Predicting the Unpredictable: Banking's Next Decade

Jim Marous (00:00):

Welcome to Banking Transformed, the top podcast in retail banking. I'm your host, Jim Marous.

Jim Marous (00:17):

As we stand the brink of 2024, it's important to unravel the seismic shifts poised to redefine the industry over the next year and beyond. Digital disruption, shifting consumer behaviors, emerging technologies, and evolving regulations are combining to completely reshape the industry at dizzying speeds.

Jim Marous (00:41):

I'm joined in the Banking Transform podcast by Brett King, a friend, and a trailblazer whose foresight is continually heralded the next wave of financial innovation.

Jim Marous (00:52):

Together, we dissect the advancements and upheavals that will reshape the banking world in 2024. And also, peer into the future envisioning what banking may look like as we approach the dawn of 2030.

Jim Marous (01:08):

More than ever, bankers must understand these trends and harness the opportunities ahead in order to be able to thrive as we look in the future.

Jim Marous (01:18):

As I often say, change has never happened this fast, and it'll never happen this slowly again. In just the next year, we expect to see rapid developments from open banking adoption to new AI applications. Looking out to 2030, the landscape may be almost unrecognizable compared to today.

Jim Marous (01:36):

And there's no better person to talk to about the future as it may be in banking than Brett King.

Jim Marous (01:42):

Brett, you've been such an astute voice predicting the future of finance. What emerging technologies like AI and automation do you see having the biggest impact on reshaping retail banking over the next five years?

Brett King (01:58):

Oh, wow. Well, all the technology that's coming into the space right now, AI is going to disrupt not just banking, of course, but a ton of industries and disrupt our way of life in many ways, for the better in most cases. But there's some new paradigms that we're going to have to adjust to.

Brett King (02:20):

But AI, you know I've talked about the technological impact on banking, and I have a series of books I've written on that. So, I talk about Bank 1.0 being the traditional era, Bank 2.0 being the self-service era, where we extended branch operations to ATM machines, call centers, and then eventually basic internet banking.

Brett King (02:42):

Then the Bank 3.0 era, which is the era most banks are in today, which is where we have mobile app-based banking.

Brett King (02:50):

And this produced a sort of whole suite of new startups in the space, FinTechs, that we call them today, that have gained massive market share. We just saw Wise's results this week, which are very impressive.

Brett King (03:07):

And then the Bank 4.0 era where we're going into right now, is the era of embedded banking. And so, buy now, pay later, and things like that are examples of that.

Brett King (03:16):

But so is the fact that more people use a mobile wallet today to bank than they do a traditional bank account, which is something that's happened almost without the banking industry even noticing.

Brett King (03:30):

And then the, the fifth era, which I haven't really talked about broadly in the market yet, Bank 5.0, is AI based banking. And that's a trajectory we're on. So, Bank 5.0 is sort of around the 2050 era, but it's starting now.

Brett King (03:48):

And so, to illustrate, JP Morgan Chase today, has, what, 180,000 employees globally. So, what does JP Morgan Chase look like as a Bank 5.0? Maybe 2,000 employees, and the rest is AI. And so, that's the-

Jim Marous (04:05):

And bigger.

Brett King (04:06):

Right. And so, that's the trajectory we're on. And so, you've now, got the consumer experience stuff happening, and AI is going to be part of that, the personal AI.

Brett King (04:16):

And then we have the era of this truly smart bank account where your AI helps you manage your money. And then we have the era of the bank as an algorithm or a set of algorithms.

Jim Marous (04:27):

It's interesting because in the past, (I've been in banking for 40 years now) consumers pretty much accepted what banks provided them. The banking industry didn't move very fast, but neither did the consumer. They took care of trust, they took care of branding, all those elements.

Jim Marous (04:44):

But we've seen major shifts in what consumers expect today, and it's because of not just what's happening in banking, but what's happened outside banking.

Jim Marous (04:55):

And the gap has really got to the point where the consumers are actually ahead of where the banking industry is, where regulation is, and where everything else is kept playing catch up.

Jim Marous (05:05):

I'm wondering how big is the gap between consumer expectations and current bank capabilities in the legacy banking sector?

Brett King (05:16):

Well, if a bank asks you to sign a piece of paper, ever, that's the biggest example of that expectation gap. And so, you still have that embedded in a lot of banking practices.

Brett King (05:34):

There's still the expectation for many banks, particularly in places like the United States, where well, if you want a real banker, you have to go and speak to them face to face, and find a parking spot at the branch, and sign a piece of paper.

Brett King (05:47):

And banks that rely on that type of activity are obviously, been shrinking fairly, I guess at a fair clip over the last few years.

Brett King (06:03):

So, that's the immediate thing is that as a customer, I want to make it as easy as possible for you to execute on what you need to do. And the more friction I put in the way of you, then the harder it is for me to retain you, to keep engaging with you and so forth.

Brett King (06:17):

So, I don't call KYC, know your customer, when it comes to the paper, I call it kill your customer. Is because the best practices-

Jim Marous (06:27):

Oh, you're exactly right.

