Welcome to the second in our series of specially curated Innovation Show podcasts focusing on the most cutting edge thinking in financial services.
This episode features Moven founder and host of the Breaking Banks podcast, Brett King, whose latest book Bank 4.0, Banking Everywhere, Never at a Bank explores embedded, ubiquitous banking delivered in real time through the technology layer.
Brett wrote Bank 2.0 in 2009 when mobile had just started to become a significant part of retail banking, and just after the internet had surpassed all other banking channels for day-to-day access. Bitcoin had just launched. Betterment, Simple and Moven were yet to be announced. In fact, FinTech was not yet even a term for most of us. Bank 2.0 was a simple exploration of the fact that customer behaviour was rapidly evolving as a result of technology, and this was creating an imperative for change within banking, which was undeniable.
Bank 3.0 was next , based on the further realisation that you could be a bank based exclusively on emerging technology: “Banking is no longer somewhere you go, but something you do.” Banking was moving out of the physical realm into the digital.
That was more than six years ago. Bank 4.0 was longer coming as the future of where banking would go after the whole multi-channel realisation wasn’t yet clear. It took some incredible changes in financial inclusion and technology adoption via unconventional, non-bank players to create a systemic shift in financial access that would undermine traditional bank models. The unexpected element of this was that the future of banking was emerging out of developing economies, and not the established incumbent banking sphere.
When technology-first players emerged in markets where there were large unbanked populations that had never visited a bank branch, there was no need to replicate branch-based thinking. There was just the need to facilitate access to the core utility of the bank. This, combined with the design possibilities afforded by technologies like mobile, allowed for some spectacular rethinking of how banking could be better embedded in our world. It turned out that these new approaches offered much better margin, better customer satisfaction, engendered trust that was just as good as the old-world incumbents, and offered businesses far more dynamic scaling potential.
Bank 4.0 will be about more than new value stores, payments and credit utility. Bank 4.0 is going to be embedded in cars that can pay in a drive-through without the need for plastic, or autonomous vehicles that generate their own income and pay their own road tolls.
Bank 4.0 is going to be embedded in voice-based smart assistants like Alexa and Siri, available at your command to pay, book, transact, enquire, save or invest. It is going to be embedded in mixed-reality smart glasses that can tell you, just by looking at something - such as a new television or a new car - whether you can afford it.
Bank 4.0 is about the ability to access the utility of banking wherever and whenever you need a money solution, in real-time, tailored to your unique behaviours.
TRANSCRIPT OF VIDEO:
This transcript has been automatically generated and may contain inaccuracies.
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The innovation show exists to bring you content that you may not hear elsewhere, so you can make better decisions, whether that be in your personal life or in your organisation. And thanks to our sponsor, Zai Payments, Transforming the Future of Financial Services with a suite of embedded products and services, empowering businesses to manage multiple payment workflows and move funds with ease.
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You can check out Zai at hellozai.com Let's get into Bank 4.0. With Brett King. Before we get into Bank 4.0, it's useful to put some historical context on the other phases of the Bank. Bank 1.0 started in the 12th century with the Medici family, and it was essentially about guarding your funds. Let's zoom in to Bank 2.0, which was banking beyond the branch.
00:00:55:55 - 00:01:26:17
This was with the advent of the ATM, and in 1995, with the advent of the internet. Bank 3.0 zooms in once again, and it emerged in 2007 with P2P payments, mobile banking and challenger banks. Bank 4.0 is embedded ubiquitous banking ai layers over the banking, contextual banking, where it reacts to your spending and gives you an advice in real time.
00:01:26:22 - 00:01:54:44
It is a great pleasure to bring you, the author of Bank 4.0 Banking Everywhere, Never in a Bank. He is the founder of Molven. He is the host of Breaking Banks Radio and he is our guest on today's innovation show. We welcome Brett King. Thanks for having me on. It's great to have you on the show. Man, I already know this is going to be an absolute cracker for so many of our audience who work in change not only in banks, but in change itself.
00:01:54:48 - 00:02:13:21
And I thought that's where we'd start a bit. The challenge of that before we get into the spine of the book and the narrative of this book. Let's talk about that because you have the scar tissue. This is not somebody who's just a founder who's just gone off. You've gone out because you've experienced the very friction you were trying to fix within a legacy organisation.
00:02:13:23 - 00:02:39:57
Maybe we'll start there, Brett. You know, before I started writing the books, I was doing digital transformation and for the best part of a decade. Within banking, particularly around the internet, I worked with HSBC, Standard Chartered, Citibank, Amex on, global digital strategy. You know, back in the noughties. And, it was tough.
00:02:39:58 - 00:03:11:53
Obviously you have within the bank, you had these innovators, you had these change agents who were trying to get this stuff done. But back in those days, there was still the overriding, you know, mantra inside the branches where the primary way banks would always do business. And so, breaking that cycle even just, you know, getting application forms for products on websites back in those days was extraordinarily hard because there was like, well, why do we need to put it on the web?
00:03:11:53 - 00:03:53:01
Because that can just come into a branch, you know, and do it. But, there was a lot of history. So I was frustrated and I thought everybody that's in my situation as a technologist, must feel the same. They need someone to champion this. So my idea behind writing my first book, Bank 2.0, which became that series, was essentially a change agent, a innovation lead, so a digital head would be able to take that book to the CEO or the head of retail and say, don't believe what I say about the change. Read what this guy says about the change. And that's exactly sort of how it worked. And why the book, became a bestseller was so successful. I heard that story so many times where the head of digital go, the CEO would read the book and get their mind blown and buy a copy for a senior management team.
00:04:11:12 - 00:04:29:36
And that was how the, the sort of groundswell of support for the first book took off. And that really changed my career personally. It's magnificent. And and I'm really so happy that you've been through that. You've broken out, you've proven that you can go and fix the friction that you were experiencing as well.
