What is poetry which does not save nations or people? -Czeslaw Milosz
The internet destroyed most advantages newspapers had built. But it did offer “one gift: free global distribution.” — Jeff Bezos On The Washington Post Acquisition
In many capitalist businesses, the bottom of the pyramid was left out simply because it wasn’t profitable enough to serve it. Then, but not now. What disruptive technologies such as open API’s, stable-coins on a blockchain and AI are doing is opening up the doors of traditional businesses such as banking to the underserved and in many cases the poor and the disenfranchised. Many would call financial inclusion a socialist ideal. However, in the ultimate irony of our times, it is this so called ‘socialist’ ideal that will drive growth for the financial services sector. As technology brings down the cost of acquisition, identification and of serving the client, the financial services business will become a ‘volume game’. A very significant ‘network effect’ will be needed to drive growth in an otherwise slowing global economy. Profit, ironically, will come from serving an ever larger mass of the human population. This article explains why this will be the case.
There are three simple truths in business today. First, most traditional businesses have been network businesses forever. The success of a business depended on who you know and who else that person knows and so on. For many years, it was hard for multinational firms to fight against local businessmen because of the network effects a local business enjoyed. That network when it came to vendors was known as a supply chain. For clients, it is a loyal fan base (clients who act as ambassadors for a business) to spread the word around. With the advent of the internet, the network became exponentially global.The internet ushered in a new definition of a ‘network effect’. In the online world, networks operate at two levels which are the platforms a business owns and the users on the platform.
For example, Apple owns the hardware (iPhone, laptops, desktops etc.). That user base gives it a fan base to sell apps and services (storage using iCloud, music using Apple Music, TV using Apple TV, news using Apple News, finance using Apple credit card and so on). So, the value of Apple is the combined value of the Apple network of platforms. Secondly, once a user is inside the platform and they see the value in it, they will invite other potential ‘fans’. These two network effects i.e. from a platform and from a user base loyal to that platform are incredibly powerful in generating billions in profits. Jeff Somer, in an article in The New York Times called Apple ‘the fabulous cash machine’. Apple’s revenue mix is changing towards a more services oriented approach. Nonetheless, the power of the network remains its growth engine.
The Facebook platform includes WhatsApp, Oculus VR, the Facebook app as well as the recently announced dating feature. It is therefore easy to imagine why most internet (cloud) based businesses such as Amazon and Chinese giants Alibaba, Tencent and Baidu rely on ‘network effects’ that operate on a global scale to grow.
Second, while many nation states are shying away from globalization, the virtual world was born out of a global network of networks i.e. the Internet. There isn’t any going back as far as globalization in the digital world is concerned because globalization runs in its’ DNA. In fact, technologies such as Blockchains, Crypto Currencies and AI are just making the connections more secure and instant. From the anonymous Satoshi Nakamoto to the millions who believe in a decentralized world, a seamless, continuously connected network is the future.
Third, Artificial Intelligence (AI) as a force, reshaping the global world, is here to stay. AI will push down costs and eliminate billions in costs. Apply all of these macro trends to the world of financial services and it is easy to understand why inclusion becomes the next growth engine especially for global and large national players.
The World Has To Become Larger
First, scale is an unbeatable advantage today. While reasoning by analogy is a great way to learn, it is effective only if you compare apples to apples. Today, people frequently compare the success that China, and to some extent India, has achieved in digitizing payments to the digitization of payments in the western world. What they forget to mention is how these platforms became juggernauts. These platforms had different origins For e.g. WeChat was a chat mechanism until it became a payments behemoth. Similarly, Alibaba was an eCommerce marketplace that layered on payments. In a relatively closed country like China, it became a necessity to have platforms like Baidu (the local version of Google), WeChat and Alibaba (the local version of Amazon). If you add the fact that all of these operate in the world’s most populous country, you get successful startups with a captive audience. Nothing takes away from the fact that these startups are highly successful and advanced even when they are compared to their western counterparts. However, they did have the home ground advantage. To see the ease of transacting, all one needs to do is visit Shenzen in China. Inexpensive innovations such as the ubiquitous QR code enables millions of transactions in a day making China one of the most cashless societies in the world. It is also a living demonstration of the shape of financial transactions to come. In the future, cryptos powered by Blockchain will enable seamless payments to the masses. It is no surprise that Facebook is trying to launch its own ‘stablecoin’ to enable payments between WhatsApp users a la WeChat style.
