Many Banks Misunderstand Innovation

Jim Marous (00:00):

Hello, and welcome to Banking Transformed, the top podcast in retail banking. I'm your host, Jim Marous, Owner and CEO of the Digital Banking Report, and co-publisher of The Financial Brand.

Jim Marous (00:22):

According to MIT, the biggest challenge to the innovative process include a lack of innovation culture, fear of change, the lack of ownership and vision, inadequate benchmarking, and even impatience. Unfortunately, there's no magic bullet or secret formula that can guarantee innovation success, but there are ways to make the odds of success greater.

Jim Marous (00:47):

And it's not just new technology or a higher-level investment — it can be a completely changed mindset, it could be the rebel in that back office that's never gotten a voice until now.

Jim Marous (01:01):

I'm excited to have Steven Monaghan on the Banking Transformed Podcast. Steve's experiences include leading the innovation team at several banking organizations, including DBS Bank. In this episode, Steve discusses why banking innovation lags many other industries, and what can be done to change this paradigm.

Jim Marous (01:22):

Originally, a commercial pilot, Steve has held several senior corporate and banking roles in product, marketing, operations, innovation, and general management across Asia. He has worked for Dell, Compaq, Citigroup, OCBC, DBS Bank, among others.

Jim Marous (01:40):

Throughout his career, Steve has specialized in introducing new business models, products, and processes in many industries.

Jim Marous (01:48):

So, welcome to the show, Steve. As I mentioned in our pre-call, it is kind of interesting how you're aware of somebody for so many years and never really interacted with them, and I guess podcast and video communication kind of gives us this opportunity.

Jim Marous (02:03):

So, before you start, could you share a little bit more about yourself, and what you think is the most important trend around innovation and banking that we'll see in 2023, 24? I’d hate to go out any further than that right now.

Steven Monaghan (02:17):

Yeah, no, thanks, Jim. And great to be here on this cold dark winter morning in Tokyo. Innovation across any industry for me has been driven by my lack of understanding. So, I'm not a smart guy. I couldn't understand many of the complexities when I got to banking.

Steven Monaghan (02:39):

So, I just look for simplicity and logic. You know, how do you find your way? When I looked at the Visa model, for instance, and developed Citibank's first mobile payments patent — barcode on the phone for mobile payments and what I call multi-entry bookkeeping, which everyone calls ledgers now, that was in 2001.

Steven Monaghan (02:56):

It was driven by a very simple problem to solve in that the logistical flow of money in the Visa system didn't make sense in the modern world back then. It was something that originated when it was offline, and you had mail moving around and confirmations.

Steven Monaghan (03:16):

So, for me, I just had to look for a way that actually made sense. To have single entry bookkeeping, not double entry bookkeeping, made no sense to me. So, how do you change that game? How do you look for something different? And so, I've applied that same thinking through industry after industry, and it just seems to work for me.

Steven Monaghan (03:36):

So, my background is really as you've highlighted. I started in logistics and flying, and then that taught me about decision-making, it also taught me spreadsheets because I had to automate so I could sleep because I run the company during the day and I'd fly at night.

Steven Monaghan (03:52):

And then I really scaled the businesses because of that automation. So, I saw firsthand what technology could do to give you an advantage and an edge. Then I started teaching financial institutions how to use this new spreadsheet technology.

Steven Monaghan (04:03):

Then I started developing pricing models in logic engines, basically. And software developers would wrap front ends around it. So, I moved into the software industry and then into the hardware industry. Developed pricing models that gave the Dell asymmetry and priced servers at desktop levels, which exploded demand on both sides of the equation, the desktop side and the server side.

Steven Monaghan (04:28):

So, I look for market asymmetries, and what's wrong in a market, and then how you can simplify flow, logic, technology, design, all the things that go around it and just kind of rinse and repeat. I'm a bit of a one-trick pony, if you'd like to think of it that way.

Jim Marous (04:45):

Well, it's interesting because you really get back to the very beginning of digital and the banking world, and even having the innovation forethought. Because banking hasn't changed very much in the last hundred years. And it has certainly changed more in the last three than it has in my previous career path.

Jim Marous (05:06):

But it's interesting with your understanding of both banking technology, what have you seen as being the biggest challenge for organizations that are trying to play catch up and what is needed to move forward?

Steven Monaghan (05:20):

Yeah, sure. Look I think the simplest thing is getting started. A lot of companies want the answers to everything. Here in Japan, they want to boil the universe before they take the first step. It's the first step that's really important because we all know agile, and for me, agile is just a reflection of technology economics.

Steven Monaghan (05:42):

So, which is strange because if you go to a bank and you'll have on boards and things, and I sit on the board of a bank now, but you have procrastination going, "Oh, it's a culture" and it's not. It's just purely a reflection of technology economics and depreciation curves and all those sorts of things. But what's really important is taking that first step and getting that learning.

Steven Monaghan (06:03):

The most powerful learning in the world is experiential learning. So, unless you're actually moving and doing and engaging, people aren't understanding. And what I've found is giving people that experience gives them platform. So, the moment they get moving, they feel confident, they're able to do things, like riding a bike.

Steven Monaghan (06:23):

The first time as a kid, you're all over the shop and scared of doing it. But the moment you do it, of course, and the moment you learn it, you never forget it. So, getting people engaged, getting them moving, getting that first momentum going is the most critical thing for me.