Brett King (06:27):

Yeah. And then if you look at the other overarching expectation, it's informational. And that comes from lots of areas in our life. And I should be able to know exactly how much money I have, whether I'm spending it well, all of those sorts of things. Those feedback loops around how I'm using my money.

Brett King (06:46):

And so, mobile wallets do a far better job of this than traditional banking apps. So, categorization, showing you predictive cashflow analytics, all of those sorts of things these are some of the features we see in these wallets.

Brett King (07:01):

And lending as a result is changing. It's shifting towards wallets in these markets or the super apps and so forth. So, in China, 40% of SME lending now, is on the Alipay platform. And that's a massive shift.

Jim Marous (07:18):

Yeah. And it's interesting because we talked about it actually yesterday on a podcast that you hosted that the reality is that one of the many things are holding the financial institutions back.

Jim Marous (07:30):

A lot of it is legacy thinking, but even legacy processes, like we talked about the difference between managing risks versus actually avoiding risks.

Jim Marous (07:39):

And most financial institutions in the United States and many parts of the modern banking world still try to avoid risks, which makes it so you have a limited customer base you can serve.

Jim Marous (07:49):

While, as you mentioned in China, you have organizations like WeBank can serve virtually everybody, because what they use is their way of deciding whether or not to serve a customer is their transactions on their mobile device.

Jim Marous (08:00):

They can manage to say, "Who's going to go bad?" Which is all they try to avoid, as opposed to how good is a customer going to be? And through the masses, they can make it work.

Jim Marous (08:12):

And when you look at generative AI and AI in general, it really is making a lot of things more possible.

Jim Marous (08:20):

As you're going around the world, how do you see your organizations really change the way they do banking based on generative ai or just AI in general right now?

Brett King (08:33):

You mean banks or you mean-

Jim Marous (08:34):

Banks, yeah.

Brett King (08:35):

Well, I mean, on the generative AI stuff, I think there is not yet a really good example of generative AI in banking.

Brett King (08:46):

And I'll tell you why is when we talk about generative AI, and we're talking about ChatGPT, Midjourney, DALL-E, these sorts of programs, you have these massive data models, which enables you to extract various types of either language or art or whatever the case may be that's generated based on this AI's broad data experience.

Brett King (09:11):

So, the equivalent of that in financial services would have to be the most obvious area, is some sort of radical personalization of your banking experience, which would combine advice and would combine the ability to give you access to core utility of banking in a highly or hyper-personalized manner.

Brett King (09:35):

And so, really no one is doing that today. We are starting to see elements of artificial intelligence and data science creep into the space, but there's no one that's really cracked generative AI.

Brett King (09:48):

And I think part of that problem is that you have to be embedded in the customer's life from a technology perspective in a fairly complete manner. So, the only I guess architecture we have for that today is a mobile wallet on a smartphone.

Brett King (10:09):

You do have voice-based smart speakers and things like that, which could obviously be an angle for that same AI. But imagine talking to your smart wallet in your phone and saying, "Hey, how much money have I got? Can I afford to go out with my friends? Or to the football game on the weekend?"

Brett King (10:29):

"Can I afford to go out for dinner on the weekend? What's my available budget given my goals of saving up for a new car or saving up for a house deposit next year?" Or whatever the case may be. And your wallet would be smart enough to answer that question.

Brett King (10:43):

Or your wallet would be smart enough to give you, say, "Hey, looks like next month you've got a car insurance payment coming up, and you may not be able to hit that because of your current cash flow. This is what you can do about it."

Brett King (10:54):

So, it really has to be integrated into your life in a way that banks I'm not sure could ever really do. So, that's really the gap there.

Jim Marous (11:05):

Why can't they, Brett? Because when I look at this, the data's there. The view of the future is there, but it seems like financial institutions hold back from sharing it.

Jim Marous (11:18):

I mean, means being integrated into another platform, but when you look at just what a financial institution can do within their four walls, I'm not getting very much predictive ideas or what I should do in my banking from my current institution that owns enough Information to do that.

Brett King (11:36):

I mean, look, banks could do components of this no problem. And banks could own this part of it if they're integrated with the wallet ecosystem, like Apple Pay, Google Pay, and so forth. Because again, it's a largely behavioral.

Brett King (11:56):

And so, we do have financial behavior in a transactional level, but we don't have all of the other behavioral data that you'd need to give that. So, we don't have geolocation data. We don't have various psychological or behavioral triggers that sit outside of the banking system.

Brett King (12:15):

So, yeah, we do have a ton of data, but it would need to be married with something else.

Brett King (12:19):

So, this is why I talk about the ecosystem of banking experiences no longer being driven by banks. Yeah, you have the surviving banks as a component of that, but you now, have the tech giants, the FinTechs, and the AI players who are equally as important in providing those seamless banking experiences of the future.

Brett King (12:38):

So, banks have to be integrated into that environment. And banks still think in terms of primary financial institution and you coming to the bank as a customer to ask for a product from the bank. And that is the fundamental shift that occurs with this move to embedded banking through the tech layer.