00:04:29:36 - 00:04:45:56
But there was one last thing I wanted to say there. You mentioned, for example, when you give talks and keynotes, for example, this was towards the end of the book. You said this was many former CEOs or CEOs who are just about to retire would come to you and go, man, that was whoa, oh, thank God I'm retiring.
00:04:45:56 - 00:05:21:13
You're like that. That's the problem. Exactly. Yeah. because they don't, it's like it's too hard to deal with. But, you know, you have to understand that banking as an industry where it's unique from other industries is at least in some other spaces, you will get individuals saying, this represents a competitive opportunity for us, this disruptive, you know, what's happening in the industry as competitive opportunity that is much rarer in banking because of the risk averse nature of banking.
00:05:21:18 - 00:06:00:35
Any change the organisation's been trained, any change is a potential risk to the business. So that's what you've got to deal with. So the way I've progressively done that over the last decade or so is to talk about the fact that the greatest risk is for you to do nothing. And getting people on board with that, and particularly now that's easier because of the massive success that fintech has seen from an investment perspective, from the challenger banks who are now some of the largest banks in the world, at least in their respective markets, like, Nubank in Latin America is the largest bank, by market cap there in N26, the second largest bank in, in German market and so forth. You know, those sort of things illustrate the fact that, well, you're already lost market share. So what's your next plan? You know, one of the things will come back to regulation, because it is a huge blocker for so many people who are actually great change agents who want to drive change.
00:06:25:55 - 00:06:47:26
But as you say, they're hamstrung by regulation. And in some cases they face imprisonment if they make mistakes, like it's not as if they're making these on purpose, like the 08 financial meltdown. If they make mistakes, they face imprisonment. So it actually fear petrifies people from making changes at all. And we'll come back to that in a second.
00:06:47:26 - 00:07:09:55
But I wanted to start where you do in the book, because one of the main cores of the book, the main principle throughout, is getting back to the concept of first principles, which is so important for any innovation, particularly when you're trying to transform a legacy industry or organisation. As you tell us, this industry goes back to the Medici family.
00:07:09:55 - 00:07:39:51
So perhaps we'll start there with the concept of first principles that's so important to understand if you're going to transform any legacy industry, but particularly a bank, you know, first principles is generally thought of as a physics concept, but has its place in engineering. If you look at some of the most disruptive innovations or inventions throughout history, they really did redefine the industry, and reset it in terms of expectations.
00:07:39:51 - 00:08:13:56
So if you think about the problem of getting information, from the east to west coast of the United States, it used to be the Pony Express. And then the telegraph came, the telegraph line came along and completely disrupted that business, the automobile, and how it changed, our view of personal transportation, you know, what's happened with Space-x most recently over the last 20 years in terms of how they've redefined the space industry using reusability and the creation of the iPhone.
00:08:13:56 - 00:08:46:13
These are all examples of innovations that really reset industry expectations and the business models around technological leap. So we see this in elements of banking today, particularly the basic bank account is shifting to a cloud based value store, an intelligent cloud based value store. So today you see mobile wallets today do twice the number of daily transactions globally.
00:08:46:18 - 00:09:09:32
When compared with plastic cards. And so this is something most bankers don't even know about, right. They think that issuing a debit card is is going to be something they're going to be doing for the next 50 years. But, if you look on a global basis from a financial inclusion perspective and from a day to day payments perspective, mobile wallets overtook plastic in 2017.
00:09:09:37 - 00:09:28:57
And so that is a massive change, in terms of the way we think about a bank account, because a bank account was always an artifact that was issued from the bank branch. You know, it used to be a passbook, then it was a checkbook,and then it was the plastic card and mobile wallets.
00:09:29:02 - 00:09:53:56
Are different in that respect, in that they're embedded in a technology infrastructure, you know, as part of an operating system or whatever. And, and that shift, just that basic nature of the bank account is a major one, but the way we think about access to credit, we've been trained that that's a credit card that you use for primary day to day access to credit.
00:09:54:02 - 00:10:21:01
Now we're seeing contextualisation of credit. So buy now pay later (BNPL). You know Apple Pay later and other stuff that you know Affirm and Klarna and and so forth. But this is just the start of that shift away from products that were designed for distribution in the branch moving to sort of this technology based utility. So banking is really getting deconstructed and redefined based on first principles.
00:10:21:05 - 00:10:46:27
And you have to sort of get through to the audience the fact that we have seen this pattern before and when this happens to an industry, all of the previous leaders in the industry are decimated because they normally can't change fast enough. And that seems to have, as an idea resonated with the industry at large that sort of got behind the book.
00:10:46:27 - 00:11:07:30
Yeah. You quip a little bit in the book that there's loads and loads of first principles thinking in the industry, just unfortunately not on the banks themselves. And it's the fintechs, it's the startups, it's the moments, it's the Zai’s (who's the sponsor of this show) It's those types of companies who are starting from first principles, thinking and taking over so many.
00:11:07:34 - 00:11:29:15
And you tell us about this is actually one of the reasons that places like g emerging industries like Africa and even in China are so far ahead of the West because they didn't have to transform legacy mindsets, legacy technology, the rails, as you say, they're starting from scratch, just like you did in Melbourne as well. Well, that's it.
00:11:29:15 - 00:11:55:41
I mean, for me, even when we started moving in August 2010 was only registered the domain, and then the company was formed, early the following year. But, back in those days, even just being able to apply for a bank account in the app, we were the first app that allowed you to sign up for a debit card.
00:11:55:46 - 00:12:35:59
We didn't actually want plastic. We wanted to go straight to a digital version of your bank account embedded in the phone. But, you know, Mastercard and Visa, wouldn't let us know. You have to issue a card we don't have the support for, you know, contactless, ubiquitously yet as an example. We were really focused on financial wellness, helping people save money with their bank account, which you'd think would be a basic element of banking, but it's not, you know, in fact, if you look at the way banks make money today on, credit cards, as an example, with the reward programs and cashback and airline
00:12:35:59 - 00:13:09:22
miles and things like that, it's your push to spend, right? Which is in the current environment is disastrous for someone's financial health. You want restraint. You want to help, you know, help people with the psychology of savings, the behavior of savings. You know, there are elements where we need, you know, significant development on that. So, but just lowering the friction, just enabling you to get a bank account without a wet signature back in those days, 2011, 2012, I mean, as you say from a regulatory perspective, that was very, very tough.
