At the Mobile Payment Conference (MPC) Digital Commerce Event 2021, TAB chairman, Emmanuel Daniel, conducted a workshop on ‘creating a roadmap for future digital banking strategies” on 18 August 2021. He stressed the importance of having in mind a view or a belief of what the future will be before one can embark on creating a strategy for the future of digital banking. He gave the workshop participants, comprising senior executive from banks and fintech companies, five elements to building a roadmap for their own future digital banking strategies.

These are the key agenda points of the presentation:

• Five elements of a roadmap for future digital banking strategies
• What will the future of finance be?
• Things we were worried about in 2007
• Things we are worried about in 2021
• Future of financial products
• Where is digital taking us?
• What do you believe the future of your institution to be?
• Ingredients of a profitable digital finance player
• Elements of a successful digital finance player
• The winning bank
• Working with fintechs
• Changing business models in the network age
• Managing regulators
• Possible goals
• Using consultants

Here is the transcript:

Good morning, everybody, from sunny Beijing. It just slipped into autumn. I'm here in Beijing, I love every day that I'm in China. This is the view from where I live and work. It's a beautiful day. Thank you very much for being here. This is going to be a working session, a workshop. It's important that I start the workshop with a presentation. I've seen the name list of the participants. It is a pretty senior group of people from both traditional banks, as well as from new players, fintechs, financial technology players trying to get into digital banking. And I'll keep my comments as broad as possible. Now, the outline that I'll give is based on my perspective. We can use that as the basis of our conversation. Now, it looks like a lot of things to be covered. But let's travel through it very quickly. And I will take about 40 minutes or so in this presentation. Because I do have a lot to say. And it's very important in creating a strategy, for our lives, for business, or for building something new or platform. It's very important to start with an idea of where we are going, as I started acknowledging in the presentation that I noticed that there are lots of senior people in this group. But there are also a number of you who are operational level managers, who have been given the job of outlining digital strategies. You're the ones preparing the PowerPoint slides, and the presentation and the supporting data and research for the digital finance strategy of any kind that you're building.

This famous line from Alice in Wonderland, where the Cheshire cat asks, it asks the shy kid, “Can you tell me where to go?” and the cat replies, “Where do you want to go?” And, Alice replies, or famously replies, “I don't much care where” and the Cheshire cats replies, “Then it doesn't matter where you want, which way you go”. If you want to know which way to go, if you have no idea of where you want to go, then it really doesn't matter which way you take, right? So that's the first rule in any form of strategy or direction that you want to take. The first thing I want to impress all of you, is “Develop your own idea”. It doesn't have to be a right idea. But start by asking yourself, “What do I know about where the future of finance is going to go? Where is it taking us? When do I know about cryptocurrencies? What do I know about blockchain? What do I know about API? What are my opinions on these things? What do I know about platforms?” 

Once you develop those ideas, then you will be able to build your own strategy. It's so important that those ideas are personal to us, personal to you, personal to me. And from there, we, people like me, help banks and new players make their decisions. And people like yourselves who actually have to build digital strategies have to make certain assumptions in terms of where the technology is going. And where the transformations are coming from and where they're taking us.

Five elements of a roadmap for future digital banking strategies

Now, if you even just google “banking strategies” or something like that, you will see there are tons of material from different consulting firms, from the brand name ones to individuals who will give you roadmaps. This is the desired roadmap to build your digital banking strategy. I am not giving you a roadmap. I am giving you five, if not more considerations that you need to have in your roadmap. Look at different roadmaps, some of them are very complicated, and some of them are very simple. A roadmap is a roadmap, you either go here, or you go there, you go this way, or you go that way, you go this way, and then turn right, turn left, do five things, and you'll get to your destination. But all road maps have certain elements in them. And the first element as I started in this presentation is a belief statement.

What do you believe the future of finance is going to be like? What do you believe, the roadmap? Or rather, the strategy? What do you believe the world is turning into? Because of these transformational agendas that are being thrown at us. If I say to you, “What do you believe to be true about cryptocurrencies?” Some of you might say, “Yes, that's going to revolutionise finance”, that's going to disintermediate current players”. And some of you will say, “No, it's going to be controlled by regulators, it's going to be harnessed into the existing model”, And I don't care what you believe, I have my own beliefs, but we need to form those beliefs. And once you form those beliefs, then you work a lot according to that. If you think it's going to be disruptive, then you might want to embrace cryptocurrencies and make it part of your strategy. If you think it's going to be controlled, then you need to say, “What can I do to harness that to for my existing strategies?”  And that's really up to you, but I have a few things to say on that front.

