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Mapping your digital journey

By The Asian Banker Live

Emmanuel Daniel, chairman of the Asian Banker, discusses key issues impacting institutions' digitalisation journey and what it takes to be successful in their digital transformation at the Annual Heads of Retail Finance Dialogue 2018 in Kuala Lumpur, Malaysia

Here is the transcript:

The big question we want to answer this morning is mapping the digital journey. Mapping the digital journey. And we don’t want to do it; we don’t want to do it like a consulting firm and say, ta, da. This is how we map your digital journey for you. I’ve actually seen a few consultant presentations on mapping digital journey and it looks like a laundry list and audit exercise of your existing inventory. When actually we are trying to decide how do we make a journey in to an unknown territory, in to an unknown future. So, the last thing you want to be able to catch an inventory of is what you have in your store room or your back yard. So, therefore, I’m not going to put up a file here and say, this is the digital journey, I’m gonna ask from each of you how you view your digital journey. We wanna talk about a few other aspects, frictionless, artificial intelligence, now let me move very quickly, I’m sorry but I have to reinforce this message.

It’s wonderful being Asian banker because we are global and it’s increasingly a name that you really need to associate with something the color purple or pink or love style, something really silly because it’s got no bearing on what we do. We are global, we run programs in Silicon Valley, we run programs in Switzerland, our annual wealth management program in London and then we’re running an innovation tour in New York later this year. And our very famous innovation tour in China, you know, the funny thing about China is that, if you run an innovation tour you have to run it in three different eco systems. That’s the Shenzhen eco system which is where the factories are, there’d the Hangzhou and Shanghai eco system and there’s the Beijing eco system and all three are very different.

Beijing is where the big four banks are, it’s government led, all the innovations are absorbed by the large banks. Each of the banks have got at least 10 to 20 thousand programmers. That’s like larger than all of Western Europe’s data processing skills put together in one place. And so, we’re running the Beijing one in May and it’s very nice to be able to run this exact same program in Nigeria, in South Africa and so on. And from the learnings that we do from our award programs we actually sell back in to your respective institutions boardroom level engagement programs. And one of it is that we are introducing now is the digital journey road map. Our staff have put together a lot of wonderful slides which we don’t really need to go through but it formed the thinking behind some of the assessment that we are putting together.

And the big question that all of us here are faced with today, is how do we think about the huge platforms being created? And if Grab says that it’s 140 million customers across eight countries that immediately put almost any South East Asian bank flatfooted. DBS five million, Maybank 15 million, you’re a non-starter. And customer acquisition costs for any of the local banks $10.00, $20.00. Customer acquisition costs for Grab 20 cents. Like, we stop counting because it’s 140 million customers, right. So, and then, the difference between what the tech vendors are doing and what the banks are doing. Which is the tech lenders and this is a slide put together by our senior researcher,Chris Skinner who has been the Head of the Excellence Program for many years but now married in the Philippines and working behind the scenes.

And he does a lot of the processing of the findings that we do every year as well. And he put this slide together saying, the funny thing about the difference between the tech giants and the banks, is that the tech giants seem to focus on transactional processing, ow value transactions. Whereas the banks go in more for the relationship type transactions. Interesting differences. Then the question is, like one of the points put there is, know what you want. Another way to say that is, know which field you wanna play, which game you wanna play. And this other question is very interesting which is, that the innovators the disrupters tend to be more successful in countries when there’s low banking penetration. That’s a no-brainer, right. And where countries have got a very strong banking tradition we don’t see the war because banks appear to be able to absorb the competition as it’s being driven.

And then, the ability to diversify products because at the moment, a lot of the competition is on payments because that’s the entry level. And that’s another reason why it’s in payments because the technology itself is just there at the moment, so that’s an easy entry. But how will that evolve? And finally, the funny thing is, of all the innovations taking place and being driven by the disrupters, guess what? The disrupters are not making money yet because the asset liability composition, they are very liabilities rich, they can’t deploy the assets just now. So, in banking you deploy the assets, you make your money and that alone makes their cost income ratio untenable and you see this especially in the U.K. with all the challenger banks, none of them want to be forthcoming in terms of whether they are profitable or not.