00:13:09:22 - 00:13:43:01
We had to convince regulators that this was as safe as someone walking in a branch and signing a piece of paper, and we had to demand demonstrate, that so there were some real hurdles to the there's early, you know, types of innovation in the space. But thankfully now the momentum, particularly behind, the startups and the fintechs, as you say, has created this, compared of landscape where traditional players incumbents are having to, adapt because the fintechs have been so successful.
00:13:43:05 - 00:14:06:48
With that innovation. Yeah. And I just want to let everybody know brass rose buying 4.0. I don't have a copy behind me. I have a copy of Breaking Banks because I have it on my iPad. But he has a copy right there as well. And he wrote that pre-pandemic. But get a load of this. I pulled a little excerpt here to show you just so far ahead, some companies are towards buying 4.0.
00:14:06:48 - 00:14:49:43
And here's, a little excerpt. Within ten years, based on current growth and financial prompts, Brett, you'll tell us a bit about, this will be valued at more than $500 billion. And by 2030, it will likely be approaching $1 trillion in market cap value. This would make it four times bigger than the largest bank in the world today is ICBC of China today, and financially, it is roughly worth the same as UBS and Goldman Sachs, two of the most well respected banking players in the world and financial has a first mover advantage as a true first principles financial institution built upon the utility of mobile.
00:14:49:48 - 00:15:10:49
I thought I'd use that little excerpt for you to explain about this company, about and financial, but also about how they are so close to what you envisage for banking of the future, which is Bank 4.0. So and they've changed their name to ant Group now. But you know, ant is the largest fintech in the world.
00:15:10:49 - 00:15:34:22
They're based out of China. They're the parent company for Alipay, which is the largest mobile wallet operator in China. In fact, in, you know, globally, they've invested in mobile wallet schemes all around the world to become an aggregator of, mobile payments. You know, in 2020 that China did $52 trillion of mobile payments.
00:15:34:22 - 00:16:02:42
And why that's notable is the rest of the world did $35 trillion of plastic card payments. So that's sort of putting it in scale in terms of what the they're doing. But they also have the most successful savings product of all time called Yui Bao, which is a savings feature they built into the Alipay wallet. And, you know, prior to the pandemic, they got to the point of almost $300 billion of assets under management in that savings pool.
00:16:02:47 - 00:16:35:07
So, so much so that the central bank, deemed it necessary to put restrictions on deposit sizes for that, you know, feature of Alipay because it was so disruptive in the market. But here's the point prior to the recent restrictions we've seen around Jack Ma and the tech companies and so forth in China, ant was on track to IPO at around $330 billion, which would put them in the top 2 or 3 financial institutions globally.
00:16:35:07 - 00:17:02:11
That was in 2019. Now, obviously the political landscape in China has changed somewhat, but not the fundamental rules around and in terms of their growth. And if you if you look at why and is successful, primarily it's because they have fully embraced being a technology first player in banking, and the payments space.
00:17:02:16 - 00:17:27:43
And so that is their competitive advantage when you look at their org chart, you know, you look at their board. It's made up of technologists. When you look at their executive team, they're all, you know, got deep technology experience. You know, when you look at many of the modern banks, you know, world leading banks today, historically they might have one technologist on the board, maybe two at a stretch.
00:17:27:48 - 00:18:11:25
And then innovation or technology is a department, you know. Oh, that's the digital team, right. Well, that's the innovation team. But and the entire business is it's like Apple or Facebook or Microsoft, their entire team is focused on technology that can really advance, the needs of of their customers and users. So that's the that's the challenge you face as an incumbent in this space that, it's not just about access to technology, but it's the cultural issues within the organisation about using technology to do banking day to day that you often got to fight against because the culture of the organisation is trying to reinforce the old model.
00:18:11:30 - 00:18:30:14
Yeah. And we'll come back a little bit if we have time to, to the org chart, because Brett does this brilliantly in the book, gives you an org chart of the future, the roles you need, the people at the table, the mindset of the CEO. Everything is covered in this book and it's a culmination of all the books before, but they also are so valuable to read as well.
00:18:30:19 - 00:18:49:49
But let's move to regulation. As I mentioned earlier on, I work with many banks and regulation always comes up as the blocker and this sometimes can be the case. But also you tell us we can try different things. But let me give a little quote again. That's magnificent here. That will bring it to life for so many people.
00:18:49:54 - 00:19:29:35
You say if there's one area that is going to need a total first principles rethink it is regulation. Presently we're in the vernacular of the software industry, madly adding patches to the system, trying to retrofit decades old regulation and core systems for all these new channels, behaviors and technologies that are emerging. But the more we try to add fixes to the system, the more we get a sort of conflated banking spaghetti code, a system that threatens to lose its coherence at any time with legacy system and platform limitations that are already decades out of date.
00:19:29:40 - 00:19:51:08
Let's share your thoughts on regulation, because this is a huge challenge. And again, it's this whole thing about it's nearly easier to start from scratch and build from first principles. But one of the big blockers, even for the early movers, you've experienced this yourself with moving on many of the other fintechs is regulation. So let's share your thoughts on this.
00:19:51:13 - 00:20:14:27
The biggest changes here are around just structurally the way we think of a bank account, the way people behave, you know, I mean, regulation, you know, that was built during the 70s and 80s in particular. It was supposed that someone's going to come into a branch and sign a piece of paper. And that's how you will deal with the, you know, disclosure requirements and so forth.
00:20:14:32 - 00:20:36:00
You know, the structure of products like how you offer interest to a customer and so forth, you know, often hard coded in regulation. So when you try and, create something, a nation around that sort of thing, you know, you're going to have the regulator say, but that's not how we do banking. And so that's where the challenges, fit.
