Figure 9.1: Worldwide mobile banking adoption, monthly active users (Source: Various)
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
Satoshi Nakamoto, pseudonym of the anonymous creator of Bitcoin
The evolution of banking and payments has often been correlated with technological advancement. Today, the primary method of transferring money between banks globally is a transaction called a wire transfer or telegraphic transfer, so named because the instructions for these transfers were sent via telegraph or “wire” initially, then later by Telex and now via interbank electronic networks like SWIFT.1 The first mainframe computer ever built was for a bank, too.
Today, we talk about using distributed ledger systems like the blockchain to send money from wallet to wallet, or account to account, instantly between devices or value stores across the globe. The future of money, payments and elements of the banking system is going to be materially and fundamentally changed by a range of technologies being deployed today. The biggest change will likely be in respect to what we call our “bank account”, and how people get access to banking around the world, but the way banks and payments operate is also being transformed fundamentally. Within 20 years, we’ll probably see the elimination of around 40 to 50 per cent of the household names in banking today. In fact, we’re already seeing the creation of new alternative banking and financial service providers that will soon be bigger, in terms of customers and influence, than financial powerhouses like JPMorgan Chase, HSBC and Citibank. We’re already seeing this shift quantified in the daily activity of bank customers.
The United Kingdom, the United States, Spain and a host of other countries are seeing the lowest number of bank branches in decades. In the United Kingdom, you’d have to go back 60 years2 to find lower numbers of bank branches than there are today. In the United States, banks like BofA, Chase and Wells Fargo have cut more than 15 per cent of their branches in the last four years alone, bringing their branch levels back to those of the early 1980s. While the United States has seen declines of around 1 to 2 per cent per year in branch numbers, branch space or square footage may be a much better indicator of the waning support for branches:
Aramanda: So branch banking is, in your view, a channel that is here to stay?
Stumpf: Yes. For right now, it surely is. We don’t know how to grow without [branches]. We can’t grow without [them]. But, we have taken the total square footage of the bank from 117 million square feet at the time of the merger with Wachovia in January of ’09, to about 92 million square feet today, and we’re continuing to go down from there...
John Stumpf, CEO of Wells Fargo, during an interview with
ClearingHouse.org in December 2015
Wells Fargo has reduced its branch square footage, or total real estate, by 22 per cent in just six years. The reason why all of these banks are reducing branch numbers and branch space is simple—customers simply aren’t using branches as much as they used to. They don’t need to. It’s not a branch design problem; it’s a customer behaviour problem. So what has changed customer behaviour? We can largely thank Steve Jobs for the shift as the iPhone started it all.
As banking becomes augmented, much of what we value today in banking will be eliminated, and we’re not just talking about branch locations. The big shift for banking will be in the very nature of how banking works, what we call a bank account and the products we get from banks, or their near-term replacements. In respect to automation and AI, there is hardly a single job in banking that won’t be affected. In fact, in 100 years when we look back at all of these changes, we’ll probably identify the bank teller or cashier as the equivalent of the telegraph operator of the early 20th century, the one job most impacted by changing technology. When it comes to the Augmented Age, the greatest challenges for banking are about to hit, and hit hard.
As of 2010, half of the world’s population didn’t have a bank account, which accounts for more than two billion adults worldwide. Traditionally, we have called these people “unbanked” because they don’t have access to traditional banking services. Being unbanked may not be an issue much longer though.
Access to financial services is seen as one of the core ways that individuals can step out of extreme poverty. Various studies by the World Bank and a recent 2012 study in Africa have shown that “promoting access to formal financial services increases the level of income of the rural dwellers and thus a retarding effect on the level of poverty in the rural areas.”3 In places like Africa, these mechanics fundamentally matter. Standard Bank and Accenture conducted a survey in 2014 that concluded that of the 1 billion unbanked on the African continent, more than 70 per cent would need to spend their entire savings, or the equivalent of an entire month’s salary, just to get transportation to visit an available bank branch. The simple fact is that we won’t get people access to banking fast enough through branches. Thankfully, we don’t have to.
If you look at Kenya with less than 50 branches per 1 million people and financial inclusion4 of 20 per cent through the traditional bank system, the obvious conclusion would be that this country needs more branches. That is, until you learn that since 2006 Kenya’s financial inclusion has grown to a whopping 85 per cent thanks to the M-Pesa mobile phone or mobile money account.
It’s pretty simple. If you allow someone who has no banking services access to basic banking via a mobile money account on a smartphone or feature phone, this will change his or her life dramatically. In the case of M-Pesa, it means that mobile money users are likely to save 25 per cent more annually5 than their unbanked contemporaries. If you insist that someone has to have a driving licence or identity document and then needs to get to a physical branch to fill out an application form in order to open a bank account, you are actually increasing the likelihood of financial exclusion. You will actively prevent the poor from having access to financial services. This is a key problem in markets like the United States, India and Italy. In these countries, it is not access to branches that excludes people from banking services, it is the rules that bank regulators have created around opening bank accounts. For Italy and the United States, their high branch density (two of the top five countries in the world for branch availability) has not stopped them from seeing a decline in the number of people with bank accounts over the last few years.