Jim Marous (06:41):

Well, it's interesting when you talk about learning like riding a bicycle, initially it's the fear of failure or the risk involved, and then the comfort level that once you know you never forget it. But is that somewhat a challenge in innovation whereby if you're successful at something, trying something new becomes that next challenge, that situation?

Jim Marous (07:04):

I mean, is banking right now almost encumbered by their ongoing success, their ongoing profits, their revenues, and the risk is still there to try to ride the next bike?

Steven Monaghan (07:18):

Yeah, that is the problem because the success of the past doesn't reflect your success in the future. I mean, in a corporate context, we're watching that happen with Toyota and Electric today. You know, their heart just isn't in the electric vehicle. They think they have a superior technology, in the same way Sony did with Betamax and the same way Intel does with TSMC.

Steven Monaghan (07:38):

This is a rinse and repeat problem. But I think what we're still missing for me in finance, and I think it's the biggest opportunity in the planet right now, is that we're focused very much on facilitation, but we haven't looked at optimization. We haven't made our expertise workforce yet in banking. And I think that that's a really interesting opportunity. And the numbers are frightening.

Jim Marous (08:02):

What do you mean by that? Making our experience work for us? Break that apart a little bit for me.

Steven Monaghan (08:09):

Okay, so compound interest drives our world, but we never really think of it that way. So, we've invested a huge amount in real-time payment systems all over the world. Well, now this, this is not a problem, we can do that. But if you look at business cycles, they're still monthly in the U.S even. Where even when you're paid biweekly, you still do monthly mortgages. Why would you do that? It's a fundamental disconnect.

Steven Monaghan (08:35):

The business cycles haven't changed. You pay your rent monthly, all of these, things. And it goes back to ancient Babylonia, 5,500 years of habit — Luna settlement cycles, and that's pretty much what drives modern payment terms, SMEs give credit to banks.

Steven Monaghan (08:52):

If I do a contract with a bank, I invoice them and they hang onto it for 90, 120 days or whatever. Why am I giving credit to a bank? The fundamental math disconnect on that is massive. And it's not like that cost doesn't travel, it just travels in price where it's not measured or managed.

Steven Monaghan (09:10):

So, the bank ends up paying this huge premium for capital when their job should really be to optimize returns on capital. So, you see these fundamental disconnects.

Jim Marous (09:23):

Well, you talk about cycles. I mean, is that somewhat one of the challenges in innovation whereby it's interesting, I mentioned to you before our podcast started that I visited WeBank, and WeBank's innovation cycle, now, they've got it down to less than 14 days. In other words, from ideation to implementation takes 14 days.

Jim Marous (09:43):

I am totally amazed by the banking industry. I'm going to talk about the States, but also in the UK and elsewhere, where innovation becomes an annual process. We look at our annual plans and we say, "We're going to do this by the end of the year. We may do it or may not do it, but it's in an annual sequence."

Jim Marous (10:01):

You also see things like in the last 24 hours, the biggest banks in the United States just announced that they're working on a wallet process through their Zelle relationship, and that they're going to be introducing it most likely in the second quarter of this year.

Jim Marous (10:18):

I am flabbergasted by two things. Number one, they announced something that hasn't been developed yet, and even put a time period on it. And number two, the time period you put on it is for me, so extended, end of 2023, that says, by the time you get it implemented, some of the ideas that you used for the foundation for your idea are already going to be outdated, or at least not maximized or optimized, to your point.

Jim Marous (10:41):

Is this also a challenge whereby the banking industry, legacy banking industry still looks at innovation as a big bang, cyclical thing, as opposed to an iterative item?

Steven Monaghan (10:55):

Look, a hundred percent, but I go a little deeper than that and say why? And that is basically, we all understand cycle time's really important. You know, that's how we built the business in Dell. We really focused on cycle time, and what drives that?

Steven Monaghan (11:09):

Well, if you change the denominator and your profits are driving in a constant way over the top, your return on capital improves. And the problem with all of these planning cycles is that while we talk about being agile, the reality is we judge projects, and we finance projects based on a waterfall process (NPV — IRR) rather than a real options approach.

Steven Monaghan (11:33):

So, we kind of prescribe that, oh, we want to be agile, and we want to do this, and we want to be quick and we intuitively understand cycle time, but yet, our planning processes and our finances are driven on a waterfall basis because we think that, "Oh, no, no, this is just what we do over there. It doesn't apply to really, how we run the bank."

Steven Monaghan (11:55):

And that's got to change because you're right, you've got to take that first step, you've got to get that learning, you've got to get that cycle time, you've got to be fast.

Steven Monaghan (12:03):

The reason that that agile classifies anything over 90 days is waste is because depreciation cycles. The half-life of technology is 18 months, which is why your new phone is worth half what it is 18 months later.

Steven Monaghan (12:17):

So, unless you're actually putting those ideas and taking that technology and those assumptions to market quickly, they're invalidated, which is why it's called waste in agile. But we don't reflect this in the financial world, in terms of the way that we plan, the way that we budget, all these things. The reality is everything has to change.

Jim Marous (12:39):

Yeah. It's a great point that the front and the backend work at different sequences. And so, what we do is we fall back to the one that has the least risk, which is again, the cycles. And the importance of innovation is obviously very well-documented, but is there a concept, a component of innovation that is more misunderstood than any others? What do organizations get wrong as they try to embrace, let's say, an innovation culture?

