Chris Skinner: On the future of banking

Our CEO, Booshan Rengachari, had the pleasure of speaking with Chris Skinner, one of the most prominent independent commentators on financial markets and best-selling author. 

Some of his books include Digital for Good, which focuses on how technology and finance can work together to address the environmental and social issues we face today, and Doing Digital, which focuses on digital transformation. Chris is also the CEO of Finanser Ltd, a research and media firm focused on fintech, and a Non-executive Director of the fintech consultancy firm 11:FS. Here are some snippets from the interview on the future of banking.

More banks are investing in unbundled variants of Fintechs — for example equipment funding, financial wellness etc. Is this the beginning of the disruption of banking conglomerates?

Banking is being fragmented into processes that are coded into APIs and then put on platforms to link between apps and analytics. The new front/middle/back office is apps and APIs and analytics rather than branches, infrastructure, and head office. However, this doesn't mean banks are going to disappear — because you can only deliver banking services if you have a banking license. The importance of that, which a lot of people don't understand, is that the link between government, economy, and society is based upon the trust in having a banking license to be stable and secure; that's the piece which is the most important part for delivering the banking service. What banks need to learn is they don't need to develop their own apps, APIs, and analytics — they can get them from third parties — but what they have to do is the due diligence with those third parties to bring those services to their customers. That to me is all about curation; curating the networks of apps, APIs, and analytics is the bank's fiduciary responsibility.

I think what banks are going to be doing is selecting a number of providers who give the best customer experience based around the apps, APIs, and analytics. They will provide the front-end management and due diligence as well as providing some of those things themselves. It's not outsourcing, it's basically saying what things do we do well and what additional services do we want to do for our customer. The customer might select to work with non-banks but then they take on that risk which is illustrated quite well with the crypto crash. Anybody can get hacked in the crypto world but you don't have that in the banking world because of the licensing and regulation and structure. The issue for banks is they think they must do everything themselves, and what I'm saying is that they need to start looking at best-in-class, third-party services that they can integrate into the customer experience to make that happen.

When Fintechs start growing they look for partners to mitigate the high cost of integration with one provider. Do you agree that it is hard to switch from one provider to another?

Where I'm leaning in terms of this is loosely coupled financial services where the bank chooses providers from a smorgasbord of players that have APIs in the cloud. And they don't integrate with them in such a way that they can't decouple them — the decoupling should be very simple. In the past, you're on a platform which you can't get off unless you do a massive project and redevelop everything; the world of today isn't anything like that. Today they're curating documented APIs, integrating them for their customers, and providing what they do best as their own services. But none of it is tightly coupled — it's loosely coupled and it's cloud-based. 

What do you see as the future of card networks? How do you see that changing in the US market where other payment modalities are slower to take off than the rest of the world?

There are two or three things happening at the moment: every market is moving into real time, every market is moving to open banking and open payments, every market is starting to adopt the mobile phone as the main payment system, every market is moving to QR codes being the main payment mechanism using the smartphone because of the pandemic lockdown. So that trend is inevitable everywhere. The difference is — what state of the market are you in? If you look at India or China, they have leapfrogged Europe and America because they're already using QR code payments on smartphones in high volume. In Europe and America this technology is emerging, but you have to think about what the existing infrastructure is and if it works. The USA still uses checks more than any country in the world because they work; having said that, the USA has the highest fraud rates in the world. So basically, the USA is behind not because they're archaic but because there's an attitude of "if it ain't broke, don't fix it." 

The operational cost and technological debt are growing with banks depending on their cores for innovation. What is your advice to banks on this front?

This is the biggest issue that most financial institutions and financial infrastructures have, which is because they have invested very heavily in high-cost infrastructure projects in the 1960s, 70s, 80s. They've embedded their core systems into those projects, and now everybody's saying they need to rip them apart. You can move your business to cloud — if you just move what you've got today to cloud then you're cloud based, not cloud native. And it's the same with digitalization — if you move your systems and add nice front-end looking apps and services, you're a digital immigrant, not a digital native. If you look at organizations who have bought into the FinTech community, the beauty of how they develop those services and apps and APIs and analytics is magnificently, widely different than how it looks when traditional banks add an app or an API to their services. My best illustration is my traditional bank thinks that I'm a great digital bank user because I open the app three times a day. And the only reason I do that is to see my balance and whether my customers have paid my bills, because I'm a small business manager. With my Neo bank, Challenger bank, digital bank, I never open the app, because they just tell me when someone pays so I don't need to open the app to find out. I can give you many other differences but the idea of ripping up and replacing is still something that most banks are resisting.

I tend to describe the most traditional banks as being a bit like a "Bankenstein" because what they've got is a huge amount of dead parts stitched together that are only kept alive by an injection of electricity and dressing them up in nice suits so they look good, but inside the suit is still a whole range of dead parts stitched together.

What is the path for financial institutions to begin to transform their architecture in the new digital ecosystem?

I wrote a whole book about it called Doing Digital after interviewing some of the biggest banks of the world and combining it with my own experiences and observations. There has to be a commitment of leadership to change the organization to be truly digital, and most organizations haven't got that commitment. The reason is, they're run by people at the executive leadership level who do financial regulation and compliance and understand risk and risk management, and they don't have technologists or digital people in that room. They tend to have them reporting to the CFO or the CIO. And quite often CIO reports to the CFO reports to the CEO so it's multi-layered. If I walk into a bank and they say meet our Chief Digital Officer, and I find out he's reporting to the CFO, I immediately know this bank is not doing digital, because they've delegated it. There was a great comment the other day from Marc Andreessen of Andreessen Horowitz. He said, "What you need to do today to be truly digital and get the organization moving in the right direction is find your best technologist and make them the chief executive." I haven't met one bank who's got a chief technologist, or rather a technologist as the chief executive. Many of them have them somewhere in the middle of the organization.

In Doing Digital, which came out in 2020, I spent quite a lot of time doing in-depth interviews with the leadership of JPMorgan Chase, BBVA, ING, DBS and Singapore and China Merchants Bank to find out how they were doing digital. I ended up with over 40 lessons about what you need to be doing and thinking about which fall into four major buckets. The first is, digitalization is not rocket science - you've got to work out what to do by learning from the best. If you go and research the Spotify and the Netflix and the Alibabas of this world, you learn very quickly how they organize and manage and lead and you need to internalize that. That brings me to the second step which is how to implement digitalization within your own organization. Learning what digitalization means from external organizations, which takes typically three years, is followed by implementation which typically takes five years. You can try and speed up the process but the first three years is all about planning. Plan to succeed because if you fail to plan then you plan to fail. You’ve got to put that effort in upfront and get it right, then implement and realize that the implementation has nothing to do with technology or digitalization: it's about cultural and organizational and people change first, and then the technology liberalization second. And then once you've done it, you then have to continuously improve.

Banks are not going to die. They're not going to disappear. What they need to do is work out how to reinvent and redesign and transform and rejuvenate and that's what the focus of my last book was. The reason why I wrote that book, specifically because I understood that banks are not dumb, they're just old. They were born physical. And now they are 100, 200, 300 years old with a lot of dead parts. It's very difficult to reinvent, unless someone can show you how.