So, the game is changing, morphing very quickly but the devil is in the detail which is who’s making money, who’s not, who’s acquiring customers at what cost, and then what are they being able to do with those customers. One bank we really love is Kakaobank, is Kakaobankrepresented at the table? Amazing, it’s a bank that acquired 5.2 million registered customers within like nine months of starting their business. And this is the fastest growing digital only bank in Asia and actually, they won the digital bank competition and when the evaluation process for these awards run from the researchers and then goes to the advisers, I only go for the lunches and dinners with the people who think that I am the decider, but I’m not. So, when I see these names being passed, I do question sometimes. I say, hmm, Kakaobank, wait a minute that bank is less than nine months why are you recommending them for this award?

And I had this altercation with Boon Pingand then when they showed me the numbers, I was astounded that this bank had done much better than any other Chinese and the Japanese banks. And David concurs and so does all the advisers and it’s a bank to watch and the reason is the onboarding technology that they use is incredibly frictionless. And Korea being a very homogenous society and so on, they were able to build market share very very quickly. And there’s another bank in Japan which comes close which is Jibunbank.

Now, so with all this, an also by the way we changed the evaluation criteria for the Excellence Retail Banking Program. We used to focus a lot on the sustainability of a retail bank, in other words if you grew your business very quickly, we look at your NPLs to see whether you are incurring a lot more bad debts as a result and whether your loan book is sustainable. If you grew profitability very quickly then we look at the quality of your assets, if you grew market share we look at what cost and did you do that in a price war and stuff like that. And now, the time has come to change the whole dimensions by which we assess the retail bank and will do the presentation afterwards as to the criteria in which we assess. And by the way, from this year onwards we’re actually putting the ranking of all the retail banks on our website, and on another website called, so that your customers can see how we rank you.

We want your customers to use the ranking in order to decide which bank to make business with and with the feedback that we get from your customers we will tweak it so that the customer at the end will feel comfortable that this is the rankings that best reflect the experience, in terms of retail banking. And lots of surprises, and I’ll leave that to to share with you. The book that is gonna be published soon and I’m very very excited, it’s called On the Eve of Finance 5.0. And the title by the way was put together; I finally came to the title about a month ago because the previous title was on the last day of finance. And I ran in to Brett King who then said, he’s got his book Banking 4.0 and I said, Brett, I’m not going to tell you the title of my because it will sound like as if I am competing with you, which I wasn’t, which I’m not.

And when you look at what Chris Skinner writes and what Brett King writes they spent a lot of time in dealing with the mindset of the bankers of the banking community as you make the journey. Whereas I’m taking a much bigger picture view of the whole evolution as we see it. Now, the conversation that we need to have about where finance is going, has to be predicated on another conversation on where the internet is taking us. And so, we know that the internet went through what is called a journey from 1.0, 2.0 and actually Christ also mentions in his book and it happened to be, I just read it but it was already in my book as well. But the way we treat it is totally different. Now, what’s in web, that’s web 1.234, we are right now in web 3.0 sort of and we can argue that and going to web 4.0. 3.0 is what TimBerners-Lee, the person who actually wrote the coding for the worldwide web calls the semantic web.

And 4.0 is where devices start talking to each other and machine learning and so on. And 5.0 is not there yet, it’s nowhere there but the literature that’s being suggested is that it’s going to be the relations or the emotional web because the web, like today, if you go in to Google and you just type, Kuala Lumpur to London you will see all the flights put out there. And you don’t have to say Kuala Lumpur to London flights because it will guess that that’s what you’re looking for. Or you put a flight SQ201 and it sort of makes the decision that you’re actually referring to a flight and not something else. So, the semantic value of the web is already on its way growing and that’s going to become even more intelligent where the web is able to decipher your emotions as well. And we’re getting there because in web 4.0, in the tagging aspects of the web, the web is being taught to structure how we view things.

So, if you want to recognize a photograph, it’ll look at photograph and say, hmm, that looks like a sail, okay, sail, no, that looks like a sale that would be an important building, okay building. That looks like a famous building in Sydney called the Sydney Opera House, you know that kind of thing. So, it sort of breaks down how we think and then reconstructs what is it that we’re looking at or what we’re learning and then when we do that with human thinking it’s able to decipher emotions. And in fact, it’s the same technology that goes in to robotics. So, one day a robot will be able to talk to you like a friend and that’s because he’s structured how we think and so on. Now, if we then super impose an evolution for the financial industry, web 2.0 was when PayPal was created.

And in 1998, you know, and what’s his name? Elon Musk put together this thing called PayPal and so on. And so, that was the start of being able to do any form of transaction on the internet and the security feature and everything else came after that. Finance 3.0 with a lot more iteration in it comes a whole lot of development, a lot of it in payments and remittance, simply because the people who are fed up with financial services were able to say, look, if we put that service on the web, the price is transparent, the process is transparent and as long as we have trust we can complete the transaction. And so, remittance payments were the first places in which there was competition but there came serious competition later on.

