From Adoption to Interaction to Feedback – Cracking the Platform Code

Jeff Bezos founded Amazon in the year 1995, when the Internet was still in its dial-up days. The company is the largest ecommerce giant today.
Following a serendipitous series of developments including toying with the idea of Amazon infrastructure and storage, AWS came into being in the year 2006. It is today one of the top cloud vendors and the largest public cloud services provider in the world. Every day the company adds server capacity equivalent to what it had at the end of 2005, when Amazon (not AWS) was nearly 5% its current size.
Amazon Cash for deposits, and Amazon Lending for short-term business loans are already part of Amazon’s value proposition for sellers on its platform. The retail giant is now officially looking to encroach on banks’ turf with services like checking account.
An industry struggling to keep profits afloat clearly needs to prepare and reinvent itself to take on players such as Amazon. And Amazon is not the only giant eyeing the space. Tech giants Google and Facebook have already forayed into the financial services space. Both the companies have launched their digital payment service in the Indian market taking advantage of the country’s instant real-time payment system UPI. Facebook, with its chat service Whatsapp has a ready user base of more than 250 million. Google’s payment service Google Tez is a convenient payment option while searching the Internet using the Google search engine. Users can send money over Whatsapp’s chat interface while chatting with friends, or search, select and pay for a service without leaving Gmail with Tez.
Banks are left with no choice but to self-disrupt their business. They have to discard the go-it-alone approach in favor of platform banking to be more – be more open, more collaborative, more diversified (into non-financial products) and more invisible.
However, the platform business is an altogether different ball game for banks that have relied on pipeline business for all these years. Banks need to understand what makes a successful platform business and what the perils are. In their book “Platform Revolution”, Geoffrey G. Parker, Marshall Van Alstyne, and Sangeet Paul Choudary elucidate the key factors to create a successful platform business. Here we look at these in the context of banking.

  • Achieve demand economies of scale

    The success of a platform business hinges on network effects. The more the number of users of a platform, the greater the value it creates. It’s a no brainer then that a platform that doesn’t make it easy for its users to use it, is only setting itself up for failure.

    Thus the first step towards building a platform bank is to ensure a frictionless experience for their customers and partners. For customers, the process of on-boarding, transacting or service enquiries should match the experience they get in prevalent platforms like Uber or Facebook. The customer’s experience should be seamless whether they access the bank’s own or partner products / service offerings offered on the platform. Only then can banks hope to build the economies of scale that attracts new customers and partners.

  • Make the right matches

    A platform creates value by “consummating matches among users”. Flawless logic and a well-defined algorithm that can perform pairing immaculately are pivotal for a successful platform business.

    Banks have an advantage here due to their access to customer data and insights that can be drawn to match consumer preferences with complementary offerings from their partner ecosystem. Banks that have already embarked on an API strategy stand to gain since they can consummate matches among developers, fintechs and other partners, to create new digital experiences for their consumers. BBVA has made eight of its APIs commercially available to companies, startups and developers. The Citi Developer Community offers APIs in 3 countries, in categories ranging from account management and peer-to-peer payments to Citi rewards and investment purchases.

  • Enjoy positive network effects

    An example of this is accurately penned down by Eric Jorgenson of Evergreen Business Fortnightly:

    “More number of riders does not necessarily improve my Uber experience but it does attract more drivers, which will improve Uber for me.”

    Similarly, a platform bank must look to cultivate large and diverse ecosystems. The greater the choice, the better is the platform for its customers. The success of tomorrow’s banks will be measured by the size of their ecosystem in addition to their asset base.

  • Be easy to consume

    A platform that causes friction in use is a non-starter. A successful banking platform must ensure easy integration of APIs into other applications to encourage adoption.

    In our study of offerings of 6 banks that have formed API marketplaces, Citibank led the pack with 49 APIs to its name, closely followed by Oversea-Chinese Banking Corporation (45), Fidor (40+) and Ratnakar Bank Limited (40).

    Moving beyond the tactical approach to APIs, more banking APIs are now allowing digital firms and developer ecosystems to build applications with production data. Banks need a definite strategy to steadily increase the breadth and depth of their APIs.

  • Have a strong community feedback loop

    The digital world has made users accustomed to receiving instant feedback. The simplest examples are platforms such as Facebook or Instagram where users get reactions to their content within minutes of sharing it. Amazon’s feedback system that allows users to review products is a way to control quality and keep vendors in check. It also helps consumers make informed purchasing decisions increasing their confidence in the platform.

    In a platform model banks will not only sell their own products and services but will become aggregators of products and services to integrate banking in the lives of consumers. Banks must borrow this concept of a simple feedback mechanism to not only offer customers the best products and services, but also build trust.

