The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week we discuss AI as a focus of banking digital transformation. We cover the fintech firms that have been given an advantage during the pandemic. Finally, we look at the importance of fintech partnerships to the future banking models.
How to Become an AI-First Bank
McKinsey published an article making the case that banking digital transformation must have AI as the central transformative technology. The article was written by partners from Mumbai, Suparna Biswas, Shwaitang Singh, and Renny Thomas, from Sydney, Brant Carson, and from Hong Kong, Violet Chung.
The writers make the point that AI “could potentially deliver up to $1 trillion of additional value each year” for banking globally. However, banks have struggled to move beyond single use cases due to “lack of a clear strategy for AI, an inflexible and investment-starved technology core, fragmented data assets, and outmoded operating models that hamper collaboration between business and technology teams.”
McKinsey calls for banks to become “AI-first” to address the challenges that are transforming society and business models.
“To meet customers’ rising expectations and beat competitive threats in the AI-powered digital era, the AI-first bank will offer propositions and experiences that are intelligent (that is, recommending actions, anticipating and automating key decisions or tasks), personalized (that is, relevant and timely, and based on a detailed understanding of customers’ past behavior and context), and truly omnichannel (seamlessly spanning the physical and online contexts across multiple devices, and delivering a consistent experience) and that blend banking capabilities with relevant products and services beyond banking.”
The writers detail how an AI-first transformation could occur. “To overcome the challenges that limit organization-wide deployment of AI technologies, banks must take a holistic approach. To become AI-first, banks must invest in transforming capabilities across all four layers of the integrated capability stack…the engagement layer, the AI-powered decisioning layer, the core technology and data layer, and the operating model.”
Amir Husain, Founder & CEO of SparkCognition, and the CEO of SkyGrid writes in Forbes that three emerging shifts in AI are “beginning to materialize in the form of real-world research and applications. These areas of work represent themes that I believe will be recorded as meaningful breakthroughs in a future timeline of key AI developments.”
- “The Cost of Training Machine Learning Systems Will Be Drastically Lowered”
- “Artificial Intelligence Will Be Increasingly Used to Augment Human Creativity and Help with Ideation”
- “Enterprises That Recognize AI’s Potential Will Upend Their Competition”
Husain’s view is that these three developments make the AI future McKinsey proposes attainable in the near future. “Every process, every workflow and every task that can be infused with AI represents an enhancement… an inorganic evolution beyond its current, ordinary state.“
He adds, “We can do this practically now because research is enabling low-cost training methods that can be embedded at the edge, in ever-smaller objects. AI-enhanced ideation brings about the potential of recursive self-improvement. And AI adoption is a competitive need to the point of being an evolutionary filter for business: adopt and evolve or deny and expire.”
With McKinsey building the case for an all-out AI-driven transformation, and Husain exploring what’s possible even in the near future, one is left to wonder what are the actual tactics that are going to get an organization moving on a transformation path. Kamila Chytil, MoneyGram COO has an article in Forbes that details the five building blocks for accelerating a digital transformation.
- “Set Expectations: Digital Transformations Are Messy”
- “Establish A Clear Owner, But Do Not Put Her/Him on An Island”
- “Leave No Part of The Organization Untouched by Digital”
- “Be Relentlessly Customer-Centric”
- “Maintain A Culture of Experimentation”
At Extractable, we agree with Chytil’s points. Often, we work organizations to build alignment behind a single vision of their transformation before they can move forward. The process is messy and it requires strong leadership and focus on customer needs, not just technology application.
‘Gust of Growth’ for Fintechs Amid Pandemic
Undeniably, Covid-19’s impact on the economy has been and will be a hardship for financial services companies. According to Jeff Kauflin and Eliza Haverstock from Forbes the current Covid driven downturn has hit Fintech firms as well. “LendingClub, which offers personal loans to higher-risk consumers, laid off 30% of staff; small business lender On Deck was sold in a fire sale.”
Kauflin and Haverstock, in an article on Forbes, go on to cover the payments-related Fintech firms, and founders, that have benefitted from the quarantine-driven increase in digital payments, however. They write:
“for a sizable crop of consumer-facing and payments-related fintechs, the virus has delivered a gust of growth, just as it has for e-commerce behemoth Amazon and work-from-home players Zoom, Slack and DocuSign.”