The supply chain players like Alibaba for example, were able to say that we have 100,000 suppliers and small businesses doing business with each other, we’ve already linked up the payment component for them and they’re asking us what is it that we do with the excess fund that we have sitting in our account. And they started a fund called Yuebao. Within one year Yuebaowas able to grow to $100 billion, now not in the history of finance, even in the U.S. has asset management business been able to scale so quickly under such a short time. And not only that Yuebaobecame the world’s foremost money market fund that was also very liquid, meaning it was equivalent to a bank account, basically. So, then the question is why do you need a deposit bank account where you can put your money in to money market fund and use it whenever you want on the mobile device?

And of course, that’s gonna evolve even further as we go on to finance 4.0 and so on. And what’s happening in finance 4.0, for example, is a company called XTX founded by ex-big bank players, Deutsche Bank and so on. Who are now reconstructing the FX market, which is making the FX price transparent to the customer, not beholden to the wholesaler, discoverable and deployable. That means you can buy and sell immediately and now XTX is one of the world’s largest forex wholesaler alongside the global banks. And so, breaking down the cartel effect of the global banks. So, then the question is, what is finance 5.0 going to bring us? And to answer that question, I wanna ask you guys a question here, okay. And we’re going to construct our digital journey in this room right now and some of this is from the book and some of this is not because it’s meant to answer this question, this digital journey.

Let’s ask ourselves this question, who do we trust more Facebook or your government? Network effect, okay, the big become bigger, that’s what he’s saying, right. And I think, Chris in saying that, he said, Facebook says we govern it for you. So, Facebook’s capitalization is the GDP of Indonesia by the way. And this is a very important question, actually I asked this, Sir George Matthewson the former Chairman of RBS at a time that RBS was offering to buy ABN AMRO together with Santander and what’s the three banks that got together to buy ABN AMRO and split it up? Fortis, yeah? I was working with him in Beijing and we invited him to speak and asked him this question, how big can a bank become? Because banks had by that time started entering the trillion-dollar market size. And he looked at me and he said, sorry asset size and he looked me and he said, it’s a stupid question, big, big, big.

And before, I mean, he didn’t say big, but he just looked at me and he didn’t think of that as a question to answer. Now, there are two aspects of being big, by asset size or by the number of customers. Today, because of platforms we’re all thinking customers but asset size there was an organic growth in asset size which brought the world’s largest banks to about a trillion, two trillion dollars. And today, the largest banks are about three trillion dollars in size, that’s an asset size question, right. But guess what? The largest financial institutions Black Rock, which is five plus two trillion dollars, so that’s seven trillion dollars. Five trillion dollars in assets under management and two trillion dollars under discretionary assets. So, they’ve aced the banks already, the war is over on assets. And the question is, should we even be looking at finance from an asset size point of view? Is the business of banking lending money?

And by the way, when Black Rock says its got five trillion dollars in assets under management, that’s actual assets under management. When a bank says its got two trillion dollars in assets, it means about a trillion dollars in actual loans and another trillion dollars in securities which are traded, which his ephemeral assets, meaning assets to value which goes up and down, which is dangerous. And Deutsche Bank is sitting on about $300 billion worth of unaccounted for derivatives to this day. Which means that even the CEO doesn’t know how much derivatives he has on his books. So, the question is how big can a bank become? And what does size mean to you? Public Bank is the one bank, worldwide, okay that I trust very strongly because they grow organically. And what Mr. Ung is saying is that there is still scope for growing organically. Organically means, your loan book, the basic business of the bank, not a trading book.

And Public Bank does not have a trading business at all. In fact, it grows by keeping trust to the customer and in the last five years or six years or so, this is one bank that was growing its loan book 30 percent year on year. And all the competitors were looking at this bank and saying, okay, at which point is it going to give, at which point is it going to give. And every year, when we run this program we, ourselves were very worried because they were growing very strongly. But they were able to grow strongly because they had a very strong legacy base, which is a trusted customer pool that they understood and they never monetized for mortgages and stuff enough and they had a few years run on building that. And so, the answer for that question is, how large can a bank grow? Organically, without fear as large as you can be.