Jim Marous (12:57):

Talk about embedded banking. How will open banking trends like embedded banking and composable technologies change where and how consumers interact with financial institutions in the short term? And I'll say in the next two to three years, how do you see this all changing?

Brett King (13:14):

So, I was talking with a challenger bank in ... in fact, we hosted them on Breaking Banks, but a company called Wio, a challenger bank out of the UAE Dubai.

Brett King (13:29):

And they've got this new feature credit plus they call, which basically they can send you a message as you walk in a grocery store and say, "Hey, it looks like you don't have enough money for your groceries today. Do you want to switch into credit mode?"

Brett King (13:42):

And so, you can basically switch over your wallet from your debit card to your credit mode in real time.

Brett King (13:47):

That's an example of where if you are still thinking about banking, like provision of credit, like a credit card as a bank, then you're going to lose out in that scenario because that's all data decisioning. So, that's an example of something today.

Brett King (14:05):

An example I gave in Bank 4.0, the book that came out in 2018 was mortgage shopping. And so, how does a bank today know if you are going to buy a home or you're interested in buying a home? How it is that you come and ask for a mortgage, and that's the first the bank knows of your intent to buy a home.

Brett King (14:28):

But Google, Apple, potentially Facebook and others, they already know you have the intent to buy a home. You've done Google searches on it. Apple, you've downloaded a real estate app on your phone.

Brett King (14:39):

So, they have a massive informational advantage when it comes to a home financing offer because as you walk into a listed property, a property for sale, it's a fairly safe assumption given your search history and behavior in the past that you're actually looking for home financing.

Brett King (14:56):

So, now, I can give you that offer contextually on your phone with a notification as you walk into the listed real estate property. Or if you walk into a Tesla dealership or something like that, the same applies, saying, "This is how much you can afford."

Brett King (15:12):

And at that point, why would you go to your bank and ask for a mortgage and jump through those hoops? But the technology plays a sort of acting as a gateway in terms of that based on their data and informational advantages.

Jim Marous (15:29):

It's interesting because we already have that data around auto purchase, because basically when you do a test drive at any dealership, they do a pinging on your credit bureau to make sure that you'll be able to buy what you're driving.

Jim Marous (15:41):

That doesn't show up in a credit bureau, but that data's available. And in fact, if you do a test drive, that's why we get all these ads from dealers and manufacturers around cars.

Jim Marous (15:52):

Yet for the most part, financial institutions don't take advantage of that same data to offer something on a proactive basis. What holds financial institutions back from using the data that is available to be my GPS of financial service? What's your perspective on that?

Brett King (16:11):

Well, there's two major issues. It's rarely technological. It's mostly cultural and it's mostly reinforcing the existing product silos through the organization structure.

Brett King (16:25):

So, for example, if I'm going to offer an alternative credit product, which is a real-time credit experience, such as the grocery experience I talked about, immediately, if you're in a major bank that issues credit cards, the credit card team is going to say, "No, no, no, no, you can't do that because that's cannibalizing our credit card business."

Brett King (16:45):

So, that's the problem you get, is that you sort of have this reinforcement of the existing product structures and org chart, because that's the way budget flows throughout the organization. Breaking that is extraordinarily difficult. It's rarely a technological issue.

Jim Marous (17:00):

Yeah. It's interesting because I've tried to talk about the fact that buying technology will not get you out of a hole if your leadership doesn't envision what the future's going to bring. I mean, it sounds logical, but we play it every day. It's why both of us are in business to a degree, is that banking runs slower than we think it should.

Jim Marous (17:20):

When we're talking about speed overall, how do you see the role of speed within the ability to compete and drive digital experience excellence? I mean, you see both traditional nontraditional finance institutions, you see financial institutions in the US and abroad.

Jim Marous (17:40):

Even real-time payments. We kid about the payments industry in the United States, but we don't see all the financial institutions, even all the big financial institutions embracing and pushing real time payments. This has got to be more than culture, doesn't it? Or is it still just culture that gets in the way?

Brett King (17:59):

The US is sort of a unique market, and that's a very protectionist market for the oligopolies that sort of run the different industries. And they get to write the rules, the regulations in respect to industry. So, banking lobbyists are basically writing the rules about FinTech adoption and crypto.

Brett King (18:17):

And you can see that in the US because we don't have a FinTech charter. We're the only country in the G20 that doesn't have a FinTech license for a bank. And that restricts very heavily the ability for challenger banks in the US to compete because you can't get a license unless you go the full license route.

Brett King (18:36):

And incidentally, you have to have at least a single branch, which no digital banking structure anywhere in the world has that requirement.

Brett King (18:47):

For what's happened with the SEC going after crypto, again, that is the fact that the regulations are being written to support the existing Wall Street firms and investment strategies rather than allowing this opening up.

Brett King (18:59):

So, that's the biggest problem in the US. But you also have legacy behavior. So, let's look at checks, for example. Although they're in constant decline and have been for 20 years, checks are still used quite broadly in the US for things like payroll.