And then of course, current market realities in the market that you operate. You may come from a country which has a per capita GDP of $50,000. And that's a very different market from a country where the per capita GDP is $1,500 or $6,000 or $8,000, which is considered to be a middle-income market, which has its own dynamics. The moment you say middle income, it means a few things. It means that the market has evolved to a certain level and the level at which it is right now, it might break into high income or remain in middle income or decline back into a low-income economy. It’s a very dynamic situation, and sometimes, the middle-income countries are beset by a whole range of supporting issues such as, migrant workers who keep salaries low, the inability of the community to upskill and take on higher value-added industries and so on. A number of current market realities that you need to take into account.

And then of course, you need to take into account your own current organisational realities. Some of you come from traditional banks. Just to move the bank operationally requires incredible investments in technology, in processes, even the internal leave application process is done manually today. So, when will it be that everything within the organisation will be digital? Things like that.

People. I've worked with banks where one of the biggest challenges they had is to transform very hardworking employees who have been with a bank 20 or 30 years, who are very supportive of everything that is done in the bank, but who cannot take on the digital agenda willingly. Their first concern is, “What about me? Where do I stand in this transformation? and where's the institution going? Do we need more people in the future?” That kind of thing. So, harnessing the people and mobilising them, and getting new talent into make the transformational changes. Those are issues. Now, these are not things that you're not aware of. And then you state your goal and you create your own future.

What will the future of finance be?

So, what do you think the future of finance will be? Even the current is very interesting. Those of you who are in traditional banks may like to know that banking is no longer the largest intermediary in the economy today. The fund management industry, the stock market industry, they're all much larger than traditional banking. And then there are new players coming on ETFs, which are trading on the information on an asset, which is actually one or two steps removed from underlying assets of any kind. Trading on information is increasingly becoming an industry in itself. Although they're small at the moment, they are growing, and, and they are cheap, and they are cost effective, cost efficient to customers. And they are growing very, very quickly.

And then digital wallets also look small as a percentage of total banking assets. But in many economies today, in China, for example, WeChat and Alipay as digital wallets, they compete with bank deposits. In other words, there's as much money sitting in the digital wallets of these two players as there are in the banking system, and the only reason you don't see those numbers in a chart like this is because they actually have to be held in custodian accounts in various banks in China. But the platforms themselves are disintermediating the banks, and when you think about new devices, like central bank digital currencies, as they come about, these will increasingly sit, if they ever become a reality, they will increasingly sit on digital wallets, that do not need to be institution specific.

So, we are talking about a very traditional bank, and you're sitting in downtown, think of yourself as the oldest building in town, which used to be the tallest building at six storeys, or 12 storeys, which is now a squat, compared to buildings which are 80  or 90 storeys high in your same city. Or, the little community church tucked away in downtown which used to be the most beautiful building in downtown, today is surrounded by a whole range of skyscrapers around. So, if you're in traditional financial institutions, you need to have that feeling.

Things we were worried about in 2007

Now, the next thing that contributes to our idea of building a judicial strategy is this. Don't get caught up by current realities. If this was 2007, some of you still remember 2007. When you go back, you will realise in 2007, you were afraid of your jobs. You are afraid of the banking industry collapsing, you are afraid of global capital markets collapsing, and the newspapers were reporting every day on one bank after another, and not just banks, but also financial institutions, which were heavy on finance, like GE Capital, AIG, insurance companies, threatening to go down under.

And so, you think that was the headline of the day in that period. But actually, unknown to you, there were many transformations taking place that defines us today. When you think about the banking crisis of 2007, it's far away now. In fact, the banking industry was rehabilitated, many new things happened. It became even stronger. The OTC market that the industry was so determined to destroy, never got destroyed. It In fact, became even larger. But insidiously, there were a number of other transformations taking place. And if you see in the chart that I've put up, Facebook became a reality in about 2007, 2006. Mark Zuckerberg started Facebook in his dorm in 2003 or so.

But it became a commercial reality at about that time. Twitter became a reality. iPhone was introduced in 2007. And then there were a number of technologies that formulate how technology is run today on the cloud. And GitHub, which is a shared platform, where technologies are built collaboratively. Then you have platforms like Netflix, which totally transformed how media is delivered today.  it just broke the cable industry, which was physical. And today, everything is digital online. So, Netflix, and so on, and the internet in 2007, went to one billion people. Today, the internet is 50% of the global population, which is seven billion. So about three and a half billion people have access to the internet. Bitcoin was born in 2008, and today, it's a $1 trillion asset class and larger than gold. And then Airbnb, shared utility, the shared economy started to take shape. And so now we are here in 2021. All of these things that originated in 2007, 2008, in that period, have become huge realities that we have to come to terms with today.

