Trust is the only product banks have left

(And that’s fine)

A recent article, interestingly titled “the challenged banks” narrates how challenger banks failed to capture a large market share from the traditional banks. I think the reason has to do with trust: while customers, especially younger ones, are not happy with the service provided by their bank, they still have more trust in older institutions than in their newer digital peers. As a millennial friend puts it to me: “I use them as a top up card, but would not trust them for my mortgage”. So, challenger banks may not have succeeded, but this certainly does not mean banks are out of the woods yet: big tech players, with massive capital and size are coming, as exemplified by Apple’s launch of a credit card. Banks should therefore waste no time preparing for the real battle, and focus on trust, because it is the only product they have left.

Every banker knows history: since its creation in the 14th century in Italy, the essence of banking is trust. Not a single banker will dispute the fact that trust is at the core of the banking business. However, very few of them are ready to accept the corollary : if the world changes fundamentally, and they have to retreat to their absolute core, trust is the only product they have left.

In commerce, trust is fundamentally a connection inside the customer’s mind between your brand and something they accept as “ok to do business with”¹. Establishing this connection is a well known problem for digital platforms, and by far the largest initial cost to kickstart the activity. While every platform hopes for the network effect to kick in at some point, in reality it takes massive amounts of energy (and marketing) to start this flywheel. For example, when you first heard about AirBnB, they already had spent millions marketing their brand and providing assurances to convince you it is safe to stay at a stranger’s apartment.

Banks have a huge advantage over platforms: they did not build trust by spending money on marketing, but by serving their customers for a very long time. Their brands are very recognizable, and still inspire a great amount of trust. While the opinion of the public about banks, and how they are managed, has been negatively impacted by the financial crisis, the surviving institutions still very much enjoy the “ok to do business with”¹ connection. Interestingly, banks don’t seem to fully exploit this advantage.

While it is relatively easy for banks to accept trust is at their core, it is much harder for them to accept that retreating to the core may mean abandoning other business activities, even those defining “banking” as it is seen today. Rebuilding the bank’s business strategy out of the trust core has two consequences: 1) every single business line not directly leveraging trust is expendable and 2) new ways must be found to monetize trust, through activities that may be very different from what banks do today.

The corporate industry is far more adaptable: large business conglomerates often decide to abandon complete verticals when restructuring, and when they do, decisions are executed promptly and without hesitation. In banking, executing on such strategic decisions is much harder, essentially because banking has not changed fundamentally since the 1400’s: it has constantly evolved and expanded, but never really changed its business model. Even the 2008 financial crisis, that could have been the banking equivalent of the dinosaur-killing asteroid², left their business model largely intact. It prompted some additional regulations but even these are already fading away.

But maybe, like for dinosaurs, the real danger for banks was not the meteor itself, but the small mammals multiplying around, adapting faster and better to the changing environment: a whole ecosystem of fintech apps and platforms, living in the cloud, driven by customer feedback, built on open source components, interconnected through APIs, and fueled by data analytics.

In most corporations, innovation starts with good intentions and the will to change the status quo, but often ends up just being incremental. Observing “innovation” or “digital transformation” projects at banks, I was amazed how this is even more the case in banking: often, management is convinced that adding a few digital gimmicks here and there will do. This kind of last ditch efforts look very similar to taxi companies thinking that “having an app” puts them on par with Uber.

In the nineties, futurists³ gave us many visions of “the bank of the future”, which often looked like “the branch of the future”… a lot was imagined about these future branches, but nobody envisioned they would just be an app on a smartphone. The problem is that even now this is obvious, banks are still communicating on how having a Pepper robot to welcome customers, or a chatbot in their traditional online banking app makes them “innovative”.

What is worse, banks seem to connect innovation with cost cutting: branches are eliminated because “we’re going digital”, even when there is no clear strategy defining what “digital” exactly means, and there are interviews where CFOs say things like “digital transformation of the business, has allowed for 149 million euros in costs savings during the second quarter of the year”.

Just like joy cannot be mandatory, innovation and agility cannot be forced upon an organization. Innovation is a state of mind, it is not decided by a committee⁴. Also, you’re never done innovating, but evidently this is not well understood by some financial institutions. Projecting banks into the digital economy will not happen by proclaiming that, as of today, “we are agile”, or by renaming departments as “tribes” and “squads”⁵, or by spending a fortune on cool-looking innovation rooms to end up with walls covered in post-its, but with few practical ideas⁶.

To reinvent banking, financial institutions need to embrace change, leverage trust as their core asset and rebuild their strategy from there. This requires a lot more courage than innovation posturing, but it is actually simpler. And a simpler plan is always a better plan.

So how can banks transform trust into a reliable business model?

