPTER 1

Introduction

Banking is necessary; banks are not.

Bill Gates

The global recession and the pandemic hit hard. They have affected
all organizations and functions. After these crises, it is vital to develop
and manage innovative strategies in banking. Except for fintech orga-
nizations, banking has almost remained outside of the trend of digital
transformations.1 Some financial institutions have begun to innovate,
create new business models, invest in emerging technologies, and partner
with fintech organizations, either financing or buying them.2 Accenture,
in a survey, found that only 1 in 10 banks were committed to digital
transformation; 4 in 10 were trying to transform but had no integrated
strategy, and 5 out of 10 were not making any progress.3 Meanwhile, an
IDC analysis estimates that 70% of all digital transformation initiatives do

1 Uusitalo, J. (2019). Strategic insurance in the face of uncertainty (Master’s Thesis).

University of Jyväskylä, Finland.
2 Generali. (2018, February). Le assicurazioni tutto connesso. www.generali.com/it/info/
discovering-generali/all/2018/A-fully-connected-insurance. Accessed 2 November 2019.
3 https://newsroom.accenture.com/news/only-half-of-banks-globally-are-making-signif
icant-advancements-in-digital-transformation-resulting-in-lower-market-valuations-accent
ure-report-finds.htm. Accessed 3 March 2021.

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2021
B. Nicoletti, Banking 5.0, Palgrave Studies in Financial Services
Technology, https://doi.org/10.1007/978-3-030-75871-4_1
2 B. NICOLETTI

not reach their goals.4 Of the USD 1.3 trillion spent on digital trans-
formation in 2018, it was estimated that more than $900 billion went to
waste. If this is the scenario, financial institutions need to design and offer
customers products and services relevant to them. At the same time, they
did not base most of their innovations on customer centrality. This book
has the objective to present this approach and calls it banking 5.0.
Bill Gates was clear: “Banking is necessary, banks are not.”5 This state-
ment forecasts potential scenarios. These innovative approaches or visions
are banking 5.0. This book underlines that the functions, disciplines,
and activities of banking 5.0 can change financial institutions to support
organizational efficiency, effectiveness, ethics, and economics within a
long-term and sustainable perspective.
The sequence of industrial revolutions is:

• The steam engine characterized the first industrial revolution. The

engine initially revolutionized the textile industry and then other
sectors.
• The introduction of electricity brought about the second industrial
revolution. It, combined with the introduction of mass produc-
tion, created another change that spread from industry to social and
political environments.
• The computer characterized the third industrial revolution, which
again revolutionized work and extended into the social world.
• The mass diffusion of the internet characterized the fourth industrial
revolution. It allowed the introduction of devices such as mobile
phones with enormous impacts not only in the industry but in the
social and political spheres.

At this point, one might wonder what the probable fifth industrial revolu-
tion will be. The answer is not easy and might tempt to say: let complete
and use the full potential of Industry 4.0 and then think about the future.
What the sequence of industrial revolutions proves is that their life cycle

4 https://thefinanser.com/2020/10/the-difference-between-cloud-based-and-cloud-nat
ive.html/. Accessed 3 March 2021.
5 Amberber, E. (2015). Banking is necessary, banks are not. 7 Quotes from Bill Gates
on Mobile Banking.
 1 INTRODUCTION 3

is getting shorter. It is therefore likely that the fifth industrial revolution

is upon us.
The fifth industrial revolution can be expected to be characterized by
the spread of solutions such as Artificial intelligence (AI), robots, and
actions on sustainability. A broad fifth industrial revolution, based on
technologies, such as robots, attention to sustainability, mobile phones,
AI/cognitive computing, and predictive modeling, would affect the entire
banking business model. These innovative solutions enable new ways of
communicating, information sharing, and banking. There is a need for
a new vision of banking. This vision is called banking 5.0 in this book.
Innovative solutions have generated researchers’ interest in very different
fields: computer and management science, organization theory, law, and
economics. An integrated vision is missing. This book shows why and
how banking 5.0 can change in an integrated way banking. Banking 5.0
is potentially the engine and starting point of the customers’ increasing
need for innovative banking services and solution models.
This book analyzes the significance, development, and application of
banking 5.0, to banking’s digital transformation. The word digital in
digital transformation might be misleading. A digital transformation is a
definition and implementation of a new business model. In implementing
this new business model, a digital solution will be relevant but not exclu-
sive. This innovative approach should be transparent (almost invisible).
As in the famous Turing test,6 the customer should not understand if a
person, a robot, or a mix of the two supplies banking.
There are important messages in this book. The first one is that
banking is not necessarily done in banks. Banking should become part of
the business activities and functions of all organizations and individuals.
Ordinary activities should incorporate banking, whenever and wherever
necessary. Non-financial transactions should embed banking transactions
transparently to the customer. This situation does not mean that all the
business or individuals should become banks. It means that the banking
transaction should be part of their ordinary activities. The provision and
processing of this transaction should be made usually by an external entity
that, if necessary to the transaction, would have a banking license to assure
the customer of the reliability and trust in the transaction. In other words,