Things we are worried about in 2021

So, as we think about 2021, and we read the newspapers, we think we are caught up with geopolitical realities of China and US, trade war and stuff like that, inflation, the massive amount of quantitative easing that is being released by all of the leading economies, the US, China, Japan, EU and then all of our respective countries because of the pandemic. Those are the headlines, but insidiously, again, the transformational things that are happening are hundreds of satellites which are being put in space which will make the internet the internet ubiquitous. And that will have amazing transformation in global geopolitics eventually because we are now creating a nation-state that is not land-based. It's a nation-state of everyone who is on the internet. It's a virtual nation state. And those virtual nation-states have started to take shape.

When you think of ISIS. It's a bad word because it is a nation-state dedicated to terror. But if you see how ISIS came about. It was through getting membership, essentially, on the internet. And you find that it attracted a whole range of innocent young people whose minds were ready, just open-minded, in terms of being influenced on a cause. And it became a nation state, a self-proclaimed nation-state. So just think about the repercussions of how when more and more people are on the internet, we're going to be forming nation-states, which are not geography bound. Again, it will have an immense implication in the next 10 to 20 years.

Crypto is building incredibly. Bitcoin, as I said, is today, a $1 trillion asset. Yes, it goes up and down a little, but it's touched $1 trillion. But it's not so much the value of cryptocurrency, it's all that is happening around it, the interoperability, the putting of assets into tokens. Those are the work that is transforming finance today, even something as simple as battery life. You think about, the iPhone that you have, the mobile phones that all of us have, the chip technology can actually do far more if the battery technology is able to support it. So, chips are getting smaller, five millimetres and even smaller than that. Soon, it'll be just a button on your shirt. And if you have the battery technology to support that, the things that can be done on the microchip can go even further than all of that exists. Human genome extraction,

I'm actually learning a lot about the history of the major civilizations. The Indians, the Arabs and so on, because of new things, we are learning about human migration, how it happened and when it happened, and data's processing speed. So, in the next 10 years, we need to look at these things and say, “Hey, which of these will be transformational and which of these will create opportunities for me that I can incorporate into my strategy?”

And these things are general not just to banking or finance strategies, but anything in finance. The challenge that I would like to give you is this, do not think that you are in an asset forming war. The battle is not whether you will have more mortgage than your incumbent competitor. So, in many markets, the dominant banks hold the bulk of the mortgage market. When a digital player comes into being, they think that their role is to steal market share from the current, traditional players into their own portfolio.

So, organisations like The Asian Banker will draw a pie chart and say, “This bank in this country has 25% market share of the mortgage market, because of digital players, it slides to 12%, and then all of the other players take over the mortgage market”. And you think that that's the battle. You really need to think that there will be no more mortgage market, that there will be a new world. Just as I mentioned, the ETFs. There's a new world where many young people would rather be in the utility market, which is asset-light, is utility-driven. And just like Airbnb, they would like to have a right to a share. And with more information, and more data available on the number of inventories, in any city, this mobility, and this flexibility, and this asset-light approach might actually define how property is evolved in the future.

And you may want to start in your business now, building a market share of that, because the market share doesn't exist, as opposed to competing with your biggest bank in the country, trying to get a market share of mortgages, which is an expensive warfare, by the way, because you got to compete on price, you got to compete on customer acquisition. So, that's the kind of thinking that's required, in order to define what the future of finance will be. Now, I'd like to say this, about how much of the competition has evolved in just about any country. Whether it's in the UK, in the US, in Southeast Asia, which is a very dynamic part of the world, in China, many new players in digital finance have been trying to compete with the dominant incumbents. And when you try to compete with the incumbents, you will end up looking like the incumbents. And that's what you don't want to do. And when you end up looking like the incumbents, you actually end up absorbing or imbibing or starting to incur the same costs factors as the incumbents.