For the first few years after M-Pesa’s creation, the big banks in Africa tried to get it shut down, but that horse had long ago bolted, with more than 75 per cent of Kenya’s adult population being users of the service. It was then that the Commercial Bank of Africa (CBA) realised that “if you can’t beat them, join them”.
In 2012, CBA launched a simple savings account linked to M-Pesa called M-Shwari.6 The uptake was incredible. In the three years that followed, M-Shwari added 12 million new accounts, for 4.5 million customers (that’s one in five Kenyans). It took in US$2.2 billion in deposits in that same period. That makes M-Shwari the biggest “bank” by number of customers, or by deposits, in Kenya. It is the single most successful banking product on the African continent today. It takes just 10 seconds to sign up for an M-Shwari savings account—10 seconds! But a more interesting statistic is that 80 per cent of M-Shwari customers have never visited a bank branch,7 and it is unlikely that they ever will.
Yu’e Bao (pronounced “yu-eh bow”) is the largest money market fund in China today, but what makes this fund unique is that it is offered not by a bank but by Jack Ma’s Alibaba payments division called Alipay. In fact, Yu’e Bao is the most successful mobile banking product in the world. In just eight months, 81 million investors throughout China deposited an astonishing 554 billion yuan, or US$92.3 billion. Within three years of its launch, Yu’e Bao is projected to make up around 8 per cent of the total Chinese deposit market,8 an incredible feat. These two very successful examples show that you no longer need a bank branch to be able to take deposits.
The top five banks in the world are Industrial and Commercial Bank of China (ICBC), Wells Fargo, China Construction Bank, JPMorgan Chase and Bank of China. Together, they have 550 million bank accounts, with 250 million mobile users. Combined, these banks have a market cap exceeding US$1.2 trillion and employ close to 2 million people. Big numbers, right?
By 2025, the world’s bank account will be a mobile phone—not a chequebook, not a passbook, not a plastic card, but a mobile smartphone that keeps your money safely locked away behind a biometric security layer.
What exactly is a bank account? It is essentially a value store; a safe place where you can store money or monetary value for the purpose of savings or for the future potential of purchase and money movement. If we count a bank account as a value store that you can use to pay for goods and services, it might provide a better definition. You can use a Starbucks app or Starbucks card to buy a coffee, for example, but no bank is required. Is the Starbucks mobile app actually a banking app? No, because technically we classify the “bank account” underpinning the Starbucks app as a “gift card”. And yet the Starbucks app accounts for 21 per cent of all purchases made at Starbucks, or roughly $4 billion in purchases annually.9
There are actually a whole host of other mobile value stores that are widely adopted and accepted globally today. These include the likes of your iTunes account, PayPal, Bitcoin or Alibaba’s Alipay. How do these compare in terms of reach and number of users or accounts? If you take just iTunes, PayPal and Alipay, they currently account for 1.2 billion account holders. That is more than double what the top five banks have in terms of the number of individual customers with bank accounts. If you include M-Pesa, MTN Mobile Money, bKash, GCash and other mobile money services, you can easily add another 300 million account holders.
That means quite simply that mobile bank accounts, mobile value stores or mobile wallets already outnumber traditional bank accounts two to one. Yes, you read that correctly. Yet the growth in mobile money accounts is set to surge further in the next few years, and most of this growth will be fuelled by people using their phone as their primary or sole means of payment.
Within ten years, most of the world will be using their phone to pay for things every day. More critically, 2 billion people will have been “banked”, or first able to save money to an account or value store, via their phone. More than 75 per cent of these people will have never owned a debit card or passbook, will have never written a cheque and will never visit a bank branch in their life. By 2025, well over half of the planet will be using their mobile device—or their personal AI—to do banking more than any other means or method of banking.
This will surely change the way we think about banking itself. Clearly, a merchant will be penalised if he doesn’t offer access to mobile payments. Cash will be in decline in most developed economies as the use of mobile payments skyrockets. The most likely candidates to go cashless first are Nordic countries like Denmark, Sweden and Norway, but the United Kingdom and other parts of Europe are not necessarily far behind. What will you call your bank account? Whatever it is, it will reside on your phone—not on a piece of plastic, not in a book and you won’t get it by visiting a building.
This modality shift of bank accounts to smart devices and the ability of artificial intelligence to supplement the financial ecosystem means that the utility of banking will be measured not via a “network” of branches or the products and services we get from a bank today, but via the way money, payments and credit works in your life every day. Financial education and financial literacy will be embedded in tools on the smartphone, not prerequisites that prevent someone from getting access to the system.
