I didn’t go into Apple because it was a tech stock. I went into Apple because of the value of their ecosystem-Warren Buffet
Imagine a scenario where every retail bank is like Goldman Sachs’s platform Marcus which is a pure play digital bank. It accepts savings from its depositors on an exclusive online platform by offering much higher yield (in bps) than other savings platforms/banks without any minimum deposit needed, much simpler terms and conditions coupled with FDIC insurance. In fact, platforms of the future can offer yields comparable to high yield corporate bonds which are usually perceived to be riskier than treasury bills or government bonds. On the other hand, Marcus provides personal loans and other consumer credit at a higher rate than the deposit rate making a healthy Net Interest Margin (NIM) without the burden of investments in branches and headcount of a traditional bank. The problem is that the online model can be easily replicated. In a perfectly competitive world, this would mean differentiation based on rates i.e. a price war or a race to the bottom. How, then, will digital banks compete, if at all they are named as such, in the future.
The answer : an unbeatable experience ecosystem that frees up their clients’ time for higher order tasks and in some cases for better experiences in the same ecosystem.
This statement is like saying Apple, Amazon, TenCent, Alibaba, Baidu or highly capitalized tech companies are best poised to leverage Artificial Intelligence, vast reservoirs of data, capital and sticky clients tied to an ecosystem, to create an unbeatable experience. This scenario doesn’t seem too unlikely considering that the competitor set for banks has been redefined around data today. Banks face not only other banks, FinTech and Tech Fin players but rather any competitor defined by two terms ‘experience’ and ‘ecosystem’. This article examines a future where there are two options i.e. banking is an experience in an overall experience ecosystem or it becomes the core of a continuously evolving ecosystem. The differentiating factor, then, becomes the ability to transform ordinary people into superhuman beings if only for a few hours.
Today, traveling to Mars, around the Moon like Yusaku Maezawa, deep sea diving, near death experiences can be examples of superhuman experiences. Of course, when it comes to colonizing Mars, many think that there are enough places on the earth that can be made more hospitable before we can even think of Mars. Cybernetic organisms or genetic editing to amplify intelligence or strength could be the next evolution. What if you could be any one you wanted to be ? Einstein, Mozart, Lucas Cranach the elder or even a rockstar? Think about how the feeling of being a demigod would drive you to pay an enormous sum of money to the one providing you with such experience. However, wealth is not equally divided in the world. So, a sweeping generalization of this sort is not logical. There would be many who would need a human experience before they crave a superhuman one.
The problem with serving the bottom of the pyramid is lower profitability which is why banks will have to use technologies such as Blockchain and open API’s to democratize banking to the masses. Even then, inequality is likely to persist. Therefore, the experience ecosystem referred to in this article will be lead by affluent and the emerging affluent which has always the case with many banking innovations.
Defining An Experience Ecosystem
The banking experience always revolved around treating financing and credit as a necessity to keep the wheels of the economy going. Banks gathered funds to lend to entrepreneurs, businesses and consumers so that they could spend that money on products and services sold by other entrepreneurs, businesses and consumers resulting in a virtual cycle of GDP growth. Thus, banking was an indispensable aspect of running an economy. Even today, it is. For years, banks created partnerships with vendors to create lifestyle oriented experiences such as discounted or early access to tickets to concerts, cash back on certain categories of spending, tie-ups with brands to cater to their clients’ lifestyle and foreign exchange benefits for international clients. Their reputation, scale and trust with the regulators emboldened people to allow them to manage their wealth. The banking experience ecosystem always revolved around money as its core with additional lifestyle benefits thrown in.
Later, technology forced them to focus on convenience and user interface (U/X) design. Today, AI enabled Chat Bots, voice banking, seamless and low cost cross border payments, aggregation of finances in a single app, personal finance management applications are all table stakes now. Everybody has to have it. In addition, for the affluent who skew more older age-wise, great financial advisers and branches are required. Once the wealth transfers hands to the millennial generation, banking will more likely become more digital. Thus, banking will move to technology as the front-end and money in the background.
Compare that to the ecosystems spawned by behemoths like Apple and Amazon. For example, Apple generates roughly $11 Billion in revenue from the App Store alone. Its’ developers made approximately $27.5 Billion from the App store alone. We haven’t even spoken of Apple’s flagships i.e. the iPhone and its services businesses such as Music and iCloud. I am deeply embedded in the Apple ecosystem which makes me a perfect client for ‘Apple Bank’.
Recently, Microsoft outpaced Apple to become the world’s most valuable company due in large part to its cloud business (Azure).
Amazon offers its stickiest product — Amazon Prime combined with unlimited data uploads to it’s Amazon Web Services (AWS) cloud in addition to being a retail shopping platform with an inbuilt recommendation engine, an entertainment provider with Amazon Music and Video. It has also morphed into a brick and mortar retailer with its acquisition of Whole Foods. Amazon also offers a glimpse into a completely self-serve retail experience without any staff at its retail outlets using Amazon Go. Amazon, today has approximately 100 million subscribers. Take into account Alexa, Kindle and Amazon cargo and you can soon envision a vibrant ecosystem. In other words, a million reasons for clients to be on the Amazon platform. I use most of the offerings in the Amazon ecosystem.