So, if you think that you are in a competition for market share, you have cost of acquisition, incumbent cost of credit, incumbent credit profile, incumbent. In other words, you're looking at the same credit profile as the incumbent, especially in mature markets. So that is why today, you will see the peer to peer lenders, for example, right around the world. The major peer to peer lenders, all of them want to become banks. So, they started by thinking that they were going to disintermediate banks. Today, they're, in the UK, in the US, going in and applying for banking licences. And that's because they had constructed the idea of competition around the incumbents’ construction. So, a peer to peer lender needed to see the business model as not being acquiring loans. And that's the model of existing financial institutions. And peer to peer in the network world was more about information on loans. And information on loans is all about creating the conversation of the community around that information, or information on assets, not just the loans, is the physical property. And when you have information on assets, the utility of it is not to get a loan, the utility of it is something totally different. And, peer to peer players never figured that out. And as they became increasingly regulated, they just decided, “Hey, actually, at the end of the day, with a banking licence, we'll be able to do what the banks do”. So that was really no fun. But with far more intense amount of information available for free, and data available for free around the world, you will see another iteration of the revolution of internet finance and the new ink, the new challenger institutions taking to another phase and that's going to happen very soon, and it's already on its way. You don't see yet but you will see that that's how it's going to evolve now.

Future of financial products

So, when we look at traditional asset classes, traditional products in finance, we need to also restate what we think to be the current issues that are redefining each of these areas. So, take wealth management for example, if I were to ask you, what is the most important challenge in wealth management today?

Just about every family office, fund manager, private banker thinks that it's acquiring wealthy customers, that seems to be the battle. Actually, the real battle in wealth management is that poor people have as much right to wealth enhancing assets as rich people. So, when you take something like cryptocurrencies, for example. Many countries have regulators who prohibit or restrict or make it really difficult for ordinary people to get access to cryptocurrencies because they think that it's volatile. It's not stable and it destroys wealth. But look at what happened to cryptocurrencies, the valuations of cryptocurrencies went very high.

There is this amazing young man in Singapore today, who actually bought the world's most expensive digital art. And his pen name is “MetaKovan” and he was a poor boy in India, collecting bitcoins and ethereums while they were very cheap, a few dollars, and today he's a billionaire. And so, people are asking, “Why do I not have access to the assets that rich people have? Equal access? Why am I not given access to structured deposits, for example, which regulation, focuses on?”

You need to be of a certain net worth and able to take on this amount of risk in order to buy structured deposits. Instead, poor people are given just basic bank deposits, which actually is a funding costs for the banks, not for the depositor. Nobody in the world with today's quantitative easing stands a chance of becoming wealthy. Saving money in deposits is actually asset destroying because of inflation. So, what is your sense of what is the competition in wealth management? What is your sense of what the value, I hate words, phrases like value proposition, because they are just words that people throw at each other. What is your value proposition? Payments. What is the real competitive issue in payments? When you think about payments, it's been reduced into information. Payments should be, the cost of payments has collapsed to zero. In fact, is negative because all it is is a piece of information that is carried on the internet rail.

All of the institutions that are trying to generate income on payments, have the mind of the old payment infrastructure of Visa, MasterCard, global exchanges, interchange fees, and so on and reconstruct those in order to generate fees. But in essence, that industry has ceased to exist. They exist only because regulation and incumbent players are still trying to juxtapose for that. Now, if you take the view that payments, the cost of payments has collapsed. If it's actually the same cost as a Twitter feed or a WhatsApp message. It can be carried on any one of these platforms today. And if it is not being carried, it's because the platform's themselves are just toying around. WhatsApp does have payment initiatives in Brazil, in India and so on. But they haven't made it global, they haven't made it interoperable within currencies and so on. But they can because the technology already exists, and the technology will take us there. So today, when you look at even card payment, the card associations, Visa, MasterCard, don't do their own processing anymore, they outsource it to companies like Wirecard, which then collapse because there's no revenues, fees in payments.

And then they passed it on to other companies, which are trying to scrap the bottom of the barrel to make income in payments. Now, if you start with those first assumptions, then you reconstruct what you would like to do in payments. Payments may be a loss leader for something else. Payments may be a platform where you onboard a lot of users and then you build your own business model, which may not be finance at all. So, there are things happening in gaming. Now, believe it or not, during this pandemic, there are villages in and I've written about this in my forthcoming book. Villages in the Philippines and Indonesia, where village people game all day to generate income to put food on the table for their families. So gaming is not just entertainment, it's becoming a life form and real-life form, especially in needy areas, in parts of the world where there's no economy. There's no productive economy. And we need to think about where that's taking us?

And, how we want to incorporate our finance strategies, whatever they are, and alternative investments, NFTs and so on. We really need to think about each of what exists, what our existing product classes in finance, and then try to make sense of what we want to do. Now, the new realities may not exist today. But what we need to say to ourselves is, “That’s where it's heading?” I want to get there eventually. I don't want to waste my time rebuilding a mortgage war in the existing market. Now, I know that many of you are bankers with a traditional job and you hop around different banks, and when you get into the new bank, you want to show that you are amazing in building market share. All you're doing is extending your own jobs for the next three years. That's all you're doing. You're not transforming the industry, you're not taking a bet, you're not creating the next institution. Sorry to say this, but you are a waste of time. If you take a certain belief statement and build on it, then you're taking the institution somewhere and investors, and venture capitalists should take that into consideration.