But, today, we are dealing with inorganic growth both on the trading book but also on things like number of customers and payments and so on. So, this is an interesting question. So, another question that should be asked is how big should a bank grow? And that’s a question you probably need to answer. This thing about, and this is something that I deal with in my book, is this. As banks grow, and this is from web 2.0 actually, it’s a guy called Kleitz Shuki, he wrote a book about collaboration and the importance of collaboration in web 2.0. And he used this as an example, he said that the mermaid parade in Coney Island in New York, and all he wanted to do and why he used this as an example, is because he was actually looking for photographs from the mermaid parade.

And, when you Google or when you search for it on the internet, you find thousands of pictures. And at that time, if a company went out to do photography and said, I will hire 20 photographers to go out there and take photographs, they might have had a few thousand photographs. But they had 3,100 photos loaded up on Flickr by 180 freelancers, just people casually putting up photographs. And there’s a whole area of different types of wonderful photographs that he could choose from. And what he was trying to explain is what is called the power law distribution which we now need to think about when we think about scaling an organization. In web 2.0, this idea is 2005 or so and today we are in web 3.0 already, so the idea is far deeper. And because of tagging on the photographs it was possible to tag every photograph as a mermaid parade photograph and put it up and then make it available for anyone who wants to see it.

The idea that businesses need to think about the network effect, about platforms, about the internet as a business model as a whole, is to what extent are you going to create your products with your customers or co-create and to what extent are you going to be an industrial age manufacturer? The days of the industrial age manufacturer is over. And so, the thing about the power graph is this, that if all you had were employees you will have say about 1,000 photographs. And they’ll all be, you know, each employee is given say 100 photographs to take, so 10 employees take 1,000 photographs. But without the co-creation you wouldn’t have what is called the tail effect. 100 freelancers out there who took photographs for you for free and didn’t cost your bank anything. So, the co-creation aspect, the collaboration aspect with your customer is becoming increasingly important part of the equation of scaling because if you scale industrially you are dead.

Now, in order to do that the concept that then you need to figure out is how do I scale by externalizing my business. This is a slide that Asian bank has been using since 2000 and something, I don’t know, 2004, one of the staff had put this together. And this is actually one of the evaluation slides in trying to assess how banks are moving from account centricity to customer centricity. So, we actually put out a laundry list of auditable items and the branch computerization where a country like India, a long time ago, even putting a computer in a branch require negotiation with unions, they had to call it the general ledger updating machine in order to say that it’s not competing with customers, with employees and stuff like that. And then, on the other hand you had banks like Bank of East Asia which had pioneered the idea of e-enabling customers and not competing on price to keep customer retention.

But all of these developments and then analytics, the whole idea of data warehousing was that you were dealing with the data inside your institution. These are historical slides. Now, what I want to do is take you to what’s happening outside the history because you’re now no longer looking at data inside your organization you’re looking at data that comes from outside your organization. And the interesting thing about a lot of the data outside your organization today if you look at analytics, what Samir was talking about, is that the infrastructure for that is still being built. Not all data is structured, not all data is tagged the way that the Flickr photographs were tagged in 2005. And so, even if you had access to what IBM would call big data, you have no way of using it just now, today. You have to invest a lot in your own tagging and stuff like that and you have to be selective about what you want to do.

And that is why when banks went in to APIs they were not outward looking, in fact, if you go in to the monetary authority of Singapore’s website, they have something called the API playbook where they have more than 100 items that API vendors could work on with your permission. And if you read the playbook it looks like a to do list of problems that they couldn’t solve for 100 years in banking and now you want to the freelance programmer to solve it for you, not fair. And the freelancer programmer is not stupid either. And that was the original idea of API in banking while other businesses in supply chain SAP and so on were monetizing APIs, banks were still patronizing the API developer by requiring them to help solve problems that they couldn’t solve. What you want to see is that the API connects you with the outside world that takes the bank from where it is to where it should be, outside. And I call this, in the book, externalizing the business.

And now we’ve entered block chain and block chain is very very very interesting, which his that this is the way to, you know, a lot of the books on block chain, and if you’re going to Google and look at videos and stuff like that, talks about, what is block chain? Block chain 101, those of you who don’t know what block chain is, this is what block chain does. It just is a general ledger that, you know – we are still in that level of conversation. But the real battle of block chain is this, when Tim Berners-Lee wrote the code for the internet, the worldwide web, he basically wrote the protocol for TCPIP, which is the transport protocol and the identity for the code which is DNS. The domain name so that they can recognize, that’s a way to call each other and stuff like that. and it became what is called a thin protocol which then became a huge platform there.

