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.