Where is digital taking us?

Now this is not a very good chart because it sort of makes all of the developments look like they are linear and equal. They're not equal, they are all clumped together in the 2000s. And, in the early days of the internet, the 1994, and 2004, and so on. So please pardon the top part of the chart. But what I wanted to point out in this chart is that we've gone through three phases without realising it. So, the first phase was during the early days of the World Wide Web, so you had Amazon being created. And then there was technology put on it, which was secure layer, SSL technology, which made it possible to transact value. And that's where banking started going online. And all of that can be considered to be the start, the origin of the platformers.

And we are still in the platform era, we are with an amazing phase of the platform era. The platform era started with a worldwide web on computers. But something happened to the platform era in about 2010. And that's two years after the iPhone and smartphone in general. Google, also came up with the Android technology in about that period, 2006 to 2008. It took about three years for mobile technology to mature and to become widespread in usage. And in 2010, several developments took place. In the US there was Square in China, that was the origin of WeChat Pay and Alipay in about 2010 period. It's not as long as you think it is. It’s actually magic that evolved, and became a reality in China today. I do not carry a wallet, I actually do my payments on WeChat Pay and Alipay, I was going to show that to you. But everywhere, the most important asset in my wallet, in my pocket is my mobile phone.

And so lots of things got developed on mobile technology since 2010. And now we are in 2021. Something interesting is happening right now, which is going to revolutionise finance yet again, and it's an insidious evolution. Why I say it's insidious is because if you think about it, Facebook, which was designed for the desktop platform didn't make that transition to mobile very well. It does have a lot of followers, but it wasn't native to mobile. And then the native players came about WeChat, Alipay. And the WeChat users will say, “Why doesn't Facebook do all these wonderful community things on the mobile device”? And that's because the origin of Facebook is one generation before that. In fact, this year, in the US, the number of Facebook users has started to decline this year in January. Or rather the last year, the last quarter, it started to decline.

So, it was reported in January this year, and declined to new platforms like TikTok, which are more mobile native. And guess what, there's a new evolution coming about, and I've actually described that in the book that I'm putting together, which I really hope to get published by November this year, it's actually ready. In fact, it's going through the edits at the moment. And what I'm saying is that, we are going to enter a phase called personalisation. And in personalisation, all of the assets that are created in financial institutions today are going to be available on a token, bitcoin. Bitcoin is such a bad word, because some of you are thinking cryptocurrency is bad. Regulators, central banks don't like it. No, it's the token economy. It's what is happening around token technology.

Technology that is carried today on mainframe technology stacks are being delivered on a token. And those tokens are becoming incredibly interoperable. The interoperability is becoming a big agenda in the blockchain community. And it's absorbing a whole range of assets including NFTs (non fungible tokens), but also deposits, loans, foreign exchange, all of that are becoming able to be carried on tokens and be transacted between individuals in a permissionless, they call it, platform. And that evolution is going to give a new phase to finance in the next 10 to 20 years that we need to start taking into account.

So, if you're going to be building a digital bank, in Hong Kong, Singapore, Estonia, , even in the US right now, you need to say to yourself, what do you believe the future of finance will look like going into the future? Here all the incumbent players who are huge platforms today, in China, you have Alipay, and so on. And then you have Apple Pay. In Southeast Asia, you have Grab, Gojek. In India, you have Ola. And, you've got Line Pay in Japan and Korea. Now, all these are platforms. What will happen when platforms start getting disintegrated into tokens and into personalization? The platforms will crumble, and the nature of the relationship will change from institutions and platforms to the individual. So, this is in a changing mode.

What we do at The Asian Banker, we have a research company called TAB Insights which collects data, which is now run separately from The Asian Banker. And by the way, the organisation I founded is called The Asian Banker, today is called TAB. The reason is we are no longer Asian, and we are no longer banker. And that's because we now have offices in Dubai, and we do events in Africa, London. Finance and the transformation of finance has not got a border anymore. So, we are global, and it's not banker anymore, because when we say bank, we mean a whole range of new players, some of you are from those institutions.

What do you believe the future of your institution to be?

We put together a list of all the digital banks around the world, and there are those which have incredible numbers of customers 33 million for NuBank in Brazil, WeBank in China is 270 million retail customers, MyBank 35 million, some of these are actually on the back of platform. So like MyBank, for example, is owned by ANT Financial. WeBank (Tencent), XW Bank, which is owned by Xiaomi, which is like an Apple phone.