Lastly, a successful platform evolves the value exchanged among users. Facebook evolved from making connections to sharing content. Amazon continues to advance into adjacent industries to become the quintessential ‘Everything Store’. Banks should move forward in their platform journeys with a scalable interaction model that constantly strives to evolve the value exchanged.
If you liked this post, you might find our paper on ‘Platform Business Model for Banking‘ interesting. You can access it here.
References:

6 Strategies for Building a Platform Bank

A Mckinsey study states that ‘manufacturing’, the primary industry for a bank’s financing and lending business now generates about 53% of industry revenues and 35% of profits with an ROE of 4.4%. On the contrary, ‘distribution’ produces 47% of revenues and 65% of profits with an ROE of 20%. This changing nature of banking balance sheets is a reflection of a clear shift in the banking business model. The traditional interest-based income of banks from lending and deposits is under pressure, and banks are looking to augment their revenue with new fee-based models.
Like every other industry digitization has led to a disruption in banking, making it possible for agile new entrants to offer innovative services at a lower cost to the customer. The disaggregation of the banking value chain, thanks to the agile and innovative solutions by disruptive entrants, is distancing banks from their customers as they lose the complete ownership of customer relationship. Thus many banks are looking to transform themselves into a platform of services to play a larger role in the lives of their customers. While the traditional pipeline model in banking creates value with owned assets and own products distributed through a bank’s own channels, a platform bank relies on a diverse ecosystem to aggregate complementary and even competing products on bank’s own and third-party channels. Here the bank looks to create value for the customer building a marketplace of financial and non-financial offerings.
As banks increasingly realize the importance of embracing the platform model, the question before them is how one goes about building a platform business. As explained in Infosys Finacle’s Point of View on Banking as a Platform, a bank can take two approaches to building a platform business– become a platform provider that curates or participates in a wider ecosystem, or become a service provider that delivers value from the ecosystem to the end consumer. Let’s first look at the key strategies for a platform provider.

  • Embed banking in the customer’s application or form factor of choice

Given the nature of transactions with their banks, large corporate customers seek an efficient way to transact and communicate with their banks. With APIs, banks can offer their corporate customers the choice of availing services as needed by embedding their services in their clients’ applications.
Besides corporate customers, digital businesses, such as Fintech firms and ecommerce companies, are also a good target because they are always looking for APIs on which they can build new, better experiences.
Progressive banks are setting up API stores and are exposing their APIs for these clients to use. BBVA has built an API marketplace with over 1500 developers and businesses, with 8 commercially available APIs.

A superset of the Banking-as-a-service model, here a bank offers services to other banks too. E.g. China’s WeBank offers its payment services to smaller banks that cannot afford to build a real-time payment service. Thus the consumer bank is able to retain customers in the payment space without having to own a product of that kind.
Instead of being a platform provider, some banks may choose to build their platform business as a service provider. In this model, banks operate a financial services marketplace. They offer their own services and products, products and services from partners or created jointly with partners, or even those procured from competitors. For example, a bank can offer its own home loans, insurance services from an insurance provider, a high interest deposit product from a competitor, and non-financial products such as holiday packages.
Banks are feeling the ground beneath moving. They need to act fast to leverage their position of trust as the primary provider of financial services and retain customer relationships by offering their customers the best that there is. The approaches shared above help banks convert the threat of digitization into opportunities by unlocking the value of ecosystems powered by digitization.
You might find our paper on ‘Platform Business Model for Banking‘ interesting, you can access it here.

Sources:

An Amazon-Inspired Wish List for Banks

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We need banking. We don’t need banks anymore” Bill Gates, 1997
Amazon may or may not enter the banking industry anytime soon. But with a vision statement which reads “Our vision is to be earth’s most customer-centric company” and Jeff Bezos’s well-known customer obsession, which ensures that Amazon really walks the talk, there are many including me who ardently wish that it would.
As a regular user of multiple Amazon products and services, such as Kindle, Amazon Fire TV Stick, Amazon.com and Amazon Prime, I love many things about that company. I have also wished many times that my bank too would conduct its business like Amazon.
Drawing on my personal experiences, here is an Amazon inspired “Wish List” for banks, one that I hope will resonate with many readers and also provide some actionable insights for banks to consider.

My Wish List

Wide choice with “Platformification”
When you shop on Amazon, you are assured of a wide selection of products. The below image is a search for a laptop bag.

