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Will Web Thinking Bring True Innovation To Banking?

A talk I gave at the EBUG Knowledge Forum on the 23rd of September. A few thoughts on how web thinking can change banking through simplicity and a more platform/pipe driven approach.

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Will Web Thinking Bring True Innovation To Banking?

  2. 2. SLIDE 2 OF 70 WE WANT TO BE MORE INNOVATIVE! Every large company in the world is probably shouting out something similar. They say it but what do they mean?
  3. 3. SLIDE 3 OF 70 WE WANT TO BE MORE INNOVATIVE* *as long as it does not disrupt any of our current business models, it can be done using our existing processes, the business case stacks up and security, fraud, risk and legal are happy with it. Do they actually mean they want to be innovative but staying inside the existing parameters?
  4. 4. SLIDE 4 OF 70 INCREMENTAL Photo: This kind of thinking usually leads to one type of innovation. Incremental innovation. Making things more efficient, cheaper, and generally better. There is nothing wrong at all with this kind of innovation and it is of course needed. But when most people think about innovation they usually mean…
  5. 5. SLIDE 5 OF 70 REVOLUTIONARY Photo: The problem for most organisations is that they are just not setup to create revolutionary innovations. For the most part they have to operate within the parameters that have built up over time including government regulations, social norms, customer expectations, system constraints etc.
  6. 6. SLIDE 6 OF 70 THE SOCIAL WEB REVOLUTION Photo: The social web, and companies that were born and raised on it are more likely to challenge the existing parameters. The web is evolving and it is changing much of the industrial landscape we know. So far the heavily regulated areas for example pharmaceuticals and finance have not been massively affected by this evolution but that is beginning to change as customers want the same ease of use of say Amazon to apply to all internet interfaces.
  7. 7. TIM O’REILLY FOUNDER AND CEO, O'REILLY MEDIA SLIDE 7 OF 70 THE WEB […] TOOK THE IDEA OF PARTICIPATION TO A NEW LEVEL, BECAUSE IT OPENED THAT PARTICIPATION NOT JUST TO SOFTWARE DEVELOPERS BUT TO ALL USERS OF THE SYSTEM Quote: Photo: Before the terms Social Media and Web 2.0, coined by Tim, the discussions about what this web revolution would be were focused on the participation of people in the web. This quote sums it up perfectly for me. The techies built a world for others to play in, contribute to and build upon. These qualities of inclusion have given rise to some of the most disruptive networks the world has seen. From the power of YouTube in changing media consumption, to Twitter changing the speed of news, to Amazon being the commerce platform for the world.
  8. 8. SLIDE 8 OF 70 ARCHITECTURE OF PARTICIPATION Photo: Tim talked about an Architecture of participation which is much better phrase than social media or web 2.0 from an explanatory point of view but just not as snappy as a brand and brand can be very powerful. This web that allows everyone and anyone with access to build and add to it, create blog, build new code, connect with the world etc etc. it has lead to some great innovations and has also lead to the downfall of many traditional businesses who ignored this revolution and thought participation was voluntary…and it could be ignored.
  9. 9. SLIDE 9 OF 70 Photo: The shift in customer expectation and experience driven by web thinking companies has caught many great companies napping. HMV and Blockbuster being obvious names that have been swept aside by the so called little guy. Blockbuster could have bought Netflix in 2000 for 50 million dollars. They did not and the rest along with their business is history.
  10. 10. SLIDE 10 OF 70 ARE BANK NETWORKS AN ARCHITECTURE OF PARTICIPATION? What I would like to talk about today is this. People in this room will say it is. You are the system & pipe builders of today, you are the banking and payments license holders, you are the gatekeepers. You are on the inside. But what about everyone else? Are we truly building systems that all can contribute to and to most importantly build upon? Should we? Photo:
  11. 11. SEAN PARK SLIDE 11 OF 70 Founder of Anthemis Group SA WE ARE STARTING TO SEE A CAMBRIAN EXPLOSION OF NEW VENTURES, NEW COMPANIES, ENTREPRENEURS FOCUSING ON THIS SPACE. THE FRUIT MAYBE HIGH ON THE TREE BUT IT IS ENORMOUS & JUICY Quote: Sean Park of Anthemis group, a metastartup which funds companies who are looking to change the way finance works today and tomorrow, is looking at this space day in day out and he sees that it is changing. Anthemis and more like them are looking to challenge from the outside in, building innovative experiences with products such as currency cloud, simple and moven.