Kauflin and Haverstock quote Victoria Treyger, General Partner and Managing Director at Felicis Ventures, “Consumer fintech adoption was already strong pre-pandemic, especially among the 20s to early-40s age group. The pandemic has become a growth rocket, fueling the rapid acceleration of adoption across all age groups, including 40- to 60-year-olds.”
Among the “winners” are Marqeta who processes payments for clients such as Instacart, DoorDash, and Postmates, and digital banks like Chime, who benefitted from the “stimulus checks, student loan payment holiday and (now expired) $600-a-week unemployment supplements.” Digital banks also benefit because they are most often payments-focused, with the nearly all revenue coming from interchange fees.
Another beneficiary of the stay-at-home economy is Robinhood. Kauflin and Haverstock write:
“The boredom of being stuck at home, wild stock market swings and government stimulus checks have turned some Millennials and Generation-Z-ers into day traders and options players.”
According to Kauflin and Haverstock ,“If there’s one fintech segment that has been an unalloyed pandemic winner, it’s…online point-of-sale installment financing. It’s benefiting from both consumers’ shift to online buying and their reluctance, in these uncertain economic times, to take on new credit card debt.” They highlight San Francisco’s Afterpay, Affirm, and Stockholm’s Klarna.
The current situation is bound to change and the conditions that have driven growth for these fintech will accordingly change. We’d expect that the economic situation will continue giving POS installment financing a long runway.
Digital banks sole focus on interchange as revenue is a problem that needs to be addressed for these organizations to thrive in the future. Particularly, when new payments rails like The Clearing House’s RTP and the Fed’s FedNow gain a foothold that could impact interchange. The wild card is changing consumer buying behaviors.
Fintech Partnerships: The Secret to Securing Relevance
The future of digital banking post-pandemic is the subject of two interviews we saw this week. ITP.net published an interview by Sarah Rizvi with Wissam Khoury, Head of International Business at Finastra, focused on partnerships between fintech firms and banks. In turn Gary Drenik, founder of Prosper Business Development, interviewed Moxtra’s CTO Stanley Huang, and CBO, Leena Iyar, for an article in Forbes discussing what is lacking in existing digital banking offerings.
Khoury notes that:
“Since the start of the COVID-19 pandemic, we have witnessed a sharp uptake in the adoption of digital banking services…Restrictions introduced to try to slow down the ongoing health crisis, such as social distancing, working from home, are bringing financial technology and other digital technologies to the fore, as consumers change their day-to-day behavior and businesses alter how they operate.”
Adoption of digital banking is nothing new, however. Khoury adds, “Ultimately, the digital transformation of financial services was already well on its way, and COVID-19 brought the future forward by accelerating the pace of transformation.”
“There was already a migration toward mobile banking, but since the pandemic, there has been a major shift to virtual banking. Today, more banks are depending on fintech platforms to deliver high-touch, personalized experiences to clients on par with their traditional brick-and-mortar branches.”
The importance of building partnerships with fintech firms, as a way for banks to address capability gaps, comes to the forefront on both discussions.
Khoury believes that banks “must look at partnering with fintech companies, which will enable banks to access the services, knowledge and experience needed to implement their offerings. These partnerships will also help banks to overcome some of the barriers they are facing internally such cost-savings pressures or risk-averse cultures.”
When looking at the customer experience, Khoury warns banks that they “must move away from legacy systems and they must do it fast.” Iyar sees a shift from a bank customer market to a bank service market.”
The current banking model allows “different levels of service based on the bank’s judgment. With a digital platform, banks are able to make their services available to all customers on-demand, and it’s then up to the customer to take advantage of those services as it fits their individual needs. This creates a persistent relationship between customer and bank, as each client profile and history stay within the organization for seamless ongoing relationships through any relationship management transition.”
“The key for banks is to integrate features focused on convenience and accessibility such as messaging, video chat, document collaboration, and more, to create an engaging solution for customers to use from anywhere, and at any time.”
Khoury sees collaboration with fintech firms as critical to all banks, “it is no longer viable to aim for success in isolation. Innovation rarely comes exclusively from within, and the sooner banks realize the inherent value within the new, open ecosystem, the better they can secure their own relevance.”
We agree about the importance of relationships and real partnerships between fintech firms and financial institutions. FIs and fintech firms need to shift their thinking when putting these partnerships together. Back in April, we made suggestions to help both sides to understand each other and get their relationships to a good start.