To conclude, if banking industry does not create its own experience ecosystem, it will end up being part of another platform’s experience ecosystem. This is because many people view banking as a chore as opposed to spending time on Facebook, Twitter, Apple and Amazon as something they enjoy doing. As AI starts taking away lower order jobs, thereby freeing up human time for higher order creative pursuits or experiences, the banking sector will have to rethink its business model and forge tie-ups that are more meaningful to people who will spend a bulk of their time travelling or pursuing creative hobbies and interests. Let us stretch that thread of logic even further now.
What If Tesla Built A Bank?
If Tesla built a bank, SpaceX would offer Tesla’s clients rides in a spacecraft to Mars at discounted rates — a futuristic bundle of cross sold ‘experiences’ . It would have recharge stations at Mars to fill money for additional ‘experiences’. Of course, deep sea exploration is the converse of outer space exploration. Why is this scenario not inconceivable? Let’s examine a few trends.
Banking, for all its complexity today, has always been based on the fundamental concepts of gathering savings by offering an interest on deposits and lending those savings to other individuals and companies at a higher rate. Thereby, making money on the spread called the ‘Net Interest Margin’.
In fact, as per Wikipedia, the word ‘bank was’ borrowed in Middle English from Middle French banque, from Old Italian banco (found in 12th century Latin texts), meaning “table”, from Old High German banc, bank “bench, counter”. Benches were used as makeshift desks or exchange counters during the Renaissance by Jewish Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.
Beginning with the oldest surviving bank — The Banca Monte dei Paschi di Siena S.p.A., the core banking activities haven’t changed at all. The search for yield, which if taken to an extreme — is pure greed, has led banks to pursue innovative financial engineering in the form of exotic loans (think negatively amortization of mortgages), derivatives (ie Options, Swaps, Futures, CBO’s, CDO’s , MBS’s), insider trading and other techniques including manipulating the LIBOR (London Interbank Offer Rate) itself. Such activities, outside the core of banking, has led to the ruin of many banks, civil and criminal lawsuits and has also resulted in the 2008 subprime crisis. While the heart of banking hasn’t changed in years, technology has changed exponentially to essentially a platform business with network effects. In fact, newer technologies are eating older ones. Quantum computing could eat up the encryption embedded in all of our security today.
In developed countries, technology is the answer for growth despite demographic headwinds. In developing countries, technology has become an instrument of premature deindustrialization and leapfrogging the developed world. Finally, the moral of the story is this: technological innovation has far surpassed innovations in banking some of which were perilous to begin with. I am not saying all innovations were bad. The ATM is a great example of useful innovations in banking.
Thus, a technology company which obtains a banking license by gathering enough capital and meeting regulatory guidelines can start accepting deposits and lending thereby giving its clients another reason to be part of their ecosystem while Big Data and AI provides them with opportunities to hyper personalize products and experiences for their clients. Now, it becomes easy to understand why many pundits have been predicting the demise of banks. However, banks can reinvent themselves if they are fast enough to build their own ecosystem. In fact, the Office of The Comptroller of Currency has seen a beeline for banking licenses by FinTech companies as soon as it started accepting applications for a National Banking Charter. Some spectators think this move is controversial. The other option is for FinTech companies to start acquiring lenders. Zillow, which used to be a search engine for homes on sale or available for rent has now acquired a mortgage company. With the writing on the wall, there is little surprise then that both FinTech and Tech Fin (think Apple, Amazon etc.) could embed banking into their ecosystems.
So, how do banks compete in a post AI world? The answer is by offering experiences the tech behemoths will find difficult to replicate especially experiences which are off the digital grid (internet). Think of new physical locations to visit and sensory delights to the brain. Then, providing the money needed to fulfill those experiences. Let’s say a bank has an exclusive tie up with a deep sea exploration company that has created a submarine for the masses. It could provide that experience at a deep discount provided the client uses the bank for financing that experience.
It is very hard to imagine a futuristic bank based experience ecosystem but the world of financial services will have to find the next ‘high margin’ relationship which could be the best experience humans can find and not necessarily a wealth management relationship.
A Comma Not A Full Stop
A lot of what I discussed above could feel ‘over the top’ and outright crazy ideas. However, think of what was normal a decade back and what’s normal today and you will soon see that the experiential economy will soon overshadow the physical consumerist economy.
With the advent of AI, jobs a decade from now will be vastly different from the ones today. Take eSports and gaming as an example . Many parents wouldn’t think that it was a normal career choice for their children a decade ago. If you ask digital natives, they would think it’s a great career path. There are companies such as OS Studios which are betting on this trend to grow. They are creating the infrastructure needed to support gaming. The gaming industry is poised to generate $1.7 billion in revenue by 2021. Some of the major gaming properties already have a viewership higher than the NFL.
If the lifestyle of their clients’ change drastically, Banking will have to be at the core of helping their clients fulfill those lifestyles. Of course, that doesn’t exclude tech companies from making hay when the sun shines. However, for banks, creating an unparalleled experience ecosystem of their own will mean the difference between survival and extinction. Taking a step further, this trend would mean offering ‘superhuman’ experiences facilitated by hyper personalized lines of credit. As Erasmus Darwin said in Phytologia; Or the Philosophy of Agriculture and Gardening:
“Such is the condition of organic nature! whose first law might be expressed in the words ‘Eat or be eaten!’ and which would seem to be one great slaughter-house, one universal scene of rapacity and injustice!”
But, that’s the way the ball rolls, folks!!