In that way, the mobile wallet platforms embedded in phones such as Apple Pay, Android Pay (Google Wallet 2.0) and Venmo have much greater utility than banks. The utility of retail banks has been largely driven off three pillars:
1. access to branch banking (often as mandated in the United States, India and Italy)
2. access to advice (read: product advisory for investment, mortgages, etc.)
3. access to proprietary, regulator-backed value stores and payments rails
All of these pillars are being challenged by technology shift but the core of banking will be pretty simple.
As algorithms get better at predicting behaviour and offering options, the best advice in banking will work like emerging systems like Apple’s HealthKit or Fitbit, not only providing you the right product or service at the right time, but also wrapping these decisions in context or awareness of your own financial health so that you can make a smart decision. Thus, we eliminate the need for financial literacy, financial education, complex product constructs and budgeting in favour of tools that monitor, advise and solve financial problems as they occur, in real time.
By 2020, we’re going to see 50 billion devices connected to the Internet, and by 2030 potentially 100 trillion sensors. Everything around us will be smart. Smart fridges that order your groceries;10 kitchens that can tell you what you can cook using what you have in your fridge and cupboard; sensors you wear on your wrist or in your clothes that monitor your health and activity; cars that talk to each other and drive themselves; smart mirrors that show you how you would look in that new shirt or with that new hairstyle; robot drones and pods that deliver your groceries or Amazon orders.
Our smartphone will soon be able to book us flights or a ticket for a train journey simply because we ask it to do so, or just by listening to our conversations in real time. Underpinning all of this is an expectation that banking, payments and credit will just work, in real time, solving our problems and helping us manage our money every day. Smart devices and smart stuff will need to do money “stuff” all the time; these devices will increasingly need to transact on our behalf. That means that within just ten years, more transactions will be done machine-to-machine (M2M) than those involving a human or a traditional banking product like a credit card.
As we start using Apple Pay and Android Pay increasingly, we’re pretty quickly going to eliminate the need for plastic altogether. We’ll just download a token or a payment app to our phone, linked to our bank. We won’t use a card number anymore, simply because it will no longer be securable. We’ll tap our phone, authenticate via our fingerprint and receive a notification that the payment has been successful, or we’ll just walk in and out of a store where payments are automatically made without a traditional checkout experience.
If we download an app or a token to our phone, then it won’t be a credit card, but does it still need to have the same properties? Not really. Think about how we generally use a credit card today and how we might redesign that in a real-time, augmented world.
The two primary use cases for a credit card today could be illustrated thus:
• I’m at the grocery store and have swiped my debit card but the transaction is declined because, unexpectedly, my salary hasn’t hit my account yet. As I really need to buy these groceries, I’ll use my credit card and worry about why my salary hasn’t hit my account later.
• I really want this new VR headset but I can’t afford it based on my savings. If I use a credit card, I can buy it today and then pay it off over the next few months.
If we are redesigning this for a mobile world, banks won’t need to sell us a physical credit card for these types of transactions.
The grocery store scenario becomes a sort of “emergency cash” credit facility, a real-time overdraft or line of credit that we deliver in one of two ways. We either preempt the cash shortage because we know the customer regularly shops at Tesco and spends £300, but only has £100 in his account, or we offer it in real time when the tap of the phone to pay fails due to insufficient funds. We can eliminate rejection of a typical credit card application because we will only offer the emergency cash to someone who qualifies. I’m actually working on this at my start-up Moven right now; we hope to deliver this sometime in 2016 (so stay tuned).
For the in-store financing, there’s an array of new product approaches. We can allow people to put a wish list on their phone of things they want to save for, and when they walk into a store where a wish list item is available, we can offer a discount combined with contextualised credit offering. We can use a preferential low- or zero-interest 12-month financing deal, getting them to switch payment vehicles at the point of sale, or we can trigger an offer based on geolocation. We can use iBeacons and geolocation technology to match a very specific offer with a unique customer that includes a preferential credit deal (more on iBeacons in chapter 12). We can message you online that your Amazon Prime membership gives you access to instant credit, even when you are not on Amazon.com.
Basically, we can redesign the way we message credit facilities, the way we determine risk (based on behaviour). We can better match risk and behaviour to the type of credit line and we can eliminate the need for a physical product or any conventional application process at all.
“We’ll probably be the last generation to use the term “credit card” and “debit card”… It will probably be “debit access” or “credit access”, and it will likely be loaded on to a mobile device.”
John Stumpf, CEO of Wells Fargo, at the Goldman Sachs US
Financial Conference, 8th December 2015
Ultimately, a piece of plastic won’t be necessary to get credit at a time of payment, and you won’t need to pre-apply for a set credit limit. It will all happen in the moment. This requires us to rethink “bank” product design for the augmented world. We may even have to reengineer the way our money itself works.