Steven Monaghan (13:12):

I think they don't understand, or perhaps they do, the complexity of people. And if you're going to act quickly, it can't be done through a central hierarchy of command and control. I mean, you have to really empower the lowest levels to be able to make decisions and respond very quickly. And so, that empowerment is very different in old banking cultures which are really from the top down.

Steven Monaghan (13:40):

We went through some of this battle at one of the banks that I work for, where there was originally this top-down mandate: you've got to be innovative, you've got to do this. And it went absolutely nowhere because in reality, you have to have that top-down leadership, but you've got to have that bottom-up view from the market. You've got to be responsive to the market.

Steven Monaghan (14:04):

And someone that's sitting in head office is not going to understand a customer in Itaewon or in Akasaka, or in the local markets in Asia. It just doesn't work. So, you've got to have that core context of — well, actually it is; it's the context of the customer, and you've got to be responsive to those changes.

Jim Marous (14:28):

You know, it's interesting because it always gets back to leadership. We talk about in banking, there's still so few organizations that if I asked you what are the most innovative financial institutions in the world, you could come up with a handful, but not much beyond that.

Jim Marous (14:46):

You're may be stretching it after that, even if you redefined what innovation or an innovative organization is. But you think about a DBS. You mentioned before we sat down here that in the past, it took a while to get DBS going, understanding, and embracing innovation. In fact, it took making money.

Jim Marous (15:07):

What is interesting is, they are a leadership that good or bad, right or wrong, profits or non-profits, you end up thinking of them when you think about an innovative culture. You have other organizations globally that you see that as well.

Jim Marous (15:23):

But does it really just get down to leadership? I mean, be it in the banking world or in the tech world, where if leadership gets complacent, if they lose their mojo, if they are no longer trying to beat themselves, does that pretty much — it doesn't matter how much structure you have in process for innovation, does that pretty much kill the process?

Steven Monaghan (15:46):

Well, leadership is the starting point. You've got to have a leader that's willing to take some risk and make some change without question. And I think in banking, we often take the view that things have to be riskless, but we've kind of forgotten that we're in the business of risk. I mean, that's what banks do.

Steven Monaghan (16:03):

But it's more than just leadership. Leadership has to exist to give the permission to go. But what's really important is to be able to take action and to make that action move. So, getting people moving is actually the hardest piece because case in point: DBS back when I joined was not even the most innovative bank in Singapore. I think it ranked clearly number three.

Steven Monaghan (16:35):

And leadership hadn't changed. And it had changed relative recent history, but it was fairly stable at that point, and you need a catalyst to break that mold in the same way that you saw it in China. Jack Ma went and basically said "I'm breaking the rules, arrest me. But if you don't do this, then there is no e-comm.

Steven Monaghan (16:56):

So, kind of the same thing. You needed a catalyst to get things moving to experiment, push boundaries. Not necessarily break rules in banking (you have good frameworks in banking), but you definitely need to push the boundaries.

Steven Monaghan (17:16):

And getting that moving even perhaps against permission, but where it's within the regulatory boundaries and limitations, that enables you — once you get moving, you start building some degree of momentum.

Steven Monaghan (17:31):

The hardest step is always the first. It's basic laws of physics. I'm a huge fan of physics because Newton's three laws for me are the laws of innovation. An object's going to stay in a steady state of motion unless you apply force to move it. And for every action, equal opposite reaction, which means that all change is going to be resisted, get used to it.

Steven Monaghan (17:54):

And then the third's the most instructive — force equals mass times acceleration. Force — what's your force in banking? It's capital and people. That's all you have. Mass is the size and complexity of your network, your customers, all that sort of thing (Metcalf's law, the network). And then A, in banking terms, acceleration is alpha.

Steven Monaghan (18:14):

Alpha's not negotiable. That's what you're driving for, which means that you're left with capital and people or mass. And clearly, what most tech companies do, like Google and Alphabet, and you're even seeing it with GPT-3, small organization off to the side and let them go and push boundaries because the mass is low, which means capital and people are relatively low versus the big institution.

Steven Monaghan (18:37):

So, if you can get that momentum there, and you get the alpha and growth, then over time, you bring that back in to change the company. And that's kind of the model that we did from a DBS standpoint. Whether we realized it or not, we created this small group of rebels off to the side that were able to get a few things moving and engage the organization.

Steven Monaghan (18:59):

And then what leadership was fantastic about was really putting the metrics behind it and ensuring that the business didn't reject those opportunities back then. And the rest kind of is history.

Jim Marous (19:13):

Innovation leaders then, could be middle level managers, or maybe not even managers at all. It's who embraces the challenge and has fun being the rebel. I mean, we talked about some of our mutual friends at DBS, and they would certainly be considered rebels.

Steven Monaghan (19:31):

Oh, a hundred percent.

Jim Marous (19:32):

And if you feel comfortable in the middle pushing at the edges, but doing things that — you've mentioned it twice now, and you have to apologize for later. It's not a bad way to lead. You just hope that sooner or later, senior management gets on board or else, you'll be leaving. You won't be staying at the organization.

Jim Marous (19:53):

You know, when you look at innovation in banking, how much of a hindrance or a potential force for the future is the back office, the way we run our back offices?

