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What Every Big Bank Should Know About Digital Transformation

Roland Alston, Appian
April 9, 2018

Chris Skinner, fintech commentator and best-selling author
Chris Skinner, fintech commentator and best-selling author of Digital Bank, ValueWeb and Digital Human.

Chris Skinner is a globally-recognized commentator on the financial markets and fintech through his blog,

Skinner has also authored the bestselling books Digital Bank, ValueWeb and its new sequel Digital Human.

He is a regular banking commentator on BBC News, Sky News, CNBC and Bloomberg. Recognized as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News and Thomson Reuters, Skinner is widely recognized as one of the most authoritative voices on FinTech anywhere.

In this Digital Trailblazer interview, we get Skinner's piercing insight into the end of banking as we know it, and a window into why banks aren't ready for the age of digital transformation.

He says that banks need to turn their thinking upside down, and not make the mistake of simply replicating old-school business models with digital technology.

The digital leaders are all re-imagining finance with digital technology that's focused on adding value to the customer journey and the customer experience. And the common denominator, says Skinner, is a mindset of leveraging technology to address a problem of people who are not getting access to money.

These, says Skinner, are the leaders that will deliver the FinTech revolution, because they are not just thinking about building a faster horse. Nor are they just looking at building bank products and trying to make them faster or cheaper.

"Digital leaders are looking at technology and trying to work out how it could be used to reach the people who need service most," says Skinner. "This is why Ifirmly believe that the FinTech revolution will not come from American or European FinTech firms, but from South American, Asian and African start-ups."

Get ready for a big dose of mind-blowing anecdotes, well-researched facts, and sweeping commentary on:

    • Big disruptions that will shake up traditional commerce.

    • Disruptive FinTech trends and their implications for C-suite execs.

    • Radical strategies needed to keep up with radical change.

This candid conversation is a wake-up call for any senior exec that wants to come out on top in the age of digital transformation.

We hope you enjoy it.

An Age of Massive Transformation

Appian: Good morning Chris. And welcome to Digital Trailblazers. First, congratulations on your new book, Digital Human.

Skinner: Thanks. I finished a draft of the book last summer. And it's coming out this spring. It talks about the digital revolution that's upon us, and how it's being made faster and cheaper with technology. This revolution is changing the way we talk, trade and transact.

And it's also changing the way we make business and relationships.

"I believe this is a massively transformational moment in the history of humankind. The stunning figure from McKinsey estimating that emerging economies will release $3.7 trillion a year in new productivity by 2025 sums it all up."

Appian: $3.7 trillion that's an incredible data point. Speaking of transformational, what's your take on the explosion of digital transformation and the implications for banking and finance. Some futurists are predicting that it's going to have as big an impact on banking as the internet had on the media and entertainment industry. What do you make of that prediction?

Skinner: It won't be the same as what we saw with the film and entertainment industry. And the reason is, is that banking is a heavily regulated industry. And it's very much tied to the government and the economy as we know from the 2008 financial crisis.

"Equally, banking is not just what we see generally with consumers and retail payments and deposit accounts. It's a whole raft of different areas that are quite complex, and heavily regulated, because it's at the core of what makes an economy successful or unsuccessful."

The Rise of Distributed Ledger Technology

Appian: What impact will emerging technology have on banking operations in these different areas you mentioned, and how will it impact workers?

Skinner: What we're seeing is that the industry is being ripped apart by technology. Wherever automation can automate something, it will. So, half of the banking jobs in the world will disappear in the next decade, because of automation and particularly AI.

"Equally, the cost of banking is going to be reduced massively, because of distributed ledger technology blockchain, and other services that are coming into play, that take away the buildings and human overhead. It's all going to be done through technology."

So, we will still need banking in the future. There's a quote saying that we don't need banks, but we need banking. That's not true. We need banks to do banking. That's the regulated piece. But we don't need banks to make payments. We don't need banks to borrow money. And that's the sort of thing that you'll see moving to other providers.

Digital Transformation Drives Shareholder Value

Appian: I read recently in the Financial Times that the business model for digital banking is fundamentally uncertain and highly over-valued. Sounds like you don't agree with that assessment.