It’s hard for many to conceive a world without little bits of paper that we today denote as currency. In fact, money is so ingrained in society that we’ve come up with hundreds of slang terms around the world to describe the stuff. In the United States, you might hear the term “Benjamins”, “dead Presidents” or “greenbacks”. Can you guess which countries gave birth to “bucks”, “clams”, “loonies”, “dough”, “shtuka”, “two bob” and “moola” when it comes to describing money?
Money is vitally important, if not central, to commerce in society, but when presented with the concept that cash might disappear or that the use of physical currency is in decline, you will get passionate responses from large swathes of the population diametrically opposed to even the thought of such a shift. When a new cryptocurrency like Bitcoin emerges, you’ll likewise have those who are passionate in their belief that Bitcoin will replace all existing currencies on the planet and eliminate the need for a conventional banking system, as opposed to those who think Bitcoin is purely an instrument for geeks and/or criminals who want total cross-border anonymity for their transactions. The fact is that “hard” cash is actually a relatively new concept in the modern world.
Figure 9.3: During the Great Depression in the 1930s, clams were issued by local merchants in Pismo Beach, California, to cope with the collapse of the economy.
It wasn’t until 1861 that the US government started to print its own banknotes, preceded by the First Bank of the United States, which issued private currency starting in 1791. Prior to this, in 1696, the Bank of Scotland issued the first banknotes for Great Britain. Today, Queen Elizabeth II, the second longest reigning head of state (behind Thailand’s King Bhumibol Adulyadej), holds the record for the most countries that issue currency carrying her image or likeness. Back in those early days, it was actually common for small communities to start their own banks and for those banks to issue their own currency. Over time, centralisation of currencies became more efficient for trade and commerce, and thus you also had the emergence of “central banks” that could issue a currency respected across the community.
Figure 9.4: The note with the most zerosin the world is the Zimbabwean 100 trillion (100,000,000,000,000) dollar banknote (issued in 2009). The note has 14 zeros printed on both the front and the back.
Prior to the use of banknotes, there were, of course, coins. Before coins, you might imagine that barter was the primary mechanism to enable trade, but there were other forms of currency that existed thousands of years ago that were a good proxy for the notes we carry around in our wallets today. The earliest recorded such currency from 3000 BC was called a “shekel”, which carried the distinction of being both a measure of weight and an early form of currency. Shells were used by many nations in the Americas, Asia and Pacific. The ancient Greeks, however, were the first to mint actual coins back around 600 to 650 BC, and by the 1st century such coins were increasingly the most standard form of monetary value exchange around the world.
Today, cryptocurrencies like Bitcoin are emerging as a type of next generation currency. While classifying Bitcoin as a currency is the most logical characterisation for most of the public at large, it is by design something that is more efficient than traditional currency, resembling more closely something like the digital equivalent of the shekel in terms of mechanics or valuation. The problem money faces today is that it is not particularly efficient for the various types of commerce that are rapidly emerging.
As a result of the increased use of plastic debit cards, mobile payments and the like, cash use peaked in most of the developed world last decade. Cash today accounts for just 34 per cent of the total value of consumer spending globally.11 While non-cash payments are highest in the developed world, as mobile payments and mobile bank accounts emerge, the use of physical currency will enter a steeper decline.
Most commodities traded on global markets like oil, gold, diamonds, titanium and so forth are priced in US dollars because it is easier to measure relative market performance. However, the more significant shift is in the fact that whether I’m on Amazon, Alibaba or Airbnb, I can pretty much buy anything from anywhere in the world today, in real time. This is putting incredible strain on market mechanisms that assume you’ll be transacting in one currency, and you have to be a local resident to purchase goods locally. How does sales tax work? What about exchange rate mechanisms? What about identity and privacy concerns—can I trust you? If you live in Nigeria and are buying something in China using a USD denominated account, to get the product shipped to Lagos, should the seller wait for payment before shipping or should you pay only when the goods are shipped or when you receive them?
As we go real time, as infrastructure becomes smart and as global barriers to commerce drop, physical currency is essentially a hurdle to commerce. It’s too slow and too difficult to handle safely. Specific currencies that today are geographically bound appear largely arbitrary, except that they remain accepted by large groups of people willing to recognise the value of that currency in local commerce.
Just as paper money was created to standardise value exchange within a community, and to make trade more efficient, those same forces have created the need for more efficient forms of payment and more relevant currencies today. If not for those needs, my guess is that Bitcoin would never have emerged, just as paper money would not have emerged without clear drivers back in the 17th century. Paper money can still compete today, but in an increasingly digital world, it might very well find itself outclassed by new, more efficient methods of payments in the form of mobile phones, lower friction transmission mediums and more relevant global community value exchanges like Bitcoin. Will Bitcoin become the new global form of currency? It’s extremely unlikely given its recent volatility; however, our eyes have been opened to new possibilities in terms of commerce and we can be sure that Bitcoin won’t be the last attempt that we’ll see at developing Money 2.0.