Brett King (19:17):

And there's not an imperative for banks to incentivize people away from that system as yet, because they still have a lot of reliance on people coming in and getting a checking account, opening a checking account and so forth. So, it needs to be a bit of a cultural shift there.

Brett King (19:37):

I am increasingly frustrated by the lack of real-time payments and so forth that's here in the US market because you can go anywhere else in the world essentially and use your phone to pay at least in developed economies and developing economies as well.

Brett King (19:56):

You can go anywhere in the world and just use your phone to send someone some cash and it happens seamlessly and [crosstalk 00:20:04].

Jim Marous (20:04):

Well, it's interesting because the consumer in many cases feels like they do have real-time payments, Venmo, and things like this, give the visual of having real-time payments, but it’s not really there.

Brett King (20:15):

And you can. There are workarounds. These are commercially available workarounds that work around the existing banking system restrictions.

Brett King (20:22):

But it's not a standard where the US has said, "We're going to have real-time payments, we're mandating it, we're going to make it as cheap as possible for banks to make that switch. And we are going to do these things to phase out checks and the ACH met payments methodologies because those legacy systems aren't helping consumers. They're increasing fraud, et cetera."

Jim Marous (20:48):

So, Brett, we've seen a lot of dynamics with regard to regulation. How do you see the regulatory environment changing over the next few years when we're looking at things like data privacy, and we're looking at AI and the risks and bias, and when we're looking at CRA, which is interesting when I talked about what's going on there.

Jim Marous (21:08):

We visited the White House in what, 2013, ’14. I mean, a long time ago. And we talked about CRA and they just came out with a new regulatory decision on CRA, which looks more adequate than it did before.

Jim Marous (21:24):

Do you see regulations being a possible inhibitor to innovation with the United States, but even globally? Or do you see it possibly improving the innovation process?

Brett King (21:38):

Great question. So, let's take CRA. The CRA law was written in 1977. At the time, Star Wars was the number one movie.

Jim Marous (21:51):

My first year in banking.

Brett King (21:52):

Yep. And Staying Alive was the number one album. And our view of financial inclusion was that if you wanted to increase access to credit, the only mechanism available to do that was branches.

Brett King (22:06):

And that got put into law, meaning that if a bank was the last bank in a town that served a certain population of people, they couldn't remove that branch because there was a social expectation as to financial access in that city or town.

Brett King (22:23):

And so, we have a large portion of regulation today concerning digital banking is framed in respect to the CRA in that, well, if we create a digital banking license that doesn't require a branch, those banks that have a digital license are no longer subject to the CRA. So, that's not a level playing field for the banks that are already in the United States.

Brett King (22:49):

But if you step back from that and say, "If you were to think about financial inclusion in the United States today, and it's still a problem because over 20% of households in the US are financially excluded. If you were to think about financial inclusion solving that problem today, is the CRA the answer to that?"

Brett King (23:10):

And the answer is absolutely not. The answer is mobile. We've had more financial inclusion globally out of mobile than we've ever had from bank branches. We've had the fastest ever growth in financial inclusion as a result of mobile phones.

Brett King (23:24):

So, you would have to say, if the purpose of the banking system is to include as many Americans as possible, then you need CRA reform. You also need to accommodate these digital pure play mechanisms to enable innovation in financial inclusion to occur. So, we don't have that either.

Brett King (23:48):

The things like real-time payments and the fact that in markets, like for example, China, or Latin America, or India-

Jim Marous (23:59):

Africa.

Brett King (23:59):

And across Africa, the wallet enables now, a lot of those elements, mobile money in Africa, Paytm in India, MG cash payment in the Philippines, et cetera, et cetera.

Brett King (24:12):

And so, the US has all the data we need to know that this is a solution set that's readily available, but it requires an act of Congress.

Brett King (24:23):

And that's, as we know in the current political environment, going to be very difficult, particularly when you've got the bank lobbyists saying, “Don't get rid of CRA, because that's going to be an unlevel playing field.” So, I think there's definitely a regulatory issue here.

Brett King (24:40):

But on the broader sense in terms of innovation, the US still has incredible resources financially to put into innovation generally through Silicon Valley, the venture capital arms and so forth.

Brett King (24:54):

So, we will probably see efforts from players like Apple Pay and others and potentially ChatGPT integration into the banking system as an effort to circumvent a lot of those limitations.

Brett King (25:09):

But you also asked about identity. So, what we know today, and it might shock your listeners, particularly if they're in the US banking system, is today, if you use your US based credit card online in the US to purchase something, you have a 10,000 times higher chance of fraud than a person in China purchasing online using Alipay.

Brett King (25:36):

And I'll give you the hard numbers because people say, "Oh, that's not right. Well, that's communism."

Brett King (25:43):

0.006 basis points of fraud at 500,000 transactions per second for Alipay. Visa and MasterCard combined globally can do about 50,000 transactions per second, maybe a little more. And the cardinal present fraud rate is 11.2 basis points of fraud in the United States. So, those are the hard numbers.