In other words, these are institutions that proliferated platforms in various forms, either through an internet platform, like an online sales platform, or the proliferation of devices like mobile phones. And then you have the smaller players, like Jibun Bank has 4 million customers. And Jibun is actually a joint venture between KDDI which is an internet platform in Japan with Bank of Tokyo Mitsubishi, saying that let's start a new bank because we can't solve the problems of an incumbent traditional institution, which is Bank of Tokyo Mitsubishi.

And then there are challenger institutions like in the UK, you got Starling and so on. Part of it is the number of customers, part of it is the product proposition. And because of regulation in many countries, the product proposition focuses a lot on deposits, which is one side of the balance sheet and not on the other side of the balance sheet which is lending today and trading and Investing.

Ingredients of a profitable digital finance player

So we take stock of what it takes to be a profitable internet bank. And when we look at the most profitable digital banks in the world, each of them has a story as to why they are profitable. By the way, there was a reason, consulting companies report that said 95% of internet banks around the world are not profitable. And then these are like the 13 which are the ones that you're looking at on the screen.

And the 13 which are profitable, because, WeBank, for example, has got access to the interbank lending market in China, which the profitability is very high. If you have very good deposits based liability space, you can actually lend to the interbank because there are small banks in the provinces, which are liquidity challenged. They will pay a premium for funding, and also for all kinds of other assets in China, which are looking for funding. And then if you take Tinkoff Bank, which is in Russia, which is also pretty, very successful, at the back end is a traditional, old fashioned credit card business. And so the income is actually from credit cards, which in Russia, it's still very profitable. In fact, it's very profitable, because many banks have lost their international credit card capabilities. So when you do have that, it's very profitable.

And then you go down the line, you take kakaobank, for example, in  Korea, they have a unique situation where foreign exchange was the dominant income for a number of nonbank money exchange companies, but kakao digitised that and so it absorbed the profitability of the foreign exchange business, when it started business. And like that you go down, QakNorth in the UK is very interesting. It's the only UK challenger bank which is profitable. And I attended briefings with the bank in the UK. And I just spent a lot of my time thinking, how did this bank become profitable? It has a few hundred thousand customers, it's very selective, and it's very focused on small businesses.

So, it keeps the balance sheet of each of these customers, and then slices and dices it to treat the small business customer like a corporate customer, with profiling and so on, with a very strong credit profiling, Think of it as making financial inclusion for small business customers, which are a very profitable segment. So, you go down the list. So those which are the 95%, who are not profitable, it's because they have one side of the balance sheet, but not the other. They are great in onboarding deposit customers. And on the lending side, on the asset side, they are incredibly weak sometimes because of legislation.

Elements of a successful digital finance player

So, when we look at the elements of a successful digital finance player, actually of all the elements that I've listed here, balance sheet, operating costs, compliance, technology, employees, customers, and platforms and churn. Balance sheet is actually the single most important criteria. The reason we put up this chart is that we actually run competitions for the best digital bank in the world. And we assess them and that's where the charts come from. The data that I just shared with you. The driver, the determinant of a successful digital bank, sorry to say, right now has a lot to do with balance sheet than anything else, any of the other elements.

In fact, I sometimes am not impressed by digital banks, in certain countries. In the UK, especially, which take great pride in demonstrating their ability to create a seamless experience for their customers and onboard 60,000 a month without a single branch. That's the onboarding skill. that's a social media skill, that's not a banking skill. And then they hide their balance sheet because they are too shy to say that we've on boarded all these customers. We're so proud of them. But every day those customers cost them money to retain the customers. So, the balance sheet, squaring the both sides of the balance sheet is the critical success factor.

The winning bank

I would really like all of you to read my book when it's published, it's going to be called “The Winning Bank”. I've tried every title, future of finance, titles such as the future finances has been taken. I want to crystallise our thinking on the winning institution. So, what are you as a bank, but the word bank doesn't mean bank anymore. And the elements that I've put into my book are as follows: the world is moving from platforms to personalisation. Also, phrases such as financial inclusion is a platform light. Now, what do I mean by that?

Banks like to say that the reason they want to go into digital and in fact, fintechs like to say that the reason they like to go to digital is because they want to make finance more inclusive. This is true in certain countries. This is true in China, this is true in India, this is true in South Africa, Indonesia, Brazil, where you've got millions of people who just don't have simple access to finance. But in many middle income countries, this is so not true.