“if banks cannot be truly customer intimate, they are doomed to be just dumb commodities“

Jp Nicols, co-founder of the Bank Innovators Council

Last year, Facebook did it again: they made headlines by asking banks for their customers’ data. In exchange there are vague promises that Messenger channels could be used to check account balances or sending fraud alerts.

Next to the public outcry this story created (what can you expect when EU MPs who are supposed to rein in monopolistic social platforms, instead long for selfies with Mark Zuckerberg?) it should make us reflect on why Facebook approached banks in the first place.

Banks are dazzled by Facebook’s importance, but they should not: the reason Facebook reaches out to them is simply that customers trust their bank, and don’t trust Facebook⁷.

Banks have a too soft approach on platforms: they are seeing them as technologically superior beings and beg them to let them in as a partner and, if all goes well, capture some new clients to whom they can propose financial services. This approach leads them to be pushed at the outskirts of the platform ecosystem, as a peripheral (and expendable) service provider. Banks are given just enough data to perform their business (often under the guise of ‘data protection’) while the platform captures every possible data point (and doesn’t really care about our privacy). In the recent launch of the Apple credit card, very few attention was given to the banking partner (although it’s Golman Sachs) and focus was set by Apple marketing on the fact that “Goldman would not share customer data” (like if they did usually!).

In order for banks to make it into the digital economy, things need to change drastically: banks need to become the platform, be at the center, not at the edge, and own the data lake, not fuel it. This is a case where the best defense is offense.

There are multiple ways to do this: one of them is to acquire an existing platform, and use it as a business development tool. This is exactly what ING did with Makelaarsland: the bank acquired a majority shareholding in this real-estate platform and turned it into a business channel. Now at the centre of the platform, the bank can choose which partners it accepts, under which terms, and benefit directly from the synergies and network effects, as it controls the data and metadata generated by the platform’s activity. A few months later, ING together with AIB invested in Transfermate, the very type of fintech that was supposed to disrupt banks, and will propose the service to their customers (but now out of a platform they control).

Other banks are making similar moves: for example State Street Bank has acquired renowned software house Charles River, and Belfius in Belgium launched Jaimy, a services platform similar to TaskRabbit. The challenge of course is always to make sure (and demonstrate to markets) that there are synergies with the bank’s business, and opportunities for growth thanks to the platform’s services or data harvesting capabilities.

Acquiring data analytics capabilities is key for banks, and building or investing in platforms is an ideal vector to master this skill. Currently, banks have tons of data, they are just terrible at using them. The bank’s DNA is to manage risk, not to improve service quality: while every single process constantly captures data, the reason for this is control and audit, not refining processes. Over time, banks learned how to become better at analytics, but because data capture and storage were never originally designed for this purpose, past information remains difficult to harness.

As an example, I recently walked into a bank where I have held an account for over 30 years to change my home address. They presented me with my customer record on paper (an all-caps print out obviously generated by a mainframe COBOL program). At the top of the page, just below my name, it read: OCCUPATION: STUDENT. Lots of data indeed, but bad data hygiene.

There is a plethora of startups who endeavour to help banks take advantage of their own data, but they often get disenchanted. In Powerpoint, the plan seems simple enough: load all information into some kind of data lake, run analytics and voilà, nice visualisations, perfect management reports and business activity dashboards… but in reality they discover it’s not that easy to aggregate large swaths of incompatible and uncorrelated data, belonging to different parts of the organization who are all competing for attention and budgets. Moreover, many departments in the bank don’t even realize they have a data problem, and hence are not really interested in a solution.

Since the first episode came out in 1977, the Star Wars movies grossed $4 billion in box office, but licensing the brand for toys and byproducts brought over $12 billion in revenue.

There has been lots of talk about “bank-fintech partnership” in recent years, but this is both a truism and an oxymoron: certainly banks and fintechs need each other, but collaboration often fails because startup founders look ahead and design products addressing needs that are not perceived internally as urgent (yet). Innovators should always remember banks engage with them to acquire the agility they lack in addressing their immediate operational needs, not to build strategic capabilities they will need in the future.

On one hand, Fintechs won’t succeed alone because they often miss how very personal money is to customers: they legitimately fear putting it in the hands of a tech startup, who for all they know could fail tomorrow or run away with their funds. Startups understand Uber had to spend a ton of money to convince people to overcome our “don’t step into a stranger’s car”, yet they seem to believe that simply providing a more convenient service will magically convince us to ignore years of scam-awareness training and trust their app with our money. Ultimately, even extreme growth hacking can’t create long-term trust.

On the other hand, banks certainly need what fintechs have: agility, focus and technology, but partnerships can’t work if partners ultimately compete to sell the same products to the same customers. Therefore, the banks’ position in the financial ecosystem needs to evolve and they need to accept they will eventually lose the direct relation with the customer and move to the business of trust. Even with PSD2 looming, banks still don’t seem to get that API is not just a new channel, but will become the dominant channel in the coming years.

