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Fintech in 60 Seconds

Invisible Banking

by David Shrier | @DavidShrier

MIT Connection Science just released a “Digital Banking Manifesto”, working with one of our Fellows, Alex Lipton.  Let’s take a look at some of the more interesting points from the writeup – which asks the question, are we looking at the end of banks?

This summer, I participated in a brainstorm about what a future bank should really look like, and one of the participants noted that “I only go to the bank for two reasons: when they’ve done something wrong or when I have.”  It’s painful.  People have anxiety levels around their bank interactions normally reserved for trips to the dentist.  

Let’s face it, commercial and retail banking today lives somewhere between “salt mine” and “Dante’s Inferno” (we will leave institutional banking aside for the purposes of this discussion).  Although some of the more progressive firms have tried to freshen up the look of the branches, remove bulletproof glass, inject a feeling more like Starbucks, it’s still just putting lipstick on a pig.  It may be a more attractively presented pig, but it’s still a pig.  The metaphor extends to the digital iterations.

"Banks are trying to be cool and hip and build super cool digital front ends... But it’s like putting lipstick on a pig - ultimately it’s still a pig and the new front end is still running into an awful digital back end."

Mark Mullen, Chief Executive, Atom Bank

Disrupter banks are emerging that are entirely digital, with lower transaction costs and fees, greater effort placed on user experience, social components, and so on.  Yet, they still fall prey to the old paradigm.  You have really cool user acquisition vehicles…that still ride on the same old rusty rails of the traditional banking system.

Change is coming.  What are the implications, for example, of the sovereign digital currency?  The UK, notwithstanding its suicidal Brexit vote, continues to press forward on financial innovation.  “Britcoin” would be a boon to consumers through reduced costs for transacting with pounds sterling.  Guess where those costs are getting taken out? Today, retail banks rely on cheap money (deposits), that they then use for other purposes to make margin.  In a world of Britcoin, that spread goes away.

The new digital models can run with 20% of the capex and 50% of the operating costs versus traditional IT infrastructure, at about 15-25% of the headcount. Trying to adapt an existing bank infrastructure to progressively eliminate 80% of its workforce (and needing a different 20% for the remaining piece) is a Sisyphean task that is perhaps doomed for failure.  At best, bank executives can hope for a really painful transition.

And in thinking this way, we’re still trapped in the old model.  Very few financial providers are not only “mobile first” but actually “integrated into my life, and using latest-generation data management systems.”

What if, instead of “my bank account” or “my bank” being a discrete activity, financial services were just part of other services that I use every day, like my mobile phone service or my communications / social media platforms? The key is having customer-centric data across all areas of life, held in standard format with standard APIs that work across the entire digital ecosystem and not just its financial services/products corner (sort of like a universal personal data store or PDS, but you don't own/manage it...they do). Using this central, panoptic data, a company like WeChat/Sesame (or Alibaba or AT&T or Verizon or Telefonica or MTN or Amazon or Google or Samsung or…) can integrate services from the whole range of life opportunities (entertainment, work, finance, family, etc.) in a seamless and consistent manner.  I note with interest that the CEO of a division of Barclays Africa recently left to go work at a major telecommunications company.  

Extending even further into the future, what if global data systems were totally decentralized and trusted, with a universal, personally controlled digital identity?  In this world, you control your information, not some central provider, and you decide what’s released or shared – and you have an “undo” button for your data.  All sorts of services could spring off this architecture, including seamless and universal financial access, bringing 2.5 billion unbanked people the benefits of commerce.  

It’s not science fiction: the U.N. has set a goal of getting everyone digital access by 2030 (via universal ID) and our group at MIT is developing recommendations around a common approach (more on that in a future column).

What if banking were truly invisible?

Opinions expressed in this column may not necessarily reflect the views of the Massachusetts Institute of Technology or its faculty.  

In related news...

We’ve got two weeks left before we wrap up the launch presentation of the online MIT Fintech certificate course: Future Commerce.

All 1,000+ students are in groups that span across 70 countries, currently consolidating their Capstone Projects in the hopes that their strategic roadmap or business plan will be voted to the top of the list based on its academic merit and commercial viability.

Taking MIT’s Future Commerce class from on-campus to online has been a whirlwind experience, one I am extremely proud to be part of.

Here’s some feedback from one of our current students, Andrew Malov:

“The course has so far exceeded my expectations in terms of networking with highly knowledgeable colleagues. From a career building perspective - assignments around preparing a pitch and compiling a business plan for a startup are really handy. In time, I plan to use this experience to come up with a startup initiative of my own.”

Andrew Malov: Senior Developer, Traiana; Current Student

Are you interested in joining MIT’s global fintech community?

The second presentation of this groundbreaking course is starting soon:

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