Steven Monaghan (20:07):

Well, in many ways, it's the opportunity. I think if I go back to my time at Citi as an example, I took advantage of the back office. I invited audit, which was bizarre, but I invited them during ideation to make sure that I set up things the right way the first time.

Steven Monaghan (20:27):

So, I wanted to understand because I'd come in from tech, I had no understanding of banking in reality. So, it was like how do I ensure that I construct this the right way to pull the right drivers to yield the right result? So, for me, the back office is actually ... and you'll find that it's a huge opportunity because no one usually speaks to them.

Steven Monaghan (20:51):

So, you can get a level of engagement there that you mightn't get from the front line. So, I take the view it's a resource and an opportunity and they often have some really great insights around how you can actually become more efficient. Because I think what's really interesting in banks is-

Jim Marous (21:10):

It also keeps it from getting watered down.

Steven Monaghan (21:12):

Yeah, a hundred percent. You know, innovation doesn't occur within one person or one group or all that sort of thing. You've really got to capture the talent and the expertise of the organization. And that expertise is there. If you look at the innovation team in DBS, there was no one that you would point out at the time and go, "Oh, that person was really innovative."

Steven Monaghan (21:34):

What we were good at was capturing the expertise of the organization and working with them so they could give them a platform for contribution. Everyone knows how they could improve their job. I mean, we don't hire not smart people in banking. We hire the best. And when you give the best, platform, then you're able to achieve some pretty remarkable results.

Jim Marous (21:58):

It is interesting because we talk about the rebels, we talk about the people that might march to a beat of a different drummer, but at the end of the day, it still has to make money. It still is about talent and it's talent all the way through the organization.

Jim Marous (22:12):

When we look right now at the type of talent that's needed, it's vastly different in many ways, or certainly an expansion that's vastly different than what we've seen in the past. How do you envision the war for talent actually playing out, especially in banking, but in any organization?

Jim Marous (22:30):

And is there need for new talent and experience going to drive more partnerships between traditional banks and FinTech organizations when they can't find the talent that they really need internally?

Steven Monaghan (22:43):

Yeah, that's an interesting one. I think there are many stratas within that. So, clearly new talent sets such as engineering — I mean, engineering was pretty much new to banking in many organizations, and that, you have to acquire from outside.

Steven Monaghan (22:59):

But equally, in the move to data science, I was lucky to have Jeremy Howard, who was a co-founder of Kaggle, and the world's number one data scientist on an advisory board. And we went through some of this thinking, and he said, you're better off training your engineers to be data scientists rather than hiring data scientists back then.

Steven Monaghan (23:21):

For the reason that they all have the ability to execute and there were plenty of online courses, and he runs one called fast.ai, which enabled people to pick up those skills quite quickly. So, in the banks where I've been on the board or executive committees and things, I always look at the training option.

Steven Monaghan (23:42):

How do you take the talent within and train them because you're giving them this huge opportunity. You're capturing that excitement and that passion, and I've seen engineers like transform their roles and go onto some pretty big things in the data science world from a banking perspective that when they felt that they were stuck in this small role somewhere else.

Steven Monaghan (24:06):

So, again, investing in people and platform, et cetera, I think is really the best way to get a motivated workforce that actually contributes and drives results because you're tapping their natural enthusiasm for change. I think it's a misnomer that people don't want to change. We thrive on change, we grow with it. Learning gives us a buzz; when we understand something new and can take ourselves to a new level.

Steven Monaghan (24:34):

I mean, that's what we've got to tap inside organization. So, there is a role for external talent, but equally, the talent inside is often undiscovered. And I'll share one quick story from a different industry.

Steven Monaghan (24:44):

If you look at the profit driver of Sony today, it's PlayStation. PlayStation was a rebel program run by some wild guy in a back room who was just sheltered by his manager. So, no one knew what he was doing. I mean, it was as simple as that.

Steven Monaghan (25:01):

If it was surfaced, if he didn't have a manager that hid him, PlayStation wouldn't have happened. It would've been resisted internally, of course. So, that's the whole idea of the rebel.

Jim Marous (25:13):

Yeah. You look at Sony and we both go back aways, but PlayStation for years after introduction was simply a side notation. There were much bigger platforms from broadcast to technology. The way people are listening to music, everything else. And the PlayStation became more important as a lot of the Sony technology became outdated through what you can do on the computer and everything else.

Jim Marous (25:40):

And it's very interesting. I've never heard that story, but it's interesting an story because when you really look at PlayStation, you realize that that and the Betamax were from the same field, but Betamax was a very well-supported platform until it wasn't. And it's very interesting to look at how these things can happen.

Jim Marous (26:01):

When you look at — I said it earlier that when you look at innovative banks around the world, there's very few of them that you'd really say they may not get it all right. But as far as innovation, they're doing pretty well in that space.

Jim Marous (26:16):

Why is it so hard for other organizations to try to replicate the culture, the people, the process, whatever else? It's not totally rocket science, but why do we find so few organizations that lag, and actually rate themselves as laggards?

Steven Monaghan (26:38):

It's fear of failure. I mean, people use fear. You either run away from a fire or you run towards it to help put it out. So, you've got to find the people that are willing to run in the right direction. Because fear, it can be overwhelming. If you look at most entrepreneurs, I mean, it's an absolute part.