Skinner: I've actually blogged about that statement. I think what they're really saying is that the major banks that are leading digital transformation around the world haven't proven any links to shareholder value. Their shares and market capitalization are performing at the same level as other banks that aren't doing digital transformation.

"But what's interesting is that one of these major banks actually sent me a note saying that they had proven a clear line between digital transformation and banking services and return on investment and equity. The point is, there is a clear link between being a digital leader, and the cost-income ratio and profitability of major banks, which will only become more and more evident over time."

AI System to Handle Million Transactions Per Second

Appian: While we're on the topic of digital transformation, AI is a hot topic in that conversation. So, what role do you see AI playing in the transformation of the banking industry, now and in the future?

Skinner: Right now, AI is being used by banks mostly for risk and fraud analytics. A good example is Ant Financial in China. They're processing 120,000 transactions per second, of very small payment amounts, through mobile wallets. And every single transaction is being analyzed by their AI system for potential fraud and risk that those transactions are being sponsored by people making illicit payments.

Ant is planning to scale up to a million transactions per second in the next few years. That's far more than you see Amex, Mastercard and Visa doing combined. I've seen quite a few interesting activities in the U.S.

Fragmented Data, Big Barrier to AI Success

But it tends to be in very niche areas, like JP Morgan using AI to re-contract with their wholesale customers. The contractual legalities in commercial and investment banking are incredibly complex. But a lot of it is administrative, legal work.

"JP Morgan has managed to save 360,000 hours of legal time by processing those contracts through their AI system. Imagine that. In just one second, the AI machine can do what lawyers did in 360,000 hours. "

I've seen another AI use case at UBS that I like. When their high net worth wealth management clients send instructions to change their investment parameters, it used to take 45 minutes per email for humans to deal with that. But that's all managed by machines now. It's been automated to take just a couple of seconds.

So, we're seeing AI working in many areas. But where we're not seeing it working yet is in personalized and advisory services to the general consumer. And that's because the banks have massive data in the back office fragmented among lots of different systems. So, until they fix the data fragmentation problem, they can't really use AI for customer service at all.

Trends to Watch: Blockchain and Mobile Wallet

Appian: That brings to mind another technology that's getting a lot of press blockchain. What do you make of all the hype around virtual currency? Do you think this trend is going to gain traction with traditional banks?

Skinner: So, it's not just blockchain, it's also mobile wallets. That's another big trend to watch. And what we're really seeing is that there are more convenient, cheaper and easier ways to pay people.

The amount of these transactions can range from 50 cents to $50 million. And the cost of these transactions will be the same because they're all being processed on the same technology platforms.

What we're seeing is that the larger transactions are taking off with blockchain and distributed ledgers. The interesting thing is that for the past six years, I've been talking about Bitcoin. But all the bankers are saying Bitcoin bad (because it's being used by criminals), blockchain good (because we can see it, and we can save money.)

Blockchain Set to Go Mainstream

Appian: So, do you expect blockchain to go mainstream anytime soon?

Skinner: The Australian stock exchange will go live in 2018 with digital asset holdings, using their distributed ledger service for clearing and settlements. So blockchain is becoming mainstream. And there are lots of other mainstream examples that I could point to.

"We're actually starting to see cryptocurrency take off this year, with the massive escalation of the pricing of Bitcoins. Ripple, Litecoin they've all taken off. All the banking people are calling it a bubble. But I think in 2018, they'll be asking "how can we bank Bitcoins? So, watch that space."

Appian: Moving on, let's talk about data, and the importance of data in financial services and banking. What's your take on why data will be a critical success factor for the banking industry, in terms of winning and retaining customers?

Data, New Oxygen of Financial System

Skinner: Yeah, so we've talked about the importance of data for decades in the financial industry.

"Just like with bitcoin and cryptocurrency, data is where all the wealth is. So, the banks that will survive in the future, will be the ones that sort out their massive data mess. Banks that don't do that very quickly will fall by the wayside, be acquired or merged."

The reason is, data is the new oxygen of the financial system. It's the air that the financial system breathes. So, if you haven't got a good enterprise data architecture that can be mined and used for machine learning and AI, then you're going to die, because (metaphorically speaking) you can't breathe properly.

Appian: So, banks that figure out data analytics, and apply machine learning to create value for customers will survive. And banks that don't will disappear.

