A bifurcation is taking place across financial services—those entrenched and those seeking to disrupt. Like a western where wagons are circled to form a defense, the weapons of financial innovation just make them easy targets now that they are all in proximity, behaving the same, and resisting change.
Innovation is wonderful. Innovation is seemingly part of the DNA sequencing that makes humans, well, human. Innovation has been around since the beginning of fire, the development of the wheel, the invention of gunpowder, the creation of nuclear fusion, the drawing of Mickey Mouse, and even the development of financial products including currency exchanges, valuations, and yes, lending. Innovation and continual improvement of how we live, the methods we interact, the analysis of data, and the advancements of technology spur not only new business, but vastly improve the quality of life generation after generation.
Good, Bad, it’s Ugly
Innovation is “good”—unless it is “bad”. In an age of intelligence multipliers (e.g., AI, machine intelligence, biohacks), who decides “good” and “bad”? As financial transparency became the guiding principles post 2010, the quest for “qualified” instruments complete with in-depth data diligence pushed aside more “exotic” products and services. Financial innovation, not intentionally disguised non-risk attributed products, have been shunned. Financial markets and offerings retreated for many families, except those with exceptional credit, and pushed those “average” customers further into the shadows including those classified as underbanked, unbanked, and undesirable (e.g., Operation Choke Point, private detention centers).
As bankers and lenders became “upstanding citizens” supervised by diligent regulators, the financial markets consolidated without fanfare where the top 1% of institutions now control over 60% of the global assets—up from 15% before the Great Recession. Top tier banks have become behemoths, an oligarchy of corporations, offering commodity solutions with window-dressing innovations. Regulators have been whipsawed by changing political guidance and financial institutions spend billions addressing the demands and wondering where it will end.
An article in Bloomberg, “Banks Spend $1 Trillion on Digital, But Few Reap the Rewards”, says that approximately $1 trillion USD has been spend by bank’s on technology and innovations, but few of these “investments” failed to significantly increase ROE or meet capital investment expectations. But, were these digital and innovative advancements merely incremental improvements necessary to met competitive pressures? Were these spends required to be in the business of fourth-generational banking products and services? In an age of M&A and a 20-year trend where 250 FDIC institutions are being lost per year, are these capital and operational investments supporting increased volumes, digital interfaces, customer contact points and methods, and automation of financial supply chains with this decline of over 50% of all financial institutions in just two decades?
The numbers are huge, yes. The impacts expected and booked should have been greater, yes. The solutions should have been game-changing, yes. However, even after 2010, banks spent lavish sums on their branch networks and physical locations as part of their strategy to reach behavioral-changing consumers. Only recently have national and regional institutions realized that their reliance on digital, physical locations was misplaced and costly. The infrastructures they spent money on, were underutilized as consumers sought to conduct their banking using virtual means, from their AI assistants, from their mobile devices, and from their peer-to-peer private networks. Banks invested in innovation—just not in the exact measures that their customers in the end sought.
Money for Nothing
These stranded investments created higher costs of provision products (e.g., mortgages), they allowed non-financial institutions to enter their domains (e.g., FinTech), and they continued to accept the advice from the very groups and individuals who took them down the wrong innovation paths. As this transpired, the very consumers they sought for profitability turned their back on these banking institutions as their offering become commodities. Slick interfaces and marketing slogans aside, the operating principles remained the same—24-hour turnarounds, delayed error correction handled by humans rather than machines, and rising fee structures that seemed out-of-place in a world dominated by Amazon, Apple, Walmart, Alibaba, Oracle, and countless FinTech’s. In the end, all the incremental innovation produced offerings that were “ok” but lacked the operating margin “juice” that would create an “arms-race” across institutions.
Perhaps, a new curve is emerging—enter the intelligence multipliers commonly identified as artificial intelligence (AI), machine intelligence, virtual reality (VR), and technology-genetic layering. As intelligence solutions find their way into IoT (internet of things) solutions and home-assistants, the bank-facing customer in many cases will become the AI or VR doing the tasks for the human consumer. As synthetic intelligences become the layers between the homeowner and banking customer, the use-cases and fulfillment infrastructures take on new functionalities, resulting in faster arrival rates coupled with highly complex transactions. A wasted reality for many banking leaders and their billion-dollar IT budgets is that digitalization was just a cost of doing business and being competitive—the age of intelligence multipliers will break the use and behavioral models.
To take advantage of these disruptive innovations, finance and lending will also be dragged into these new supply chains—or they will be merged or acquired by those with greater capitalization, market valuation, and consumer trust? Will those with an ability to create building blocks be able to transform financial services markets rather than accept the dogmatic model of building in-house (e.g., blockchain solution sets)? Will successful financial firms be the ones who can assemble and reassemble products and services like what Amazon does with their consumer pages or AWS? Will social media firms struggling with oversight and ill-will, be able to offer financial solutions and even cybercurrencies to tap into markets such as the under and non-banked (estimated to be over 1.5 billion people, and represent a net gain globally of 6% to 8% of all the world’s GDP’s)?
“… Here I Come to Save the Day!”
