I have seen several banks note, and particularly two in the past week, that shows the shift of thinking as we move to the hybrid world of technology and finance. Most talk about Fintech start-ups but these two show a different perspective.
First, Derek White of Barclays talks a lot with Business Insider about blockchain and innovation. A few choice words:
“As a heritage organisation we can either embrace disruption or be disrupted. We’ve chosen to embrace disruption … We fundamentally believe that the world is shifting from closed to open — closed architecture to open architecture, everything moving to the cloud; closed networks to open networks; closed systems to open systems.”
On the blockchain, Derek says:
“We looked at how many experiments we wanted to do internally with the blockchain. The first wave led to 22 experiments, we've now got over 45 experiments our businesses want to do … this is everything from identity, to corporate payment solutions, to treasury, to supply chain, to core payments.”
But the quote that resonates most is this one:
“We're increasingly becoming a technology financial services company, not a bank with a technology division.”
Not a bank with a technology division, but a technology-based financial firm.
This reminded me of the quotation from Francisco Gonzalez, Chairman and CEO of BBVA, which I mentioned the other day: “BBVA will be a software company in the future.”
Or the discussion with Oliver Bussmann, Global CIO of UBS, who says: “The whole advisory business is in the middle of a big change. How you provide this automated investment advice to a customer is the key question that will involve the whole industry.”
As a result, the bank has opened several research labs to encourage disruption: “What we did was to come up with an ecosystem approach that established not only internal innovation teams and digital teams, but also embraced start-up incubators.”
Interestingly, Mr. Gonzalez and Mr. Bussmann both come from the technology industry, where Francisco Gonzalez began as a computer programmer and Oliver Bussmann has moved from IBM to Deutsche Bank to Allianz to SAP to UBS.
These guys get it. In fact, it amazes me how long it’s taken these banks to get it though. Thirty-five years ago John Reed, the then CEO and Chairman of Citibank, said: “banking is just bits and bytes”. We’ve known this a long time.
Most bank CEOs seem more concerned with risk, regulations, compliance and the balance sheet, than technology. A good example is Deutsche Bank:
Deutsche Bank’s return on equity has slumped to a pathetic 3.1% recently … Deutsche Bank failed its U.S. stress test by a very wide margin … Deutsche Bank needs to show it can be much safer, or much more profitable. If it stays in investment banking, accomplishing either of those tasks will be hard to do.
So, the first thing is that the bank needs to be in good shape, I admit it. For banks like Deutsche, Lloyds and RBS, it means that technology considerations may be priority, but so are many other things. After all, although Derek says that Barclays is a technology company, it’s primarily still a bank.
Antony Jenkins, the chief executive of Barclays, has been fired after falling out with the board over the bank's cost cutting and profitability. Board members are believed to have wanted bigger cost cuts and more focus on the investment bank's performance.
And new Chairman (and effectively acting CEO) John McFarlane laid out five priorities for the bank going forward and none of those mentioned were technology-related (they were legacy business issues [settlements for bad business practices, fine, etc.], dumping non-core businesses, restructuring the investment bank, increasing shareholder returns and improving management structures].
So it’s easy to delude yourselves that technology in finance is the #1 priority for a bank these days but, if technology is not up there as priority with those other things, then that is a failure too. The rise of Fintech must be high on a bank CEO’s agenda. After all, take note of Jamie Dimon’s comment: “Silicon Valley is coming”.
A number of other senior bankers are making similar comments and then there are all the start-up banks who make comments like: “We are a FinTech with a banking licence”, Frank Schwab, CEO of FidorTecS AG.
This is the integration of finance and technology and is where incumbent banks are evolving and start-up banks are targeting. Most of the former are awake to the challenge, but you can tell if they’re not. From PwC’s annual CEO Survey 2015:
David I. McKay, President and Chief Executive Officer of RBC, speaks for his peers on the emerging tensions as industry boundaries transform. “I hear a number of CEOs talk about, well, the regulatory barriers that we have [that] are so high. (Just wait till the Googles of the world and the Apples have to comply as a bank…)”.
But Mr. McKay warns against waiting for that day to come. “Their [technology competitors] goal is not to become a bank and walk in our shoes. Their goal is to take our shoes and throw them out and give a new set of shoes to the customer. So I think regulatory barriers buy us time, but we can’t hide behind them because our competitors are trying to take them down or trying to build a whole new wall over here. So I think those are two critical things we have to think about as bank CEOs and how to evolve our franchise.”