This Time Is Different: A book review
of Digital Human by Chris Skinner, Marshall Cavendish (2018)
Mr
Skinner has written two books on FinTech and banking (Digital Bank and ValueWeb),
and now Digital Human is his third. This represents an opportunity to take
a step back and consider some of the bigger questions about FinTech. How much
of a change could this represent for banking? For financial services? For
society?
His
main argument is that digitalisation has reduced the cost associated with a
minimum viable product beyond recognition for nearly anything in financial
services. One way of looking at FinTech is as ‘one big bucket of finance and
technology’ with a range of technologies from InsurTech (based on artificial
intelligence) to digital currencies, with mobile wallets and peer-to-peer
lending in between. Indeed, one could make the argument that it should be called
‘TechFin’ instead. However, it is possible to make overall sense of these technologies
by distinguishing between those that challenge existing business structures and
those that create new ones.
One
of the main aspects of the digital revolution with respect to banking is the
differential effect between the (developed) West and developing world. Surprisingly,
it is not in the direction you might expect. For the West overall, FinTech
represents a challenge to existing business structures. Current IT systems took
shape in the 1970s and 1980s at a time when now-ubiquitous ATMs were first introduced.
While the front-ends of these systems have changed over time, the core
architecture has not. As Mr Skinner points out, CEOs invest significantly in
systems maintenance to pass on to the next CEO rather than overhauling
technology. I was left wondering if this might also be a reflection of
misplaced risk aversion that contributes to the relatively short tenure of CEOs.
There
also seems to be a potentially systemic issue arising from the natural ageing
process of the programmers who can still write code in the language of the
legacy systems (COBOL). Mr Skinner observes that more than 50% of COBOL programmers
are over 45 years old, so the challenge of maintaining legacy systems is not
going to get any easier.
However,
the real challenge does not seem to be adopting new technologies but the
vertically integrated business model of banking or, as Mr Skinner puts it
rather eloquently, being ‘control freaks in a proprietary operation building
everything themselves’. As usual,
technology enables the challenge but does not help the incumbent figure out how
the business model should evolve and how to remain profitable. Mr Skinner offers
two suggestions. The first is leveraging on its capital, history and brands and
repositioning the business as a trusted party that can select specialised
providers, like Amazon Marketplace. The second is leveraging on the data and
focusing on advice and data analytics.
Indeed,
there seems to be a change in emphasis in FinTech. Between 2010 and 2014, the focus
was on disrupting existing banking business models and unbundling. Since 2014,
the focus has shifted to collaboration with more dynamic banks leveraging on
their customers’ reach and capital.
Perhaps
the key point to emphasise is that the regulatory framework has already adapted
to some extent, at least in the EU where Open Banking is already a reality because
of EU directives.
If
you don’t work full time in FinTech, it is difficult to form an impression
about how far these trends could go. (Yes, I know there are forecasts, but they are
merely forecasts.) This is where the other part of the book is particularly
useful.
In
the developing world, banking tends to be restricted to affluent clients. . FinTech
does not challenge major incumbents; rather, it represents more of a
development opportunity. FinTech allows for servicing relatively small transactions
(by Western standards) which is compensated through a relatively large number
of transactions. In this way, financial inclusion becomes a business and stops
being a form of charity.
Mr
Skinner illustrates extensively how far and deep these trends are going. In sub-Saharan
Africa, mobile banking and e-wallets lead with the overall number of accounts
growing fivefold between 2011 and 2016, reaching around 275 million accounts
out of 420 million mobile subscribers. Interestingly, use is not evenly spread.
Institutional design continues to matter even in the age of FinTech. In some
countries, these developments are led by mobile network operators and in others
by banks. Some countries actively encourage partnership and agreements to
enable domestic and cross-border money transfers cheaply.
This
is not just a matter of convenience. If you cannot get paid reliably and must
rely on cash, there is a limited number of business opportunities that can
thrive. The case study of China’s Ant Financial is therefore fascinating. It
starts with a problem of trust between buyers and sellers that limits the
development of the e-commerce that evolved into what we call now electronic
payments. One of the lessons of this is really about the central role that the
consumer plays. The business scale is staggering: in 2016, the value of
transactions in the peak day (called Singles’ Day) was double the amount
transacted on the US’s Thanksgiving Day, Black Friday and Cyber Monday
together. It’s not just payments, as there seems to be an emerging pattern that
starts with electronic payments and moves to managing money, and Ant’s money
market fund is already larger than JP Morgan’s US Government money market fund.
And
what about society? Living longer, 3D printing, the Internet of Things and conquering
space may well change how we live. I am sure you have heard before the old
dictum that this time is different. Perhaps this time it is indeed, if only for
banking because of FinTech.
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