  12. 12. SLIDE 12 OF 70 WEB THINKING Web thinking is what this talk is about. How the social web has given rise to people thinking in new ways about industries and how this can impact banking and its business models. The standard view is that the banking industry is a bit staid, it is a late adoptor of digital and mobile and is still rooted in branches and records. I want to look at some opportunities that the web offers to the banking industry.
  13. 13. BEN MILNE FOUNDER OF DWOLLA SLIDE 13 OF 70 PAYMENT NETWORKS SHOULD HAVE A MEMORY. YOU ABSOLUTELY SHOULD BE ABLE TO LOGIN TO VISA.COM AND SEE EVERY TRANSACTION YOU HAVE EVER ENGAGED IN WITH A VISA CARD. THE FACT THAT YOU CAN’T DO THIS IS RIDICULOUS. I love this quote. It contains so much new thinking that a lot of people in this room might scoff at. ‘Well of course you can’t do that as many people can issue cards, we don’t tie back identities etc.’ Not many banks provide customers with basic transaction search capabilities let alone for the entire customer history. Things that people take for granted today in the age of Google , persistent history, search everywhere and everything just don’t apply to the world of finance…yet. That curiosity that why not, that what if they could.
  14. 14. SLIDE 14 OF 70 WEB THINKING • WEB THINKING • 1. SIMPLIFICATION 1. SIMPLIFICATION I want to look at 3 areas of what I am classing as web thinking, there are many more but I only have 20 minutes or so. The first is simplification – of the user interface. The web has allowed for some excellent examples of simplified user experiences hiding massively complex processes behind it. Not simple because they do less, simple because it enables people to do more than they ever have been able to.
  15. 15. SLIDE 15 OF 70 • Square Square is a name I suspect most people in this room are familiar with. A US startup that wondered why it was so difficult for everyday folk to accept credit and debit cards wherever they were. Be they builders, taxi drivers or mobile hairdressers. They put in the hard work to make registration for an account and day to day use of this so simple that any of the above trades could easily do so. They have well over a million merchants now including …..
  16. 16. SLIDE 16 OF 70 People really started to take notice was when this happened. Simple scales up it seems. Learn how to make it simple for the masses, then move up to the bigger and more complex and apply the same methods.
  17. 17. SLIDE 17 OF 70 Transferwise are a really smart company founded by two chaps from Skype and PayPal, two companies that simplified traditional industries and made a massive dent. Transferwise are extra smart in that they use the power of social networks to move money, touching the banking network only when they absolutely have to. Imagine you are a Polish builder in Warsaw and you need to send money back to your impoverished family in London. International remittances are expensive. There are hundreds, if not thousands of people sending money between those two countries so why move the money at all? Find someone in Poland who needs to do the opposite transaction with the UK so you only need to move the money inside the country only remove the actual international remittance. Yes there is still a need to touch the banking network to credit accounts, and do some exchange where necessary but it is a much lighter touch than a full remittance.
  18. 18. SLIDE 18 OF 70 My third example of simple is Dwolla, the company of Ben Milne who we heard from earlier. They are a P2P payments company who want to route money around using the networks of today i.e. social networks, and to again limit the touches of the network. They are partnered with a small bank in Des Moines, Iowa, Veridian and this gives them direct access to the bank network on terms beneficial to both organisations. Transfers under $10 are free and over that it is 25c irrespective of the amount. The thing that really interests me about Dwolla is what else they have done. They rebuilt a component of ACH to make clearing faster, They want to make the pipes better than they are today.