6 The Turing test was born as a criterium to determine if a machine is can behave as
a person. Alan Turing suggested this criterium in the article Turing, I. B. A. (1950).
Computing machinery and intelligence-AM Turing. Mind, 59(236), 433.
4 B. NICOLETTI

Computers &
Cloud CompuƟng CosmopolizaƟon
Telecom Technology

More Persons Risk

involved Wider Range of OpƟons
Management

Request of
Complexity of Personal data
Pandemic
Banking 5.0 And Basel Compliance
TransformaƟon
More severe
Consequences of
Incorrect AcƟons
Wider set
Pressure on Need of beƩer
Of criteria
prices Response Times
To Consider

Concern on
Costs Customers
Sustainability

Fig. 1.1 Impacts of transformation on banking (simplified)

at the center of a transaction, there should be a customer and his/her

needs, not the bank.
From an internal point of view, the operations should be provided
by an actor who could be a robot, a person, and in most of the cases,
a combination of the two (a cobot). The robot should have Artificial
intelligence (AI). This vision implies the importance of person–machine
collaboration. In this new vision, AI is fundamental. Banking 5.0 is born
out of an industrial revolution determined by AI, like the earlier four
industrial revolutions were determined by other enabling technologies.
The 2020 pandemic is pushing even more to embark on the banking
5.0 transformation and become more agile, responsive, and connected
enterprises. In a survey of Fortune 500 CEOs, 63% said that the Covid-
19 crisis would accelerate their technological investment despite financial
pressures.7 One legacy of the pandemic could be the acceleration of the
financial institution’s transition to banking 5.0. This transition entails
challenges.8 Figure 1.1 summarizes some of these challenges.

7 Jacobides, M. G., & Reeves, M. (2020). Adapt your business to the new reality.
Harvard Business Review, 98(5), 74–81.
8 Iansiti, M., & Lakhani, K. R. (2020). Competing in the age of AI: Strategy and
leadership when algorithms and networks run the world. Harvard Business Press, Brighton,
MA.
 1 INTRODUCTION 5

Banking 5.0 will bring a cultural transition to the customers.9 The

growth of banking for a financial institution will come from a change
of approach. This approach must be transformed from merely passive
to preventive and proactive, with a range of new services and products,
new business models, and more considerable attention to prevention for
defaults. Customer needs, knowledge, and expectations have expanded
exponentially over the past years. Financial institutions need to adapt to
their customers’ needs. In an age of immediacy, continuous changes, and
overwhelming choices in which loyalty is no longer a certainty, the sector
must extend beyond its main products and services if it wants to keep and
increase its customer base. It must innovate and change its approach. It
is critical to understand who the banking customers are, and their needs
expressed or implicit.10
In a highly competitive environment, current financial institutions can
no longer rely on organic growth or internal innovation. As a result,
mergers and acquisitions, equity partnerships, and collaborations are
essential. The winners are the financial institutions able to launch and
grow an ecosystem, with alliances with innovative start-ups, teaming up
with fintech organizations, and joining even with some of their competi-
tors. Merger and acquisitions (M&A) activity will focus on key markets
and products. Access and use of solutions that allow improvements within
the sector will come through acquisitions or partnerships. These poten-
tial opportunities require a holistic view of innovation. It would include
distribution, new products, credit management ability, or improvements
in the default settlement process.
The winners will be the ones which would invest in innovative plat-
forms. They should rethink and revise their business model. A rapidly
changing market and evolving industry require an unprecedented ability
to do banking. Technological changes are essential. They are not enough.
Knowing these changes and using them in the best way are different
things. Financial institutions should use analytics, AI, and robots to
benefit and use them as a basis for a radical banking 5.0 transformation.

9 www.insuranceup.it/it/opinioni/deloitte-4-trend-per-le-assicurazioni-nel-2020/.
Accessed 25 December 2019.
10 Parasuraman, A., Berry, L. L., & Zeithaml, V. A. (1991). Understanding customer
expectations of service. Sloan Management Review, 32(3), 39–48.
Another random document with
no related content on Scribd:
 General Miles,
Report
(Annual Reports of the War Department, 1898,
volume 1, part 2, page 36).

{618}

UNITED STATES OF AMERICA: A. D. 1898 (July-September).

The War with Spain.
Capture of Manila.
Relations with the Filipino insurgents.
General Merritt's report.
Aguinaldo declared President of the Philippine Republic.

"Immediately after my arrival [July 25] I visited General

Greene's camp and made a reconnaissance of the position held
by the Spanish, and also the opposing lines of the insurgent
forces, hereafter to be described. I found General Greene's
command encamped on a strip of sandy land running parallel to
the shore of the bay and not far distant from the beach, but
owing to the great difficulties of landing supplies, the
greater portion of the force had shelter tents only, and were
suffering many discomforts, the camp being situated in a low,
flat place, without shelter from the heat of the tropical sun
or adequate protection during the terrific downpours of rain
so frequent at this season. I was at once struck by the
exemplary spirit of patient, even cheerful, endurance shown by
the officers and men under such circumstances, and this
feeling of admiration for the manner in which the American
soldier, volunteer and regular alike, accept the necessary
hardships of the work they have undertaken to do, has grown
and increased with every phase of the difficult and trying
campaign which the troops of the Philippine expedition have
brought to such a brilliant and successful conclusion.