00:20:36:01 - 00:21:18:31
Also, think about this. A regulation that was built during the 20th century was not designed to scale up to millions of customers simultaneously doing types of activity. You know, it was always having to be dealt with on a piece of paper. And it's same for things like, anti-money laundering, rules that we have where you have these supervisors whose job is to go around and actually go through these suspicious transaction reports, like on a, on a printout of these, you know, thousands of transactions identifying the ones that they're going to referred to the Financial Crime Authority as an example, very antiquated approach.
00:21:18:36 - 00:21:55:12
And that's why we're woefully, unsuccessful at stopping money laundering today is because those systems are, designed for a time when, data access was printing at a spreadsheet, effectively, on a piece of paper. So, to be effective at regulating the future financial services industry, we are going to have to apply technology to be able to do the supervision at scale based on the massive amount of transactional volume that it's emerging because of the digital layer.
00:21:55:17 - 00:22:40:45
And that requires a technology skill set within the regulated regulatory bodies that currently, they're having to build from scratch because it's not something that they've had as a core competency. And in many cases, as you automate the regulatory environment, you completely change the structure of regulation. Soif you look at the United States is over 70 regulatory bodies that manage, the regulation function in the United States, the federal authorities, the state level authorities, even at the federal level, you have a payments authority, you have the SEC, you have the fed, the FDIC, and often they're in conflict, so automating regulation would require a structural change
00:22:40:45 - 00:23:05:09
to the regulatory bodies. That's something that in a country like the United States, they're just not ready for, the UK as an example, is making some fairly good progress on that. The FCA's been, a leader in terms of running tech sprints and things like that. Mass in Singapore has been, you know, fairly progressive.
00:23:05:14 - 00:23:26:06
But those markets, it's, somewhat simpler to deal with than, say, in, in markets like China, India or the US where you have, such a big regulatory infrastructure so that, they're going to have to become technologists as well. And that's a big leap. That may in fact be harder than getting banks to become technology focused.
00:23:26:11 - 00:23:47:21
Yeah. And it's so important for them as well because, they don't they don't understand. And for anybody listening who thinks this might be not relevant to you, think about AI or any type of replacement tech. So when you have to replace a legacy system with a new one, you're going to get this type of resistance anywhere there as well.
00:23:47:22 - 00:24:09:25
So I wanted to just go a little bit deeper. There's another little excerpt I pulled here because I love how you write about this. It's not just technical, it's from that scar tissue that we talked about that you have from working in the industry as well, so brilliantly written. And you say, ironically, the very traits that have made regulators effective have suddenly become top contributors to new risks.
00:24:09:30 - 00:24:39:13
As the gulf widens between the velocity of market and regulatory change, regulators must rapidly address new technologies that they don't understand and which are rapidly exposing current regulatory modes. Regulators are left and walking and knife edge between either blocking emerging benefits nor allowing new risks to proliferate. The chance of all this going smoothly with minimal failures is honestly, as you say, zero.
00:24:39:19 - 00:25:09:53
And I think, you know, that characteristic of the the adaptation of the overall regulatory space is sort of key. But it's as I say, it's a skill set issue. But here's where the fintechs have been able to move the needle to some extent. And when you look at a banks ecosystem, the immune system, when you try and do something new, often the compliance and legal team will say, well, no, the regulators haven't explicitly given us permission to do that.
00:25:09:53 - 00:25:35:38
So we shouldn't do that, right? Whereas a fintech will say, well, the regulators haven't specifically denied us the permission to do that, so let's do it. And if we get in trouble will adapt then or actually going to the regulators and saying we, you know, we did this as moving, we'd like to try this, you know, what are the conditions with which you would be happy for us to prototype this in the market and, you know, see where this goes.
00:25:35:43 - 00:26:03:43
So that's the fintech culture in terms of experimentation and trying new things versus the the incumbents. What we generally found is a startup is going to the regulators and having those conversations, they would be that would like, yeah, we've talked about this internally. We'd love to see, a trial on this. But none of the big banks are coming to us asking us about this because the big banks are saying, yeah, but the regulators haven't said yes or no on this first.
00:26:03:48 - 00:26:25:57
So, that's a chicken or egg problem that you see in the incumbent space. Or as the fintechs tend to be more experimentation and consultative with, with the regulators. And that's done them some favors. Now, that doesn't mean that all fintechs have an easy time of it. You know, we've seen Revolute and others sort of get the slap on the wrist and be pulled back sometimes.
00:26:25:57 - 00:26:49:07
And I think that's fair. You know, especially where, you know, a risk is emerging, unique risk is emerging based on their business model. But having said that, you know, it needs to be a consultative process. You need to be proactively innovating, and that needs to be a process of going to the regulators saying this is what our intent is, how do we do this safely?
00:26:49:07 - 00:27:15:49
And that will give regulators comfort and support for your, you know, baseline initiatives, rather than seeing them as an enemy, they embrace them like the fintechs do. Like you. You've done what moving, for example. But one of the other things that you mentioned, there was money laundering. And as you say unwittingly and definitely against their will, banks have become almost like they have to take this upon themselves.=
00:27:15:49 - 00:27:31:51
So they're not getting much help as well, and that's distracting them. We've said, for example, a CEO of a bank will get your book and go, we got to do this. But everybody's like, but we're so busy trying to keep the lights on with existing business, how can we possibly do this? We have to invest in ourselves.
00:27:32:02 - 00:27:54:48
We have money laundering, we have blockchain, we have crypto. All these different things are going on in the background, and you're asking us to do this on top of everything else. That's a huge thing that happens in most industries that are transforming. What are your thoughts on that, particularly that you mentioned, for example, how ineffective we are? Money laundering, but particularly the onus is all gone on to the bank.
00:27:54:48 - 00:28:18:08
And it seems somewhat unfair. If you look over the last, you know, 20 years, you know, 60, 70% of incumbent IT costs have been regulatory and compliance based. Whereas fintechs, you know, when they're building, they're building from scratch and they're building. Yeah, you know, up to date regulation and compliance stuff into the stack. But you know that they have it easier.