So, everything that exists today, Facebook, Google, Alibaba, Tencent, everything that exists today sit on that thin protocol and that’s the power of that protocol. The problem with block chain is that it’s a think protocol and there’s hardly any applications that sit on that. And all the war that is taking place today are taking place at the protocol layer. In other words, all the protocol players want to be the dominant protocol and hoping that there will be players that set up applications on top of it. And right now, there are six very dominant protocols, some of them have got a monetary value attached to it like Bitcoin and some of them are attempting to move away from carrying values so that it can start focusing on carrying applications and stuff like that.

Now, the big difference between block chain and the worldwide web is that block chain is also answering a few other questions and they are very amazing deep questions for all of us. It’s answering the question of identity in the digital world. In other words, identity is personal, identity is something that I give you, not you take away from me, identity is non-reputable, so that once you’re on the chain you cannot be repudiated. And so on, and that creates a lot more personalization effects that the worldwide web wasn’t able to achieve. And what it might end up doing, is that the very platform effect that all of us are aspiring to today, may one day be over. Today, if I wanted to know the data of any one of you, I need to go to Facebook and look you up, so the application carries your identity. Tomorrow, the amazing thing about Bitcoin, is that it’s not the fact its value went up to $19,000.00 and then came down and so on.

That’s not the real story, the real story was that there were about 2,000 bitcoins in the market place or cryptocurrencies or more than that, that was the real story. In other words, it was now possible for 2,000 people to set up their own Facebooks and make it personalized and of different sizes, of different applications, loyalty programs and every one of them could carry value and transact value of them. And that’s the world that hasn’t come yet and that’s why my book is called On the Eve of Finance 5.0. Because we don’t think about the war that is in front of us, we think about what happens at the end of the war and then work backwards from there. And know that there are some battles that are not worth fighting. Because personalization at the end of the day will overtake platforms.

So, with those thoughts, I’ve already brainwashed all of you, so to answer this question, are you afraid of Alibaba, Tencent, Grab, Air Asia, in financial services? So, this is like scenario has changed, in other words I you’re a bank suddenly something has grown up so huge around you and Kuala Lumpur is an excellent example of that. It’s called Kuala Lumpur because it’s, Kuala means the estuary, which is two rivers meeting, Lumpur is a muddy estuary, it’s muddy because it used to be a tin mine town. And as a tin mine town, a lot of the Chinese immigrant workers came here, made their money in tin and this building sits on what used to be like three bungalows of wealthy Chinese who makes up Kuala Lumpur. And in this area of Bukit Bintang, exactly where this hotel is, used to be people who make their money from tin mines.

And their houses were beautiful black and white bungalow houses and then over time they got torn down and then large shopping malls came up and huge. And if you came back here after 50 years you’d just not recognize this place and you’d forget that this used to be a sleeping town with nice, huge rain trees giving shade and nice houses and now it’s all concrete jungle. And the conversation we had was exactly that, which is the scale of the Alibabas and depth of the information that they can look at, far out exceeds anything that your bank is capable of individually today. That war is over, that’s the universe in which we exist. I’m so sorry, we do need to get in to the last part of the meeting because sharing of the key findings is very very important.

The questions I wanted to ask were, they were very important, do you think the banks should acquire the Alibabas, that would’ve been a natural question, is it aspirational as part of becoming bigger? Cost is an issue, every time I hear someone say that we’re going to digital because we can save cost, every single expression of that has resulted in a destruction because the cost comes back to haunt you. It becomes a huge, and there are many examples of that and I think both Chris and Brett cover that, the cost shouldn’t be one of your drivers. Do you think that financial services should give back something to the customer? See, Amazon became huge because it said to itself that we will slash the cost of delivery of books by 90 percent and give that money back to the customer.

And I don’t hear a single financial institution saying that, in fact they’re so proud, especially the dominant players in each market that the moment they go digital they’re becoming more profitable. And so, the question is what does the customer get at the end of that? And do you think that digital financial services necessarily needs to be profitable? These are very important long-term questions that helps answer this question which is, what is y our digital journey? And we have a methodology but I’ve not put it up because honestly, the open-ended way of asking the question is the way to get us all engaged and to all benefit from the conversation. And now, for the second part which is the key findings for this year’s assessment.

Change the slides please. I’m gonna sit and do it. How does it work? Oh, wow. Okay, these are the four key agenda items we wanna talk about. I do not propose to go through all the two dozen plus slides.

Institution: Kakaobank, Alibaba, Blackrock, Facebook, Google, Tencent
Region: Asia Pacific
Guest: Emmanuel Daniel
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