For the first time in history every industry faces a very similar problem: the massive democratization of data, its use and the power it has provided the consumer. From healthcare to retail to banking, new players are emerging that are more agile than ever before to serve a client base that is demanding change and experience.
FEI Daily spoke with Simon Moss, managing director in the Financial Services Advisory practice at Grant Thornton, about fintech disruption, where to begin with blockchain, the Paris Agreement, hacktivism and more.
FEI Daily: What can financial executives learn from how banks are handling an increasingly competitive environment?
Simon Moss: We're seeing an enormous demographic change. The iPhone came out in 2007, but it has transformed the way that we deal with the retail supply chain, the way we deal with our banks, and the way we deal with each other. That has essentially been a catalyst for completely new operating models, but it's also given way to a very different demographic demand.
I think that we have created a client base who expects much faster satisfaction and are less concerned with regulatory and legal risk. If that weren't true we wouldn't be using things like Venmo, Ledge and other new payment systems.
And we're seeing a lot more consolidation into a single asset. In other words: Apple Pay, Google Wallet, and Samsung Pay, at the client interaction level, are transforming the expectations the customer has of the institution and the institution’s speed in developing new ideas, new products and new solutions.
Traditional banks have huge amounts of legacy technology and legacy infrastructure. But the new fintech players do not. So they're much more agile and able to focus on the user experience. It looks like their strategy is to make the traditional banks just a bunch of pipes.
I believe that the larger banks are beginning to get a lot more focused on what their client base truly needs. Particularly the small to medium-size banks who may be dealing with an older demographic who want to walk in and discuss their finances.
I think that's a very solid logic. We are going to bifurcate the client base between the younger and older and the demands that they put on financial institutions. The big question is, “Will Millennials want traditional banking services as they reach their 30s and have kids?” You add to that the rather peculiar regulatory market at the moment in which the new fintechs seem to be less regulated than the larger banks. But we’re beginning to see some of that change as well. The regulators are now getting, for the first time, a true interest in innovation and technology. The OCC and CFTC have both set up technology innovations labs and the Combating Money Laundering, Terrorist Financing and Counterfeiting Act of 2017 is looking at a tighter definition of both “financial transaction” and “financial institution” including prepaid, digital currencies and digital exchanges.
To sum it up, the market is in flux. The industry is not going through an evolution, but a revolution, in terms of expectations, speed, and satisfying customer expectations. I think we're in an incredibly disruptive time.
FEI Daily: Fintech is this buzzword we hear so often. When it comes to the banks, are their back-end systems behind? I’ve heard they’re at least ten years behind the front-end systems.
Moss: Ten years old would be modern! In the U.S. the banks are still using payment systems that date back to the 1970s. Last year, corporations wrote more checks than they ever have, which, coming from the UK where the check is nonexistent, is profound.
The user experience is where a lot of innovation is coming in, particularly in payments and payment derivatives, like foreign exchange, for example. But from a pure execution, middle and back office perspective, the technology is a long, long way behind.
However, there are three really interesting innovations we’re seeing. The caveat here is that there is true promise in these technologies. Not just rebranded trends from the past, but real, revolutionary innovation that is being fed into the market. And we have yet to validate it and we should not rush in to these decisions. This is not another Y2K. This is not another U.S. Patriot Act. Nor another launch of CRM or “Big Data”. This is not another gold rush. Rather there is a set of transformational technologies that offer huge promise, but it's going to take a bit of time to really understand, validate, and execute against them because of the magnitude of the change that they are going to bring.
The first is artificial intelligence. I draw your attention to a project that JP Morgan did called COIN, which was Contract Intelligence, in which they put a natural language processing AI engine on top of the way legal contracts were analyzed, investigated, and cleared, and they saved hundreds of thousands of man hours of expensive legal work within months of deployment.
Add artificial intelligence to robotics, the second trend, and you can begin to see that middle and back office functionality—repeatable projects, or repeatable functions, things like money laundering investigation, clearing of checks, analyzing letters of credit, looking at legal contracts, onboarding clients, reviewing the validity of transaction execution and payments. Reasonably well-documented, clearly understood standard operating procedures, but largely repetitive. Here, the combination of AI and robotics – or “cognitive automation” - is going to have a really big impact.. No doubt about it.
Now, what happens? I think step number one is we are going to see a lot more offshore teams being replaced by onshore AI and robotic solutions. The combination of growing offshore cost parity and the current administration’s focus on US jobs is forcing a review of the offshore strategy of the last decade. This is where AI and robotics is going to be fascinatingly exciting— increase consistency and performance, and you can transform your organizational head count overnight. So I think AI and robotics in the middle and back office operations units are going to have a huge impact and offer a very compelling alternative to current offshore operations models.
The third is blockchain, and I'll break it into two parts. First of all, blockchain itself. And then secondly, the cryptocurrencies.
Blockchain can connect in a common identifier the various representations of a supply chain or of a person. So when we're looking at blockchain with our clients, it is transformational, but you've got start somewhere, and probably the best place to start is looking for a single representation of the customer. Because Simon Moss is Simon Moss in this system, it's Moss comma Simon in this system, it's S.B. Moss in this system, it's Simon Byford Moss in another. And frankly, I have no idea whether he's the same guy.
Blockchain enables me to say, "Okay, Simon Moss is S.B. Moss, S. Moss, Simon Byford Moss, etc.” In that way, it's very similar to a manufacturing supply chain connecting multiple parts into a common sequence, so the whole is the sum of the parts, or a “chain”. I think blockchain is going to add some really significant opportunities to firms that have very heterogeneous operating models and data topographies. But nobody is going to transform their business on blockchain quite yet. They need to find a way to validate whether it will work. And we believe, and I personally believe, that the first step for firms will be figuring out how to understand their customer. For example, Legal Entity Indentifier (LEI) is an interesting starting point. How do we do an enterprise client view? How do we do a single identifier so that I don't have to homogenize and go through a huge data integration project totaling in the hundreds of millions of dollars just to understand the relationship with Simon Moss. Add to this biometric information that is also seeing an explosion and innovation, and we begin to see some really interesting business models.
On the other side, blockchain came from Bitcoin. I think that cryptocurrencies will eventually play a significant role, but they are going to be on the periphery for a long time because we still don't understand their risk. We are still concerned, at least optically, about their security. I think that they are going to remain fairly on the periphery of the banking industry and of the retail industry.
But if we can start to clean up the cyber security risks and build systemic protections between institutions, and the regulators can begin to say, "We need to look at the system as well as the participants in the system," then I think we can build a more robust system that can normalize against the single units of currency or cryptocurrency. We have a ways to go yet.
FEI Daily: Is there a cultural change happening alongside the technological innovations?
Moss: Most definitely. I am still amazed that the end of this month marks the 10-year anniversary of the launch of the first iPhone. Only 10 years! Not only have we seen a cultural change in buyers and customers, but also within many firms themselves. Institutions are beginning to understand that they need a West Coast development culture. Fail fast, succeed fast, experiment, innovate, try things, be agile. The days of the quarter billion dollar project are gone. Agile development, small teams, and sand boxing experimentation is really the way that many firms are going. And that's going to have a transformational impact on the size of the technology organizations within these institutions. Open source will continue to be an area of constant innovation and breakthroughs, and in this space we will begin to see the first source code created by AI engines available.
Read Part 2 here.