Steven Monaghan (27:00):

I mean, I've invested in I think 16 companies, I'm on a global fund, and investment committee, et cetera, and failure is part of the journey. But in failure in many organizations is terminal, where it's the most powerful form of learning. You learn to adapt, you're forced to adapt, you're forced to survive. And it's that survival instinct that has to kick in.

Steven Monaghan (27:24):

I mean, I'm watching it happen here in Japan at a country level — this resistance to change, this lack of embracing digital. Toyota doesn't believe in the electric car. Their heart's just not in it. And you're just watching it die. I mean, I've seen this story before: Compaq and distribution versus Dell.

Steven Monaghan (27:41):

It's a story that just repeats and repeats and repeats because the successful companies fail to put the most valuable assets to work in the right direction.

Jim Marous (27:52):

You know, that's interesting because I've read some of your recent writings and your frustration with Japan, which if you ask people in the world today, they would not see Japan as lagging, but they'd certainly see China in front. And if they started peeling back the layers on some of the other Asian countries, they'd see a lot of countries ahead of Japan.

Jim Marous (28:14):

But it's interesting because that was Japan's calling card, was their innovative culture, their transformation of businesses. But it's amazing how you can, again, you can lose that mojo even when you had it, when it was your brand.

Steven Monaghan (28:31):

Yeah. Look, you're right, Jim. I think if you have a look at it, would you use a 30-year-old code banking system? Would you place your bets on it for the future? And I know your answer and you know my answer. But in reality, if you look back at the context of what made Japan successful, the average age of the country back then in the fifties, was 22. The average age today is 48.

Steven Monaghan (28:56):

And so, you wonder if that conservatism is actually what's holding it back. Because today, it's a very hierarchical-run country. It's permission-based, it's very risk-averse. You're not giving the youth a platform. The talent's still here, you're just not giving them the platform for change. So, that for me is interesting.

Jim Marous (29:17):

Success can be a problem. You talk about the 48-year-olds, they all hit home runs consistently in their twenties. You look at the age of people in China, in those R&D labs, those huge facilities at Huawei or at WeBank or at Alibaba, Ant — you look and you go, these are filled with 20-year-olds that have no fear because they don't know any better.

Jim Marous (29:49):

I kid about in almost every podcast now, the fact that a legacy bank in the United States, certainly in the mid-range asset size are run by a group of white men that played golf together 30 years ago, and have not had a bad year overall since. Well, that can make it so your risk of failure is pretty high.

Jim Marous (30:09):

Because you're going "I'm on the tail end, I don't really want to lose now. I got a pretty good legacy going. I have a bunch of people around me that continually, we congratulated each other every year at annual report time," and they laugh when they see that VC capital is not coming into the FinTech area as much as it was. And where FinTechs are struggling, they say, "See, it was all just a fad" when it's not.

Jim Marous (30:35):

The world's changing too fast. And again, very much in your Japanese analogy, you don't know you've lost until you've lost. You don't know you are falling behind until it's too late and happens. We've seen it in many technologies. It's happened overnight.

Steven Monaghan (30:55):

Yeah. And what's really sad about it is when I see such a big capital advantage, which it goes to your analogy as well; you're very comfortable with the dividends and you want to maintain those dividends, you want to grow those dividends, and you're not prepared to take from the dividend pool to go and invest to do the thing that's going to keep you going into the future because you're comfortable now.

Steven Monaghan (31:14):

Why change? Things seem to be going well. And bringing it back to finance optimization it's really looking at how do you get the best of that return on capital. And it's obviously not by just paying it out. The tech industry for many years never used to give dividends at all because they were just in continuously investing in their growth.

Steven Monaghan (31:35):

And to lose that connection to the market, I think is the downfall of many big companies. They fail to realize that their financial position is actually one of the biggest resources and advantages they have, and yet they fail to deploy it and use it. And I find that an interesting dichotomy.

Jim Marous (31:55):

It's interesting. You hear a level of frustration between both of us and we're dying for more to happen. So, let's take a short break here and recognize the sponsors of this podcast.

[Music Playing]

Jim Marous (32:03):

So, welcome back. I'm joined today by Steve Monaghan, longtime innovation guru in the banking industry and beyond. We have been discussing innovation in financial services and what the industry must do to better support the innovation process.

Jim Marous (32:21):

So, Steve, what do you see as the ... now, this is a long one. So, what do you see as the impact of embedded finance, cryptocurrency, and the metaverse as we look forward?

Steven Monaghan (32:34):

I think that each of them have a role. Embedded finance, I think is obvious. It's you're moving banking from relationship, bilateral relationships, into network relationships. And that makes sense. This is what we've done in the technology industry, it has to happen in banking. And the question is how do you do it in a smart way and how do you make it yield.

Steven Monaghan (32:56):

Crypto, absolutely, tokenization. I'm a huge, huge fan of tokenization of physical assets, and being able to now, create liquidity around those assets. I think that that is a hundred percent the future. Individual cryptocurrencies where they have purpose, I think is very interesting, of course, and I think has a huge role in finance.

Steven Monaghan (33:22):

I think one of the structural problems with crypto is it's we broke the mold of holding entrepreneurs accountable for generating value, first for their customers, then for their shareholders, and then finally for themselves. We enabled them to suddenly, monetize and become liquid off their own coins immediately before the others had realized value. Which I think just drives a very dangerous behavior into the market.

