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The Element Podcast - The Fintech Imperative, Ep.2

Digital banking is transforming financial services. On this episode, we explore the explosive growth of mobile payments, the coming battle for the smart wallet and how startups and big banks can tame the influx of new data to win over customers – and keep them.

Host: Peggy Smedley, Content Influencer, Podcaster, President/Editorial Director Specialty Publishing Media

Interviewees: 
Brett Kings, Breaking banks podcast co-founder and Moven app founder
Delvon Jones, Director and Chief Technologist Financial Services, HPE

 

 

Also available on:   Spotify    /   Apple Podcasts    /   Other podcast apps  

Featured content:  Learn how to accelerate transformation for the digital

Transcript

 

Peggy Smedley:

Welcome to the Element Podcast from HPE. I'm your host, Peggy Smedley. This season, we're examining the digital agendas that are rapidly transforming business and society creating a host of opportunities and challenges.

In today's episode, we're looking at FinTech. During the last year, the shift to digital banking has dramatically accelerated. The pandemic has prompted consumers to embrace digital wallets, automated bill paying and other online tools.

During the last year, the shift to digital banking has dramatically accelerated. The pandemic prompted consumers to embrace digital wallets, automated bill paying and other online tools. But what does this mean...

But what does this mean for companies and financial services? How does the influx of new customers and a lot of new data create an opportunity to improve personalization speed and ultimately customer loyaltyand what cyber risks are there to mitigate.

Joining me to delve into all of this is Brett King, host of that popular podcast, Breaking Banks and co-founder and CEO of Moven, a mobile banking startup and Delvon Jones, Director and Chief Technologist of the Financial Services industry at HPE. Brett and Delvon. Welcome to the show. 

Brett:

Thanks very much Peggy.

Delvon:

Thank you, Peggy. Glad to be here.

Peggy:

So before we get into the tremendous growth of digital and its implications, let's define what we mean by FinTech today. After all, at one point, the credit card was considered FinTech. Brett, what is FinTech, I guess I'd like to ask you to start us off. Why really matter? 

Brett:

Well, you know, there's still debate over actually the term FinTech and, um, you know, what, what it means. but the more modern, um, you know, version of this is essentially a startup that was created in the digital age or the internet age that is focused on disrupting financial services. That's a, the way most of the, um, the commentators will focus on FinTech today as a definition.

Peggy:

So that's kind of interesting because one of the most surprising, I think recent stories in this space had to be Robinhood, Reddit and GameStop saga. It felt like a wake-up call for Wall Street. Delvon you've worked for several longstanding global financial firms like Goldman Sachs. I would imagine that this has had some impact or at least in FinTech for these large institutions.

Delvon:

I think the Robin hood story is a perfect example of, of the challenges that a lot of the larger established companies face today. The barrier of entry is so low things to Cloud service providers, such as Amazon, Facebook, and Google. And, you know, it's very easy for a startup to get in there and, um, and really chop things up.

There is a huge fight for the customer experience right now. And I think that's impacting all of the large financials, They're kind of working together on one project. And then the next moment you’re competitors.

Peggy:

Do you think we need to dive into digital banking and the changes during this past year? what does this change look like?

Delvon:

The market forecast for digital payments is somewhere north of $12 trillion by 2025. And I think when you look at what's happening globally, uh, if you, if you take tap to pay as an example, that's the preferred method of payments in 24 countries. you have these major players out there. You have the Squares, the Stripes, the WeChats, uh, WeChat pays an example. So digital payment, E-wallets is the preferred method that that is the trend and those numbers are growing.

I'll give you another example after pay, you know, your four to six pay installments, that's preferred by over 60% of Millennials and about, you know, well over half from Gen Z. So that's definitely the direction that we need to embrace that.

Peggy:

So I saw a report that 71% of bank leaders expect to increase spending on cyber security and Cloud computing, storage and data privacy, and to keep any of those evil doers data breaches at bay. Brett, I guess I'm kind of curious from your perspective, how is digital banking different across globe?

Brett:

Last year in 2020, uh, China, Chinese mobile payments, wallets, Alipay, and Tencent, WeChat Pay topped $52 trillion in mobile payments.

And so that is more than twice the total use of plastic cards globally. Um, so when you look at what's happening in China, facial recognition, uh, identity infrastructure, um, explosion, you know, the, the, the largest FinTech in the world is Ant group, which is the parent company of Alipay. Um, prior to its restructuring at the, uh, at the direction of the central bank and the Chinese, uh, uh, government, uh, preparing for their IPO and was going to be valued at someone in somewhere in excess of $300 billion, which would make them the third or fourth largest financial institution in the world.