The more interesting development emerging out of the Bitcoin movement is actually the technology that underpins the way Bitcoin is transacted and recorded. We call this the blockchain, and this could quite possibly be the answer to a world full of smart, transacting devices.
Traditional banking asserts that a bank account is owned by an individual and that individual must be identified so that he can safely and legally transact over the networks, pipes and wires maintained by the chartered banks of the world. This is why the creation of Bitcoin was somewhat of a headache for bank regulators around the world. Essentially, Bitcoin wallets are anonymous at the time of a transaction. If the user identifies himself, then you can link an account to a person, but it’s not required in order for a transaction to take place.
Fearing an explosion of anonymous illegal transactions across the blockchain, such as those that made the dark web e-commerce trading site Silk Road possible, regulators around the world attempted to rein in Bitcoin’s explosive growth. Bitcoin, however, is decentralised so it is impossible to block it or stop it without effectively pulling the plug on the entire Internet, which would seem like overkill. The only way to regulate Bitcoin’s activity was to control how people bought, sold and traded BTC,12 or how they converted other currencies into bitcoin through exchanges.
The way regulators eventually cracked down on this in places like the United States, China and Russia was to make unlicensed bitcoin exchanges illegal. You could not buy, sell or trade in bitcoins unless the exchange was a licensed money transmitter or financial services business. This enabled the regulator to ensure that each user or owner of a Bitcoin wallet had his identity verified as per the traditional banking system. The motivation was twofold: identify users of the Bitcoin system/currency and prevent criminal money laundering systems from circumventing existing controls.
At the core of Bitcoin is a decentralised ledger system that means that no one person, organisation or government controls the way Bitcoin works. There are only a few thousand Bitcoin nodes,13 but the distributed ledger system that allocates the millions of bitcoins around the world is constantly syncing and updating the records of digital currency moving from one wallet to another. For the same reason that regulators generally don’t like the Bitcoin system, i.e. a wallet functioning independent of the wallet holder’s identity, it makes the blockchain or something similar, much better suited to the future of money. It has much higher redundancy than exiting banking systems, and works to reinforce itself constantly. There is no such thing as a bitcoin, of course, at least not in the physical sense. The blockchain simply keeps track of an ever-expanding list of addresses, and how many units of bitcoin are at each of those addresses.
Figure 9.5: At the heart of Bitcoin is a distributed ledger system that is far more efficient for digital transactions than the existing banking system.
If you own bitcoin, what you actually own is the private cryptographic key to unlock a specific address with a value stored in it—it just so happens that value corresponds to the number of bitcoins you hold. The private key looks like a long string of numbers and letters. You may choose to store your key, or keys if you have multiple addresses, in a number of places including a paper printout, a metal coin, a hard drive or via an online service. Some have even tattooed their Bitcoin wallet address on their person.
The banking system of 2025 will need to work more like an IP, or peer-to-peer, network than the current centralised banking networks that we have today; and the blockchain is a better, future-proof example of that.
We are moving to a world where smart devices can have a value store or multiple value stores and can act as agents transacting on our behalf or on behalf of a group of people. We’re also moving to a world where identity won’t be tied to your driving licence, signature or social security number, but instead managed as a construct based on biometrics, unique identity markers, behavioural data and heuristics. Identity could itself be managed on a blockchain, as could contracts, assets and other information that need to be secured in a distributed, redundant system of record.
Today, the banking system says that only banks (and licensed money transmitters) can send money from one trusted party to another, and only through those proprietary, restricted networks. You only get to use those networks (opening a bank account) if you have provided your identity to a bank, generally by physically going to a branch. This means that in most countries if you don’t have a driver’s licence or passport, it’s almost impossible for you to open a bank account. The augmented world will need a much more flexible ecosystem to be able to respond to the needs of smart transactions.
State regulation of bank charters today require a bank to capture customer information in a way that is known as “know your customer” (KYC) before you are allowed to open a bank account. This sort of system will quickly become redundant and outdated in the Augmented Age. Why? It would be like insisting that before you use a computer or a new smartphone, or connect to a new ISP or WiFi hotspot in a café, you need to submit your identity documents, confirm the name of your employer and establish proof of your address. In fact, it will quickly become impossible to conduct commerce with this constraint in place.
In a real-time banking and payments world, the idea of a vault that secures your money in a building, and thus requires an identity to be verified in that building, is anachronistic. The current licensing system for bank charters, payments and remittances is trying to regulate a 19th-century problem in a 21st-century digital ecosystem. Let me give you a simple example of why the banking system that today requires a person’s identity to be tied to a bank account cannot survive this shift.
While owning a car will definitely be an option in the future, many Millennials and their descendants will opt to participate in a sharing economy where ownership is distributed, or where self-driving car time is rented. So let’s take a scenario in 2025 to 2030 when a Millennial subscribes to a personalised car service guaranteeing access to an autonomous, self-driving car for a certain number of hours each day, or where they buy a “share” in a self-driving car.