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Other than the selection, what really strikes you is the clear and transparent manner in which Amazon’s own product, the actual best seller and the advertising money backed “sponsored” products are shown to the user so he or she can make an informed decision.
Contrast this with a typical banking experience. Let us say I am looking to buy car insurance or invest in a mutual fund. I am fairly certain that the priority of the bank and its personnel is to sell their own products.
If at all third party products are offered, it is quite likely that they would be displayed lower down the list. This is the exact space that the financial aggregators and comparison sites are targeting.
How I wish I could buy any financial product offered by any financial institution from my bank itself. What stops banks from selling products from other banks? Is it a fear of losing customers? Is it the possibility of lower margins and reduced profits? Maybe.
But there is definitely a need for a bank, which acts as a one-stop shop for fulfilling all customer banking needs, offering competitor products alongside its own.

Personalization

“You know you’re not anonymous on our site. We’re greeting you by name, showing you past purchases, to the degree that you can arrange to have transparency combined with an explanation of what the consumer benefit is.” – Jeff Bezos
It is one thing to aspire to offer wonderful personalized experiences based on insight to customers, and quite another to actually deliver them.
I have never availed a personal loan all my life. However, my bank somehow seems to think that I need one desperately or at the very least, would be interested in taking one. My bank regularly sends me messages like the one below.

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The bank has so much of my financial data, including income sources and regular expenses, that it could make me offers that I would actually be interested in. Unfortunately, it has chosen to offer me loans that I have no need for.
Contrast this to my Amazon account. The below picture speaks a thousand words.

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It say’s “ravichand’s Amazon” and it actually feels like one. The recommendations are based on things I have searched for or those that I am really interested in. Also, I have complete control over improving those recommendations by deleting things I don’t want to be alerted about.
Then there is this wonderful “Wish List” in Amazon where I can list as well as track things I find interesting. What makes it even better is that if there is a deal or offer on any item on my wish list, Amazon proactively notifies me so I don’t miss out.
How I wish my bank too kept a close watch on my browsing history on its website, applied insightful analytical data models to my banking transactions and provided me with actionable insights into things that I want to buy, as opposed to things that it wants to sell. How I wish there was a “wish list” I could use to inform my bank about my requirements.

Trust and Transparency

“I am a big fan of all-you-can-eat plans, because they are simpler for customers”- Jeff Bezos
The below image is a random offer based on an internet search for credit cards in India. Technically, there is nothing wrong with the credit card offer.

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It is just that the principle of caveat emptor (buyer beware) applies here too. The prospective customer here is shown a 10% cashback but with a rider with various terms and conditions and a ceiling, all in fine print!
Also, the exact offer is not clearly articulated and the onus is on the prospect to actually “dig out” the relevant information as well as to scrutinize the fine print to check if there are any clauses, which are against his or her personal interests.
Contrast this with a search on Amazon for Chris Skinner’s book, “Digital Bank”.

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The price, delivery charges, and taxes for each format are displayed in a transparent manner, with no scope for ambiguity. I don’t need to worry about reading the fine print or trying to understand legalese.
How I wish that banks would stop putting out catchy captions and teaser campaigns just to attract the customers’ attention. It would be significantly better to focus efforts on presenting the terms and conditions of the offer in a clear and transparent manner, so it could be understood even by a lay person. Things presented in a clear, simple and transparent manner inspire trust, a huge factor in building customer loyalty and advocacy.

Best Offer

“There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second” – Jeff Bezos
The above statement by Bezos highlights a key part of Amazon’s business model, which is to ensure that there is relentless focus on lowering the cost structure. The thing to note is that cost savings are actually passed on to the customer.
Contrast this with the way banks work. Most of the banks are seen working hard to increase or maintain their “spread”. There is a continual focus on increasing Net Interest Margins (NIM) by garnering low cost deposits, generating fee based income etc., all with an objective of profit and margin maximization.
A few years back when I was looking for a housing loan, I found that my bank was charging a whopping 1% more for a 20-year term. I am sure a similar story also plays out in deposits as well as other areas.
How I wish I could be confident that my bank will not overcharge me. How I wish I could take the bank’s offer at face value without having to read the fine print. How I wish I could be sure that my bank will strive relentlessly to provide me the best offer possible. Presently this remains just a wish.

Customer Experience

“The best customer service is if the customer doesn’t need to call you, doesn’t need to talk to you”. It just works.” – Jeff Bezos
Personally, I find the handling of returns and refunds a good barometer for judging the customer service / customer-centricity of a business. In Amazon’s case I was very impressed with the whole process.
Among many things, I had ordered a bottle of shampoo which was promptly delivered the same evening. When I opened the package, I found a dent in the bottle that was leaking shampoo. Returning the product was as easy as purchasing it.

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The same night I used the customer service option shown above to lodge my complaint, including a photograph of the spillage. I woke up the next morning to a message saying that the refund process had already been initiated!
Let me contrast this with the experience I had when an excess charge was debited erroneously to my account. To get it reversed, I needed to visit the branch, submit a written application and then wait a few days for the internal approvals for processing the refund to come through.
Comparing the near frictionless and seamless return process of Amazon and the not so smooth refund process at the bank, it is clear as daylight that the former’s relentless focus on customer experience has permeated through and through.
How I wish that banks designed every possible banking interaction with customer experience in mind. As of now, they have a lot of catching up to do.