Enter stage left, and as many have already noted, Facebook has altered the innovation discussion in finance with their introduction of a future cybercurrency called Libra. Billed as a mainstream cybercurrency alternative for those in developing nations and those who are unable to take advantage of local financial services, Libra is being billed to stabilize cybercurrency markets—unlike the wild daily valuation gyrations associated with Bitcoin.
Think of it, a technology and social media platform that has a currency. Still trusted by billions of individuals and firms, it will use Libra to conduct financial transactions and provide security and disclosure to meet oversight demands and personal privacy. Is it the answer to many problems of an emerging financial instrument (e.g., cybercurrencies, transparency, stability, exchanges and redemptions), or just an opportunity to change the discussion about the parent firm and its breaches of trust and deliberate data sales?
We have seen it before, large non-financial players hoping to capitalize on the inefficiencies within financial offerings and geographic markets find that the resistance can be overwhelming and unexpected. After a few years and millions of capital dollars spent, these brand name institutions shelve their rhetoric and find a middle ground that often involves partnering with existing institutions rather than disrupting the markets—or bucking regulatory overseers. Their big boasts, their grand plans, their disruptive initiatives seem to have left consumers bewildered and angry—they wanted something new. They wanted them to succeed if for no other reason than to provide alternatives.
As we know, in the mortgage markets a majority of loans are now done by non-banks. Some would argue it was standards that allowed non-traditional players to compete. Others believe it was the rise of FinTech’s that delivered the capabilities for lending supply chains to be segmented and compartmentalized using digital solutions (i.e., banking as a service, BaaS). Still others, point to the rise of mobile technologies, big data, machine intelligence and now AI as the rationale to why traditional banks have retreated from mortgage lending.
We would be negligent if we ignored customer service, consumer advocacy, servicing, securitization and a host of other interconnected pieces that secure the largest investment for most American families. Was there a big, disruptive innovation that everyone agrees with as to the root cause for non-traditional players? Were banks hamstrung by regulators? Was the consumer’s bond with innovation singularity that tipped the scales?
Yet, hindsight be damned, the reality is that a cluster of innovations, some incremental, some disruptive has permanently changed the lending markets. If the next shoe drops with the outcome of the GSE’s, then will that usher in new entrants or bring back familiar brands? Will presidential politics play an even uglier side of it all and demand that as part of the “American Dream” available to mortgages should be a rallying cry of “Mortgage for All” akin to recent proposals surrounding healthcare and student loans?
Innovation, true innovation and not some marketing slogan designed to stem the bloodletting, in the mortgage world must move beyond the idea that disruptive innovation is a one-off, a singular idea, or a Wozniak and Jobs tinkering in a garage. Disruptive innovation moving forward integrated with intelligence multipliers for lending are about layers—how we assemble them, how we define them, and how we constantly adjust them. As point-based, grand-big bang solutions slow, the ideas of how to redefine markets without consigning the existing brands to their demise, resides with an ability to assemble, as much as it is about creating new.
Ditch the Rose-Colored Glasses
If traditional banks, and their highly driven leaders, believe that their trillions spent on IT has yielded little return, it is probably because they are looking at the output against the wrong questions being asked. If they believe that incremental innovation is going to produce out-of-ordinary ROE against competition hoping to do the same, well that is the definition of having blinders covering the eyes. The rationale on why these “new” ideas such as Libra enthrall consumers is that they don’t have the same ingrained vision of what finance should do, how it should behave, and the purpose it provides. In the end, bankers seem to be their own worst limitation.
Singular, disruptive innovation for traditional banks is dead. Finding the holy grail of one-off innovative financial solution is a fool’s bet. I would say to those leaders who’s vision aligns with the current and future consumer now facing domestic and global uncertainty (e.g., tariffs, AI job markets, wages, affordability), look at what the trillions you spend actually satisfies for the consumer before those competitors with the means to implement innovation layers disrupt your brand into one of the 250 institutions lost every year.
Innovation it seems are everywhere, but the difference moving forward is that the spread of synthetic intelligence is new. We’re not talking about process automation, robotic assembly, or even business intelligence. We’re talking about embryonic, artificial systems that are “taught” using petabyte after petabyte of data scraped and assembled from sources that most consumers cannot fully appreciate.
It’s a realm of scientific wonder and the future of synthetic intelligences integrated with parallel advancements in robotics and genetics brings forth an acceptance of singularity with our wonderous innovations. Financial services and banking organizations (FSBO’s) are leading some of these advancements with consumers who conduct their existence digitally—home, office, personal, and now across geographic and cultural boundaries.
But in all the excitement, across all of the acceptance, within all the innovations, are FSBO’s comprehending the vast disruption that is about to take place? With an industry more and more concentrated (i.e., the loss of 5,000 institutions in just 20 years), are FSBO’s willing to embrace financial innovation? Or, will consumers reminisce about their favorite financial institution pushed into a forced M&A, going to a virtual graveyard, standing in front of a virtual tombstone, reading an epitaph restating the vision of the enterprise and say, “I wish you weren’t dead, if you had only decided to change”.
Look around, by the end of this year, there will be about 250 less institutions in the FSBO mix. Will you be one of them? Was is disruption that sealed your fate, or “bad” innovations that altered the business model? Was it a failure to internalize that innovation spurred by growing cyber intelligences are using layers of advancements to conduct business? Indeed, innovations depending on perception, can be “good” or “bad”.