And so when we look at FinTech globally, um, from a US lens, we really get a very skewed view. Whereas we look at it from China, we get a very, very different view. We get a view where 75% of the population on a daily basis uses FinTech as their primary, um, sort of day-to-day banking tool. Um, and we see a massive shift that that's created in terms of the makeup of players in the financial services ecosystem in China.

Now that's affected Hong Kong, it's affected Singapore, um, it's affected the Asian market more broadly. And so you see a lot of innovation coming out,. And one other great center of FinTech innovation globally, particularly when it comes to challenge banks has been the UK. Um, and so there you have real market shifts going on. You have the challenge of banks now, um, you know, catering for catering for about 18% market share in the UK, uh, banking sector. These are all things that haven't yet happened in the United States, but will happen from a behavioral perspective..

Peggy:

So when you think about that, r- r- is, are, is that surprising?

Brett:

Am I surprised that China's seven to 10 years ahead of the US when it comes to something like mobile payments? Um, Oh, I think it surprises many Americans, (laughs) the innovation that's happening in financial services happens as a result of two primary factors. One is obviously the quality of the startups you have, the amount of funding that you have, all of those things, whether you S uh, you know, frankly has some advantages with Silicon Valley and so forth.

But it's also very dependent on regulatory, um, uh, involvement and, and, and where the regulators see that, yeah, this is the future. We need to create this competitive landscape. We need to, you know, create these new categories of banking and support that growth.

That's the difference really between the US market eightwhen it comes to mobile payments, um, you know, versus China, where the regulators sort of let it go. In, in the US you have a lot of, um, you know, sort of investments that have been made in, you know, check, uh, usage in plastic card usage in these ecosystems that, um, uh, are slower to evolve than say in China where you haven't had, you didn't have those mechanisms really. You just had cash to displace. So some of it's behavioral, but also in the US the regulation is not as friendly to FinTechs as elsewhere in the world, namely UK and across Asia.

Peggy:

So Delvon,  What kind of data is being captured?

Delvon:

I'll give you a story to kind of illustrate what's going on in a lot across a lot of the financials that I'm in contact with, but you can imagine your, your mobile device and imagine you are on Wednesdays, you'd like to go to, uh, Cold Stone Creamery for ice cream, and you like to take your, your fiance with you as well.

I mean, if you have what we refer to as edge device, edge processing of this data, analytic data, if I'm a bank, and I see that your transaction history shows up consistently on a Wednesday at this establishment, and I know maybe your fiance also has that, that banking app. And I can see that she's in close proximity, and then I can zoom out and I can see my customer install base my clients, um, their spending habits during the time seasonal spending habits, uh, you know, um, as well, geographical behavior that can compare and contrast that globally, you can do things like, uh, you, you can enhance the user experience.

You can process that data and say, "Hey, maybe we should have a as a bank, I want to have a relationship with Cold Stone Creamery. Maybe I want to offer discounts, uh, conveniently Wednesday morning, uh, in anticipation of this, of this habit or result." That's where we're going in terms of the, these, the banks, the FinTechs, whoever in this space finds a way to monetize that data, to enhance the user experience, they're going to be way out ahead of everyone else.

Peggy:

Delvon, then what you've just described then is a more socially engaged community that if you can offer banks, offer more services for things like reward redemption or online bill payments,

Delvon:

Absolutely. It's, it's about making it more convenient for that end user. The user experience is everything.  the younger generations that are active now, um, they don't have the same loyalty. if they don't have a good experience, they will leave.

That is the fight that's happening right now. And we've seen a lot of, uh, consolidation with respect to the payments industry. You've seen what happened, uh, you know, Fiserv and First Data, FIS and Worldpay, uh, Global Payments and TSYS, PayPal, uh, bought honey for $4 billion. Right? And then we see what's going on over in countries like India. I think back in, um, I think even back in '19, 2019, it was the first time mobile payments exceeded, uh, ATM withdrawals in India,

Peggy:

More digital banking means more risks and cybersecurity. So Brett, are we then saying companies and consumers are going to experience an increase in cyber crime activity, you know, because I think financial institutions have to be prepared for that?

Brett

Yes and no. from the perspective of day-to-day banking, working through an app versus going to a bank branch, um, there's no real difference in terms of, uh, base security. 

But part of the problem we have is that the identity infrastructure we use for the banking system is based on things like your mother's maiden name, your date of birth, and address your social security number. Those data points are no longer securable.

And so we need really that, uh, evolution in identity frameworks to ensure a security, think about how many passwords and how many, you know, usernames you have to remember for all these different services. And, um, you know, you see all these password breaches, uh, occurring, uh, regularly. And so the easiest way to fix that is using biometric identity.