There is a place where the interests of banks and fintechs converge: if banks were ready to market their brands, the fintechs would happily buy. Every digital platform has to go through hell to acquire customers and reach critical mass. Now let’s imagine for a moment you are a young startup selling for example an online accounting service: you have to convince freelancers and SMEs to adopt your platform. Wouldn’t it be much easier if your app had a bank’s logo on it? Something like “verified by HSBC”, or BNP Paribas, or CITI? it inspires a lot more confidence than a startup name nobody has heard of. In such a cooperation, the fintech is service provider and the bank is trust provider.

In order to make this work, banks need to become a lot better at alliances and partnerships, something that’s not currently part of their culture. This is crucial, since becoming a trust partner also means banks need to vet their partners thoroughly.

“You cannot pass!”

Gandalf

Customers now value their privacy. No one understands that better than Apple, who is building all of its marketing around the idea that Apple is the safe custodian of your privacy (even including your health data).

In the Apple credit card launch, Goldman made the tactical choice to partner with Apple, which helps them leverage Apple’s huge customer base, but at the same time they let Apple take control of the narrative. Now, Apple’s marketing has made themselves champions in privacy, while the bank is merely an execution partner (together with Mastercard). This is of course a complete distortion of reality: Goldman would never share customer names anyway, and Apple definitely shares customer data… the only difference with Google or Facebook is that they do it only with other Apple services (on a constantly expanding scope). It is possible that Goldman Sachs and Mastercard will eventually end up with Motorola and AT&T on the list of partners Apple used to make their way into a market.

Access to customer behavioural data is of course the key here: banks only knows their customers through their transactions, while a digital platform sees a lot of other things (searches, communications, location, other devices…). Once the platform becomes central to the consuming habits of the customers, it can connect the dots and infer patterns from it, learning from data and metadata.

This is not the way it should be: banks already are the trusted custodian of our funds, they could evolve to become the (compensated) custodian of trust. For this, they need to start by understanding this is a very valuable business, even if it’s different from the one they are used to. While banks realize the value of the public’s trust in their brand, they don’t realize this is a valuable product they can license, lease or rent.

For example, one thing banks have been very effective at protecting is customers’ private information. Most leaks that occurred where due to third parties, very few to actual security breaches in banks. So marketing a service where they keep and certify our digital identities makes total sense, but strangely no bank seems to think about it.

Another example would be to leverage the lack of trust and security of cryptocurencies to promote trusted services: banks are in the perfect position to offer services such as custody, — safeguarding a customer’s assets against theft or loss. This is arguably one of the biggest challenges for crypto investors, as exchanges have often had their holdings stolen by hackers. Moreover, unlike institutional financial markets, crypto exchanges typically don’t have a specialized separation of duties for this service.

Despite the regulatory challenges⁸ (at least in Europe) banks could actually become a regulated conduit to access crypto markets. As an example, Bank of NY Mellon executives said they were looking at ways to play a role in the custody of cryptocurrencies. The bank has $33 trillion of assets under custody and administration.

“The future of our business is in how we enable a digital community”

Don Duet, Global head, technology division at Goldman Sachs

Today, it seems obvious to state (as the CEO of Goldman Sachs said in 2017) that banks are technology companies, but in reality they are not. An essential rule for every business is to never outsource your core business, but banks massively outsourced their technology to vendors, integrators and consulting companies. As they now realize technology is the essential enabler or their trust asset, they should regain control of these capabilities. If needed, they can scale down everything else to pay for it.

Digitalization of banking services are still only scratching the surface of what is possible, as rethinking the complete fabric of the bank is a difficult and lengthy task. In the meantime, new banks, digital from the start, are emerging, as are Fintech companies, filling the gaps in the banks digital strategy. Banks should embrace this evolution, but the only way to play a significant role in this new ecosystem is to focus on trust and on developing the technical capabilities to integrate with other players.

[1] Trust is a fascinating subject, see this article for other definitions

[2] I’m told by reliable sources any innovation piece should refer to the dinosaurs’ extinction at least once.

[3] A term that used to be cool in the nineties, but does not seem to be en vogue anymore

[4] The tragicomical way “agile” is implemented in banks is worth an article by itself.

[5] In management consulting, ‘digital transformation’ is the new LEAN, and Spotify is the new Toyota.

[6] Banking is not alone, even the Defense industry has issues with Agile BS

[7] It remains an open question if Libra would change that, if it materializes

[8] For example current EBA rules prevent banks from holding crypto currently (https://www.coindesk.com/bbva-bank-cant-hold-crypto-problem/)