The car picks up the Millennial and takes them to work. During the journey, the car is alerted that it will be required again in approximately 6 hours. After dropping off the individual at their shared workspace, the car goes off and collects two more of the collective owners of the vehicle and delivers them each to their required locations. At this point, the car makes a decision to find a charging station and recharge for an hour. It drives to a local car park where supercharging stations are located and hooks in. As the car was making its last drop-off for the morning, it had already worked out that it would need to recharge so it had communicated with the car park’s machine interface, negotiating a price for both the parking facility and energy it would need.
A company owns the actual car park, but it has allowed individual investors to each own or lease a supercharging station connected to a solar grid on the roof of the car park to offset the costs of retooling the car park with charging stations. Each supercharger has its own wallet linked back to its owner(s), and the energy used by the self-driving car as it recharges is paid for in kilowatt-hour (KwH) directly between the car and the supercharging station. Likewise, the car parking fee is paid to the garage owner.
The self-driving car, then calculating it has approximately 3.5 hours before it will be required by one of its owners again, logs in to Uber and makes itself available for a 3-hour block as a self-driving resource. It is immediately called out to a pick-up, and after 3 hours has earned $180 in fees, which it puts away in its own wallet.
The wallet in the self-driving car is not linked to a single individual owner. It is a collective account. Any earnings it makes are used to offset ownership costs, energy costs, parking and registration fees, etc. The owners just top up the self-driving car’s own wallet on a monthly or weekly basis as required, but the self-driving car’s ability to pay for energy, or earn income for rental time, is independent of a typical identity structure or bank account. It is an IoT wallet or value store.
The wallet in the self-driving car is analogous to the debit card you carry around in your wallet today, but there is one big difference. A person does not own this wallet; it is linked to the car and may or may not have multiple human owners and the identity of those owners could change frequently. In today’s banking world this might be marginally possible, but only through a torturous series of contracts, declarations and identity verification (IDV) processes that would essentially require all of the owners of the vehicle, and the self-driving car itself, to personally front up at a bank branch. That’s clearly ludicrous.
Whether a self-driving car, a smart fridge that orders your groceries, a smart house that both consumes and generates data and energy, a solar array or any AI that negotiates specific transactions, all of these will need independent access to the banking system, along with their own bank account. This obviously raises some very interesting questions.
You can’t ask a self-driving car or a fridge to identify itself at a bank branch with a signature, so will it have its own identity? Will the self-driving car have to pay tax on the money it earns as part of a sharing economy, or will this be passed on to the collective owners? If a self-driving car is involved in an accident, who would ultimately be liable in the case of injury: the car, the joint owners or the manufacturers of the self-driving car itself?
Initially, regulators will try to enforce a structure whereby a “person” owns a smart asset and the bank account of that asset is linked back to the owner. However, within five to ten years, we’ll see start-ups built specifically for the purpose of enabling joint or shared ownership of assets like self-driving cars. Uber will be in this game for sure. This is all going to shift in about the same time it took Apple to launch its first iPhone in 2007 through to the launch of the Apple Watch in 2015. Disruptive indeed!
Day-to-day banking and payments are set for some pretty radical changes. The most immediate of these will be how you pay for goods and services in your daily life. The most efficient form of payment is simply to walk into a store, restaurant or service business and when you are done, walk out. At best, you’ll simply need to authorise a payment by tapping on your phone to accept the charges or responding with an “air” gesture that your smart glasses recognise. There will be no checkout, no swipe, no tap, no need to fish in your pockets, wallet or purse for change—the payment will have effectively become invisible. We might very well augment payments with data that gives you better deals, encourages you to use a particular payment vehicle or shop at a specific merchant or provides context to your spending decisions that simply helps you manage your money more effectively.
This will radically alter store design and stores that digitally engage customers will enable better in-store moments and improved sales. Over the next couple of decades, one of the most important decisions that you’ll make as a consumer will be pairing a specific wallet to a specific retailer or agreeing to use a specific payment method based on a specific behaviour set. For example, if I’m in Starbucks buying a coffee, use my Starbucks app. If my app has a low balance, top it up using my Simple or Atom bank account, and if that hasn’t got enough cash, use my Bitcoin wallet. If my personal AI is booking a flight for me while I’m in a business meeting, use my corporate travel account. If my self-driving car is off driving for Uber, use those credits for future travel on Uber instead of recording it as income. If I walk into a store where I regularly purchase merchandise and my spending account has less than $1,000 in it, give me a warning that I’m low on funds on my PHUD or smartwatch.