Final thoughts

For a long time now the “what” of banking has remained fairly stable. It’s in the “how” of banking that we are seeing tremendous action and innovation. Technology savvy, customer-centric companies like Amazon have a lot of lessons to offer to banks, such as providing wide choice, useful insight and delightful customer experience against a backdrop of trust and transparency.

Who leads who?

Banks have globally witnessed and withstood an onslaught of changes in the last decade offsetting the absolute monopoly they enjoyed for the last one century.
These changes have emerged and originated not only in the financial/banking industry but also from entities that didn’t even exist a decade ago.
There are sweeping changes from the regulators as well who have joined the party, albeit not so much to the liking of traditional banks.
If we look at these changes in isolation and purely from the perspective of banking there are very few which are hard core domain related changes.
Changes started in the form of user experience offered by the new internet based tech giants (GAFA), progressed further by technology led startups- FinTechs, fueled by Government and regulatory directives.
As a result, we saw banks across the globe either in a denial mode, reactive mode or some even panicking, but very few being responsive and proactive to these changes.
This resulted in mergers and acquisitions, neo and challenger banks, digital only banks and finally some banks becoming invisible too!
Let’s look at three major change factors, their impact and the future state of these changes:

Influence/change by GAFA and FinTechs:

If we analyse the banks of 80’s,90’s and early 2000s’s what appears very common is – complacency of banks. Banks for obvious reasons took their business for granted which probably cannot be termed as negative from the position they were in.
As stated earlier, consumers of banking services are also consumers of other industries which offered them products and services in unique personalized ways and consumers were spoilt for choice and offers. But the same could not be said about their banking experience and that’s what led to the FinTech challenge.
As we know, at one point there were strong indications that FinTechs will close down traditional banks.
But now we see that banks somehow seem to have thwarted that threat by the sheer position they have in the market and the trust factor from consumers. But this didn’t happen overnight and not without paying a price. Most importantly this shook the entire banking industry and had some great learning too.
An offshoot of this challenge is that banks are now working more like tech start-ups with heavy investments made in futuristic technologies and platforms.

Change induced by regulators/governments:

Some of the leading regulators have always been keen observers at the global level and in fact at times have even taken proactive steps to embrace these changes in their sphere of influence, while still playing the role of regulators.
We have seen this phenomenon in India, Europe, Middle East, Australia and UK as age old regulations are revisited, new directives are framed and new business platforms are set up.
We can look at what NPCI (UPI) is doing in India, PSD2 in Europe, Blockchain banking in Australia, Open banking in UK etc.
Banks have lapped up these changes/challenges too or appear to have geared up to embrace them and here again, banks whether they like it or not learnt their lesson and for now, seem to be taking these challenges as opportunities to revive their branding and business.

Changes brought in by Technological innovations:

Interwoven with the above two influencing factors is the pace of technological innovations seen in the last one decade. The way data is presented, captured, processed, secured, analysed and used has changed from being manual to humanoid. Embracing this change has definitely not been easy for banks and in this process, banks have undergone overall transformation and have evolved into more lean, agile, digital and innovative organizations in the process.
Everyone in the process went through these waves of change thinking that they are the ones who are riding these waves and banks forever will be at the receiving end.
This leads us to think – who emerged as the winner, who lead whom?
In my view, majority of banks have taken a very balanced, matured approach and at times adopted the wait and watch approach too.
It’s an old saying that every now and then life comes a full circle. And who leads in a circle? Well, when everyone comes together and forms a circle/ecosystem of innovation is when we see a revolution that cannot be accomplished in individual capacity. To understand this is of utmost importance as we usher into the era of open banking.

Digital Banking, so what?

GAFA, Airbnb, Netflix, LinkedIn, UPI, Open Banking, PSD2, digital transformation, ecosystem play, analytics, AI, Blockchain and some more – together they constitute the what, why and how of digital banking. In the same breath we also talk about being cloud native, using RPA, establishing a start-up culture and so on, to recognize and accept both outside-in and inside-out strategies to become a Digital Bank for the present and future.
When they start their digital journey, most banks go through a “me too” syndrome, trying to stay relevant, and be recognized as tech savvy by analysts, peers and customers alike. In this process, they often reinvent themselves. In my view the outcome of this journey is dependent on how well banks accomplish this reinvention.

The journey:

Most banks, more or less, take the following approach to their digital transformation journey:
Define where they are, where they want to be and how they want to get there.

