Is Banking Headed for a “Dumb Pipe”, Telco-like Future?

Ilya Dubinsky, head of Credorax’s CTO office, recently attended Money2020 Europe.  He took part in a panel on the Future of Banking that was streamed live, with over 500 people attending globally. Check out the webinar here.

We caught up with Ilya afterwards, to find out more about his insights on the trends transforming banking and e-commerce.

What does the future look like for banks?

They may be going the way of telcos, which became little more than dumb pipes, offering communications and connectivity as a commodity. Something similar is beginning to happen with banks, especially in Europe, as a result of PSD2 and the Current Account Switch service.

The big hit for telcos was number portability – this made it easy for people to switch carriers. While it had been difficult to change bank accounts in many jurisdictions, in the UK they mandated a process that makes it much easier, almost completely transparent to the consumer.

So, people there are now switching since it is so easy.  In one of the recent Money2020 Europe sessions, they related that someone switched because the bank application was more user-friendly.  When the only thing that matters is the quality of Web experience, consumers have zero loyalty.  There is very little differentiation, like in the telco world.

Is customer experience becoming more important?

Most traditional banks don’t deliver a great experience.  There’s a lot that can be improved.  Eventually, the market will converge around a standard experience and have very little else to offer. Going back to the telco example, it’s like the smartphone market that supports two similar major competitors. All the rest are non-existent.

Ralph Hamers, CEO of ING Group said in his keynote at Money2020 that a consumer only needs five simple products from a bank: a current account, savings account, and investment, loan and mortgage accounts. The only differentiator is customer experience through application channels. This means dumb pipe.

Banks can be more aggressive, lure customers from competitors, whether by offering smaller fees or better deals on individual products. If they can access your account (allowed under PSD2) and see your balance history, banks can offer you better deposit or mortgage terms.  It’s no longer based on a single number like credit rating.  They can offer consumer loans based on income and recent expenses and personalize other offers.

It opens a lot of possibilities to compete for consumers. If you are already winning based on experience, and everyone converges to something similar, there isn’t much left to offer.

It’s also like airlines or cable TV.  There’s little loyalty.  They’re services that you just expect to work in as seamless and frictionless way possible.

It sounds like a grim future for banking

Yes and no. There are huge unbanked populations everywhere, even in mature markets that present opportunities for growth.  If you stay ahead of the trends and become a player, you can increase market share.  There likely will be consolidation as banks in traditional markets get swallowed by bigger players.

But it is a good time to be a fintech pro.

What about the role of payments in banking?

According to the Edgar, Dunn Advanced Payment Report, 81% of merchants specified frictionless payment acceptance as strategically important for customer experience.

How about card schemes?

Instant interbank payments, at least for CNP transactions, can and probably will try to challenge card schemes.

Just look at the Netherlands. They have a local method called iDEAL for direct interbank payments.  It is the 800-pound gorilla in that market. 70-90% of transactions there go through iDEAL.  You just need to authenticate your bank account and can then perform a direct bank transfer.

Dutch banks had developed a method which enjoys good consumer uptake. The card payments are yet to displace it as the most visible e-payment method, even though card market share is growing. Until consumer habits change, an online merchant whose customers strongly prefer iDEAL will keep offering it as the number one choice for online payments. And settlements are just as fast, or faster.

So, banks can step into card scheme territory. But card schemes innovate at a much faster pace, so any major shift, if it happens, will take time, and in the meantime we can watch how the Dutch market evolves, to get a feel of what can happen elsewhere.

You said AI is like Skynet from the Terminator movie franchise

That was a bit of a joke. In those movies Skynet was a hostile AI algorithm that made inscrutable decisions.

Similarly, today an algorithm could decide that people whose last names begin with D are a credit risk. Or with last names that end with a “sky” are likely immigrants with no wealthy parents, and thus need more capital.

If the system is wrong, no one can explain why or fix it.  They’re black boxes. Check out the frustrating experience of Andy Maguire of HSBC.  Amazon kept recommending things he didn’t need, because it was basing decisions on his wife’s and daughter’s purchases.

That’s not such a dramatic example.  But if mortgage rates are high because the machine senses a high risk applicant, and it’s unexplainable, that can have a much more profound effect in life.

That is why AI will not have as much impact in front-end areas as people might think.

Thanks Ilya!

This concludes our interview with Ilya Dubinsky.

 

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About Ilya Dubinsky

Ilya Dubinsky is Head of CTO Office for Credorax (www.credorax.com). He has over 15 years of experience and in-depth knowledge in a wide range of technologies across several industries, in both start-ups and large enterprises. In his current position, he defines the technology roadmap for Credorax, manages its IP portfolio and teaches students as part of an academic cooperation program. Prior to assuming this role, Ilya had defined, procured, implemented and launched Credorax's core acquiring platform.