Steven Monaghan (33:48):

And then the metaverse, absolutely, digital twin, the ability to create a frictionless society to the side that mirrors your reality over here. I think there is a future in that, NFTs, all that sort of thing can be valuable in that context.

Steven Monaghan (34:05):

But I think one of the challenges is we often hype the technology rather than focusing on the business model. And what's lacking in the metaverse today is the business model, what's lacking in crypto is business model and fundamentals, so there are still problems to solve. Tech isn't a panacea; tech is a tool set.

Steven Monaghan (34:27):

So, we've got to make sure those tool sets are facing in the right direction.

Jim Marous (34:32):

Well, it's interesting, embedded finance probably is the closest to the business model being there because it's kind of like a spur off of the mothership. The other two are somewhat nebulous and metaverse, you talk to 10 people, you're going to get 10 completely different definitions as to what metaverse is. So, it depends on what you throw into that.

Jim Marous (34:55):

But I think it's interesting because it's an open concept, but I think getting back to something you said earlier, and I've known a couple really good innovative companies in my time. Not many of them, but I've known some of them, and all of them involved the naysayers as part of the process.

Jim Marous (35:14):

So, they involved in the old days, legal, they involved the technology, the back office people. But more importantly, now, they've involved the people who are all about the actual government regulation, and being able to look at this and say, okay, bring these people to the table to have them have a voice beforehand, rather than having watered down innovation.

Jim Marous (35:42):

But more importantly, to help define what regulators probably aren't going to define as quickly. One thing I'm seeing too often is that regulators tend to be the oldest bankers in the industry, therefore, they're way behind the curve as to where the consumer usually wants things to go.

Jim Marous (35:59):

And if you don't have your compliance people, and if you don't have your legal people, and if you don't have your government regulation people into the discussion, there falls apart your business model to a degree, or at least waters down your innovation in the future.

Jim Marous (36:16):

So, Steve, innovation's a top priority for virtually any organization. We can take apart what that means so is customer experience, but we don't see the investment and the commitment to really getting down to the brass tacks as to what the consumer wants.

Jim Marous (36:32):

But a lot of organizations still consider themselves laggards in the innovation area. To be prepared or to get started, which is where you started the whole conversation, you got to get started: where do organizations need to start first?

Jim Marous (36:48):

Pick any organization, I know you won't pick one that's probably not already have a little bit of a head start because you don't want to hit your head against the wall. But let's say you did, what would be the first thing you'd have an organization do?

Steven Monaghan (37:04):

Understand the customer and customer value and how that's shifting. So, that was pretty much how I ended DBS. It was a digital desert. DBS stood for "Damn Bloody Slow." So, there was no real innovation culture there whatsoever.

Steven Monaghan (37:23):

So, going into an organization which is fundamentally dead, I think you've got to look at first where that fiscal opportunity is. There are many places that I think look at innovation and go, "Well, let's build some nice new space first, or let's do this and make it appear that it's innovative."

Steven Monaghan (37:46):

For me, I think that the key is to look at where the value is and understand where the asymmetry is that you want to create in the market. And then look at how you tap that value, and then start absolutely going out, getting the back office, getting the regulator.

Steven Monaghan (38:01):

I used to call the MAS, the "Ministry of No." Now, look at them, they're driving MAS as the regulator in Singapore. You could argue that they're in front of innovation now. But that was a function of shared learning. And I think that the most important thing if you want to get things moving is you've got to create this learning culture.

Steven Monaghan (38:22):

Tech's moving so fast. I mean, two years ago, we're using Google, now, we're using ChatGPT. I've forgotten how to write queries in Google. But you've got to take people along on that learning journey. And that is regulators, it should be collaborative. We've got to learn together. You've got to take the people, the back office, you've got to learn together.

Steven Monaghan (38:45):

Creating this learning culture for me is the number one thing you've got to do to get things moving inside an organization.

Jim Marous (38:52):

That scares me too, because I think about the desire to learn. My team knows that I got going in writing content, pushing content, sharing ideas because of my desire to learn. So, the only way I can share things was to learn things every week, or else I'd be sharing things and I'd run out of things to share.

Jim Marous (39:14):

So, that's why I do the podcast, that's why I do the writing, that's why I do the webinars. That's why I do speaking on the road, is because each one of them is a learning opportunity, not a selling opportunity or a talking opportunity, despite the amount I talk.

Jim Marous (39:25):

But what's interesting is I'm wondering, "Do we lose this?" I mean, we find it when we want to find it, we know people that do this, but sometimes, resting on your laurels is less scary.

Jim Marous (39:40):

And I get concerned because you mentioned ChatGPT and I find it interesting that people blow it up and say it doesn't work. And I try to explain to them it's the structure of the questions, it's the structure of what you do on the front end that's going to define how good the backend is.

Jim Marous (39:57):

And I think it's going to become more and more of an issue, not in AI, but in everything — that if we don't have people that learn how to ask great questions in a format that gets you where you want to go, you'll never get there. You certainly aren't going to know if you do get there.

Steven Monaghan (40:14):

Oh, Jim, you're so on point there. It is. It's the quality of the questions. And this is how you get people engaged.

Steven Monaghan (40:23):

I believe fundamentally, people want change, they strive for change, and asking the right questions. If you look at a bank and you look at regulatory and someone usually owns the regulatory relationship: "Oh, you can't go and talk to the regulator because we comply with it, that's our shop."