  • Define where they are – this phase can be quite a journey on its own and is mostly done in a bottom-up manner. This is the stage when banks open their eyes to the ground reality.

  • Defining where they want to be – this phase calls for introspection, external inputs and the preparation of short, medium and long term strategies.

  • Define how they want to get there – this phase focuses on things such as the organization’s culture, people, partners and investments.

Checkpoint review:

Banks on a digital transformation journey could find themselves falling short of their set goals at different stages owing to the following reasons:

  • The fast pace of digitalization, which requires the transformation strategy to be revisited or at least re-examined every 6 months.

  • A race against time and especially against nimble competitors, such as the likes of GAFA.

  • Complexity of transformation, causing both long lead times and internal resistance to change, which can derail the program.

And so what?

This brings us to a very pertinent and intriguing question: what is digital transformation?
What matters most in business is the health of the business itself and its profitability.
Earlier, business used to drive the IT landscape, but now we see that IT is driving business. While business continues to lead the change, it relies on IT to not just enable, but to play an important role in the achievement of its goals.
Though this can vary from organization to organization, a simple checklist driven framework of “WHAT” is necessitating the change, and what it is leading to, will make the journey more reliable and meaningful.
The checklist driven framework should be guided the following:

  • If it ain’t broke, don’t fix it: Dig deep to understand why something needs to be changed. Amazon’s back dated press release is a good example here.

  • Ask if the customer will get any value out of this change.

  • Also ask if the bank is deriving any value: This is very critical for avoiding the “me too digital syndrome” and ensuring that the decision is based on the impact on revenue, profitability and branding.

  • Well, it could be as simple as this – “we know that we need to change this, it’s time!”

Each bank should use this kind of checklist to evaluate its proposed changes to make sure that at least some of the boxes are ticked. Something that is applicable to a competitor need not be applicable to its own organization. Also, the bank need not have every technology under the sun (cloud!). Last but not least, it should never lose sight of profitability as that is what will allow it to be what it is in the present, and also stay relevant in the future.

Culture of Analytics

What separates humans from the rest of the living beings is the power of thinking.  While the anatomy of all humans appears more or less the same, the most differentiated factor between two individuals is the ability to think differently. Well, thinking as per science is nothing but composition and reaction of chemical substances in our brain, and it is mesmerizing to see the variation in this process between people with ‘mind’ [‘minded’ needs clarification]. Ability to have a right mixture of chemicals at right interval of time and in right proportion makes people step up their level of thinking. Is this a gift of nature by birth or can we train humans to think better? While it certainly has genetic influence, a large part of thinking can be trained and that is where culture plays a major role.
Analytics is a result of differentiated thinking by humans. To be able to analyze, one must have the right balance of experience, data, presence of mind and most importantly the ability to synthesize information and think ahead for the solution. A well trained brain can definitely produce better analytical results than a disoriented brain in terms of culture. While technologies such as big data, AI add to the effectiveness of analytical thinking, the cultural part of it influences the most. When we refer to culture, it is not limited to the cultured analytical ability of the thinker; it also covers the aspects of cultural behaviors of the data subject.
Let us specifically look into this matter from a financial/banking world’s viewpoint. Well known analytical theories rally around volume of data, the financial behaviors of customer, the pattern of financial accounting, past history (again financial) of the subject in view, etc. It is interesting to notice that most such theories keenly focus upon ‘technical’ or ‘financial’ or ‘social’ behavior of the entity.  Most analytics completely miss out the cultural behavior of the subject matter. 
It is a well-known fact that individuals are majorly influenced by two aspects, one being the genetic quality and second being the culture in which he/she grows up. The culture includes all matters such as religion, region, family background, parents and parental behaviors, society in which individual has grown up, institution where he/she was educated, company of individuals/groups involved with the individual, value system of the family, financial and social behavior of the family, hobbies, etc. 
For example, consider the matter of generating a predictive analysis on whether a specific individual will default loan repayment or the probability of a loan becoming an NPA. We usually look at past financial behavior of the individual, his/her current earning capacity, availability of continuous cash flow, etc. to determine the probability of NPA. However, most important factor ignored in most such analytics is the cultural background of the individual. If the person hails from a culture where it strongly resists defaulting the loan, no matter what, the individual will make up and ensure the loan repayment is honored to the best of his ability and it can supersede all other analysis.
Let us focus on another example, which is a blend of cultural analytics as well as run-time or real-time user experience. Colors and cultures go hand-in-hand as each color means something in different culture. Color will also change according to situation within a culture. Therefore, if only applications can determine the culture, life events, occasions and circumstances of individuals, it can remodel the appearance (UX-UI) according to the cultural background.  This helps provide a personalized and contextualized experience to the users.
The current analytical engines therefore must be tuned to look for ‘culture’ of subject matter as one of the most important pieces of information and build a ‘cultural’ database for all subject matter entities. While all other behaviors of individuals can change over a period of time, the culture and value system will remain engraved with him/her and that can help to predict the financial or associated behavior in a more cultured way. One of the ways how this can be done is to build ‘cultural’ database for individuals that signifies the background, society, value system more so in defining real ‘character’. Social behavior and cultural behavior are different and in critical situations, culture takes over social behavior and therefore analytics can become more real-time.

