The Future of Banking
Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it. — Adam Smith, Wealth of Nations (1776)
This article is a continuation of my two previous articles that examined the history of banks titled “You Can Find Silicon Valley in a Bank, Not a Bank in Silicon Valley and the present state of play titled “How to Build a Bank”. If you haven’t read the previous two articles, I strongly recommend you do to get a full perspective of the future of banks. This article is not a prediction of the future rather it attempts to provide a set of tools and frameworks to imagine the future of banks.
It is almost impossible to predict the future of anything, let alone an industry as complex as financial services. At this point in time, this article is titled ‘Bracing for Impact’ because the technological innovations that are re-shaping financial services are evolving much more rapidly than regulations can keep up with. Visually, a fast paced asteroid heading towards earth that is bracing for impact. Not the most rosiest of pictures but definitely something to know about.
As long as these innovations signal a simpler, cheaper and more user friendly experience, there will be strong business and economic arguments supporting them. In other words, strong demand from the consumers will make the changes (the asteroid) inevitable. To me, this situation doesn’t seem too unfamiliar. As an auditor in a previous life, I have witnessed the growth of financial derivatives — products of ingenious financial engineering which outpaced regulations at the time. Today, it is engineering of a different kind. Although, mathematics is the common link.
What will be needed, just like before, will be a set of regulations that can create a soft landing without disrupting people’s lives either from a risk or from a user experience perspective. For that to happen, there are two fundamental questions to be answered: 1) In general, are the changes a force for the good of society? and 2) Based on their utility, what standards (including those on transparency, accountability and fraud minimization) will be needed to bring them into the everyday lives of people so that people can brace for impact easily?
The Futility of Time
One of the biggest disclaimers about the future is the rate of change. I wish I could say the changes mentioned below will occur in the next 25 years. However, considering cash is still widely used across the world while countries like Estonia have gone completely digital tells you that not every country is moving at the same speed. Recently, Estonia decided to launch it’s own token called ‘estcoin’ through an ICO. Different issues such as regulations, government interference or acceptance of new technology, taxes, talent etc. are responsible for varying levels of diffusion of technologies that have been adopted in the mainstream. Because of the global connectivity, new technology may become known easily but like the title of this article says governments across the world have to create a safe and practical environment for adoption and then brace for impact. This article provides you with a set of tools to analyze the future. How soon will these changes materialize is anybody’s guess.
For an overview of my discussion on the future of banks below, refer to the simple illustration of the key technologies in play:
The Future Could be Quantum
The world is increasingly getting digital. That’s not all, with advances in Quantum computing, computers can harness the power of subatomic particles to consume less energy and process the same tasks faster. In a classical digital computer, data is represented in 0’s and 1’s. A quantum computer on the other hand uses ‘qubits’ which can be 0, 1 or any superposition of the two. In simple terms, superposition refers to one lying on top of the other. If we think of 0 and 1 as two ends on a line, a qubit can be considered a sphere with 0 and 1 at the two ends and with values in between. If you want to learn more, read this article in WIRED magazine. The net result is more storage, faster processing of transactions and lower energy costs.
Many countries including Russia, China and Australia have devoted significant resources to Quantum computing. IBM Quantum Eperience (Qx) allows anyone to access IBM’s quantum processor for experiments and learning. Of course, I am no expert with a crystal ball but assuming there’s a limit to Moore’s law and we end up devising Quantum computers, the IT infrastructure powering banks of the future or the Internet of Everything (IoT+ Internet of Value) could be powered by Quantum devices.
Creating an Online Avataar
Even before beginning interaction with a bank, establishing identity is vital. As an example, approximately 19% of India’s population is unbanked. Also, approximately 2Bn people worldwide are unbanked. India has initiated a biometric based identity system, among other things, to promote inclusion and to experiment with Basic Income.
Digital Identity is a very complex topic. Even in the physical world, there are challenges of forgery, identity theft and fraud. Building an online world centered around digital identities is an equally, if not less, daunting task.
In 2016, the World Economic Forum (WEF) released a report titled ‘A Blueprint for Digital Identity” that provides a great overview of the digital identity landscape. It describes digital identity as a collection of inherent attributes (age, height, birth date for individuals; company identification number, incorporation date etc. for legal entities and asset issuer, creation date etc. for assets), accumulated attributes (health, medical, tax, financial etc.) and assigned attributes (telephone no, tax identification number, citizen ID etc.). I would add machine generated attributes to the list of assigned attributes (private keys and public keys used in cryptography)
Players in financial services, business enterprises and governments can have different attributes stored on a decentralized ledger that have a common primary key to link all these databases to a single digital ID. However, it is easier said than done. A platform like Ethereum could end up being an operating system on which decentralized applications (DApps) are built to perform different functions just like apps on IoS or Android.