And in highly established countries with banking facilities, there's a big difference in Africa, for example, between a Kenya, where you had the Kenyan payment systems evolving, and a Nigeria or South Africa, which has strong banking infrastructure. Financial inclusion in Nigeria and South Africa is giving people more banking accounts in Kenya is actually giving them a mobile device and putting it on Mpesa. So Mpesa works very well in Kenya, it doesn't work very well in South Africa, for example, because it's got a strong banking system.

Now, the thing about financial inclusion is, whether it's for wealthy countries or poor countries, what we are doing is trying to onboard, we're taking a platform mindset, we are taking the same mindset as Facebook, and Twitter, and Facebook and LinkedIn. And Google is to onboard as many customers and Amazon as many customers as possible, and then to milk them, to charge them exorbitant interest rates. Now, for all the countries where financial inclusion has meant giving digital access to the poor, I've studied that there is not a single country where the poor pay interest rates that are lower than 24% a year, that's 2% a month for loans. So, financial inclusion didn't result in making finance cheaper for anyone. And at the back of a finance digital strategy is a venture capitalist who wants his money back, who wants to monetise what he has so that's the onboarding phase, which is to get everybody on stream, either the venture capitalists then sells the platform to another venture capitalists and benefits from that, because there's no money being made. And then after that, the monetisation starts just like subscriptions on social media platform.

And also, the very nature of how we build technology has changed dramatically. Just to do one piece of analytics, you have three or four fintech players, feeding into a bank's technology stack, which then adds to the technology costs, it doesn't reduce them. And the whole idea of fintech making finance cheaper is not true. Go attend a fintech conference anywhere in the world. And you should look at how many credit evaluation software companies there are in the exhibition booths. And those are the ones trying to get on boarded into banks and banks are buyers of technology, they don't create technology. Banks lost the API revolution.

The API revolution revolutionised so many companies. It revolutionised Microsoft, it revolutionised Adobe, it revolutionised Salesforce. All of these companies opened up their core technology to any number of API partners. And when you think API, and when I think API, I'm thinking of a little girl sitting right next to me, which actually happened, and designing her own game on her phone, using an API linked back to one of the platforms. That's API. In other words, anyone can create a connectivity to a core system. And that's not the way the banks thought of API, originally, banks thought of API as a patch solution to core banking problems that they had. So, they wasted five to six years on that. And now, there is a lot of activity on the API front. Banks just don't get it. And API has now gone into the token. So, APIs now sit on tokens. In other words, the agenda had moved on, but banking is still trying to catch up with what APIs are supposed to do to revolutionise finance.

Blockchain, the funny thing of blockchain in finance, when you think about all the revolution that's taking place in blockchain today, in fact, right through this pandemic, in Africa, there are agricultural communes that now put their information on blockchains and have the quality of their seeds, it can be coffee seeds, it can be grain, and they are bought by the last cafe in Tokyo, or in Australia. And the validity and the credibility of the agricultural produce is confirmed right through in the on the blockchain. So that's transformational. Whereas in finance, every blockchain project is permissioned, which means that “Wait, you don't need blockchain”, because every party on the transaction are known to each other and have to be validated by the bank beforehand.

And when the large value transactions come into place, there is not a single compliance department in any bank anywhere in the world, that will allow a transaction to take place on blockchain without being verified by compliance. Why? Because compliance now is a huge army of people sitting in the bank. And so, so yes, there's a lot of activity, but they're not transformational activities as they stand now. Why do I say all this? It's only when we come to realise the reality of some of these transformational technologies in finance, that we then start to see where your opportunities might be, the opportunity may well be that you need to start from outside of finance to come back into finance. So, please, when my book is published, you must read that.

Working with fintechs

Banks are not good partners of fintech players, or financial technology innovation players. Very many of them use fintechs to absorb technologies, because they have 2,000 staff in house that you need to deploy to make those patch solution changes within the bank. Just think about this. Your bank may well be doing this, which is you run hackathons, and then you identify which young person has an idea that's good. And then the first thing in your mind is, “Can I can I onboard those ideas without having to hire this young person?”  And then the second thought in your mind is maybe I just hire him and give him a job. And then you neutralise the whole idea of innovation, which is you've hired the innovation in house. Third idea is that, you'll be the only customer for that fintech player, and all the other banks in the city will not use that fintech player because you are the bank that's playing with using him, you should throw a paltry sum to get that innovation.