Brett King (26:06):

So, this is a twofold problem. Primarily it's identity, is that your 16 digit card number, your CVC, and you know, the expiry date, these data points are no longer securable. And so, we can tokenize, but that is a stopgap measure.

Brett King (26:24):

What we really need is digital identity infrastructure. We need biometrics, we need biometric heuristics. And this is where China, with the facial recognition and so forth, has been able to radically reduce fraud on the mobile payments rails.

Brett King (26:41):

And of course, that becomes complicated because we talk about now, "Oh, you're going to have a Chinese system, or what about civil rights and so forth?"

Brett King (26:48):

Let's put aside that immigration and border patrol already have facial recognition for passports, and it's integrated. There are 600 federal databases already that use facial recognition. So, let's not fool ourselves into thinking we're not using this tech.

Brett King (27:03):

But at the same time, in a 21st century ecosystem, think about the pandemic. If you want to get access to telehealth, you want to get access to tele-education services for your children, you want to get access to ongoing financial services in the world of the future, it's always going to be based on digital identity.

Brett King (27:27):

You can't have all of this digital layer of services and keep paper-based identity documents or plastic based, driver's license, or a passport. You have to have digital identity infrastructure.

Brett King (27:39):

So, I would say that if you start talking about AI now, if you are going to have an AI agent act on your behalf, the ability to tag digital identity deeply to you and to your Ai, creating a separate digital identity for your AI that is your agent, that's part of the infrastructure we're going to need to keep these ecosystems safe.

Brett King (28:06):

And that requires broad federal agreement on identity standards and so forth, which I think we're a long way off from.

Brett King (28:13):

So, unfortunately, if you're in America, you are having to absorb significantly higher risk and fraud rates because of the legacy regulation and legacy banking infrastructure.

Jim Marous (28:31):

So, you've talked a little bit about the competitors, about the FinTechs and big techs, what competitors or models pose the biggest threat to incumbent banks. And alternatively, what types of FinTech partnerships and collaborations do you see happening in the next year and then in the future?

Brett King (28:53):

Well, I mean, in terms of collaboration, we do have more and more FinTechs partnering with banks particularly on the infrastructure side. And with AI, I wouldn't necessarily say FinTech collaboration, but AI. Startup collaboration with banks is obviously going to be a big thing.

Brett King (29:12):

You are also going to see banks acquiring FinTechs, FinTechs acquiring banks, sort of this cross pollination to some extent. In specific areas where there are specific capabilities that you want to get.

Brett King (29:28):

Like if you want to do buy now, pay later, rather than completely reinventing the wheel there, you might integrate with a partner on that front, on the wallet side. You're not going to build a competing wallet to compete with Apple Pay. You really have to be integrated with Apple.

Brett King (29:42):

So, there are plenty of tech and FinTech type collaborations that are necessary for you to be present and connected to customers in the digital sphere. And that's even before we start talking about Central Bank digital currencies, or the metaverse, or AI based agency and so forth.

Jim Marous (30:06):

So, let's take a short break here and recognize the sponsor of this podcast.

Jim Marous (30:12):

So, welcome back to Banking Transformed. So, I'm joined today by Brett King, good friend. Been in the business longer than I have in many ways. And truly as a person that we look at for a view into the future, but also, with grounding in the present.

Jim Marous (30:26):

So, we're exploring what we expect to see next year, but even further out in the future in 2030, 2050.

Jim Marous (30:34):

So, Brett, can you expand a little bit around the idea of responsible banking and the importance of this in this current client and how much we have from the standpoint of financial institutions walking the walk as opposed to just talking the talk?

Brett King (30:51):

Well, first of all, we're both the OGs, dude. So, I said that.

Jim Marous (30:55):

Yeah.

Brett King (30:55):

But we are good friends, and we've maintained that. So, I remember the early days getting you on hosting Breaking Banks and stuff like that. We've done a lot of stuff together. It's fantastic.

Jim Marous (31:05):

Hey, I wouldn't have this podcast today if it wasn't for you. So, thank you.

Brett King (31:08):

I thank you for saying so.

Brett King (31:10):

In terms of responsible banking, I would start with a very basic premise, which is what is the main thing a bank should do for you, particularly as a customer? But the same is true of a business. What's the number one thing a bank should do for you as a customer?

Brett King (31:32):

And I would argue philosophically not from a regulatory perspective is that the bank should help you save and manage your money. And we lost sight of that a long time ago in the banking system globally.

Brett King (31:49):

If you look since the 1970s, since the emergence of credit cards, there was an epiphany that credit access was where the money was to be made for especially in retail banking. So, pushing people to spend more money so they could increase their credit utilization is a fairly common aspect of banks.

Brett King (32:10):

So, we have cash back rewards for using a credit card. We have airline miles and airline benefits for using a credit card.

Brett King (32:17):

And so, we increasingly have this posture where spend, spend, spend is the approach that we push from a product and revenue perspective as a bank, when actually it should be exactly the opposite for a consumer, which is, we should just help you save money. We should help you manage your money.