00:28:18:13 - 00:28:40:25
Yeah, yeah, they're more adaptable to that because they have newer tech and they don't have legacy systems and legacy code and so forth. So that's a distinct advantage you have where, in a fintech, essentially 95% of investment is going into the innovation, whereas with the banks you're limited because you've got to change all that legacy stuff.
00:28:40:25 - 00:29:02:16
So that's a challenge, which is why, when we see banks trying to experiment, really with sort of digital direct models and so forth, putting a new organization outside the old org chart, being able to put new technology in place, new leadership and and experimenting and trying something new is often an approach that is quite successful.
00:29:02:16 - 00:29:43:07
But then you've got the problem of, you know, when that startup that you've created on the side, you know, has been successful, you know, what are the lessons you can take back to the larger organisation, and you still have the challenges with the legacy, you know, org structure to, to fix. But, you know, I think, if, if we look at a few years in respect to this, this is where artificial intelligence really changes the game, because as we deploy more robotic process automation and we as we have artificial intelligence embedded in our lives, you know, it's it's going to require radical transformation there as well.
00:29:43:21 - 00:30:10:34
We're going to be replacing a lot of, you know, human, process led workers in the banks. We're going to be, you know, changing the way, the banks can respond in real time to your needs for the utility from the bank and so forth. So as that AI competency builds up, then you have no choice but to sort of rethink the way the function of the bank works, even from a regulatory, perspective.
00:30:10:34 - 00:30:48:11
And in respect to sort of core core capabilities. And that's why I say in the book that regulators have to become technology companies, too, because if you take something like AML, the easiest way to tackle AML will be to create large pools of data on transactional data. You know, have, AI's mined that data, define suspicious actors and cut their access to the system, like we would with hackers, you know, from a cybersecurity perspective, and that's going to improve our success at stopping money laundering significantly over the current system.
00:30:48:11 - 00:31:19:35
But, you know, we're talking about a grassroots change in the way, you know, regulation is is, is executed in respect to money laundering. One of the other things you talk about there, and it's falling under there remains of regulation because of the money laundering that inevitably takes place within this realm. And unfortunately, there's a lot of bad actors which give a bad name to the good actors, which is digital currencies, cryptocurrencies or ICOs, etc..
00:31:19:36 - 00:31:45:45
I'd love you to share your thoughts on that, because that's also a big challenge for regulation in the book. The way I describe it is that, you know, we are digitizing the world and, as part of that fiat currency as it stands, is not really well suited to a real time borderless environment. You know, neither are many of the ways we think about, products.
00:31:46:00 - 00:32:09:30
The big thing, you know, in over the next ten, 15 years in particular, is that as we try and automate supply chain and as we try and, improve the flow of money in an automated society, we're going to have to create these smart contracts. So smart contracts won't use fiat currency, they'll use CBDCs or stablecoins or tokens.
00:32:09:35 - 00:32:42:35
So that is the way we're going to automate commerce at a global level based on artificial intelligence. And that changes the way we think about money, particularly because it becomes programmable and, you know, embedded in these, AI based systems. So that's the shift that's occurring at a macro level. Then, you know, you've got at a geopolitical level, you know, the issues of, you know, US policy and how USD is being used and China wanting to reduce reliance on Petro dollars and, you know, sort of dollar rise.
00:32:42:35 - 00:33:22:45
The world, you know, you've got the commodities markets which about half of commodities trade globally today energy based. You've got renewables and energy reform coming in that's going to dramatically change that, so that there's a lot of macro stuff that's happening there. But crypto, and digitization of, you know, the tokenization of the world is largely inevitable as, automation, comes into society because the way we think about money today and the way bank accounts work today, they they won't adapt to this, this highly automated world that we're moving to.
00:33:22:50 - 00:33:42:57
One of the other challenges, just to get through that from a regulatory perspective. And you've experienced this with moving is the cloud. So the misperception that the cloud is not safe. And in some cases, you said, for example, in the book comically, that some regulators were like kind of going, we need to know who have key cards for your server.
00:33:43:02 - 00:34:27:01
And they're like, well, the servers in the cloud, you've experienced this yourself with moving and the challenges with regulation. Often regulators will want to know where is the the physical hard drive located that stores this information as an example? And that's a very traditional way of of looking at things. What we do know today is that when you compare a bank on prem system compared with the likes of, you know, Azure or AWS, you know, as examples, Google Cloud, that these cloud environments, you know, they're hosting all of these next generation apps and technologies.
00:34:27:01 - 00:34:53:37
And the first thing that's going to happen is fraudsters are going to jump in and try and hack the system or whatever, you know, Amazon, you know, dot com, for example, running on AWS constantly, you know, attempts at hacking and taking users credentials and all of those sorts of things. So it's like, an immune response that those cloud based systems, over time, by necessity, have had to become a lot more secure very rapidly.
00:34:53:42 - 00:35:18:26
Whereas the sort of flavor of attacks, cyber crime and cyber attacks that you might see on a traditional on premise system may be limited just because of scope. So as a result, we now know that cloud based servers, cloud based operations are much more secure than on premise solutions. But, helping regulators understand that, and, you know, it has taken years, frankly.
00:35:18:26 - 00:35:42:10
And now finally, you know, when we've seen operators, you know, like fintechs operating on cloud based servers for a decade without those in, you know, those instances of, of, risk that everyone thought would exist in the cloud in the early days. That sort of has solved that problem. But you've still got on on premise champions in banks.
00:35:42:15 - 00:36:11:48
And there's a lot of incentive for bank executives to build their own data centers and so forth, because, you know, they get more budget, they get more people, and so forth, rather than, you know, outsourcing, you know, part of their architecture to cloud operators. Yeah. And again, you talk about this in the book, we won't have time to cover today, but even your own experience with moving versus moving in HSBC, where you were in the incumbent, industry moving.