In US, 43% of Big Banks Run on COBOL


"Yes, that's where we are. Most banks haven't sorted out their back office. They've left it there for years to fester with old technologies. Here's a great statistic. In the biggest US banks, 43% of their main back office systems are running on COBOL (a pre-digital programming language). I'm not saying COBOL is terrible, but it's antiquated."

Appian: So, what are the barriers that are preventing big banks from upgrading their systems and adopting modern technology to get out of the legacy system rut? Is it a mindset? Cynicism about digital technology?

Skinner: It's the leadership team. The leadership team of most banks are made up of people who are bankers, people with careers in risk compliance management and regulation. They do not like to spend money or take risk. And spending money to replace back office systems is a high-cost, high risk activity. So, they've avoided doing it for 40 years or more. Which is why these systems are so old and antiquated.

Over 90% of C-Suite Execs Have Zero Tech Experience

"If you go to the leadership teams of most large, financial institutions, you won't find a single technologist in the C-suite. I've seen analytics that say, right now, 94% of the people on these leadership teams have had no technology experience."

So, how can they transform a bank in the age of digital transformation, if they have no idea what digital transformation is?

Appian: So, you see the lack of technology expertise among senior banking leaders as a major problem?

Skinner: Yes. It's the biggest flaw in the industry, a fundamental flaw.

Appian: The next topic I want to tee up is an interesting idea I came across in one of your blogs. It's the notion of embedded or "smart" contracts. You've said that in the next 10 to 20 years, smart contracts could transform how bank accounts work. Would you elaborate on that thought?

Transparency and Trust in a Digital World


"Smart contracts relate to Ethereum, which is one of the cryptocurrency, blockchain, platforms out there. But it's the one that most of the corporate folks like. Mainly because it offers a level of trust on transactions that you don't have in other cryptocurrency forms."

So, what you're doing is taking centralized banking structures and decentralizing them into a trusted, shared database network, using smart contracts. And this approach is applicable beyond banking as well.

Charitable work is a good example of this. You know when you send money to a charity, the question is does it actually go to where you're giving it? With smart contracts, you get far more transparency in the system. And that's where we're seeing big things happening with smart contracts.

In insurance, if you buy a work of art or a diamond, how do you know that it's a real diamond, and not a fake or blood diamond? How do you know that that work of art was really done by that artist? Those sorts of records are being digitalized onto smart contracts and distributed ledgers. And this trend is really going to transform our world.

"The thing is, we're no longer going to have to have the massive overhead of people authenticating and registering these things, and then having paperwork that can be easily manipulated.It's all going to be digitalized on a trusted database shared by everyone instead."

Three Trends to Watch in 2018

Appian: As you know, there's lots of hype around cryptocurrency, blockchain and AI. Which digital trends do you expect to have the biggest impact on banking and financial services in 2018 and beyond?

Skinner: Well, we've touched on quite a few of them. And I'm especially excited about AI and machine learning, robotic process automation, the use of distributed ledger to lower costs, and the increasing use of biometrics.

"But I think in 2018, there are three big messages I'm picking up. The first is that the banks are going to really get down to drive efficiency with AI. Because many banks now have one in three staffers that are just there to check the other two.A good example is that in Citigroup, 40,000 people work in compliance. Better to use AI and machine learning to incorporate regulations and monitor compliance in real time."

The problem is, we've got an awful lot of money laundering going through the system, because it's all tracked on paper and not digitally.

Wake-up Call for Regulators

The second big thing is going to be rationalizing and cleaning out these massive, legacy, data structures that we know are inefficient. It's time to come up with a plan to create an enterprise data platform. It's already mandatory to have that in play before the next decade, and we're already two years into that journey.

The wake-up call and the alarm are ringing really loudly on that one.

And the third big message is what I call the rise of open sourcing and financial structures, where the front, middle, and back office move to open APIs and analytics. What's really happening and driving that space is the regulatory structures.

"The regulators have finally woken up to the fact that technology can transform banking. And they're now starting to legislate that banks will have to start using open APIs, open banking, and open source structures, and partnering and co-creation."

Which is fantastic, because when the regulators say you've got to do it, you do it.

This interview is part of our ongoing Digital Trailblazer series. Join the conversation as we talk with innovators and big thinkers on all things digital transformation.

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The digital forecast 2018