How can Banks do AI right?

Introduction

AI is one of the most talked-about technological innovations of our times. Everyone in the industry is talking about AI, automation and deep learning. However, very few know what AI is and how it works. Possibilities for AI are limited only by one’s imagination. There are a few underlying principles which if followed provide a solid foundation for a futuristic solution. Let’s dig into this a bit more.

Banks and AI

A lot has been written on what banks can do with AI, the various use cases, and the wishful end states in various functions. Many banks are doing something or the other about AI but very few seem to have a solid progressive strategy to fully utilize it. Most of the banks are doing it out of compulsion. They have automated many manual processes and have introduced various stand-alone pilot programs but have very less to show in terms of the gains achieved.
There are banks which have implemented chatbots remarkably well to enhance customer servicing. Also few banks seem to be getting targeted offers pretty spot on. But to have a sustainable competitive advantage through the use of AI, banks need to do a lot more and a lot faster.

Where to start

There are a few crucial points which if done correctly can lay a strong foundation for the bank of the future.

Data Quality

Raw and unprocessed fuel cannot be used to power even a small bike engine. Similarly, raw and unstructured data cannot be used effectively to power the AI engine. It is true that banks have a treasure of customer data but it is worth examining whether they are readily able to use the same to power AI.
One of the major issues with banks is that data is stored in numerous systems and more often than not the systems do not talk to each other and have their own version of data for the same attribute. My own bank has stored different mobile numbers for my savings account and credit card account. As a result, I keep getting cross-sell messages on both the numbers. This is just a small example but as the number of systems increases, the complexity and hence the magnitude of problems caused by data inconsistency increases. Though this issue is not fatal, it limits the application of AI to a great extent.
Another issue with data is integrity of data even in a stand-alone system. Example – A bank created a data model to cater to the prevailing regulations. Sometime later, the regulations were changed and it called for an introduction of an extra field. As the time was limited, the operations team decided to capture the new piece of data in the remarks field. A few years later, auditors had a hard time figuring this out. AI is still not that intelligent to decipher such human hacks.
So, to reap the benefits of AI in the long term, banks need to start getting their data in order at the earliest. It will need some investment and unfortunately there is no shortcut to fix this.

Human intervention

AI will be self-sufficient one day. But till that day arrives, it will need help from humans. There are two levels at which humans need to intervene in AI systems to ensure business continuity and to improve the system.
Basic level of human intervention is needed when the AI system runs out of options and looks up to us. For example, a financial advisor chabot may encounter a unique situation which needs human intervention (at least for the first time). In such cases, the chatbot can handover the conversation to a bank executive to solve the problem or can raise a service request to be catered by someone at a later point of time. Banks need to be ready with such fallback mechanisms while implementing AI solutions.
The next level of human intervention is needed to make the systems more intelligent. The AI systems (machine learning systems to be specific) observe human behavior and convert that into a mathematical model to emulate it the next time. While these systems are able to learn, to make they are sustainable, they must continuously be taught new models by a human being. That human being is the data scientist. Banks need to plan for such maintenance and enhancement activities while creating a solution.

Cultural shift and the right talent

AI can be very aptly compared with digital transformation, in the sense that everybody wants to do it but very few know how to do it.
Such a thing cannot be done as a separate function. It cannot be a plug and play silo which will work. Each and every system, every business process and all channels need to work as a unified machinery to deliver truly digital service or AI powered service for that matter.
Business leaders, technology leaders, operations managers, everyone needs to be sensitized about the importance of AI enabled services. These leaders need to communicate with their teams and assure them of how AI can be beneficial to organization and to an individual. Fears of employees must be allayed. I can say from my personal experience that driving even a small cultural change in a bank is a herculean task. Unless everyone embraces this with an open mind, the implementation is going to be very difficult.
One additional factor is to find talent with the right mix of expertise in data science and banking domain. There are very few resources available in market today having both these skills. Banks can also look at training their high aptitude employees in AI methodologies.