00:36:11:48 - 00:36:32:06
So it was so slow and it's so frustrating for the change maker as well. But let's not move on from regulation, because I don't want our audience to think that this is picking on banks. Yes, there are some people who are clinging to the past, but there are lots and lots of people trying to make the change, and it's bloody difficult for so many of them.
00:36:32:11 - 00:37:04:17
Brass within all his books give solutions. And in the book and in particularly on the section on regulation, you suggest some elements of reform for regulation. And you tell us success will require strategies grounded in first principles of assuring financial system stability, customer fairness and curtailing money laundering. You share some critical elements here of regulatory reform. Perhaps you'll bring us through them, some of them even at a high level.
00:37:04:22 - 00:37:31:39
I was very fortunate for the second chapter of Bank, for which deals with the regulatory space. I was very fortunate to work with Joanne Barefoot. Joanne has worked globally on policy and regulation. She's advised the FCA in the UK, she's advised MERS and Singapore approach in Australia. You know, and of course she was the deputy comptroller of the currency at the OCC in the United States.
00:37:31:44 - 00:38:04:56
So, you know, I had a delightful, time working with Joanne on this because she really understood the regulatory environment and the need for change. But at its core is about the fact that, if we look at the function of the regulators in the past, that supervisory function will still exist for these regulators, but it will largely be based in code rather than individual examiners going around looking at the compliance of the banks.
00:38:05:11 - 00:38:41:59
So in the future, the banks compliance, I will talk to the regulators. Regulators I and that's how the compliance, you know, will be verified or checked between, between the bank and the regulator. Again, big conceptual shift. But we you know, it needs to be clear that when we look at things like terrorist financing, suspicious transaction reporting, and all of those things that have become such a big part, you know, even KYC, you know, know your customer, mechanisms and identity verification.
00:38:42:04 - 00:39:10:42
And those things are have become so much more reliant on technology. So even if a supervised a, you know, an examiner who goes to a bank to check on compliance, you know, very soon, the examiner will be just looking at a black box functioning code and won't really be able to assess, you know, the compliance, capabilities of, of the bank unless they're just looking at outputs, you know, from, from the black box.
00:39:10:47 - 00:39:39:33
So this it does require a real reset in terms of thinking and, and, and capabilities at the sort of grassroots regulation level. The biggest challenge with that is not necessarily around, you know, the, the ability to adapt, you know, within the regulatory body because there's plenty of people who are now sort of fighting that fight. But the fact that the mode of regulation is sort of hard coded in laws, they're going to have to change.
00:39:39:42 - 00:40:12:26
So if you take the US, around financial inclusion, there was a law put in place in 1977 called the Community Reinvestment Act. And this defined in 1977 that the best way to financially include people was to have them have access to a bank branch so they could ask for credit. Today, we know that a mobile phone is a far better vehicle for financial inclusion than a bank branch, but that law hasn't changed in the United States since 1977, you know, 50 years ago.
00:40:12:31 - 00:40:33:01
And so therefore, you have these traditional banks who are subject to that regulation saying, but we need to keep these branches open because the law says we must. And you've got these digital guys like, you know, chime and borrow and Karen and move and, and, and simple that are coming on and they don't need branches. So it's a it's a un-level playing field.
00:40:33:01 - 00:40:55:38
So you should stop them from being able to open bank accounts digitally because we can't do that in the same way. So you know, that's part of the challenge you've got with these hard coded laws that are in place. So the way to fix that, of course, is as we move to AI based regulation, you are going to have to encode the laws on the books that make the most sense.
00:40:55:42 - 00:41:17:04
And that's going to require Acts of Parliament of, you know, legal reviews and things like that, that, create that reform. So as we, we automate more and more of the banking system, you know, we're going to have to go through that process of review. There was a line that I want to quote from your book that will account for all change.
00:41:17:04 - 00:41:48:37
And this goes to your point about you need to have sandboxes and test beds, small incremental changes that you can make with regulation even, for example, and you said that regulated entities should be given a choice here. They can remain in the traditional regulatory process they hate. But no. Or they can elect a new data driven regtech challenge channel, submit to intense real time scrutiny, and be relieved of process oriented compliance requirements.
00:41:48:42 - 00:42:19:10
The government stands here would be that if the entity can prove through data that it is meeting desired outcomes measured using transparent and empirical standards, then regulators need not care how they got there. And here's the line that I thought was a brilliant line that will make sense to all the change makers who listen to the show. Making this new channel optional would avoid the biggest obstacle to regulatory reform, namely the need to force change on the entire system at once.
00:42:19:21 - 00:42:45:54
That's one of the biggest challenges, is that we try to boil the ocean instead of making little changes to different parts of the bank here. In this instance, instead of one big change, demonstrate it. You know, just show the ability of this technology to transform the space, particularly when you look at something like AML. Right. It is we know that data science and data modelling are going to be much more effective.
00:42:45:54 - 00:43:05:56
In fact, the regulators I speak to like, FinCEN in, in the US, the Financial crime Unit and so forth, they know that this is the way it's going to eventually go. The only question is when, should it happen now and now? And my view on that is that if it's going to happen anyway, then just let's just get on with it.
00:43:05:56 - 00:43:27:59
You know, it's, that's, that's the lesson you learn at, at of innovation historically is, there's no real benefit in slowing it down. You know, no, no industry has successfully been able to stop technology innovation. So let's just get on with it. But being able to show that sort of a B approach like this is the new way we're doing it.
00:43:27:59 - 00:43:48:58
This is the old way, which is more successful from a a data perspective. One of the outcomes that we're achieving, I think that is the easiest way to sell the lawmakers and the policymakers on the success of, automating the regulatory function. I think you're so right. I think that's one of the big challenges, is because they can't imagine what you can see clearly in your hand.
00:43:48:58 - 00:44:19:52
They can't see it. So you show them a minimal success rather than selling them an idea in the first place is much, much easier. But I wanted to also jump into buying 4.0, the re-imagine Bank 4.0, and also try and get org chart in there before we finish. So you say here that in the 19th and 20th centuries, the value of a bank account was primarily that it kept your money safe, that you could save money securely, and you could pay for stuff based on the authority of the bank.
