It’s easy to see why banks and fund managers alike are in love with automation – in terms of management, scalability and cost, machines are a lot easier to lover than people.
Yes, it’s true, machines lack flexibility and the warmth of human interaction and yes, they outsource the problem-solving to the customer but they have been something of a revolution when it comes to profitability.
In December in Germany and Holland the outperformer in the lending sector was ING Da – a business which has no branches and only online services – leading ING – the big Dutch lender to declare that the branch is dead.
The driver behind this declaration was the hidden economic data that the Germans, after being a nation of home renters are, in a continuing low inflation rate environment, starting to become a nation of home buyers and few of the German banks and their hundreds of small credit providers are good at processing mortgages.
However, the very interesting data on the rise of the machines hasn’t come from banking research or from the usual consultancy sources – instead it’s leaked out of the reports from Davos – the annual Swiss think tank attended by academics, Government ministers and interestingly this time by the Chinese premier Xi Jinping, Joe Biden from America and we are reliably informed, Westpac’s Brian Hartzer.
Technically, the information wasn’t a leak – it was a presentation from Eric Jing – who runs the financial services arm of Alibaba on what they have been able to achieve; a presentation which as far as we can tell went largely unreported.
I’ve written about Alibaba, which is a China’s version of eBay and Ant Financial, its payment platform, before – suggesting that we all keep an eye on it, because this thing could be big.
It’s worth understanding for a second what Google, Facebook and eBay all say about financial services– the theme of the messages coming from these businesses seems to be “yeah sure – we are interested – but who needs the scrutiny and who needs the regulation?”
Alibaba seems to have squashed all those fears and simply launched Ant Financial and built a payments platform and allowed people to make deposits and has entered into the area of lending.
Three years ago when Ant launched and CoreData first wrote about it, we suggested, and I quote from the 2014 article, “that the idea of a method to store money digitally, outside the scrutiny of China’s main banks and potentially the Government would attract millions of customers.”
Well I’m here to somewhat gleefully report that we were right and of course wrong at the same time.
Ant Financial has attracted 500 million customers (they grew by a staggering 100 million customers last year) and in the meantime have hoovered up huge amounts of data about their customers’ saving, spending and browsing habits.
So it’s not just the growth that’s staggering, if the numbers are to be believed – numbers out of China need to be viewed with healthy skepticism – then they are growing faster than everyone else and it’s not just that – it’s the data aggregation that’s going to change the world as Ant Financial powers into lending and starts to offer differential pricing to different risk customers.
But it’s not just differential pricing which is going to change the world, but in the Ant Financial model where there are few humans, more computers and a systemic reliance on big data and machine learning – they are going to be bringing down the cost of all parts of the value chain – by as much as 15% across the board, which will allow them to continue to outcompete the traditional systems.
The other part of the disruption is the adoption of block chain – the accidental success story of and the engine behind the digital currency Bit Coin. While the currency might be a so-so success story – the highly secure, cheap to build and highly scalable platform that it is built on is booming.
Block chain skills appear to be the new black in IT and the European Banks are expected to spend as much as $US100 million this year on block chain development, rising to an estimated $500 million a year by 2019 as the 10 biggest banks in the world look to re-platform their businesses to bring down costs.
So in a lot of ways the future is clear in retail banking – back office skills and operational skills are on the decline, being outsourced by big data and re-platforming, and if the model from China is any hint of the future then all parts of the value chain are under attack.
How quickly it’s going to happen is a challenge for all the banks – re-building requires capital and decisions about where to compete but the future is already clear for ING’s staff in Europe; they announced that their digital decisions were such a success that they will be laying off 12% of their staff in the next three months.