The innovation agenda has been top of mind for bankers attending Swift's operations forum in Amsterdam, with delegates sharing their experience of agile development practices, distributed ledger technology and IoT and AI deployment.
Day 2 of Swift's Operations Forum Europe kicked off with a keynote presentation from Peter Hinssen, chairman of Nexxworks. Hinssen looked at the technological and cultural changes happening in society and examined what financial institutions can learn from other industries in terms of how to be ready for the huge changes that are coming our way.
The day after tomorrow
What was science fiction three years ago is today's new normal. Hinssen used driverless cars as an example of this, using a clip showing a driverless Uber. The car still had a person in the driving seat, but they are purely there as a reassurance for passengers. As Hinssen said, they are paid to sit there for 8 hours and do nothing. The first reported crash from a driverless Uber turned out to be when the person in the front seat had incorrectly attempted to take control - the algorithm worked fine, it was human error that caused the accident.
Hinssen said that some companies are either angry or in denial at the disruption that is occurring across industries. The speed of change in the outside world is moving very quickly compared to within traditional industries.
The example of Amazon buying Whole Foods was used. The transaction is reported to have cost Amazon $13.7bn, but the jump in stock price that Amazon received upon the announcement roughly equated to $15bn, while stocks in 'traditional' competitors such as Walmart, Costco and Target fell.
One thing that Hinssen urged the audience to pay attention to is the rise of global network platforms. Network effects can help category kings - market-share leaders in particular business sectors who can end up creating the majority of the market value relative to their competition. Hinssen told the delegates that they need to understand whether they are a platform or a provider. He looked at the telecoms industry as an example of this, where telcos risk becoming simply the plumbing, the 'dumb pipes' of the industry post-disruption. On the other hand, in e-commerce, Amazon is a true category king as it accounts for approximately two-thirds of the e-commerce growth in the US.
Taking in the geographic picture, it is clear that Europe lost the first digital battle, as Asia and North America dominate the successful startup market. But Hinssen noted that the forensic knowledge of transactions that Europe has does give the continent a head start in the war of information. He urged companies to rethink all processes for the digital world, don't simply digitise what you are already doing.
AI, such as DeepStack, have beaten professional poker players thanks to new algorithms and machine learning. Hinssen made the point that we are all training AI every day through the data that we provide it, through apps such as Google Maps, for example. AutoDraw is another example of machine learning, where it recognises what someone is attempting to draw and offers options of a much better drawn version of that item.
Innovation takes many forms
Hinssen went over a few different examples of innovation that financial institutions should bear in mind when thinking what they want to look like in the future. Product innovation can be cool, particularly if you can shift to a new market, but it is vital to ensure you get this right. He cited the brief foray that Colgate made into the beef lasagne market as an example of when a company somewhat misjudged its product innovation.
Service innovation is another consideration - how do you deliver your product, could this be optimised or changed entirely? Netflix began as a postal dvd rental service, which is hard to remember now that it is so synonymous with streaming content and binge watching. More recently, the McDonalds hook up with UberEATS is another example - you are getting exactly the same burgers and fries, but the delivery method is transformed. Then there are model innovations, where an idea or an invention completely changes how we interact with a medium - think what the Kindle did for reading, or iTunes for music.
Taking inspiration from the natural world, Hinssen equated banks to plantations and startups to a rainforest. If you work the plantation and only have to worry about bananas all day, there's not much critical thinking required. The concept of the rainforest may be quite scary - you could die in there, but you may find something that could change the way that you work and be hugely beneficial for you. However, you cannot simply drag something from the rainforest to the plantation and expect it to flourish as the conditions are inhospitable.
In the case of the financial world, these conditions are the culture that exists here, compared to the culture of startups. When you are coming up with something new, he said, you do now know what you are doing. He cited Elon Musk as a great example of this - someone who sets out with an idea, is told it can’t be done and sets out to do it nonetheless. So by nature, innovators, don’t know what they are doing. In the mature banking market, Hinssen suggested that 99% of employees in an organisation know what they are doing, while the 1% - the innovators - do not. The problem he identified is that the 1% generally are not able to simply work on innovation, they have to spend a lot of their time fighting the 99%. Essentially, they are so busy in the office, they don't have time to get any work done. He went on to encourage the 99% to let the 1% do their job, because the future depends on it.
Hinssen said that, compared to other industries, the world of finance is yet to be disrupted. Fintechs alone will not do this. He suggested that PSD2 will show which institutions have digital built in to their DNA, and which simply have it bolted on. Thinking back to the telcos example, he urged banks not to become the dumb pipes of the finance world.
Using a quote from Nelson Mandela ("I never fail. I either win or learn"), Hinssen acknowledged that this was a hell of a motto to live by in a financial institution, and that it takes guts to be able to move to focus beyond today, and even beyond tomorrow's challenges, to be able to focus on what a successful bank looks like the day after tomorrow.