Apple Pay, Android Pay, Samsung Pay, PayPal, MasterCard, Visa, Amex and Alipay are currently in a race to dominate your in-store (or via e-commerce) payment choices. Each of them wants to be the primary wallet or app that you use to pay, and they are all starting to recognise that it isn’t about being able to offer you more airline miles but having more data about your payments behaviour—where you like to shop, when you shop and what you buy—that they will then be more likely able to influence your purchase decisions in the future. They might be able to influence what store you walk into, when you choose to purchase something you’ve been thinking about buying or whether you use your savings or an in-store finance offer to be able to afford that new thingamabob.
You might notice that I didn’t mention any “banks” when I talked about payment choices in this new world. Well, the banks are increasingly being pushed out of the payments space. The main reason why is that they were just way too late to the game; most banks in the United States, for example, don’t offer anything near to real-time payments or link to wallets on a mobile phone. They’re still stuck in an era where cheques are considered one of the most efficient forms of payment. On top of this, they’re still trying to sell Millennials checking accounts14 when they walk in the door, and Millennials don’t even write cheques (or checks as they are known in the US)!
It is very unlikely that anything but the very biggest banks will have any real role in this future payments ecosystem medium term. Yes, these banks will be forced to link to the apps and wallets that enable payments, because otherwise the bank accounts they try to sell you will be largely useless, and you certainly won’t be swiping their plastic card. You’ll be using a mobile or device-based payment capability that pulls money from an account or value store, and you’ll have plenty of choice where to “store” your money, including with numerous non-banks that underpin these wallets.
An example of this is an iTunes account. Half a billion people have linked their credit and debit cards to iTunes today, and many are buying coupons or prepaid cards and vouchers to top up their iTunes accounts. The balance you carry on your iTunes or PayPal account is not a bank account, it is a non-bank payment account or value store. Your balance on your Starbucks app or card is the same. In 2015, Starbucks took in more than US$3 billion in deposits on its app, meaning that the company took more deposits than about 70 per cent of the banks in the United States. But as I said before, Starbucks isn’t a bank, despite the fact that it takes more deposits than most.
We will see a lot of these value stores in our augmented future, and as we move to decentralised ledgers and payments systems like blockchain, it will become less important day-to-day that these value stores are government guaranteed or nationally insured deposits. Your big deposits and savings will still sit in a bank, but a lot of your day-to-day operational money will be distributed in a non-bank ecosystem backed by technology. But will it be safe?
For over ten years, people have been using PayPal without requiring that their deposits be guaranteed. PayPal isn’t going out of business anytime soon, and the number of people who have issues with their PayPal accounts is very small compared with the daily transactional activity, and certainly less than the average bank deals with today as a result of fraud. Ultimately, the safest systems will be the most used systems because they will build trust within their community of users, and these become even safer and more robust as the more people use those networks.
What this means, however, is that the so-called Universal Banking Model will start to fail and break apart over the next two decades. The concept of universal banking is that you open your first bank account at school, transition that account when you get your first job or go to university and then build your credit through that bank by taking your first car loan and eventually a mortgage, all with the same bank. You probably choose that bank because of its location in the community or based on your parents’ recommendation. In the new augmented world, however, we’ll choose payment options, value store options and credit lines based on utility and experiences, driven much more by immediacy and core value proposition than by the location of a branch.
We won’t apply for a mortgage, we’ll just buy a home and the application for credit to buy that home will be a part of the home-buying process. At first, this shift will be in the presentation of a fairly typical mortgage offer, but in real time as you are out and about looking at homes. In the future, however, it will be an experience-based financing decision as you are buying the home, with various service partners offering you different ways of assessing their capabilities to finance your home.
For example, the estate agent might send you the contract for the home electronically and then you’ll link your identity to that contract. By doing so, you will expose specific information about your salary, credit history and so forth that can be used to underwrite a credit decision. In real time, your device or cloud-based Life Stream Agent will then negotiate with a number of credit providers to present you with a financing option for the home. You might be presented with a visualisation of how long you want to take to pay off your home, and as you interact with the visualisation in your field of view in your smart glasses, you might attempt to reduce the length of time it will take for you to own the home fully down from 25 years to 15 years. As you do this, the visualisation will start to warn you as you go below 18 years that your current salary and living expenses won’t allow you to own the home sooner. However, as you go about your daily life, you’d be able to occasionally put some money into your “home” credit line, thus reducing that time frame to full ownership, or you might draw down on the credit line in real time to underwrite a new car purchase instead of taking a car loan.
The key difference from today’s banking world is that we won’t apply for these products, wait and then fear rejection by the bank for the loan. We may be asked to provide our information for access to various facilities, but it will be the bank or lender’s ability to assess our “risk” that will materially change from today’s system. This data-driven approach will allow a lender to assess your viability so that you don’t have to fill out an application form; you’ll just be offered a credit facility in real time. If you don’t qualify, you just won’t get an offer. That still beats being rejected, right?