  20. 20. GORDON GEKKO SLIDE 20 OF 70 CORPORATE RAIDER - JACKSON STEINEM I DON’T CARE ABOUT THESE HIPPY UPSTARTS, NO ONE TRUSTS THESE COMPANIES. THEY ARE JUST SMALL FRY AND WE STILL GET A PIECE OF THE ACTION* *maybe a made up quote Gordon is right they do. But for how long? And those pipes that people plug into today…who has the best ones? The most simple yet powerful pipes? The pipes built for participation? The pipes built for the web and all that connects to it. Because they very well might end up with the best cut
  21. 21. SLIDE 21 OF 70 WEB THINKING • WEB THINKING • 1. SIMPLIFICATION 2. PLATFORMS & PIPES People in this room know a lot about the pipes and platforms of banking and payments today. Base 24 is the origin of this conference and was and is the backbone of money flow in the UK and much further afield.
  22. 22. SLIDE 22 OF 70 • Better pipes Those pipes though are seen by some as legacy, old, creaking and rusting at the seams. My colleague Anton is speaking tomorrow and will be talking about our switch which he told me was implemented in 1988. I had just started secondary school. Old it maybe but its still fit for purpose and billions of pounds pass through it every year.
  23. 23. SLIDE 23 OF 70 MAKE OLD LOOK NEW They might need a bit of an update to help them plug into today a little better but they are cool. They are useful and they should not be consigned to the scrap heap without thought. There is also the issue that these pipes may not need that much of an update. The ATM switches represent a great example of the value of standards and interconnectivity. The very same tenets that much of the successful web properties are built on today. Photo:
  24. 24. SLIDE 24 OF 70 These pipes have proved themselves ready for today, so much so that when the first mobile banking applications went live in the UK, November 2009 with Natwest if memory serves me well, they did not plug these new services into the Internet Banking platforms they plugged them into the ATM network. Infrastructure is a key asset and always will be, if we can add tomorrow’s interface on to it then it will be able to survive much longer.
  25. 25. SLIDE 25 OF 70 What we need are…..APIs (see what I did there…sorry) automated ways to share data between services.
  26. 26. SLIDE 26 OF 70 APPLICATION PROGRAMMING INTERFACES Application Programming Interfaces. Automated ways to share data between services, as well as programmable and accessible services. These are the fabric of the social web and we are seeing them built by many industries to allow their business models to interact not just with the web but with other business models. Currently no UK retail bank has an automated way of feeding data out of banking systems for their customers to use elsewhere. APIs will offer a solution.
  27. 27. SLIDE 27 OF 70 We are starting to see the rise of business that effectively are one simple business model sitting on a smart pipe i.e. an API. This is Go Cardless which some of you may know (actually are they here?). It allows people to simply add Direct Debit setup capability to their sites and services. Making things simple, removing complexity, and focusing on getting things built.
  28. 28. SLIDE 28 OF 70 Payments capability used to be a pain, set up a merchant account, integrate said merchants wretched software built in late 90s at best technology. We are starting to see companies change this. Braintree are one such company, they make it simple for you to add payments to your site, they deal with PCI DSS, regulation, the hidden complexities of plugging into the bank network. Tech built and problems solved by developers for developers. They process 12 billion dollars a year, a quarter of that on mobile, they have around 4,000 merchants. Braintree have recently been acquired by PayPal for 800 million dollars. There is money in these pipes it seems
  29. 29. SLIDE 29 OF 70 This is another big player in this market, Stripe. It will be interesting to see if anyone buys these guys off the back of the braintree sale. The rising star in this world, in my opinion, is Stripe. They are building beautiful APIs that developers love.
  30. 30. SLIDE 30 OF 70 “TO DATE, ONLINE PAYMENTS INFRASTRUCTURE IN MOST OF THESE COUNTRIES, INCLUDING IRELAND, HAS BEEN DOMINATED BY LUMBERING INCUMBENT BANKS. ACCEPTING INTERNET PAYMENTS INVOLVED WEEKS OF SETUP, REAMS OF PAPERWORK, AND BUREAUCRATIC APPROVAL PROCESSES.” They are rolling out rapidly now. They have launched in the US, UK and Ireland and are currently in beta in Spain, The Netherlands, Belgium and Germany. I love this quote form their recent launch in Ireland. Simplicity is key.