And so we've seen, for example, um, you know, when I talked about Alipay and Tencent, WeChat Pay, um, you know, in China, Alipay fraud rates are fractional compared to the fraud rates. We see generally in the use of plastic cards, for example, in the United States or Europe. Um, and so that's because of the facial recognition technology that's built into that ecosystem. Now we have concerns from a civil rights perspective about facial recognition in the West, but the reality is biometrics is the only way we get to have safe, um, you know, services and commerce in the future.

The second piece of this, and I'm sure Delvon has some comments on this as well, is that it's, it's also an infrastructure issue in respect to, you know, the, the tech stack that you're using.

A lot of the banks have very old, uh, you know, mainframe architectures and so forth, not a really clean fit to the 21st century digital world when it comes to financial services. And this is where the new players, um, you know, the, the FinTechs and, you know, the tech giants who are playing in this space, they of course have much more robust, much newer technology architectures that are sort of Cloud native and, and work very well in, in the, in the internet and digital sphere.

Delvon:

Yeah. I was just going to just piggyback on that. I think from an AI perspective, you see a lot of emphasis on ethical AI and a lot of work's being done to drive out, uh, innate bias from a lot of the algorithms that we use. And I think the closer we move, uh, to those goals as a society, I think the, the fear factor of some of these, uh, you know, facial recognition type technologies, if we, if we are fairly confident that it will be used in an ethical manner, I think a lot of the fear will subside on that.

And from an infrastructure perspective, you know, yes, this is you have customers who are caught with this aging infrastructure. And then when they move on to move to a more nimble infrastructure, um, they run into a couple of problems.

One, the amount of data that they've collected, lot of times can't easily be moved, uh, to the Cloud. So they need to have an on-prem, uh, experience that matches, uh, these Cloud ecosystems, right? These Cloud operating models will, uh, basically dominate, um, you know, technology, you know, moving into the next five, 10 years from now. So, but at the same time, they have to kind of build what's new and bridge the gap from what's old and then retire. And then that gets us into a lot of other branches, sustainability conversations, where, you know, companies such as my company will try to take those assets and, you know, recycle them in a way that's, uh, eco-friendly and things of that nature. But yeah, there, there are a lot of moving parts with, uh, with this.

Peggy:

Delvon does this also have to be that we have to address the idea of the demographics of banking, that there are multiple generations in the workforce right now. And do companies have to address or banking have to address these different capabilities,?

Delvon:

Absolutely. I, I, they say they're all, they're always around four generations alive at any one time, and you always have this, this push pull effect where, uh, sometimes the older generation is kind of comfortable with the progress that's been made and the younger generation is unhappy always like to bring up my, my, uh, my three-year-old granddaughter and, you know, she's on YouTube kids and, and, and, and there's a buffer for even one second. She's just flipping out. It's unacceptable to her.

Brett:

So true.

Delvon:

And the same goes for the digital payments. They don't want to touch anything, Tap to Pay, um, you know, Zelle, uh, you know, they, they don't, they don't want to transact the same way, uh, that, you know, they're quite frankly, their parents and grandparents are transacting. They want it instant. So I think technology will have to evolve to keep up with the pace and the expectations of the younger generation. I think that's a great thing.

Peggy:

And then if we take this even a step further, Brett, how does this impact where we have this digital shift and the divide between those companies that get digital early adopters from banks to startups, to those that don't?

Brett:

W- well, I, you can see the results, uh, through 2020, where you saw this rapid digitization as a result of Corona virus, um, you know, we, we seen a shift towards, um, the, the big brands in the space, the big banks who have done a lot of work on digitization, because they've got the budgets, frankly.

And, uh, secondly, um, you know, from the challengers who are the new entrants in the market who have a high level of digital competency, and that leaves those that are slower to respond. And so if you're looking at the United States, um, you know, like going back prior to the global financial crisis, um, about 25% of all deposits held in banks were held by the top banks in the US. Today that's closer to 70%.

And so you could argue that's largely because of digital competency that, that shift in consumer behaviors occurred. It's certainly true of what we're seeing in other parts of the world., the real challenge then becomes, um, you know, uh, is that creating more opportunities, more inclusiveness as an example for access to financial services, or is that accentuating the problem we already have? Um, and that's, that's definitely an issue, not just in the United States where traditionally about 20% of households are underbanked, but look at these emerging economies, look at countries like Indonesia, or, you know, look on the African continent. Digital inclusion, um, is going to be absolutely critical to ensure that financial inclusion is possible.