Steven Monaghan (40:45):

But if you get them asking the right questions, you often find that you overregulate yourself to be on the conservative side of the regulator, rather than just going and talking with the regulator together at a new answer. So, not only the quality of the questions, but to address those questions to the right people.

Steven Monaghan (41:06):

And we're in a world where I think we now know we can go direct with just about anything. So, working out where to ask the questions and then doing it in a very direct manner. So, you're cutting out all these layers of judgment that sit in the middle to get to the source.

Steven Monaghan (41:21):

I mean, this is what I learned in Dell, this is how you go direct. And that culture, I think becomes very important. So, you want to engage the expertise and capture that expertise at the source. And I think that really helps invigorate the innovation process and cuts through a lot of the bureaucratic mess that that lies in barrier to it.

Jim Marous (41:44):

And it also gets back down to your rebel idea, the fact that asking the right question, but sometimes, continually asking them, because the answers are based on facts of the past, whereby just because you get an answer doesn't mean you have to accept the answer you receive. And then that, again, takes confidence in yourself because as people or as organizations, you have to have confidence.

Jim Marous (42:10):

I remember a very large U.S. finance institution, I don't think many people would put in the top five of being the most innovative — said that their idea of innovation was to do what they knew was right and beg for forgiveness if they went beyond what the regulators thought they thought. And try to convince them that no, they're still within the confines of what was meant by the rationale of the regulation.

Jim Marous (42:34):

Because regulators right now are not writing things for each specific thing. And in fact, we're hiding behind that in many cases in industry.

Jim Marous (42:42):

So, Steve you have an eye on the world, not just the Asian market, but if you look at, let's say, three financial institutions that may not be in everybody's spotlight as far as being truly innovative, that are scale, that are financially bigger organizations, what three would you put on your top five list?

Steven Monaghan (43:05):

Oh, WeBank absolutely: Kakao in Korea, I mean, phenomenal. If I look at a more stayed old financial institution, I do rank DBS. I think they're doing a great job and continue to push boundaries. So, they would be the three that I admire and learn from.

Jim Marous (43:29):

You know, and it's interesting: each one of the three — I probably should say two or three, because WeBank actually has so much competition in their backyard. They're continually pushed. But if you look at DBS, yes, Asia's a very, very innovative marketplace. But the overall is to keep your game going, is a credit to them.

Jim Marous (43:51):

I look at location, I look at some other financial institutions, some Indian ones as well, that I think do a really good job at a time when they could have easily taken a more laissez-faire attitude. If you look beyond financial services, if, you again, get out of financial services quite a bit, what do you see as being some of the more innovative companies that are not banking?

Steven Monaghan (44:20):

SpaceX, I love. That story of SpaceX, it's a classic 10x story. You know, it's rethinking the game from the ground up. It's the story about the flat computer, a hundred thousand dollars in NASA, it's just a PC, isn't it? It's a couple of grand.

Steven Monaghan (44:38):

To re-challenge all of those fundamentals, and reusability … I mean, if you think about it, he created microservices for space travel, reusable rockets, reusable components, all these sorts of things. And I think the fundamental rules are the same no matter what the deployment of technology, and what the industry or the assets.

Steven Monaghan (45:02):

All of these things are about the same thing. How do you reuse assets? How do you generate multiple times off them? It's having that framework of thinking and pulling together that network around it that's really interesting. So, SpaceX, I love and admire. I think that's probably the best example.

Steven Monaghan (45:21):

But equally, you see in many other industries some fascinating things that are happening. I love what they've done with ChatGPT, rethinking the search engine when you've got Google that's like a high 90% dominant.

Jim Marous (45:37):

And want to put your neck out there and say oh, by the way, what you've seen so far, it's going to not look the same a year from now. Which you all of a sudden say the speed of innovation is exciting as the innovation itself.

Jim Marous (45:50):

And you and I both lived in the time when we watched every space take off, and they happened really infrequently. And it is so much different than it is today. And to think it'd be commercialized, successfully commercialized is amazing, as you mentioned.

Jim Marous (46:08):

For me, to think of a rocket engine re-landing itself on a space that's no bigger than my hotel room, the technology that's gone into this and that the pilot's no longer have to pilot the spacecraft tech. They don't pilot airplanes today. But the technology has happened so fast that it's really interesting to fathom.

Jim Marous (46:32):

And honestly, we have taken completely for granted what's in all of our pockets. The mobile phone is just insane what we rely on it for today. When you travel or anything else, you start thinking, how could I ever get from point A to point B without a mobile device today. Could — not successfully,

Steven Monaghan (46:54):

Well, I think this goes back to your earlier point, Jim, around asking the right questions because if the constraints and the variables have changed during time, which they do. If you look at ChatGPT, once they open the next stage, GPT-4 , and I'm sure it's a multiple of what it is today — your constraints are going to be very different. Your questions are going to be very different.

Steven Monaghan (47:17):

And to even ask old questions, you'll get a different answer because the data sets, the knowledge, all of that thing's expanded so much. And I think that you should never assume that what was a constraint in the past is a constraint in the future. And we should always challenge to look for where we can make those connections.

Steven Monaghan (47:35):

So, for me, the biggest value in banking that's untapped today is the value between the silos. I think we're starting to nail the silos themselves, but we're not nailing what lies between the silos the B2B2C connection. I mean, this is still a huge source of friction and opportunity.