Brett King (32:35):

And so, this is what I would say is AI's biggest contribution is that it's creating the smart bank account. It is creating a bank account that will help you manage your money, and your AI will be on your side. Your AI will be saying, "Don't use your credit card, don't use credit, you don't need to. These are the other options available to you."

Brett King (32:59):

And that, I think, is at a basic element, helping you manage your cash flow, helping you understand your goals and how micro decisions, like how many times you go and buy a Starbucks coffee every week, how those sorts of things are affecting your overall financial health and sort of managing that.

Brett King (33:18):

Now, the problem of a smart bank account that really helps you manage your money in that way for banks is it destroys all of their current product suite. It destroys their current revenue model.

Brett King (33:32):

And for many banks that will immediately make most of their retail banking customers unprofitable from a conventional viewpoint.

Brett King (33:41):

And so, you will see many banks who have to make this shift eliminating all but the most high net worth customers because of the margin and a lot of the lower to middle income customers shifting to rails like wallet systems and so forth.

Brett King (34:00):

So, that's my guess is that there is that sort of banks need to have that cultural shift that your bank account needs to help you save money. And to do so, it means a complete rethink of the product model and the revenue model in the bank. It's pretty significant shift, right?

Jim Marous (34:18):

Well, yeah. The shift actually gets more towards the investment model where you pay for a value transfer of showing empathy and providing value to me.

Jim Marous (34:27):

I will pay for a financial institution's knowledge into how to manage my money better based on what they've learned about me in the past and what they know about me in the future.

Jim Marous (34:37):

And we pay $140 a year for Amazon, and yet I'd be hard pressed for anybody to say what they really get over and above what a non-prime customer gets. But the reality is, nobody gets rid of it.

Jim Marous (34:51):

And it's because there's trust, there's an empathy feel from the Amazon team. There's the feeling like you've gotten to know me, and I trust the fact that you're managing my data. Well, which finance institutions have lost that.

Jim Marous (35:07):

And it's no longer I want to work with a bank that's closest to me, because right now, it doesn't matter where that financial institution is located, but I really do want to work with a financial institution that seems to be looking out for my wellbeing or building products that I really need. And I don't care if they charge for them. If I'm getting a value back that's greater than the cost.

Jim Marous (35:27):

When you look at overall digital transformation, and when you look at the human element, everything else, what excites you about what can happen in the future banking today?

Brett King (35:40):

It's obviously a very big open question, but if we sort of limit it to the next five years, the reality is we're already starting to see some of this occurring in — look at Latin America, Nubank is now, the largest bank in Latin America 85, 90 million customers.

Jim Marous (35:57):

In a matter of less than a handful of years. Yeah. It's amazing.

Brett King (36:00):

Eight years. And then WeBank in Shenzhen. Again, first account was open April, 2015, so yeah, eight years but they obviously started the tech earlier. 380 million, probably 400 million customers by now.

Brett King (36:18):

So, if you want to look at all of the fastest growing financial institutions in the world, they're all digital. So, that means in five years time, we've seen significant market share.

Brett King (36:29):

Look at Wise and all of the dominance that they have in terms of the cross-border transfers and remittance market out of Europe in particular.

Brett King (36:43):

So, market share is already changing around these organizations. So, I think in five years time, you are seeing lots of different organizations giving people choice in terms of what we would traditionally call banking that aren't traditional banks.

Brett King (37:01):

They don't have a traditional core system. They haven't gone the traditional charter route. They may eventually for regulatory reasons or growth reasons. But what is a bank has been radically changed.

Brett King (37:15):

And I think this just gets weirder and weirder as the future goes on, because you may have an AI bank launch sometime in the next 10 or 15 years as an example, that how do you license a fully artificial intelligence bank? Like how do you regulate that?

Brett King (37:37):

Like we don't even have the start of the regulatory standards that might be required to regulate an algorithm as a bank that has a banking license. How do you give an algorithm a banking license?

Brett King (37:51):

Well, you still have to have a corporation, and you need capital adequacy and all of those regular things. But a lot of those metrics that we had in the past, which was critical to create a healthy bank actually the biggest benefit and the biggest risk is now this algorithm itself.

Brett King (38:10):

And this requires regulators to have highly technical understanding and capabilities. It actually requires regulators to be tech organizations themselves, which we're clearly not in that situation as yet.

Brett King (38:26):

So, in answer to your question, I see that the traditional banking infrastructure, including the regulation, continues to get attacked mercilessly by these emergent properties and these emergent models.

Brett King (38:42):

And the markets that best adapt to this in terms of their regulation, in terms of their openness and their ability to absorb experimental models and things like that, are those that mature as an economy fastest and in the most productive manner.

Brett King (39:05):

So, like at a macro basis, we're moving from a situation with highly bureaucratic government systems and lots of these old paper-based systems that have been retrofitted under computers and things like that to autonomous government, autonomous markets, what I would call smart economies of the future, which are highly automated.