Having the right partner

We talked about data consistency across multiple systems. We also talked about the importance of thinking about AI as a way of life across modules and not as an afterthought. But who creates these systems? The answer is – software service providers. Banks are dependent on these partners for most of their system needs. Very few banks do end-to-end in-house development. These partners are in a good position to help banks implement AI related services. An ideal partner should have a futuristic roadmap but at the same time be accommodating of the banks’ needs, limitations and should come up with appropriate solutions. Similarly, banks must focus on long term investments to move in the right direction. What matters is being on the right track, no matter how slow the start.

What next

All the points discussed above do not mean that banks stop thinking about various use cases and just focus on these foundational activities. Both should go in parallel. At an application level, banks should engage in pilots with whatever data they have, but at the same time should not miss the bigger picture. At the strategic level, banks should plan to improve the quality of intelligent services in a phased manner as and when the back-end support (technical as well as business) keeps evolving. Though we have been talking about this for a few years now, there is still a very long way to go and I indeed believe that we will collectively achieve the wishful end states that we have thought of.

Why is the world going “gaga” over instant payments?

Gone are the “not so good” and “old” days of money orders, postal orders and cheques. Gone are the days of going through the long waiting periods for actual money to be sent or received. Some of the old timers who have not understood or are too scared of the word “digital” may disagree with the new generations living with the ease and fun of being digital. But there are many – even the baby boomers and generation X along with the newly coined xennials – who have taken up the fast and secured benefits of ‘instant’ payments, thus leaving behind forever the day-long and hour-long waits for making transactions.
In today’s world of instant news, instant coffee, instant social media feeds or instant messages, ‘Instant Payments’ as defined by ERCB – electronic retail payments, are available 24/7 resulting in real time or near real time (in seconds) settling of payments between the originator and the beneficiary.
Let’s look at why there is so much talk about instant payments in the recent times and why even the regulators all over the world advocate its benefits and push all banks to adopt real time payments. It was Japan which implemented the first ever real time payment followed by Switzerland, Turkey, Taiwan, Iceland, South Korea, Brazil, Mexico, South Africa , Chile, China, India, Nigeria, Poland, Sweden, Denmark and Singapore in its order.
We have now UK FPS moving into instant payments, SEPA Insta pay being launched, KSA and UAE planning to launch their instant payments. Instant payments have benefits not just for retail users but have far reaching benefits for banks and corporates alike.
If we look at the benefits derived by the banks, the first and foremost is the overall reduction of costs once their platforms are upgraded. Another important factor is opening up new lines of business by offering services to third-party providers as well as corporates. It could directly lead to increase in the scale of business offerings and lowering of TCO. They can also bundle services as part of instant payments to effectively address customer needs and offer value added services that aid customer retention.
The age old adage of “customer is king” is now truer than ever before. It is generation Z which now drives the banks, compelling them to modify and adapt their offerings as opposed to banks deciding what customers should have. This is the direct impact of Fintech-driven technology that has even pushed the big banks against the wall. Many banks are grappling with this, and are losing their foothold in the market. Social media, customer experiences and analytics could even corner some of the banks to the brink of almost becoming irrelevant.
Just the other day, at 10 pm, I remembered about a payment I had to make towards electricity bill as it was the last day. It took me less than a minute to do that using instant payments. Instant payment to the regular chai wala, vegetable vendor, juice corner or an interior decorator are now literally possible without carrying a physical wallet. And it is providing us a service 24X&X365 also.
Instant payments have become a boon for small time vendors and small and medium enterprises that generally depend on cash or cheques. It benefits both the parties where the supplier gets instant credit confirmation for handing over the goods while the purchaser gets satisfaction by getting to see or gauge the quality and quantity of the goods before making the payment.
The benefits of instant payments can also be extended to cross border payments which are usually expensive and take at least a day for settlement. One such example of instant cross border remittance is the use of distributed ledger technology where a bank is using the technology to instantly credit the salary to its employees across the globe. This also means that corporates need not send the payment files in advance inviting liquidity risks, but can do it any time, any day of any week.
In the B2B scheme of things, the opportunities that instant payment offers may be numerous. One such example could be international trade where companies go through the process of escrow maintenance and documentary letters of credit. For such trades instant payments could be made through escrow accounts for the quantity and/or quality of service rendered. However, currently, use cases for instant payments are not many in this area. But this may change once insurance and logistic issues and details are sorted.
The list of applicable use cases and the benefits that can be derived with instant payments are infinite if properly understood and applied.