Second, what technology has done to the financial services industry is to operate as a great equalizer reducing the cost of entry for the unbanked. The bid for a seamless, friction free client experience has forced traditional banks to start comparing their apps to those of tech companies. A simple, de-cluttered easy to navigate design, coupled with seamless onboarding at a fraction of the cost, has become table stakes now. Another development is the advent of digital identification (ID). As technology lowers the cost of KYC (Know Your Client), it will open up the gates of banking to the unbanked. One of the primary reasons for not banking the unbanked was that there was a heavy cost structure associated with client acquisition (branches, marketing etc.) and client servicing (paper statements, staff cost etc.). Technology is driving down those costs to near zero.
Thirdly, the world of cross border payments which are typically associated with old technological plumbing is getting an overhaul courtesy the Blockchain and digital currencies. Smart contracts which are nothing but pieces of code will automate millions of online transactions. Technology is forcing an inevitable future upon the financial services industry. This future is the inescapable conclusion that the client base will get larger and larger as millions of people will be included in the financial services on the basis of enabling technologies such as digital ID’s, Blockchains, StableCoins and AI.
Simplicity Is The Only Sophistication
In the world of financial services, being good is no longer good enough. That’s because success in the world of banking will depend not on churning out widgets but on treating clients as humans. To develop a mutually beneficial and long term relationship with clients, hyper-personalization is here to stay. Big data and AI algorithms will provide a plethora of tools to customize the client experience.
Second, that client experience will also be more frictionless than before. For example, facial recognition has made it easier to login to a banks’ app than typing out a password. Success, in the world of financial services, will depend on observing small frictions in the client experience and removing those frictions. In fact, applying social media like features (e.g. Venmo) and gamification will make banking more pleasurable. God will indeed be in the details.
Thirdly, automation will also offer many people access to financial services. The classic case in point is the rise of robo-advisors. Robo advisors are pieces of software code/algorithms designed to create customized, optimal portfolios for clients in an instant by crunching vast amounts of data. The result: you don’t need to be a millionaire and pay someone a hefty fee to construct a portfolio. John C. Bogle had a very simple philosophy to succeed in the world of investing. The father of ‘owning the index’ warned investors against making investing more complicated than owning major indices such as the S&P 500 or the Dow Jones.
If banks have to offer simplicity, a hyper personalized and pleasurable client experience at a fraction of the cost, they need to rely heavily on technology to do just that. The inevitable ‘side-effect’ or benefit of that attempt will be financial inclusion. The very same technologies that create such efficiencies will also dramatically lower the barriers of entry to the world of banking for milions.
The Shape Of Things To Come
In a conversation with the head of Marcus (Goldman’s digital retail banking platform) Harit Talwar, David Solomon — the CEO of Goldman Sachs asked Harit the difference between doing business in the developing world and doing business in the developed world. Harit explained that in the developing world, growth depends on creating new markets whereas in saturated markets such as the developed world, growth is about capturing market share.
Because the digital world is global, it makes no differentiation between developed and developing economies. As such, it is inevitable that the ‘new market’ these new technologies will herald will be that of the unbanked (those not included in the banking system). It is also inevitable that capturing market share in that ‘new market’ will be a numbers game based on network effects. To grow in this new market means outcompeting technology firms and FinTech players by offering a personalized experience at a fraction of the costs of the old banking system.
The good news is that the bottom of the pyramid will no longer be the bottom. That’s because there is no pyramid. Technology allows us to put the rich and the ‘not so rich’ on the same platform largely because of network effects. The more the people using the platform, the more the efficiencies. In fact, banks can now tailor products and services to the needs of clients with AI and big data. Many predict banking will become a utility hidden behind a virtual assistant. For example, a client will simply command a virtual assistant, in natural language, to make a payment and the assistant will process the payment to the intended recipient.
It is hard to imagine a society that is 100% cashless. However, the application of exponential technologies presents us with such a possibility. Perhaps, a nobler goal would be to make finance more inclusive. That goal becomes all the more real if it is an inevitable outcome of the application of technology to the world of finance.