As per the WEF, ‘federated identity standards such as SAML 2.0 can create interoperability between ID management networks and external applications’. The challenges to digital identities are well known — mass adoption, hacking, theft, fraud. For simplicity sake, let us assume everyone in the future will have a digital identity with privacy options.
User Interface (U/X)
Augmented Reality (AR) or Mixed Reality would be the next evolution from mobile computing. Whether it is a set of ear buds that project a screen across the face or a watch that projects an interface, clients would increasingly use AR or Mixed Reality devices such as a hololens or a projection system that can be activated and controlled by voice or biometrics. For now, assuming authentication is possible using bio metrics, an account can be opened using a digital identity (which can be an ID number or multiple authentication ID’s). Except for physical currency, digital currency can be transferred using the sender and receivers digital identity. For simplicity sake, let us assume, there are multiple levels of authentication including biometrics and machine generated one time passwords .
Inter-operability between various banks would be facilitated by open API’s similar to the X-Road in Estonia which operates on a combination of interacting databases.
An omnichannel interface consisting of contact centers, online chat and human interaction can become a shared service utility operated by a federation of banks. Online chat and contact centers will be a combination of chat bots monitored by humans.
Again, trust over virtual meetings will be built over time. Once there is widespread adoption, its very hard to argue why anybody would need to meet a human for any transaction. Many people may not agree saying that there is always going to be a need for humans to watch over errors. Let us assume for now, that is the case.
Automation of Processing
There is a clear movement towards complete automation for demographic and economic reasons. Account opening can be automated using digital identities , smart contracts for transacting and the Blockchain for recording transactions. Wealth management is increasingly using robo-advisors.
The challenge however is how do you build trust in technology?
Think about people in a place such as Des Moines or Cedar Rapids, Iowa or a small town in China or India where word of mouth acts as a trust builder and sometimes, relationships matter more than absolute performance of the financial advisors. How do you get such people to adopt robo-advising? The other lens to think about this problem is financial literacy. I feel that the growth of Machine Learning/AI in the field of wealth management is very strongly dependent on financial literacy. Consider this- freakonomics radio reports approximately 70% Americans are financially illiterate.In the near to medium future, I believe human financial advisors will persist.
Functions in the bank such as Accounting, HR, Legal, IT may continue for oversight over computerized functions but may be significantly leaner.
Evolution of the Contract
It is very eerie to note that Marc Andreesen’s words on the future of banks echoes Adam Smith’s when Andreesen says ‘financial transactions are just numbers; it’s just information’. Add to that Smith’s explanation that the practice of banking is capable of being reduced to strict rules. Therefore,
A rule based system can be parsed through smart contracts.
On a simplistic note, if everything can be combined in ‘If this, then that’ statements-all banking transactions can operate using smart contracts and the Blockchain. Let’s say for now that is the assumption. Everything from investment banking to underwriting loans to accepting deposits of digital currencies can be automated using smart contracts.
If everything is standardized, do banks then become utilities? That is one thought. If that truly is the case then, proprietary algorithms for asset allocation, client experience, concierge services and creative tasks such as unique lifestyle management services (including tie-ups with gymnasiums, healthcare services, entertainment providers etc.) could become the next factors of differentiation. Personal digital assistants (the future Siri’s, Alexa’s, Cortana’s etc.) that predict your needs may become your constant companions.
Banks become leaner, cost of servicing and acquisition falls promoting inclusion, basis of differentiation change and FinTech players may coexist with banks. Any of these things could change. As Niall Ferguson says in the Ascent of Money “there really is no such thing as ‘the future’, singular. There are only multiple, unforeseeable futures, which will never lose their capacity to take us by surprise. It is impossible to predict the future which is why you can say everything I wrote above is at best conjecture. It could very well be-but then my intent is not to predict the future, it is to provide frameworks to understand a fascinating story that is being created even as I write.
Some would say ‘ignorance is bliss’ . To some extent, I agree because variables and their interplay are difficult to forecast. However, storytelling and science fiction have always entertained us and have an uncanny ability to come true. I leave you with these words:
Imagination is a very powerful prediction model which cannot be captured by numbers. However, it can create a very fascinating and human future. A future that I want everyone to have a front row seat to.