Brett King (39:27):

And the largest economies of the 2050s are going to be highly autonomous economies. So, the more resistance there is to that autonomy and that high level of automation, which is a way to keep government big, then you have significant problems in terms of decade long development as an economy itself. It makes it much, much harder to compete.

Brett King (39:55):

It also makes resource utilization and all of those things much more difficult to manage moving forward. So, you retain a level of complexity in the system that you just don't need moving forward. That's the key issue.

Jim Marous (40:11):

So, what emerging technology that's currently under the radar, do you see that could be transformative as we get towards 2030, let's say?

Brett King (40:22):

I think there's a few philosophical changes happening in the 2030s. I do think that you're going to start to see a lot more smart contract activity. So, smart contracts, the AI based components by which we run business commerce and marketplaces in the future.

Brett King (40:46):

So, how it happens today, you have your company, you have vendors or suppliers, and you have clients. And right now, today, those relationships are defined by a contractual arrangement.

Brett King (40:59):

Sometimes it's a very simple contractual arrangement. You should go and buy some stuff off their store. Sometimes it's more complex, such as distributorship agreements and so forth. Real partnerships.

Brett King (41:11):

But that starts to get implemented in code. The rules by which you get paid and as many elements as we can for automation in that.

Brett King (41:22):

So, maybe autonomous delivery of packages and things like that or ordering that's done and managed by an algorithm or two algorithms talking together. Those sort of things are managed by smart contracts.

Brett King (41:34):

And there's no bank in the US that I'm aware of right now, that has smart contract infrastructure. Maybe JP Morgan Chase with some of the work they've done on tokenization and so forth. So, it may not be fair to say no bank has it, but-

Jim Marous (41:50):

Well, but it is emerging elsewhere. I mean, IBM's starting to put things in place and others.

Brett King (41:55):

Right, right, right. So, that's a primary element we're going to be experimenting with to create sort of dynamic autonomous business operations and so forth.

Brett King (42:08):

And that has implications because US dollars don't really work on smart contracts the way a central bank digital currency does, because if I send your US dollars out with an AI based agent, it's gone forever.

Brett King (42:21):

Whereas with a central bank digital currency, if an AI agent makes a mistake, you can roll it back as long as both parties agree, as an example. You've got that traceability and auditability and so forth that you have.

Brett King (42:34):

By the time we create enough smart infrastructure around the US dollar to make it work like a CBDC, it is a CBDC. So, a lot of people saying, we don't want the CBDC and in the US because it enables tracking and control over bank accounts and so forth.

Brett King (42:51):

Well, at some point the US has to decide, does it want to be the world's leading economy and use automation to keep that status? Or are they going to let that moniker of being the world's largest economy go to someone like China because of their automation?

Jim Marous (43:09):

So, 2030 at one point seems a long way away, but on the other hand, it's very close. Do you see that the way we do banking changing between now, and 2030, where maybe we're not doing it on a phone, we maybe are doing it on another device or another way, or there's some new technology that's being introduced right now that it's hard to embrace?

Brett King (43:34):

Yeah. Probably the most obvious one will be rapid improvements in voice interaction with your bank account. So, you'll be able to just tell your bank account what you need to do.

Brett King (43:48):

Like for example, "Oh, hey, bank account, can you check if I paid my car loan payment this month?" Or something like that. Those types of interactions. That's probably the most obvious area over the next few years.

Brett King (44:04):

But the other area is all of the fastest growing FIs again, are those that are digitally enabled digital acquisition. So, here's the thing is by 2030, you're going to see quite a market share shift in the US where the biggest banks are those that are really digitally competent and those that haven't made that switch.

Brett King (44:24):

If you are still requiring a signature on a piece of paper in 2030, you are going to business-

Jim Marous (44:31):

Or driver's license. Yeah.

Brett King (44:32):

Right, right. Your business has shrunk to half its size of today potentially.

Brett King (44:40):

In some time around 2027, branches will hit half of the peak in the United States. In the UK, it's far less than that. They're down to about a quarter of the branches that they once had.

Brett King (44:53):

There is nothing that we see in the future to reverse that trend. So, again, if you're a bank that's relying on a customer coming into a branch, a lot of that market share is going to shift away to banks that can onboard customers digitally. And we saw that happening during the pandemic.

Jim Marous (45:10):

As we talked about yesterday on your podcast, it already is. It's just that banks haven't recognized it. It's the silent attrition. It's upon us now. It's just really interesting.

Jim Marous (45:22):

Brett, you're a voracious writer. You're writing all the time. You're on the road all the time also, visiting organizations across the world. What are you writing right now? What are you working on?

Brett King (45:33):

Ah, well, we're working on a project together. So, it's called Branch Today, Gone Tomorrow. Hopefully this will be out in the first or second quarter of next year.

Brett King (45:43):

And it is really a definitive look at branch utilization globally, looking at a dozen or more economies and seeing the way branch utilization and branch traffic has changed. And really helping people understand that the era of the branch as the primary channel for banking is over.