00:44:19:57 - 00:44:49:06
When you wrote a check, people would trust it as a mechanism of value exchange because a bank was behind this, the value in a 21st century bank would be in how it provides utility in context, how it adapts to your financial life and your behavior. The bank account is transitioning to a smart money artifact bank utility embedded in our world, enhanced by artificial intelligence that responds to your financial needs as and when they present themselves.
00:44:49:10 - 00:45:15:23
So let's share some of the principles behind the 21st century embedded smart bank account, and how it will change the way all of us live with our money. So there's the org chart graph that you're talking about. If it's okay with you, I'll share that on the screen so people can see it. The key element here is that we're moving from, you know, we're moving to a real time world.
00:45:15:27 - 00:45:46:20
And in, in that real time world, I'm solving your financial problems as they appear. So, the illustration I gave, gave in the book is walking into a grocery store, and you, you fill up your cart and you get to the checkout, and you give the cashier your debit card and it's declined right now, that's a scenario where a traditional bank would say, oh, you need a credit card, but a technologist, a first principles innovator, would say, well, no, you don't need any plastic, obviously.
00:45:46:23 - 00:46:06:34
Right. But what do I know that can help me solve this problem for you? Well, I know how much you spend on groceries. If you know, every 2 or 3 weeks. I know you've just walked into a grocery store or a supermarket, and I know your bank balance or your wallet balance, and I know you don't have enough cash to complete your grocery shopping.
00:46:06:39 - 00:46:25:05
So as you walk in the store, I can present you with a solution now. So this is sort of the contextualisation or embedded banking. And now we're talking about the next layer of technologies like smart glasses that are going to come over the next few years. Imagine walking into a Tesla dealership and seeing which Tesla you can afford, right?
00:46:25:10 - 00:46:52:28
You know whether the financing offer or walking into a real a listed real estate property, and seeing a home financing offer on your smart glasses. So there the that's the sort of embedded utility of banking that we're talking about. Place money coach in your pocket, helping you save money. You could ask your smart bank account. Hey, Aiden, you know, you could or you could say, you know, can I afford to go out for, dinner over the weekend with my mates?
00:46:52:28 - 00:47:10:55
And, you know, your bank account will know how much you can spend over the weekend without compromising your goals. You've got for the end of the year or upcoming bills that you might have, you know, your smart bank account saying to you, hey, you know, you've got to pay your car insurance in three months. But on your current cash flow, you're not going to be able to afford that.
00:47:10:59 - 00:47:32:04
Here are some strategies for you to mitigate that. This is what a smart bank account is like. It's embedded in your life, giving you access to banking when and where you need it. And that's a very big shift from the old days of, well, you go to the bank and you jump through these hoops, and if you're not too risky, if you're very lucky, we might give you a product.
00:47:32:04 - 00:47:59:13
You know, that's sort of the bank perception of risk. So you, you know, it's a completely different risk model. It's real time. It's when and where you need it. This is really the big shift behind smart bank accounts embedded in a wallet versus sort of the dumb bank accounts, like a check or, you know, credit card or cash that don't really give you any contextual feedback and don't adapt to changing conditions.
00:47:59:18 - 00:48:13:59
I'm going to annoy our audience if I don't get to org chart before you run out of time today. Brett. So I'm going to jump into that. So this is what is the org chart of the future look like. And I'm I'm going to show with Brett's permission, the org chart that he gives in the book. And I highly recommend the book.
00:48:13:59 - 00:48:38:09
There's checklists there. You also follow Brett's podcast and will ask where to find all those in a second. But here you say when the automobile was invented, the dominant form of urban transport was horses. Within 30 years, that had all changed along with it the shape of cities, manufacturing and support systems around cars. When the telephone was invented, it rapidly changed communication.
00:48:38:14 - 00:49:00:08
The same is patently true with the impact of the iPhone. Not only has it changed the way people think about their phone, but it created an entirely new ways of doing business via apps. It changed the music and the taxi industry markedly. It changed the hours we spend on our advice devices, and it changed the way people consumed and created content.
00:49:00:23 - 00:49:30:43
So it begs the question, Brett says, how do we organise the new competencies in the 21st century bank 4.0 Bank? Do you simply create new roles in existing businesses, or does it require reorganising the business to be more effective from the ground up? Over to you, Brett. The biggest shift is really moving from a posture of a product based organisation to banking experiences and utility.
00:49:30:48 - 00:49:53:07
So the example I gave at the grocery store that really destroys, you know, as does buy now, pay later, those types of scenarios, it destroys the credit card business as a product. Because getting rewards or, you know, cash back and so forth is not the motivator of this future world. It's the contextual, the ability to solve a problem in real time.
00:49:53:11 - 00:50:22:17
And that requires access to credit. It doesn't require a credit card product. And the same exists for mortgages and savings and investments and so forth. So you think about an org chart in a bank today. Those are all departments. You know, the the wealth management team, the mortgage team, the credit card teams. And so forth. Those teams shrink dramatically because they're now become experts at understanding embedding the banking function in a customer's life.
00:50:22:17 - 00:50:46:50
And then you have to create the experience around that. So it's experience design. It's behavioural psychology. It's data science supports that. So that's really the big shift is is and and just building great experiences for customers. Building the delivery capability in terms of the tech stack, that's how, you know, fintechs don't talk about core systems. For example, they talk about the tech stack.
00:50:46:50 - 00:51:19:03
That's where the agility of the organisation exists technically. So they're the big changes moving from a product to an experience led, org chart. And, you know, building the technical capability to deliver that in, in real time. And then the data science or the behavioral stuff that was really going to ferret out those unique opportunities for your brand versus another one where you can do something different based on data or behavior or, you know, emerging trends, in the customer space.
00:51:19:03 - 00:51:40:34
And it works for retail as much as it does for, commercial banking, you know, just, just even, the ability to help someone manage cash flow at a business level and anticipate when they need credit instead of asking them for three years of financial, you know, financial data, you know, like their statements and stuff. Now, well, we got all that data.