Banking innovation under the microscope
Focussing in on where innovation is happening in the financial services world, and the challenges this runs in to, was the theme for a lively afternoon plenary panel discussion. Mark Buitenhek from ING moderated proceedings, with Mark Hakkenberg from ABN AMRO, Vadim Kotov from CIB Sberbank, and Craig Young from Swift making up the panel.
The delegates were polled to find out which technology they believe will have the most impact on banks in the next five years. A majority of the audience (56%) selected AI, ahead of DLT (24%) and IoT (20%). Hakkenberg said that he would have voted for AI as well. If all banks work with AI, he suggested that the bank with the best AI will do the best deals. For Kotov, DLT and AI are tactical innovations, but IoT is the real game changer. He pointed out that 3.5 billion are connected to the internet, and globally there are 7 billion connected devices. For Young, all three of the technologies are in play. He made the point that the move to the shared economy creates a strong interplay between all three.
On the subject of DLT, Kotov said that Sberbank has completed 12 proof of concept projects this year covering many areas of banking. He said that in some areas of banking, they found that DLT is not appropriate, but it is a good fit in others. Hakkenberg added that trade seems to be a suitable area for DLT, pointing to Ethereum smart contracts and smart containers that can check themselves in as early examples of this technology at work.
The discussion turned to AI and whether this would eventually take over all banking and Swift operations. Young said that this wouldn't be the case, but it is useful in areas such as fraud controls, and security to tackle unseen threats. He suggested that AI won't replace humans, but it will be beneficial by creating new viewpoints. Kotov made the point that the human brain is just a neural network, and that the largest capacity artificial equivalent is catching up quickly. Even the creation of new things is falling into the reach of AI. Hakkenberg sees a clear use case for AI in the customer services area of banks. Institutions that have a complete view of the customer via their data can use AI to add value to that relationship.
Finally, the emerging technologies conversation moved to IoT. Hakkenberg pointed out that, while there are endless possibilities with IoT, banks must find practical applications for it. He pointed to automatic toll booth payment sensors in cars, and his own Swatch watch with mobile wallet as early examples of this. Kotov questioned whether machine to machine payments will use cryptocurrencies. If they do, he see no role for banks in the process. However, if they do not, this represents a great opportunity.
Within banks, the panel agreed that IT and the business must work together and have a clear understanding of the issues that each other faces in order to be in a position to successfully innovate. Young explained that there is also the challenge that Swift is meeting to stay relevant for its customers at this time, and citing the earlier example from Hinssen on how telcos have become the dumb pipes of their world. To avoid this, as we move into the API world, Young's challenge is to ensure that SWIFT continues with the security and reliability that it is known for, and then is able to overlay this with additional services relevant to the banks.
Agile working is one practice that banks are adopting to ensure they retain relevance. Buitenhek mentioned how ING adopted an agile approach when it launched 'The ING Way of Working' in 2015. In the agile method, everyone at the bank works in squads. These are self-managing, autonomous units with end-to-end responsibility for a specific customer-focused project. Squads that are involved in the same area of work are part of an overarching tribe. The bank has also created Centers of Expertise for scarce or specialised knowledge.
Kotov spoke about how Sberbank also has an agile banking programme, called Sbergile. It turns out that the person who had run the ING programme now runs Sbergile, so the panel were able to compare notes a little. Kotov said that to ensure the whole bank is aware of current and future technology trends, there is an educational element to this programme, which concludes with an exam on the topic. This year the topics were AI and DLT, and board members actually need to pass these exams. He made a point that chimed with the earlier presentation from Hinssen, that moving to Sbergile is not just an IT issue, but it is a cultural shift of the whole business. Kotov said that this was the most difficult challenge the bank has faced. It is a new way of working for the entire organisation.
Another challenge for Sberbank has been to get the right IT development staff into the bank - they currently have 11,000 programmers, which essentially is the whole talent pool that existed in Russia. This is a problem as they want to have more programmers, so they have moved into academia to sponsor university programmes on this topic, to try and bring through the Sberbank programmers of the future.
The discussion concluded with a second poll of the audience, this time asking them which technology would be most important in supporting them in their actual day to day functions. AI still came out on top, claiming 46% of the vote.
Today's discussions on the future of technology and innovation have highlighted that the changes the financial services world has gone through over the past decade are only the beginning of something much more profound for the industry. If anything, the pace of change looks set to accelerate more rapidly than ever as emergent technologies combine with increasing customer expectations. This is one of the great challenges for today's banking world. As Hinssen noted in his keynote presentation, every Facebook employee is given a red binder when they start working for company, which includes the note 'If we don't create the thing that kills Facebook, someone else will'. This mindset is required in financial institutions if they are to keep up with the external challengers and remain relevant in the face of fast-evolving customer needs.