Brett King (46:07):

And we know this because in 2013, the density of branches globally started to decline according to World Bank data. And we know that from looking at all of the major markets, that the number of branches globally started to decline around 2017 for the first time in 500 years.

Brett King (46:28):

So, this shift in posture means that banks have to have that mindset shift that (and regulators need this shift as well) if you are still going to maintain branches, their primary role moving forward is to support digital.

Jim Marous (46:47):

Not the other around.

Brett King (46:50):

Yeah. You can't think of them as the primary channel and digital as secondary because all of the fastest growth is coming from digital. And so, the more you rely on branches in that scenario, the less growth you have, the more market share you give up to competitors who are digital.

Brett King (47:05):

So, you have to really say, “Alright, well, how is branches going to work to support digital?” And there are good opportunities for that. The Genius Bar concept, the more technical help.

Brett King (47:18):

I often say in five years time, if you go into a branch, probably the number one reason you have to go into a branch in five years is your tech isn't working. "Can You help me fix my app? I can't use my wallet with the card in the app for some reason." Whatever the case may be.

Brett King (47:39):

So, again, this requires a different level of thinking about the skills and resources in branch. And even the size of the branch. Teller window becomes far less important than just having someone with presence with a iPad or something like that to help you.

Brett King (47:53):

So, that's sort of the example of what's happening in Branch Today, Gone Tomorrow.

Brett King (47:59):

I'm also working on a science fiction series, which I don't want to talk too much about yet, but there's some really interesting moves in that respect.

Brett King (48:09):

And the next book I'll do next year that I've sort of started working out is because you and I both have extraordinary access to the FinTech OGs, is, I wanted to tell the story of the emergence of challenger banking around the world.

Brett King (48:26):

David Velez from Nubank, Tom Blomfield at Monzo, and Anne from Starling, Henry Ma at WeBank, and basically-

Jim Marous (48:36):

Brett King from Moven.

Brett King (48:38):

Of course. And get these guys to tell us their story as founders. And so, the working title of that book is The Rise of the Challengers. And that includes also the mobile wallet structures and stuff like that.

Brett King (48:53):

And that is, I really wanted to document that period of history where banking sort of really fundamentally changed and the trailblazers that helped us through that process. Because we do have that for Silicon Valley in terms of the rise of Silicon Valley.

Brett King (49:13):

And we do have disparate information about individual challenger banks and so forth, but no one's really put together a historical perspective on the rise of all these different challenger models and what it will ultimately mean. So, that's something that I'll be working on next year.

Jim Marous (49:29):

And wherever you are at the time, I know that sometimes we touch base in coffee shops globally, and you are if nothing else everywhere and anywhere, so.

Brett King (49:40):

Well, I mean, I am starting to rethink that a little bit in terms of whether I need to slow down the travel a bit. I'm not recovering as quickly as I used to-

Jim Marous (49:50):

Oh, I know that one real well.

Brett King (49:52):

... from jet lag and stuff. Yeah, I'm sure you do. And so, I am sort of rethinking that to some extent. But having said that, I'm blessed to have really generated a global audience and global demand as a thought leader.

Brett King (50:10):

I do a lot of work with central banks around the world now, sort of helping them. I'm on the boards of some new FinTech’s and startups around the world.

Brett King (50:18):

And I spent a lot of time in the last five years, so including during the pandemic I've done 60 countries or so where I've toured and been able to talk about what's happening in this space.

Brett King (50:29):

But there needs to be antagonists. We need people like you and I out there helping the traditional players see the rate of change and what's happening, so they at least have enough warning to be able to adapt and make the changes they need.

Brett King (50:48):

As we've seen in many other industries, publications with Amazon and Kindle versus the bookstore, and blockbuster versus Netflix and so forth, rarely do incumbent organizations survive this transition. It normally is new entrants.

Brett King (51:06):

And the same is happening in banking. We can see today that the world's number one bank account is a mobile wallet. It's not a debit card issued from a bank branch. That's already happened. But the banks still think like, "Well, we've got all this money, we're still making all this profit, so we must be okay."

Jim Marous (51:23):

We must be doing it right.

Brett King (51:23):

Right. But in many ways, the pendulum has already shifted.

Jim Marous (51:28):

Brett, thank you as always. It's been a while since we've been on this show together. I really glad to have you on the show and keep up to date on what you're doing. Safe travels and have good holidays as they're coming up.

Brett King (51:40):

Thank you, brother.

Jim Marous (51:41):

Thanks for listening to Banking Transformed, the top podcast in retail banking and the winner of three international awards for podcast excellence. We appreciate the support we received to make this endeavor a success.

Jim Marous (51:53):

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Jim Marous (51:59):

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

Jim Marous (52:06):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios; and video producer, Will Pritts.

Jim Marous (52:17):

If you have not already done so, please remember to subscribe to Banking Transformed on both your favorite podcast app and on the YouTube channel for more thought-provoking discussions on the intersection of finance, technology, and leadership.

Jim Marous (52:32):

Until next time, remember, keep innovating and transforming.

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