But having said that since, uh, 2000, we brought almost2 billion people into the banking system for the first time because of smartphones and mobile phone technology. And so, and, and that's something that bank branches haven't been able to do in the last 150 years in modern society. Most definitely it is a, uh, sort of a once in a lifetime shift in terms of the role of financial services is going to play in society and how that's organized. Um, so in that respect, I find it tremendously exciting.

Peggy:

We started this conversation talking about how you defined FinTech. So now looking ahead and I guess Delvon, I would like to kind of have you con kind of what constitutes, I think FinTech looking five, maybe 10 years out?

Delvon:

Yeah, absolutely. And, and that, uh, I'd like to, uh, piggyback off a little bit of what Brett resist talking about corona virus's impact, because I think it determines it's going to have an impact on what happens in the next five, 10 years. So, you know, the companies that were a little behind in a curve, I mean, they had these transformational projects initiatives, but they were slow to implement. And then they were forced to rapidly adapt, uh, during COVID. Those companies lost ground.

And the future is sort of up for grabs for some of these companies, will they be able to close that gap or where the, the, the, their competitors make up so much, uh, you know, uh, progress that they will go under and they won't catch up. That's a very real possibility as we move forward. What we know is that businesses are going to rely more and more, more and more on these digital B2B payments.

So you're going to see digital payments can totally consume the back end in terms of how, you know, businesses and, uh, conduct payments, you know, you have, cross-border, e-commerce payments, that's going to, you know, pick up as well. So you're going to see the back end digitize in terms of payments.

Um, there's initiatives, such as blockchain technologies that, you know, we're still, I would say at the fringes of exploring, but I, I think you're going to get to a point very quickly where everything was transacted digitally. Um, you're not gonna, you know, right now, if I have to carry any bit of cash on me, um, it's, it's only as a sort of a reluctant fail back. I don't expect to use it ever.

And I think as we catch up with the rest of the world, meaning the US catches up with the rest of the world. I think you're just going to see that it's exploding for the soul. Uh, that's it, I mean, you know, E-Wallet it's going forward B2B, B2C payments, um, you know, G you know, most of the companies are going to invoice electronically. So, you know, digital payments is here not only here to stay, but it's going to consume everything in my opinion.

Brett:

I agree. Um, let me jump in, um, you know, I think, uh, can you imagine trying, um, train Delvon's a, three-year old granddaughter, how to write a check when she gets older?

Delvon:

Right.

Brett:

It's the definition of absurdity, right? Um, and so if you look at those sort of behaviors are, or emerging, you know, we, we already see a sort of consumer digital driven trend, but let's just hone in on the, on the wallet thing. So we already see that in, um, places like India with PTM in China with, uh, um, you know, Alipay and Tencent, WeChat Pay, on the African continent with, um, M-Pesa, MTN Money and so forth, uh, in, um, you know, Philippines with G-Cash, you know, even here in the US with Google Pay and Apple Pay, the use of mobile wallets is exploding around the world.

So the big thing over the next five years is going to be sort of this battle for the smart wallet, the battle for the smart bank account. And so what Delvon was describing earlier about that sort of contextualized station of banking, knowing where you are and what you're doing, which merchants you're interacting with and enhancing, you know, your access to financial services, the buy now pay later stuff, you know, being able to ma you know, make a decision without having to go and apply for a credit card or a line of credit, and just having it embedded in the purchase experience. They're the very early elements of what I sort of call the smart bank account was is that the bank account you choose in the future, you will choose based on the way it molds itself to your life using tools like artificial intelligence and behavioral psychology, and those sort of things built into that. Not because of bank has branches close to your work or your home, or that they have a better ATM network. Those sorts of things will sort of largely being meaningless moving forward.

And so that also fundamentally changes the economics of the business, your ability, right. To acquire customers at scale becomes a real competitive, competitive edge, um, and you know, the, the connections you have within that broader ecosystem, um, the relationships you have with the tech giants that use these emerging technologies, like Smart glasses and, uh, you know, uh, AI based, um, you know, uh, the smart speakers that we have, uh, and, you know, th- those technologies are going to drive the way we do our banking and financial services in the future.

We're going through this period of significant shift. The broad benefits to consumers will be there, but it's going to be extremely disruptive to the banking and financial services landscape overall.

Peggy:

Wow. Let's end there. I have to admit Delvon. I'm still trying to visualize your three-year-old granddaughter, writing a check. (laughing). That's all I have to say, Brett, Delvon, thanks for such an amazing conversation today. You gave us a terrific sense of the opportunities for big banks, FinTech, startups, and companies using their services. So thanks for listening everyone. I'm Peggy Smedley, your host for the season of the elements podcast from HPE. Be sure to subscribe to the show. So you don't miss our next episodes coming up this season.

 


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Editor-in-chief for the HPE Advancing Life & Work blog.