What IBM used to charge a million dollars to your bank to to implement you now get it at $40,000. This is a real story, by the way, because it's a pilot proof of concept. And after the proof of concept is over that fintech or financial technology player is done. That's the game. Now, then the question is, so how do we need think about financial technology players. The advice that I give fintech players is this, “The bank must need you”. Don't ever listen to a regulator that says to you that please work with the banks. It's the other way around, go build something, let the banks come chasing after you. And that's the whole conversation that's separate from this.

Changing business models in the network age

Now, business models need to change. On the left side is the idea of packaging, repackaging product sets, the traditional product sets. And we think about bundling and re-bundling on the platform. Because everything is digital, we think that bundling is the thing to do. But on the network it is totally different. It's not products anymore. We need to come to the end of products, we need to come into the beginning of creation of products, which is a totally different dimension.

Managing regulators

Now manage your regulators. Different regulators have different tones in their relationship with the institutions. That's one regulator who never fails to amuse me by saying that they are the world's biggest supporter of financial technology, and they send out a circular to all the bank saying that please make sure that you verify the credibility of the API's that you work with, otherwise we will hold you accountable. Then all the banks get afraid and they don't work with APIs anymore, in the same jurisdiction where there's a lot of financial technology so called activity.

When you read the language of regulators like in the UK or Canada, you will see a much more amiable language in that we don't know where this is taking us. We create sandboxes, we want to collaborate with you, we don't keep count of who's doing what but we get a sense of what's out there and the kind of regulation that we need to meet. You read their websites and that's the language that they have. Canada, for example, has said that we have no plans to introduce a CBDC, central bank digital currency, we have no plans, already very clearly stated, but we are experimenting with it right now. Very transparent, very congenial language. And then you see other jurisdictions which have much more restrictive languages. Whatever it is, Richard Sandor the founder of climate change markets in the US told me this, “Never surprise your regulator”. He said it three times he said never surprise the regulator, never surprise the regulator, never surprise the regulator. So I guess that's good advice in terms of how to handle regulators.

And then your own social economic profile. I've touched on that a little bit, the social economic profile of your country. Malaysia, for example, the income in Singapore and countries which have a strong migrant population, one source of income, actually mobile bandwidth for migrant workers, where labourers from poorer countries watch videos on their phones at the end of the working day. And that is a huge business, both for the telcos and also for the financial institutions.

Possible goals

The possible goals that you could have given the audience that I have today. General upgrade, all you're doing is keeping up with the times. Unless you do something transformational, actually, it's okay not to do anything. It's like the Cheshire cat talking to Alice and saying, “Unless you know where you want to go to. It doesn't really matter where you go”. And the reason is that as long as competition in finance is prosaic, everyone doing the same thing, it's just everyone running around. So, if it is just a matter of keeping up with the times for and by the way, in the US I follow three banks which have done very well during the pandemic. Signature Bank in New York,

Silicon Valley Bank in California and the third bank, CIT Bank in the Midwest, and I thought that maybe because they were technology savvy. No, they were really old-fashioned banks, which were very relationship-driven and very strong small community banks. Their share prices moved from $100. I've seen that going up to $600 in the last two years. Go look up these banks. What I'm saying is that until things really change, nothing really changed. So, protecting your existing franchise is far more important than becoming revolutionary for creating activity for activity sake. Building on existing franchise.

In Malaysia, there's a bank called Public Bank, which had the world's best deposit franchise for many years. Its deposit franchise is all Chinese money in the small towns of Malaysia, and it started building its asset lending base, 30% compounded annual growth every year for about five years. And it didn't suffer any nonperforming loan issues. And the reason is, the deposit customers are the most stable customers in an economy which is driven by essentially the same hardworking Chinese entrepreneurs, who are essentially the customers of this bank. Leveraging platforms, building a new reality, or your goal could be to attract investors to tell a story, to up the share price. And for that, if you had a lot of hackathons in your bank, go ahead have fun.

Using consultants

Using consultants, I put this slide in here because some of you are thinking strategy. You're thinking which consultants do I need to use. The ones that I've come across, you need to think about what is the core belief and the core skill set that the consultant brings. Many consultants are ex-bankers in their 50s and sometimes in their 60s, so they actually built their franchise 20 years ago, somewhere. So, you got to figure out what was that franchise that they built 20 years ago. And very often, that's the core skill that they still have, regardless of trying to reinvent themselves in the digital age. And then you say, is that the skill that I'm hiring, and will that be the skill and everything they do will be translating where they come from, what they were built on.

So, to conclude, belief statement, your current market realities, your organisational capability, people, and then you state your goal. So I hope that what I had to share with you today is useful. Please don't hesitate to contact me if this video is put on my YouTube, I will provide some links in there of some of the sections that I talked about today. And look out for my book when it's out. Thank you very much.