The products we currently get from a bank, namely a debit card or current account, a mortgage, an overdraft, a certificate of deposit, a car loan or lease, etc., will disappear. Payments, value stores, investments and credit lines will all be available but they won’t be packaged as distinct products that banks offer today. They’ll simply be utility featured in distributed, embedded, day-to-day experiences built around your money and your life. Most banks will be too slow and too fixed in their ways to adapt to this era. Consequently, we’re likely to see 50 per cent of the household bank names we know today give up their existence to a range of new FinTech providers and technology companies that will own or enable those day-to-day money moments and experiences we’ll have each day.
The term “FinTech”, like HealthTech, is an amalgam of “finance” and “technology” and has come to represent a group of disruptive technologies, start-ups and innovations that are challenging the traditional financial system. In 2008, US$930 million was invested in FinTech initiatives like Dwolla, StockTwits and other start-ups. By 2013, that figure had ballooned to investments of US$4 billion, and was expected to double in 2014. However, it actually trebled to $12 billion,15 and then hit a whopping US$21 billion in 2015.16 The figure for 2016 could be as high as US$100 billion.
This supports the underlying thesis that every industry is becoming a technology-based industry as a result of the infusion of capital and technology into transformation and automation. The fact is that industries like financial services have products and constructs that are hundreds of years old, and it doesn’t take a lot of technology to be disruptive when that state exists.
“BBVA will be a software company in the future.”
Francisco González, chairman of BBVA,
speaking at Mobile World Congress in 2015
The future is about putting the bank in the lives of customers with zero friction (ok, well, minimal friction) every day. That means banks have to come to terms with the fact that anytime they stick a piece of paper in front of a customer, it is just pure friction, and it certainly won’t allow them to build revenue or relationships on a mobile phone, iPad or in a self-driving car in the moment. Let me state that again to be crystal clear:
Paper and signatures have no future in the banking world—at all.
Am I sure? Yes. Not least of all because with facial recognition, image recognition on driver’s licences/passports and other identity verification technology (geolocation, social media, heuristics, etc.), a physical identity verification is now fifteen to twenty times riskier than a digitally automated identification process. Why do you think every customs department in the world is turning to the biometric verification of passports at borders? The answer is simple. Humans are the single weakest link in the security process—the most prone to errors, the least likely to recognise a false ID document. An algorithm never gets tired, or makes mistakes, and they can now see better than we can.
Think about that. The single riskiest thing banks do today is have a face-to-face account opening based on a piece of paper with a signature. Put it another way, the single riskiest thing you can do today, the easiest way to be a victim of fraud, is to sign a piece of paper in a financial transaction!
Keep in mind that every FinTech company that was founded in the last few years doesn’t use paper or signatures—each of these companies is way ahead of the curve on this. They have got no legacy process to circumvent; they’re just figuring out how to use technology to make it easier for customers.
Most physical artefacts of banking will have disappeared for the majority of customers within ten years, not least because 2 billion people who get their first “bank account” on their phone in the next decade will never use a plastic card or chequebook.
The component utility of banking, namely a value store, apayment, a line of credit, a savings rate, etc., will be integrated into experiences defined by context. The future of product design actually isn’t products at all, it’s experiences—money experiences, payment experiences and credit solutions.
Along with fossil fuel generation facilities and energy retailers, banks, accountants and financial advisers will be amongst the hardest hit industries over the next 20 to 30 years. Some banks will survive, but it’s very unlikely that they’ll look anything like the banks your parents grew up with.
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1 Society for the Worldwide Interbank Financial Telecommunication
2 Graham Hiscott, “Number of bank branches at lowest level for over 60 years,” Mirror, 5 July 2013.
3 H. M. Aliero and S. S. Ibrahim, “Does Access to Finance Reduce Poverty,” Mediterranean Journal of Social Sciences 3, no. 2 (May 2012): 575–581.
4 The percentage of the population who own a bank account
5 Alliance for Financial Inclusion (AFI)
6 Shwari is the Kiswahili word for “calm”.
7 “Banking on FinTech,” Breaking Banks podcast interview with Mohammed Jama Dalal of CBA, 19 October 2015.
8 Chinese International Capital Corporation (CICC) estimates
9 Starbucks Fourth Quarter Results, 29 October 2015
10 For those sceptical of the “Internet Fridge” example, keep in mind that you can already order groceries from Amazon Echo or Amazon Dash, essentially in the same way a smart fridge could.
11 See “MasterCard’s Cashless Journey” at http://www.mastercardadvisors.com/cashlessjourney/.
12 BTC and XBT are the commonly used abbreviations for bitcoin as a cryptocurrency.
13 As of 1st January 2016, bitnodes.21.co recorded an average of 6,400 nodes on the Bitcoin network, but it has been as high as 10,000 nodes in the past.
14 While the rest of the world calls these current accounts, perhaps we should just now call them digital or mobile spending accounts?
15 “The Fintech Revolution,” Economist, 9 May 2015.
16 Some estimates put this number as high as US$30 billion in 2015.