00:51:40:34 - 00:52:02:49
We, you know, we can actually produce, you know, an accounting ledger from your bank statement. We can do that in real time with AI. And so now we can tell you as a business when you need credit based on, on your business activity rather than the other way around. As, as sort of an example that does blow things up from an old chat perspective, like, for sure, for sure.
00:52:02:54 - 00:52:30:30
But every time, for one more question, of course, okay, let's do this. So I, I wore a pin especially I have a practice of wearing a pin for each other. This one says adapt or die by the way. And it's a picture of a moth. That's that's one of my, chapter headings. Yeah, exactly. So I was delighted when I saw the chapters, like, I have a pin for those, so I thought we'd share your thoughts on adaptation because there's a chapter called Adopt or Die, and it covers all types of disruption itself.
00:52:30:30 - 00:53:03:51
And here you say disruption is not new. When you look back over the last couple of centuries, you see time and time again evidence that incumbents underestimated the impact of change on their industry and the banking sector. Today, the huge potential changes we're facing are no longer just focused on front end user experiences. We're seeing currency, capital markets, wealth management, bank licenses, labor force and economics all under attacks from emerging new systems, paradigms and technologies.
00:53:04:00 - 00:53:29:27
The biggest question you say probably is why is it when faced with disruption, incumbents don't react any faster? It's like a mixture of disbelief in the speed of change, combined with fear over being disrupted, which often creates a condition like a deer in the headlights on an oven, oncoming vehicle, you know you need to move, but you still get hit anyway.
00:53:29:42 - 00:53:49:51
And here you share some of the indicators, some of the triggers that disruption and those headlights and that car is coming straight for the deer. That is many, many banks throughout the world. Quarter. This is really the culture of the organization in terms of being able to adapt. And that starts at the board level. It starts at the CEO level.
00:53:49:55 - 00:54:10:16
I always get asked, you know, the most frequent question I get asked when I'm speaking to bank boards or at a banking conference is they say, tell us a bank who's really good at this? You know, my first answer to that will be, look, it aren't right anchor, because they're better at this than anyone else, but they're not a traditional bank.
00:54:10:16 - 00:54:29:04
No no no no no, not the fintechs. Tell us a bank that's really good at this. As if, like, if we can get a bank case study that demonstrates this, maybe we can get permission to do this. And when you look at and there's only a handful of them, you know, globally where that you got really progressive banks.
00:54:29:09 - 00:54:53:28
But it all starts with the CEO, you know, Jamie Dimon, you know, with Chase in the US, you know, BBVA historically, Piyush Gupta, the CEO of DBS Bank in, you know, Singapore, you know, there are a handful of bankers who have made this shift who have real, really driving their organisation to this new reality and have been very successful at it.
00:54:53:33 - 00:55:24:11
But they're far and few between. And that's really the the challenge of that industry disruption, that we talked about is so much inertia, which is generally why I say the largest banks and financial institutions in the world in the 2030s will be fintechs, just like we've seen in other industries that have been disrupted. These technology first players most likely will be the new, you know, foundational elements of banking in the economy.
00:55:24:16 - 00:55:51:47
And, you know, historically speaking, this is fairly common. You know, when you when you, you see, these industries being disrupted by these major technical developments, the, the core industry resists. You look at the movie industry and the, you know, the music industry, they spent hundreds of millions of dollars trying to stop people downloading, music and films.
00:55:51:52 - 00:56:29:03
If if that effort had been put into reforming the industry and, and putting these innovations in place, it would have been an entirely different process. It was inevitable in the end. But there was so much effort spent in defending the existing business model. And that's the biggest guarantee of failure as a brand in in this new world of banking that that we have is is the resistance to that that inertia brilliant present for people who want to find out more about the Breaking Bands podcast and find out more about moving and indeed yourself and all your books, where can they find that?
00:56:29:07 - 00:56:50:22
Go to Brettking.com. That's, you know, my personal brand page. Of course, breakingbanks.com You can check that out. We just launched a new podcast called The Futurists. Sort of a little bit more sci fi, talking about changes happening at a macro level. So check that out. But, yeah. And you connect with me on LinkedIn, Twitter, and Facebook.
00:56:50:22 - 00:57:14:47
Brett King, author, on Facebook, on Twitter, at Brett King and LinkedIn. Know you should be should be able to find me easily. If you had one last message for our audience today, one last call to action to legacy banks in particular, what would that be? Start today. Move. You know, you're not going to make progress in this by debating whether it's the right or wrong thing or not.
00:57:14:51 - 00:57:38:48
And, you know, become a technology first, champion. That's going to be the way to guarantee the success of your career individually and the success of your organisation. Founder of moving. Host of the Breaking Banks podcast. Author of multiple titles. But today the focus was Bank 4.0 banking everywhere. Not on the bank. Brett King, thank you for joining us.
00:57:38:50 - 00:58:01:59
You're welcome. Thanks for giving me a chance to have a chat. Thank you for all you do for change makers, people who are struggling to make change in banks as well. That's been my platform, you know, because I used to be one of them, welI I still am I guess. But, you know, I used to be in the trenches at HSBC and it was just so hard to get stuff done, you know?
00:58:02:04 - 00:58:25:52
And even in the face of real evidence that things were changing, the resistance, the immune system of the organisation in terms of, you know, trying to stop change and innovation was so strong. So that's why I wrote my first book, Bank 2.0, back in 2010. Yeah. Well thank you. I mean, it really speaks to the very core of this show because this show is for those people.
00:58:25:57 - 00:58:49:45
Loads of people who work at banks were listening to the show as well, because it's mentally unhealthy for them. Such a pleasure to bring you this increased content on this bespoke series powered by Zai payments boldly transforming the future of financial services with a suite of embedded products and services, enabling businesses to manage multiple payment workflows and move funds with ease.
00:58:49:45 - 00:58:55:28
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