  31. 31. SLIDE 31 OF 70 These so called smaller players are putting pressure on the big boys. PayPal were pioneers in the API space but the functionality that Stripe have been building has forced hem to adapt…and buy a competitor i.e. Braintree
  32. 32. SLIDE 32 OF 70 And the traditional players now know that developers are a key market for them. Can the big players capture the developer cool? Can the incumbent throw money at it? An interesting battle. Conventional wisdom say they win. We shall see. Will Visa buy Stripe? Can they?
  33. 33. SLIDE 33 OF 70 • Add in hackday screenshot. Battle hack? What do these APIs enable? As well as being simple to use what they offer is flexibility and speed. The hackday is a crucial element of raising developer awareness but also of building things quickly. Using APIs to build live services in a matter of hours not months and years.
  34. 34. SLIDE 34 OF 70 What can banks do? Banks exist to facilitate growth and commerce and they are the reason they built these platforms. How should they react to these new players? Defend the network and the business model at all costs or let the new players build and expand them?
  35. 35. SLIDE 35 OF 70 I may be naïve but I believe that the Banks with the best pipes could well win. Those that embrace the web and its brave new entrepreneurs will reap the benefits. Those that embrace the new builders, the new routes of trade built upon age old business models of saving, investing, and paying.
  36. 36. SLIDE 36 OF 70 WEB THINKING • WEB THINKING • 1. SIMPLIFICATION 3. BUILD IT BETTER I also think if we do not embrace the new players then the pain points in the network will become too great and the incentive will exist to build new, better pipes that ignore the old world entirely.
  37. 37. SLIDE 37 OF 70 An example of new pipe. Bitcoin - a maths based currency. A pseudo maths/physics PHD thesis set loose to wreak havoc on the world. ..or to see if money can be made for the digital world.
  38. 38. SLIDE 38 OF 70 The Bitcoin ecosystem is small compared the banking network we know and love. But it is growing steadily and today is worth about a billion dollars per year. Chicken feed to some….but lets us not forget this currency was set free on January 9 th 2009. It is 4.5 years old. Only just going to school….
  39. 39. SLIDE 39 OF 70 In its short yet exciting life it has been the subject of an FBI report entitled - Bitcoin Virtual Currency: Unique features present distinct challenges for deterring illicit activity. Which is a tough report to receive while you are still at nursery but illustrates the parameters within which the financial services sector operates. The report looks at the risk from illegal use of the currency, the risk of attacks upon users of the currency i.e. theft and the types of crime it could permit.
  40. 40. SLIDE 40 OF 70 The regulators have been tough on the exchange points of Bitcoin i.e. where the new meets the old. With exchanges, frozen or closed or just quitting in the face of regulatory nightmares.
  41. 41. SLIDE 41 OF 70 It has been banned in Thailand….kind of. An exchange tried to get certified there and the central bank of Thailand declared that they had no means of deciding if it was legal, so it is therefore illegal.
  42. 42. SLIDE 42 OF 70 Meanwhile in Germany they have declared it legal and classed it as a unit of account, private money or (if you will excuse my German accent and pronunciation) Runginsteinin’ (Spelling?) What impact will that have on the rest of the EU? Will we now see a flood of Bitcoin businesses in Berlin?
  43. 43. SLIDE 43 OF 70 MARKET PRICE (USD) Graph This is the exchange rate for Bitcoins. It has suffered many mini crashes but in April this year prices rocketed to around 240 dollars and all of a sudden the world took notice. The inevitable crash happened…sending the currency back down to around 80 dollars. It has since recovered and seem to be hovering around 140 dollars at the moment.