Virtual accounts – the next big thing in liquidity management

In the present globalized world, big corporates have their business operations spread across continents and countries. As a legal entity in different countries, they open bank accounts based on their relationship with different global banks. In these cases, it is very difficult for the global finance controller to see their consolidated liquidity and manage them based on their requirements.
Banking laws are tightly coupled, and account-related information as well as transfer of funds from one account to another account in different countries is governed by the respective countries’ banking laws. And taking services from expensive payment gateways like SWIFT may not be the best solution to manage this.
Virtual accounts, where actual accounts are not disclosed to the payers, are in use for a long time for collection purposes and are an effective alternative to overcome this barrier. This process is widely known as COBO – Collections-On-Behalf-Of. Banks when receive funds in these virtual accounts, pass the respective credits into the actual account of merchant/corporate.
In today’s world, the usage of virtual account has been extended to managing global liquidity by corporate treasurer, as controlling banking accounts and its liquidity in each country is very expensive and expensive to administer. Now, global treasury departments need real time information on funds being paid or received by its subsidiaries across the globe, so appropriate sweeping targets at balancing liquidity functions can be performed and managed better.

Functions in Virtual Account Management

  • Account Management functions include opening of virtual account, linking it with actual account, calculating interest and limits maintenance on virtual accounts

  • POBO, COBO functionalities, where virtual account is used by the corporate for making and collecting payments

  • Real time sweeping and pooling from virtual accounts

Typical structure of Virtual Account Management

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In the above example, in figure 1, without the presence of virtual account, individual banking accounts are maintained in each entity. This in turn increases operational and administrative cost of the corporate. To minimize this effect, virtual accounts are opened under one operational current account. Under VAM, corporate treasury department can view the consolidated liquidity in one physical account and can perform all working capital methodology to manage funds in respective entities.

Benefits of VAM Solution

  • Centralized treasury operations – Better cash visibility and optimization

  • Optimized cash flow – Help clients manage their working capital better

  • Lower costs – Lower transaction cost, administrative and fund transfer cost for physical accounts

  • POBO/COBO/ROBO – Capability to initiate or receive payment in the virtual account while hitting real account from debit/credit

  • STP reconciliation capabilities ­­- Reconciliation at virtual account level

  • Better tracking of inter company funds

Corporate Dashboard for VAM

Corporate treasury department requires a dashboard view of all its virtual accounts, its structure, real time balances and interest component. This would be required so that the global department can monitor liquidity and check for its working capital requirements. This also helps the corporate in better reconciliation of its payables and receivables.

A quick summary of virtual accounts and VAM platforms:

  • Mostly large global banks that have a presence across the globe offer VAM platforms to their global customers. This poses threat to local banks

  • VAM solutions offer corporates to create, manage and monitor virtual accounts

Banks must keep in mind the following:

  • Questions regarding tax, local compliances, KYC formalities and legal impact must be checked while opening a virtual account

  • Putting the customer in control may pose problems for bank in monitoring fraud related activities

The Changing Workforce and Culture for the Bank of the Future

Gone are those days when people used to stick to a single organization and retire from it when the time came! The mindsets of millennials are different from their previous generations and with the boom in digital media, we are witnessing a different set of workforce culture in this decade.
Part time culture is yet to be fully recognized in the developing nations owing to cultural differences and the need to support a family unlike westerners. For e.g., college students, retired professionals, women joining work post maternity, etc. Companies have started realizing the importance of such a workforce and have started to welcome them. More and more college students are trying to get into part time jobs both for exposure and for monetary benefits. Women returning from a maternity break look to take this route in general to slowly ease into the work culture. Retired professionals are interested in sharing their experience and contribute in a meaningful way to the society by helping in administrative work or by becoming a part of advisory committees and earning money in the process.
Contract employees are one set of employees who are hired for their specific skill sets for a specific pay. They may either work for their parent company or get to work in a different company if their parent company gets the contract to work for a different one. If they happen to work in the parent company, then they merge into the workforce of that company and there is hardly any difference among the employees. However, if they have to work in a different company they might get treated differently.
Full time employees are associated with the company. They have been employed and enjoy better benefits, be it monetary/policy wise, compared to the other two types mentioned above.
This diversified workforce is becoming increasingly common now. One of the main reasons for it is the characteristics of the current workforce, mainly millennials who are more exploratory in nature, tech-savvy and open to switching jobs and changing companies.
Human resource professionals would need to take care of this diversified set of employees and their different needs. Each one has different motivational needs and these need to be compensated monetarily differently. However, if all of them are treated at par or with minimal differences then there would be a healthy workforce culture and companies can reap enormous benefits from what each set of workforce can offer.
Since there is a constant change in technologies, one is always forced to equip oneself in the best possible manner. If companies can offer a wide gamut of learning atmosphere, namely class room training sessions, desk learning through online courses or videos, then employees can tap into these and grow their knowledge which will in turn lead to better productivity.
Everyone needs to be recognized and companies can look to offer scholarships or nominate high performers for prestigious conferences for all of them, thereby boosting morale of the employees equally and also develop healthy competition among them.
Communication channels are to be open/transparent and companies should look to integrate the other types into full time workforce smoothly in the case of high performers.