Steven Monaghan (47:53):

We haven't challenged the fundamentals from a finance perspective. We're focused on facilitation, not optimization. How do we re-look?

Steven Monaghan (48:02):

I'm working on a project at the moment where if you look at the average discount rate for supply chain finance is 600 basis points. So, how can you generate capital? In Japan, Toyota's funding rate as an example, is one basis point. So, one basis point, 600; one basis point, 600. That's a huge regular arbitrage. How do you take advantage of the actual math?

Steven Monaghan (48:29):

And yet, you come up against resistance, like that's not the way we do things or you can't do that. And it's like, "Of course you can."

Jim Marous (48:38):

The underlying thought also, one thing that has not been talked about that much, but something that's really struck me was how open AI has built both DALL-E and ChatGPT, and then made it commercially viable before it was even introduced.

Jim Marous (48:55):

So, in other words, it doesn't take a rocket scientist to look at those two technologies and say, "Oh, this is totally consumer-friendly, and oh, this can make money, and it will be in demand." And Microsoft's investment, you realize they're doing quite well, but I thought it was interesting that they're doing it to enhance the customer experience, whoever the customer is, both on the visual and on the written form, and to get better answers.

Jim Marous (49:25):

Now, for me, I've used ChatGPT quite a bit recently in the development of my articles. Not the writing of the articles, but in the formatting, the thought process because every question came back with different answers. And I said, "Oh, I hadn't thought about that." It's good to test your logic.

Jim Marous (49:42):

So, okay, finally, Steve, to end the conversation: what do you see as the biggest opportunity in banking today?

Steven Monaghan (49:49):

Moving to optimization. So, really rethinking how money works and optimizing value for customers, and the simple example. Most bankers will pay their mortgage monthly, what if you could pay it daily? How does that change the financial returns? How does that accelerate ownership? What's the new model there? How would you get it funded?

Steven Monaghan (50:14):

You know, putting together those pieces across multiple silos: how do you turn employee payroll from an expense to an asset, how do you re-challenge some of the fundamentals? How do you look back into legislation and use technology tools to really rethink how value works in society?

Steven Monaghan (50:34):

At the end of the day banks need to reinvent themselves to think about how they move, because a lot of the front end, the transactional thing is commoditizing. All tech commoditizes. This is the challenge in all technology industries, is tech itself isn't the differentiator. It's how do you string together the value, and that, I don't think banks have begun to scratch the surface off just yet.

Jim Marous (51:00):

You know, optimization in everything we do, I keep on looking on the neighborhood and seeing I think we have 15 houses on the street. We got probably 42 cars on the street. We aren't all driving all 42 cars on an ongoing basis. How much is wasted? How much friction is there when we aren't just scheduling three cars for everybody to go to the place where we want to go, when we want to go there and using them optimally.

Jim Marous (51:28):

Uber was just a start of that. Fractional timeshares of flights, fractional timeshares of residences, as in Airbnb and everything else, every element of that. And then what role can banking play in that is at the end of the day, almost everything gets financed. There's a way to make it so that it becomes a greater value for the user as well as the organization that are in between the processes.

Steven Monaghan (51:55):

And I think what's missing in banking to make that happen is the growth mindset. In the technology industry, we will cut the pricing of something to drive scale and to really think about how we grow and make it up in share. The reason we don't move in banking is we're unwilling to rethink the model, the pricing, and the scale.

Steven Monaghan (52:13):

And so, having that growth mindset and really thinking about scale and making technology work at scale, time to value, time to money, time to scale — that's exactly how you drive every digital project regardless of industry. But we don't do it really effectively in finance. So, we've got to make finance work, we've got to make finance scalable. And I'm right with you.

Jim Marous (52:35):

That's a great way to end it because you're really talking about the ability to rethink the business models from a revenue perspective. And we've seen some of it in open banking. We're going to see more of it because traditional ways of funding things between interchange and other bizarre ways we spread, which is gone now because of the efficiency in the marketplace.

Jim Marous (52:56):

We have to rethink the way banking makes money. And there's so many ways, because again, getting to your very strong point, there's so much inefficiency in the marketplace today that banking's in the center of, but sometimes they just have lived by that for so long, it's hard to think that banking may be completely funded by outside the bank as opposed o inside the bank.

Steven Monaghan (53:20):

Right.

Jim Marous (53:21):

Steve, thank you very much for being on the show. I really appreciate you getting up early in Japan to sit down with us, and I hope you have a great day, and I appreciate your discussion.

Steven Monaghan (53:31):

Yeah, appreciated the opportunity, Jim. Great to speak.

[Music Playing]

Jim Marous (53:36):

Thanks for listening to Banking Transformed, winner of three international awards for podcast excellence. If you enjoy what we're doing, please take some time to show some love in the form of a review. It does help us to continue having great guests like today.

Jim Marous (53:50):

Finally, be sure to catch my recent articles on The Financial Brand, and the research we're doing for the Digital Banking Report.

Jim Marous (53:58):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage, audio engineer, Sean Rule-Hoffman, and video producer, Will Pritts.

Jim Marous (54:08):

I'm your host, Jim Marous. Until next time, remember the words of Gary Vaynerchuk who says, "Don't fear innovation, figure out a way to take advantage of it."