"I discovered during my visit to General Greene that the left

or north flank of his brigade camp extended to a point on the
'Calle Real' about 3,200 yards from the outer line of Spanish
defenses of the city of Manila. This Spanish line began at the
powder magazine, or old Fort San Antonio, within a hundred
yards of the beach and just south of the Malate suburb of
Manila, and stretched away to the Spanish left in more or less
detached works, eastward, through swamps and rice fields,
covering all the avenues of approach to the town and
encircling the city completely. The Filipinos, or insurgent
forces at war with Spain, had, prior to the arrival of the
American land forces, been waging a desultory warfare with the
Spaniards for several months, and were at the time of my
arrival in considerable force, variously estimated and never
accurately ascertained, but probably not far from 12,000 men.
These troops, well supplied with small arms, with plenty of
ammunition and several field guns, had obtained positions of
investment opposite to the Spanish line of detached works
throughout their entire extent; and on the particular road
called the 'Calle Real,' passing along the front of General
Greene's brigade camp and running through Malate to Manila,
the insurgents had established an earthwork or trench within
800 yards of the powder-magazine fort. They also occupied as
well the road to the right, leading from the village of Pasay,
and the approach by the beach was also in their possession.
This anomalous state of affairs, namely, having a line of
quasi-hostile native troops between our forces and the Spanish
position, was, of course, very objectionable, but it was
difficult to deal with, owing to the peculiar condition of our
relations with the insurgents, which may be briefly stated as
follows:

"Shortly after the naval battle of Manila Bay, the principal

leader of the insurgents, General Emilio Aguinaldo, came to
Cavite from Hongkong, and, with the consent of our naval
authorities, began active work in raising troops and pushing
the Spaniards in the direction of the city of Manila. Having
met with some success, and the natives flocking to his
assistance, he proclaimed an independent government of
republican form, with himself as president, and at the time of
my arrival in the islands the entire edifice of executive and
legislative departments and subdivision of territory for
administrative purposes had been accomplished, at least on
paper, and the Filipinos held military possession of many
points in the islands other than those in the vicinity of
Manila. As General Aguinaldo did not visit me on my arrival
nor offer his services as a subordinate military leader, and
as my instructions from the President fully contemplated the
occupation of the islands by the American land forces, and
stated that 'the powers of the military occupant are absolute
and supreme and immediately operate upon the political
condition of the inhabitants,' I did not consider it wise to
hold any direct communication with the insurgent leader until
I should be in possession of the city of Manila, especially as
I would not until then be in a position to issue a
proclamation and enforce my authority, in the event that his
pretensions should clash with my designs.

"For these reasons the preparations for the attack on the city
were pressed and military operations conducted without
reference to the situation of the insurgent forces. The wisdom
of this course was subsequently fully established by the fact
that when the troops of my command carried the Spanish
intrenchments, extending from the sea to the Pasay road on the
extreme Spanish right, we were under no obligations, by
pre-arranged plans of mutual attack, to turn to the right and
clear the front still held against the insurgents, but were
able to move forward at once and occupy the city and suburbs.

"To return to the situation of General Greene's brigade as I

found it on my arrival, it will be seen that the difficulty in
gaining an avenue of approach to the Spanish line lay in the
fact of my disinclination to ask General Aguinaldo to withdraw
from the beach and the 'Calle Real,' so that Greene could move
forward. This was overcome by instructions to General Greene
to arrange, if possible, with the insurgent brigade commander
 in his immediate vicinity to move to the right and allow the
American forces unobstructed control of the roads in their
immediate front. No objection was made, and accordingly
General Greene's brigade threw forward a heavy outpost line on
the 'Calle Real' and the beach and constructed a trench, in
which a portion of the guns of the Utah batteries was placed.
The Spanish, observing this activity on our part, made a very
sharp attack with infantry and artillery on the night of July
31. The behavior of our troops during this night attack was
all that could be desired, and I have, in cablegrams to the
War Department, taken occasion to commend by name those who
deserve special mention for good conduct in the affair. Our
position was extended and strengthened after this and resisted
successfully repeated night attacks, our forces suffering,
however, considerable loss in wounded and killed, while the
losses of the enemy, owing to the darkness, could not be
ascertained.

"The strain of the night fighting and the heavy details for
outpost duty made it imperative to re-enforce General Greene's
troops with General MacArthur's brigade, which had arrived in
transports on the 31st of July. The difficulties of this
operation can hardly be overestimated. The transports were at
anchor off Cavite, 5 miles from a point on the beach where it
was desired to disembark the men.
{619}
Several squalls, accompanied by floods of rain, raged day
after day, and the only way to get the troops and supplies
ashore was to load them from the ship's side into native
lighters (called 'cascos') or small steamboats, move them to a
point opposite the camp, and then disembark them through the
surf in small boats, or by running the lighters head on to the
beach. The landing was finally accomplished, after days of
hard work and hardship; and I desire here to express again my
admiration for the fortitude and cheerful willingness of the
men of all commands engaged in this operation. Upon the
assembly of MacArthur's brigade in support of Greene's, I had
about 8,500 men in position to attack, and I deemed the time
had come for final action. During the time of the night
attacks I had communicated my desire to Admiral Dewey that he
would allow his ships to open fire on the right of the Spanish
line of intrenchments, believing that such action would stop
the night firing and loss of life, but the admiral had
declined to order it unless we were in danger of losing our
position by the assaults of the Spanish, for the reason that,
in his opinion, it would precipitate a general engagement, for
which he was not ready. Now, however, the brigade of General
MacArthur was in position and the 'Monterey' had arrived, and
under date of August 6 Admiral Dewey agreed to my suggestion
that we should send a joint letter to the captain-general
notifying him that he should remove from the city all
non-combatants within forty-eight hours, and that operations
against the defenses of Manila might begin at any time after
the expiration of that period.

"This letter was sent August 7, and a reply was received the
same date, to the effect that the Spanish were without places
of refuge for the increased numbers of wounded, sick women,
and children now lodged within the walls. On the 9th a formal
joint demand for the surrender of the city was sent in. This
demand was based upon the hopelessness of the struggle on the
part of the Spaniards, and that every consideration of
humanity demanded that the city should not be subjected to
bombardment under such circumstances. The captain-general's
reply, of same date, stated that the council of defense had
declared that the demand could not be granted; but the
captain-general offered to consult his Government if we would
allow him the time strictly necessary for the communications
by way of Hongkong. This was declined on our part for the
reason that it could, in the opinion of the admiral and
myself, lead only to a continuance of the situation, with no
immediate result favorable to us, and the necessity was
apparent and very urgent that decisive action should be taken
at once to compel the enemy to give up the town, in order to
relieve our troops from the trenches and from the great
exposure to unhealthy conditions which were unavoidable in a
bivouac during the rainy season.

"The seacoast batteries in defense of Manila are so situated

that it is impossible for ships to engage them without firing
into the town, and as the bombardment of a city filled with
women and children, sick and wounded, and containing a large
amount of neutral property, could only be justified as a last
resort, it was agreed between Admiral Dewey and myself that an
attempt should be made to carry the extreme right of the
Spanish line of intrenchments in front of the positions at
that time occupied by our troops, which, with its flank on the
seashore, was entirely open to the fire of the navy. It was
not my intention to press the assault at this point, in case
the enemy should hold it in strong force, until after the navy
had made practicable breaches in the works and shaken the troops
holding them, which could not be done by the army alone, owing
to the absence of siege guns. … It was believed, however, as
most desirable, and in accordance with the principles of
civilized warfare, that the attempt should be made to drive
the enemy out of his intrenchments before resorting to the
bombardment of the city. …

"All the troops were in position on the 13th at an early hour

in the morning. About 9 a. m. on that day our fleet steamed
forward from Cavite and before 10 a. m. opened a hot and
accurate fire of heavy shells and rapid-fire projectiles on
the sea flank of the Spanish intrenchments at the powder
magazine fort, and at the same time the Utah batteries, in
position in our trenches near the 'Calle Real,' began firing
with great accuracy. At 10.25, on a prearranged signal from
our trenches that it was believed our troops could advance,
the navy ceased firing, and immediately a light line of
skirmishers from the Colorado regiment of Greene's brigade
passed over our trenches and deployed rapidly forward, another
line from the same regiment from the left flank of our
earthworks advancing swifty up the beach in open order. Both
these lines found the powder-magazine fort and the trenches
flanking it deserted, but as they passed over the Spanish
works they were met by a sharp fire from a second line
situated in the streets of Malate, by which a number of men
were killed and wounded, among others the soldier who pulled
down the Spanish colors still flying on the fort and raised
our own.

"The works of the second line soon gave way to the determined
advance of Greene's troops, and that officer pushed his
brigade rapidly through Malate and over the bridges to occupy
Binondo and San Miguel, as contemplated in his instructions.
In the meantime the brigade of General MacArthur, advancing
simultaneously on the Pasay road, encountered a very sharp
fire, coming from the blockhouses, trenches, and woods in his
front, positions which it was very difficult to carry, owing
to the swampy condition of the ground on both sides of the
roads and the heavy undergrowth concealing the enemy. With
much gallantry and excellent judgment on the part of the
brigade commander and the troops engaged these difficulties
were overcome with a minimum loss, and MacArthur advanced and
held the bridges and the town of Malate, as was contemplated
in his instructions.

"The city of Manila was now in our possession, excepting the

walled town, but shortly after the entry of our troops into
Malate a white flag was displayed on the walls, whereupon
Lieutenant Colonel C. A. Whittier, United States Volunteers,
of my staff, and Lieutenant Brumby, United States Navy,
representing Admiral Dewey, were sent ashore to communicate
with the Captain-General. I soon personally followed these
officers into the town, going at once to the palace of the
Governor-General, and there, after a conversation with the
Spanish authorities, a preliminary agreement of the terms of
capitulation was signed by the Captain-General and myself.
This agreement was subsequently incorporated into the formal
 terms of capitulation, as arranged by the officers
representing the two forces, a copy of which is hereto
appended and marked.
{620}
Immediately after the surrender the Spanish colors on the sea
front were hauled down and the American flag displayed and
saluted by the guns of the navy. The Second Oregon Regiment,
which had proceeded by sea from Cavite, was disembarked and
entered the walled town as a provost guard, and the colonel
was directed to receive the Spanish arms and deposit them in
places of security. The town was filled with the troops of the
enemy driven in from the intrenchments, regiments formed and
standing in line in the streets, but the work of disarming
proceeded quietly and nothing unpleasant occurred.

"In leaving the subject of the operations of the 13th, I

desire here to record my appreciation of the admirable manner
in which the orders for attack and the plan for occupation of
the city were carried out by the troops exactly as
contemplated. I submit that for troops to enter under fire a
town covering a wide area, to rapidly deploy and guard all
principal points in the extensive suburbs, to keep out the
insurgent forces pressing for admission, to quietly disarm an
army of Spaniards more than equal in numbers to the American
troops, and finally by all this to prevent entirely all
rapine, pillage, and disorder, and gain entire and complete
possession of a city of 300,000 people, filled with natives
hostile to the European interests, and stirred up by the
knowledge that their own people were fighting in the outside
trenches, was an act which only the law-abiding, temperate,
resolute American soldier, well and skillfully handled by his
regimental and brigade commanders, could accomplish. …

"The amount of public funds and the numbers of the prisoners

of war and small arms taken have been reported in detail by
cable. It will be observed that the trophies of Manila were
nearly $900,000, 13,000 prisoners, and 22,000 arms.
Immediately after the surrender my headquarters were
established in the ayuntamiento, or city office of the
Governor-General, where steps were at once inaugurated to set
up the government of military occupancy. … On the 16th a
cablegram containing the text of the President's proclamation
directing a cessation of hostilities was received by me, and
at the same time an order to make the fact known to the
Spanish authorities, which was done at once. This resulted in
a formal protest from the Governor-General in regard to the
transfer of public funds then taking place, on the ground that
the proclamation was dated prior to the surrender. To this I
replied that the status quo in which we were left with the
cessation of hostilities was that existing at the time of the
receipt by me of the official notice, and that I must insist
upon the delivery of the funds. The delivery was made under
protest.

"After the issue of my proclamation and the establishment of

my office as military governor, I had direct written
communication with General Aguinaldo on several occasions. He
recognized my authority as military governor of the town of
Manila and suburbs, and made professions of his willingness to
withdraw his troops to a line which I might indicate, but at
the same time asking certain favors for himself. The matters
in this connection had not been settled at the date of my
departure. Doubtless much dissatisfaction is felt by the rank
and file of the insurgents that they have not been permitted
to enjoy the occupancy of Manila, and there is some ground for
trouble with them owing to that fact, but, notwithstanding
many rumors to the contrary, I am of the opinion that the
leaders will be able to prevent serious disturbances, as they
are sufficiently intelligent and educated to know that to
antagonize the United States would be to destroy their only
chance of future political improvement.

"On the 28th instant I received a cablegram directing me to

transfer my command to Major-General Otis, United States
 Volunteers, and to proceed to Paris, France, for conference
with the peace commissioners. I embarked on the steamer
'China' on the 30th in obedience to these instructions."

Report of General Wesley Merritt

(Annual Reports of the War Department, 1898,
volume 1, pages 39-45).

"Aguinaldo … retired to Malalos, about 25 miles to the

northward, leaving his troops entrenched round Manila, and
there with considerable pomp and ceremony on September 29th,
1898, he was declared First President of the Philippine
Republic, and the National Congress was opened with Pedro
Paterno as President of that assembly."

G. J. Younghusband,
The Philippines and Round About,
page 27.

UNITED STATES OF AMERICA: A. D. 1898 (July-December).

War with Spain.
Suspension of hostilities.
Negotiation of Treaty of Peace.
Instructions to American Commissioners.
Relinquishment of Spanish sovereignty over Cuba and cession
of Porto Rico, the island of Guam and the Philippine Islands
to the United States.

In his message to Congress, December 5, 1898, President

McKinley gave the following account of his reception of
overtures from Spain, for the termination of the war, and of
the negotiations which resulted in a treaty of peace:

"The annihilation of Admiral Cervera's fleet, followed by the

capitulation of Santiago, having brought to the Spanish
Government a realizing sense of the hopelessness of continuing
a struggle now become wholly unequal, it made overtures of
 peace through the French Ambassador, who, with the assent of
his Government, had acted as the friendly representative of
Spanish interests during the war. On the 26th of July M.
Cambon presented a communication signed by the Duke of
Almodovar, the Spanish Minister of State, inviting the United
States to state the terms upon which it would be willing to
make peace. On the 30th of July, by a communication addressed
to the Duke of Almodovar and handed to M. Cambon, the terms of
this Government were announced, substantially as in the
protocol afterwards signed. On the 10th of August the Spanish
reply, dated August 7th, was handed by M. Cambon to the
Secretary of State. It accepted unconditionally the terms
imposed as to Cuba, Porto Rico and an island of the Ladrone
group, but appeared to seek to introduce inadmissible
reservations in regard to our demand as to the Philippine
Islands. Conceiving that discussion on this point could
neither be practical nor profitable, I directed that, in order
to avoid misunderstanding, the matter should be forthwith
closed by proposing the embodiment in a formal protocol of the
terms upon which the negotiations for peace were to be
undertaken.
{621}
The vague and inexplicit suggestion of the Spanish note could
not be accepted, the only reply being to present as a virtual
ultimatum a draft of protocol embodying the precise terms
tendered to Spain in our note of July 30th, with added
stipulations of detail as to the appointment of commissioners
to arrange for the evacuation of the Spanish Antilles. On
August 12th M. Cambon announced his receipt of full powers to
sign the protocol submitted. Accordingly, on the afternoon of
August 12th M. Cambon, as the plenipotentiary of Spain, and
the Secretary of State, as the plenipotentiary of the United
States, signed a protocol providing:

Article I—
Spain will relinquish all claim of sovereignty over and title
to Cuba.
Article II-
Spain will cede to the United States the island of Porto Rico
and other islands now under Spanish sovereignty in the West
Indies and also an island in the Ladrones to be selected by
the United States.

Article III-
The United States will occupy and hold the city, bay and
harbor of Manila pending the conclusion of a treaty of peace,
which shall determine the control, disposition and government
of the Philippines.

The fourth article provided for the appointment of joint

commissions on the part of the United States and Spain, to
meet in Havana and San Juan, respectively, for the purpose of
arranging and carrying out the details of the stipulated
evacuation of Cuba, Porto Rico and other Spanish islands in
the West Indies.

The fifth article provided for the appointment of not more

than five commissioners on each side, to meet at Paris not
later than October 1st, and proceed to the negotiation and
conclusion of a treaty of peace, subject to ratification
according to the respective constitutional forms of the two
countries.

The sixth and last article provided that upon the signature of
the protocol hostilities between the two countries should be
suspended and that notice to that effect should be given as
soon as possible by each government to the commanders of its
military and naval forces. Immediately upon the conclusion of
the protocol I issued a proclamation of August 12th,
suspending hostilities on the part of the United States. The
necessary orders to that end were at once given by telegraph.
The blockade of the ports of Cuba and San Juan de Porto Rico
was in like manner raised. On the 18th of August the
muster-out of 100,000 Volunteers, or as near that number as
was found to be practicable, was ordered. On the 1st of
December 101,165 officers and men had been mustered out and
discharged from the service and 9,002 more will be mustered
out by the 10th of this month. Also a corresponding number of
general staff officers have been honorably discharged from the
service. The military commissions to superintend the
evacuation of Cuba, Porto Rico and the adjacent islands were
forthwith appointed: For Cuba, Major-General James F. Wade,
Rear-Admiral William T. Sampson, Major-General Matthew C.
Butler. For Porto Rico, Major-General John R. Brooke,
Rear-Admiral Winfield S. Schley and Brigadier-General William
W. Gordon, who soon afterwards met the Spanish commissioners
at Havana and San Juan respectively. … Pursuant to the fifth
article of the protocol, I appointed William H. Day, late
Secretary of State; Cushman K. Davis, William P. Frye and
George Gray, Senators of the United States, and Whitelaw Reid,
to be the peace commissioners on the part of the United
States. Proceeding in due season to Paris they there met on
the first of October five commissioners, similarly appointed
on the part of Spain."

Message of the President to Congress,

December 5, 1898.

The instructions given (September 16) by President McKinley to

the commissioners appointed to treat for peace with Spain, and
the correspondence between the commissioners at Paris and the
President and the Secretary of State at Washington during the
progress of the negotiations, were communicated confidentially
to the United States Senate on the 30th of January, 1899, but
not published until February, 1901, when the injunction of
secrecy was removed and the printing of the papers ordered by
vote of the Senate. The chief interest of these papers lies in
their disclosure of what passed between the American executive
and the peace commissioners on the subject of the Philippine
Islands which led to the demand for their entire surrender by
Spain.

In his instructions of September 16th to the commissioners, on

their departure for the meeting with Spanish commissioners at
Paris, the President wrote on this subject: "By article 6 of
the protocol it was agreed that hostilities between the two
countries should be suspended, and that notice to that effect
should be given as soon as possible by each Government to the
Commanders of its military and naval forces. Such notice was
given by the Government of the United States immediately after
the signature of the protocol, the forms of the necessary
orders having previously been prepared. But before notice
could reach the commanders of the military and naval forces of
the United States in the Philippines they captured and took
possession by conquest of the city of Manila and its suburbs,
which are therefore held by the United States by conquest as
well as by virtue of the protocol. In view of what has taken
place it is necessary now to determine what shall be our
future relations to the Philippines. …

"Our aim in the adjustment of peace should be directed to

lasting results and to the achievement of the common good
under the demands of civilization rather than to ambitious
designs. The terms of the protocol were framed upon this
consideration. The abandonment of the Western Hemisphere by
Spain was an imperative necessity. In presenting that
requirement we only fulfilled a duty universally acknowledged.
It involves no ungenerous reference to our recent foe, but
simply a recognition of the plain teachings of history, to say
that it was not compatible with the assurance of permanent
peace on and near our own territory that the Spanish flag
should remain on this side of the sea. This lesson of events
and of reason left no alternative as to Cuba, Porto Rico, and
the other islands belonging to Spain in this hemisphere. The
Philippines stand upon a different basis. It is none the less
true, however, that, without any original thought of complete
or even partial acquisition, the presence and success of our
 arms at Manila imposes upon us obligations which we can not
disregard. The march of events rules and overrules human
action. A vowing unreservedly the purpose which has animated
all our effort, and still solicitous to adhere to it, we can
not be unmindful that without any desire or design on our part
the war has brought us new duties and responsibilities which
we must meet and discharge as becomes a great nation on whose
growth and career from the beginning the Ruler of Nations has
plainly written the high command and pledge of civilization.

{622}

"Incidental to our tenure in the Philippines is the commercial

opportunity to which American statesmanship can not be
indifferent. It is just to use every legitimate means for the
enlargement of American trade; but we seek no advantages in
the Orient which are not common to all. Asking only the open
door for ourselves, we are ready to accord the open door to
others. The commercial opportunity which is naturally and
inevitably associated with this new opening depends less on
large territorial possessions than upon an adequate commercial
basis and upon broad and equal privileges. It is believed that
in the practical application of these guiding principles the
present interests of our country and the proper measure of its
duty, its welfare in the future, and the consideration of its
exemption from unknown perils will be found in full accord
with the just, moral, and humane purpose which was invoked as
our justification in accepting the war.

"In view of what has been stated, the United States can not
accept less than the cession in full right and sovereignty of
the island of Luzon. It is desirable, however, that the United
States shall acquire the right of entry for vessels and
merchandise belonging to citizens of the United States into
such ports of the Philippines as are not ceded to the United
States upon terms of equal favor with Spanish ships and
merchandise, both in relation to port and customs charges and
rates of trade and commerce, together with other rights of
protection and trade accorded to citizens of one country
within the territory of another. You are therefore instructed
to demand such concession, agreeing on your part that Spain
shall have similar rights as to her subjects and vessels in
the ports of any territory in the Philippines ceded to the
United States."

On the 7th of October, Mr. Day, on behalf of the American

commissioners, cabled a long communication from Paris to Mr.
Hay, his successor in the United States Department of State,
summarizing testimony given before the Commission by General
Merritt, lately commanding in the Philippines, and statements
brought by General Merritt from Admiral Dewey, General Greene,
and others. In part, the telegram was as follows:

"General Anderson, in correspondence with Aguinaldo in June

and July, seemed to treat him and his forces as allies and
native authorities, but subsequently changed his tone. General
Merritt reports that Admiral Dewey did not approve this
correspondence and advised against it. Merritt and Dewey both
kept clear of any compromising communications. Merritt
expresses opinion we are in no way committed to any insurgent
programme. Answering questions of Judge Day, General Merritt
said insurrection practically confined to Luzon. Tribal and
religious differences between the inhabitants of various
islands. United States has helped rather than injured
insurrection. Under no obligation other than moral to help
natives. Natives of Luzon would not accept Spanish rule, even
with amnesty. Insurgents would be victorious unless Spaniards
did better in future than in past. Insurgents would fight
among themselves if they had no common enemy. Think it
feasible for United States to take Luzon and perhaps some
adjacent islands and hold them as England does her colonies.
Natives could not resist 5,000 troops. … General Merritt
thinks that if United States attempted to take possession of
Luzon, or all the group as a colony, Aguinaldo and his
immediate followers would resist it, but his forces are
divided and his opposition would not amount to anything. If
the islands were divided, filibustering expeditions might go
from one island to another, thus exposing us to constant
danger of conflict with Spain. In answer to questions of
Senator Frye, Merritt said insurgents would murder Spaniards
and priests in Luzon and destroy their property if the United
States withdrew. United States under moral obligation to stay
there. He did not know whether the effect of setting up a
government by the United States in Luzon would be to produce
revolutions in other islands. It might cause reforms in their
government. … Answering questions of Mr. Gray, Merritt said
consequences in case of either insurgent or Spanish triumph
made it doubtful whether United States would be morally
justified in withdrawing. Our acts were ordinary acts of war,
as if we had attacked Barcelona, but present conditions in
Philippine Islands were partly brought about by us. Insurgents
not in worse condition by our coming. Spaniards hardly able to
defend themselves. If we restored them to their position and
trenches, they might maintain themselves with the help of a
navy when we withdrew. Did not know that he could make out a
responsibility by argument, but he felt it. It might be
sentimental. He thought it would be an advantage if the United
States would change its policy and keep the islands. (He)
thought our interests in the East would be helped by the cheap
labor in the Philippines, costing only from 20 to 80 cents a
day, according to skill. … Answering questions of Mr. Reid,
Merritt said he considered capture of Manila practically
capture of group. Nothing left of Spanish sovereignty that was
not at mercy of the United States. Did not think our humanity
bounded by geographical lines. After Dewey's victory we armed
insurgents to some extent, but Dewey says it was
over-estimated. Insurgents bought arms from Hongkong merchants
with Dewey's cognizance, but Dewey was not in favor of allowing
this to continue. Spaniards would destroy Aguinaldo and his
principal followers, if allowed to do so."
 October 25, Judge Day cabled a message to Washington, saying:
"Differences of opinion among commissioners concerning
Philippine Islands are set forth in statements transmitted
herewith. On these we request early consideration and explicit
instructions. Liable now to be confronted with this question
in joint commission almost immediately." The differing
statements then transmitted were three in number, the first of
them signed by Messrs. Davis, Frye, and Reid, who said:
"Information gained by commission in Paris leads to conviction
that it would be naval, political, and commercial mistake to
divide the archipelago. Nearly all expert testimony taken
tends to this effect. As instructions provide for retention at
least of Luzon, we do not consider question of remaining in
Philippine Islands at all as now properly before us. We
therefore ask for extension of instructions. Spain governed
and defended these islands from Manila, and with destruction
of her fleet and the surrender of her army we became as
complete masters of the whole group as she had been, with
nothing needed to complete the conquest save to proceed with
the ample forces we had at hand to take unopposed possession.
{623}
The Ladrones and Carolines were also governed from the same
capital by the same governor-general. National boundaries
ought to follow natural divisions, but there is no natural
place for dividing Philippine Islands. … If we do not want the
islands ourselves, better to control their disposition; that
is, to hold the option on them rather than to abandon it.
Could then at least try to protect ourselves by ample treaty
stipulations with the acquiring powers. Commercially, division
of archipelago would not only needlessly establish dangerous
rivals at our door, but would impair value of part we kept."

Disagreeing with this view, Judge Day said:

"I am unable to agree that we should peremptorily demand the

entire Philippine island group. In the spirit of our
instructions, and bearing in mind the often declared
disinterestedness of purpose and freedom from designs of
conquest with which the war was undertaken, we should be
consistent in our demands in making peace. Territory
permanently held must be taken as war indemnity and with due
regard to our responsibility because of the conduct of our
military and naval authorities in dealing with the insurgents.
Whether this conduct was wise or unwise is not now important. We
cannot leave the insurgents to mere treaty stipulations or to
their unaided resources, either to form a government or to
battle against a foe which (although) unequal to us, might
readily overcome them. On all hands it is agreed that the
inhabitants of the islands are unfit for self-government. This
is particularly true of Mindanao and the Sulu group. Only
experience can determine the success of colonial expansion
upon which the United States is entering. It may prove
expensive in proportion to the scale upon which it is tried
with ignorant and semibarbarous people at the other side of
the world. It should therefore be kept within bounds." Judge
Day, accordingly, suggested a division of the archipelago that
would give to the United States Luzon, Mindoro, and Palawan,
and control the entrance to the China Sea. Senator Gray, in a
third statement, dissented from both these views, saying: "The
undersigned can not agree that it is wise to take Philippine
Islands in whole or in part. To do so would be to reverse
accepted continental policy of the country, declared and acted
upon throughout our history. Propinquity governs the case of
Cuba and Porto Rico. Policy proposed introduces us into
European politics and the entangling alliances against which
Washington and all American statesmen have protested. It will
make necessary a navy equal to largest of powers; a greatly
increased military establishment; immense sums for
fortifications and harbors; multiply occasions for dangerous
complications with foreign nations, and increase burdens of
taxation. Will receive in compensation no outlet for American
labor in labor market already overcrowded and cheap; no area
for homes for American citizens; climate and social conditions
demoralizing to character of American youth; new and disturbing
questions introduced into our politics; church question
menacing. On whole, instead of indemnity—injury. The
undersigned can not agree that any obligation incurred to
insurgents is paramount to our own manifest interests. … No
place for colonial administration or government of subject
people in American system. So much from standpoint of
interest; but even conceding all benefits claimed for
annexation, we thereby abandon the infinitely greater benefit
to accrue from acting the part of a great, powerful, and
Christian nation; we exchange the moral grandeur and strength
to be gained by keeping our word to nations of the world and
by exhibiting a magnanimity and moderation in the hour of
victory that becomes the advanced civilization we claim, for
doubtful material advantages and shameful stepping down from
high moral position boastfully assumed. We should set example
in these respects, not follow in the selfish and vulgar greed
for territory which Europe has inherited from medieval times.
Our declaration of war upon Spain was accompanied by a solemn
and deliberate definition of our purpose. Now that we have
achieved all and more than our object, let us simply keep our
word. … At the very least let us adhere to the President's
instructions and if conditions require the keeping of Luzon
forego the material advantages claimed in annexing other
islands. Above all let us not make a mockery of the injunction
contained in those instructions, where, after stating that we
took up arms only in obedience to the dictates of humanity and
in the fulfillment of high public and moral obligations, and
that we had no design of aggrandizement and no ambition of
conquest, the President among other things eloquently says:
'It is my earnest wish that the United States in making peace
should follow the same high rule of conduct which guided it in
facing war. It should be as scrupulous and magnanimous in the
concluding settlement as it was just and humane in its
original action.' This and more, of which I earnestly ask a
re-perusal, binds my conscience and governs my actions."

But the President had now arrived at a different state of