  44. 44. SLIDE 44 OF 70 It has been invited to some interesting meetings in the last few months. To Washington to met with ‘nearly a dozen high level agencies’ as the governments and regulators try to get their head around what this decentralised thing is? The biggest concern is the supposed anonymity it offers and how this subverts govt regulations aimed at money laundering, capital controls, financial sanctions etc. And there have been recent meetings at Number 10 as more understanding is need from both a regulatory point of view but also from potential bitcoin businesses.
  45. 45. SLIDE 45 OF 70 WHY IT MATTERS 1. NETWORK They are creating their own money moving network as if the internet had existed when banking began. It is open source, it is transparent (to those with good enough eyes), an exchange can be opened by anyone brave enough to try and link it to the old world. It can be added to and updated by anyone with the coding chops. Someone has just built a micropayments channel into the next release. A problem traditional payment networks have struggled with for years. It does not see countries it sees endpoints…people moving money form one place/address to another. The actual mining network is also a force to be reckoned with. The computing power used in mining currency, and at the same time ensuring the security of transactions in the network reached one petahash, this means it is doing around a 1000, trillion calculations a second. Photo: Mick Wright:
  46. 46. SLIDE 46 OF 70 WHY IT MATTERS 1. NETWORK 2. REGULATION They are facing regulation head on. The list of incidents above has impacted on Bitcoins progress but if it can negotiate the complexity of the regulation and pass through relatively unscathed then what can it become? This network is now also very well funded because of …… Photo: Mick Wright:
  47. 47. SLIDE 47 OF 70 WHY IT MATTERS 1. NETWORK 2. REGULATION FIGHT 3. BRAND This should not be downplayed either. In this room the brand will be very different to the brand in say some swanky silicon valley VC fund office. But Sean’s Cambrian explosion insight is right and Bitcoin has the focus of some very rich people around the world. The legions of developers these VCs have sway over could build out systems we could not dream of, using libertarian ideals in the hope of delivering old fashioned capitalist gains. The brand can become a byword for new banks/new pipes. Like Big Data, Social Media, Mobile, Geolocation etc. etc. a brand to let million ideas blossom under? Or just another fad for a million conferences? Photo: Mick Wright:
  48. 48. FRED WILSON COFOUNDER UNION SQUARE VENTURES SLIDE 48 OF 70 IT REMINDS US OF SMTP, HTTP, RSS, AND BITTORRENT IN ITS ARCHITECTURE AND OPENNESS. LIKE WHAT HAPPENED WITH THOSE OTHER LOW LEVEL PROTOCOLS, ENTREPRENEURS AND DEVELOPERS ARE NOW BUILDING TECHNOLOGY ON TOP OF BITCOIN TO MAKE IT MORE USEFUL, MORE ACCESSIBLE, AND MORE SECURE. I will end on Bitcoin with a quote from a very well known Valley VC, Fred Wilson early stage funder of some key networks such as Twitter and Tumblr. This is what they see, new foundations, payments as fabric of the web. Something to build upon, that a legion of new makers and doers can play with, contribute to and buildQuote: upon. Is it a real architecture of participation?
  49. 49. SLIDE 49 OF 70 WEB THINKING • WEB THINKING • 1. SIMPLIFICATION 1. SIMPLIFICATION 2. PLATFORMS & PIPES 3. BUILD IT BETTER So in summary, I think we need to see more web thinking in banking. Look to the startups and the angles they are attacking, the changes they want to see and the questions they are asking.
  50. 50. SLIDE 50 OF 70 REVOLUTION IS COMING Revolution is coming….those that are most prepared will feel less pain. Photo:
  51. 51. SLIDE 51 OF 70 SMART INCREMENTS increments are imperative, cheaper smarter and faster is always better but do not forget about building for other builders and understanding the power of networks.
  52. 52. SLIDE 52 OF 70 MAKE THE BANK NETWORKS AN ARCHITECTURE OF PARTICIPATION Can we make the banking network we know and love today more participative by all, not just those that hold all the keys but by each and everyone of us. Photo: