Interviewed By The Asian Banker Live
Emmanuel Daniel, chairman of The Asian Banker, challenges banks to give up their traditional notion of core banking during the Huawei Connect Summit 2016 in Shanghai, China.
Remember that you first heard it at this conference. It is time to kill core banking as we know it. For the longest time, some of you come from banks here, when it took forever to clean your data centres, to consolidate them, to start putting in place the analytics, and to start seeing static profiles of your customers (Fig 1). There was a time in the 1980s when one bank put together its checking account with the savings account. It took the bank next door six years to configure their system, to be able to do the same – six years! There are banks in this audience today that have been working on your data centre infrastructure for four years, for eight years, for ten years, and you can still never catch up with the new players that are coming on stream today.
What do new players in the market have that traditional banks don’t (Fig 2)?
What is it that makes Moven – and my friend Brett King, the founder of Moven – to be able to go to market instantly and capture a market share of customers from under your feet? What is it that makes a company like Ant Financial to be able to say: “You know what? We will give you a core banking system, we will put it on the cloud,” and immediately get forty banks to sign on and get services that they were not able to provide using traditional core banking systems?
This is what a core banking system used to look like. It has something called a CIF – Customer Information File and under the CIF sat the general ledger. And on top of the CIF, you put the data infrastructure (Fig 3).
The core banking vendors were selling this proposition of core banking because of a number of reasons. First, because it was expensive, because they could justify why your institution need to spend millions of dollars. They used to call it “heart” replacement.
Second, because they need to grow. The core banking vendors became larger and larger and larger and had to match the institutions they need to serve.
But the main reason we understand core banking and the way we do is because of ourselves, because of complications within our own institutions, because of the number of applications that should be consolidated. It is not in the hundreds – it is in the thousands. The patch solutions you put in place that hang all your functionalities together – and you did this on XML, you did this on DB tools. Then guess what happened? The new players came on board and said, “Going to the market was far more important than the static information you have at the back-end of your systems.”
So the new fintech companies that came into the market were able to sell solutions at the application layer that took away the need to have an enterprise approach. And suddenly, many of you started to see banking in a different way – in a tactical way – rather than an enterprise way (Fig 4).
The organisation that I come from, The Asian Banker, run a number of competitions around the areas we cover – in Asia, in Africa, in the Middle East and now, in Central Asia. When we run our annual technology competition, we look at all the submissions that come in from different banks that we talk to and we have seen a change in the submissions coming in. We see a drop in core banking projects that banks run today. You can see that over the years, core banking projects have dropped in favour of mobility, data analytics, kiosks, and self-service banking (Fig 5). We have all become tactical. There is a war going on, and we want to win at the front-end of that war.
But there is a more interesting reason why we need to think less about core banking and think more about the markets where we go to. Because everything that we have been able to achieve on traditional core banking infrastructure – the hardware that used to sit on an IBM mainframe – can now be serviced out of a server network. The operating system is now an open platform. Even the middleware – and it seems that is where the magic is – is now a solution rather than a hard coded application (Fig 6).
Everything that you have been able to do on a proprietary platform, you are now able to do on the network. When we try to figure out where we are going in terms of technology infrastructure, where we have been, and what we have built over time, we can get a sense of where this is taking us. There was a time when there was a focus on modularisation of applications and then we started connecting them together. We started building the business processes on top of the applications so that the business processes mirror the limitations that the applications give us. We created open platforms and there was a lot happiness since the number of vendors we needed were being broadened out. Then, there was greater focus on front-end applications and the concept of service oriented architecture came into being. And then we dropped the word architecture and talked about services (Fig 7).
At this conference, there is a great focus on getting as many banks to become comfortable on the cloud and on using the network as the infrastructure. But you know something? That is already given. If you are not on the network as an infrastructure, you are not going to be prepared for what there is to come.
Just imagine that when all of the applications that sit on your mobile phone start interacting with each other, the power of your mobile phone is limited only by the energy that is given to it – the battery on which it functions. It can do far more than what it is today. When IT comes into being, everything that you do on your mobile phone becomes doable on a whole host of other devices. And all of the partners that you work with – your application programming interfaces (APIs) and your customers – start interacting with each other.
So, the agenda cannot possibly be to persuade you to go on the cloud. It is to persuade you on what you are going to do after you go on the cloud. There may be other speakers who will share with you their visions of what that world looks like.
We also a run a survey at The Asian Banker. We asked banks how digitised are you? And you know what? Many of you are very proud that you are digitised!
“We are 80% digitised. We are 90% digitised.”
No, you are not!
Digitisation has not even begun. When we look at the peer-to-peer (P2P) lending business, for example, it has grown 15 time – 150% in the last two to five years. Of course, it has grown more in China than in any other country in the world. And for our guests, one of the interesting thing about China is that if the same growth took place in the US, it is called innovation. When that growth takes place in China, it is called shadow banking. Somehow, there is always a sinister element associated with the free spirit, the learning, and the “rules breaking” that happen in China and the entrepreneurship that creates the new world in which we are going into .
But even as we think about P2P lending, it is only about $77 billion – maybe it will reach about $100 billion soon. In China, it is only about 1% of the total assets that banks carry at the moment, but the story is like an iceberg (Fig 8).
What is under the iceberg is far greater than what we see today. If P2P exists primarily to enable borrowers and lenders to match with each other online, if you go and visit any of the P2Ps you know in China or anywhere in the world, there is a lot more taking place offline even within the P2P players themselves (Fig 9).
The institutional investors are looking for tranches of loans to invest in and those deals are made by phone. The P2P players, when they do a due diligence on their customers, a lot of that is done manually by checking on them [customers] and by giving them a call. Yes, they also look at big data, but that is not enough at the moment. The whole fulfilment process and the whole securitisation process are done manually today. You can actually reflect on your own bank’s lending business against this profile and see that so much of what you do is still manual.
But you know when it becomes digital, how big it is going to become?
We are now entering a phase in the world which I call the “Financialisation of Everything”. In other words, the financial services industry will financialise anything that it can digitise. That trend started twenty, thirty years ago and we see this most developed in the derivatives and futures market (Fig 10).
And what are derivatives? Derivatives are trading on the information against a fixed asset. So, the asset may be a mortgage. On that you build a tranche of mortgages; and on that you build information when they are due. On that, the market builds a trading platform on which different players trade on the price of that information over time.
How big is the derivatives market? It is many times larger than the real economy. The global economy is only about $100 trillion. But both the over-the-counter (OTC), which means the derivatives industry that is not traded on a visible exchange, and the traditional derivatives industry are far larger than what the real economy and the real businesses do. Imagine how much larger that is going to become when more information is digitised.
I want to spend one minute putting in place a rule that is going to guide us for the rest of this conference and that is the rule in a digitised world. What is a digitised world? A digitised world is where information is available to all of the constituents. Take Uber for example. What is Uber? When you go out of this building and try to hail a taxi, you do not know how many taxis there are waiting for you. You don’t know what price you need to pay to quickly get a taxi as opposed to somebody who can wait a little longer. The regulator doesn’t know the taxi problem; he doesn’t know where the taxis are. Maybe all the taxis in the city are at the airport.
But when information is digitised - the regulator, the customer, the taxi driver, and its competitors - all have the same information and therefore they are able to use the information to the best of their benefits (Fig 11).
And that is what is going to happen in the financial services industry, your customer will have the same information as you do (Fig 12).
Why should a credit card user be given a physical token that does not tell him how much credit he has, how much money he has that he can use, when was the last time he was at a store using that money, or other information that he needs to have to make a certain purchase or a transaction?
In a digitised world already on your mobile phone – and Moven already does that – it gives you so much more information as a customer that it empowers you and makes you feel free to use your money in the way that you want to.
And it is for that reason that a lot of the competition taking place in the fintech community today are focused on two areas where banks hide information: payments and lending. These are two areas left where by hiding information, the global payments network is dominated by six global banks that sets the price of foreign exchange trade that the rest of us buy.
That wall is going to collapse and collapse soon as the availability of funds or the availability of currencies in different markets become increasingly more transparent. In the same way, customers will be able to buy loans in the way that they want because that information will be made available to them (Fig 13).
And that is why sometimes, when we look at the developments taking place in blockchain today and all the news that you read about Digital Assets and R3, we don’t learn, do we? Unless we free that information to become available to our customers, banks cannot dominate the network world. And that is the fatal flaw of the banking approach to information, to digitisation, to empowering the customer (Fig 14).
So we need to take this view that we no longer look at our business from “inside looking out”, we look at our business from the “outside looking in”.
And when we look at the business from the “outside looking in”, what do we know about our customers? You know, just 20 years ago, the average profile or the net worth of an individual, a lot of it was on fixed assets, on property, and on savings. And today, for an average wealthy individual, only 50% of his assets are in fixed assets. Fifty percent of his assets are in tradable assets like securities, alternative investments, and pensions. So, if the profile of your customers has become fungible, meaning it has become liquid, the use of information has to become liquid (Fig 15).
And when we start to look at our business and our world from the “outside looking in”, we also need to start asking ourselves how we should be organised. If this is the way we are organised in the traditional way – where we have the chairman, a CEO, a head of business, and head of technology – in a hierarchical way, we will not be able to make use of the way in which the network technology world is evolving (Fig 16). Maybe in the future we should be organised in clusters (Fig 17)?
So, these are some initial thoughts that I have in my mind as I start today’s session. And it will be built from our thought leaders and our practitioners and especially the better banks that have figured it out – that are making decisions that enable them to break away from traditional banking infrastructure, as they have known it, and embrace the brave new world that has been created.
Let’s kill core banking as we know it.