Banking disruption: Removing the friction
Brett King combines innovations in tech to find opportunities in finance.
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Brett King is the founder and CEO of Moven, a fintech company offering what it describes as the world’s first downloadable bank account. He’s been called the “King of the Disruptors” by Banking Exchange, and he’s the author of many books on finance and technology, including Banking 3.0 and Augmented (forthcoming); he also hosts the top fintech Internet radio show, Breaking Banks.
Back in 2009, King predicted that mobile would overtake Internet banking by 2015 — if it hasn’t happened yet, it’s well on the way (PDF). He sees a future where bank customers will have access to great innovations that increase money management and control, if traditional banks can overcome their legacy systems. I caught up with King to discuss the future of banking. Key takeaways from our conversation include:
- Algorithms that are five times better than the human eye at identifying false documents like a driver’s license or passport.
- Redesigning bank products for a real-time world.
- New customer acquisition models.
- Collaborative regulators.
Heather Vescent: What aspects of banking are most susceptible to disruption?
Brett King: If you look at the industry broadly, over the next five to 10 years — and that’s the critical time frame — we are going to see a heavy push, particularly by fintech companies, to remove friction from day-to-day banking experiences. That friction is most evident in the way you get access to a new bank account, a credit line, buying a home or buying a car. Any bank that requires a signature on a piece of paper in that process is going to be screwed. Anything in banking right now that has a physical process will not work in the digital world. A bank that is not ready to make that transition will find their market share eroded by fintechs who are very, very good at this stuff.
HV: Blockchain is getting a lot of attention. Some call it the ultimate fintech disruption. What do you think?
BK: When we talk about blockchain, you hear talk about trade finance, letters of credit, and things where it could be used for digital assets. Let me give you a scenario. My son is almost 13. I can imagine in 10 years’ time he may have a self-driving car. It’s unlikely he will own his own, but he could be part of a group of 10 or 15 people that own a single self-driving car, with access to it.
This car picks him up in the morning and takes him to work. The car has a few hours before it’s needed again by its owners, so it makes itself available on the Uber network for three or four hours — driving, picking up passengers, faring them. Before it concludes its workload, it has to recharge the battery. So, it goes to a parking garage with a wireless charging point and charges up.
Think about the wallet that’s in the self-driving car. For the three or four hours it’s getting paid. When it goes to the parking garage, it’s paying for that electricity. Let me ask a question from a traditional perspective: Who do you KYC (know your customer) for that wallet in the self-driving car?
HV: That’s a great question.
BK: Do you take the 15 people who are the part-owners? Do they have to come into the branch and sign signature cards? This would be ridiculous.
HV: You’ve described a KYC scenario that’s very different from the way it works now. Will KYC, as we know it, become obsolete?
BK: One of the problems with KYC is, it’s just friction. I make a joke, that KYC, for most banks, stands for Kill Your Customers with paperwork. If you look at what is common in fintech right now, the common element is all these fintechs are trying to remove friction. Identity is becoming more mobile, more portable. We use it for a lot more things — getting on a plane, online transactions, contracts, banking. There’s no reason each of these organizations should be responsible for capturing separate instances of the same identity information. There should be a way to centralize that.
HV: You call Moven the world’s first downloadable bank account. What is a downloadable bank account?
BK: The simple objective with Moven is to give someone a bank account completely digitally. You download the app and you can sign up, right in the app. Right now, we have to send you a physical plastic card — that’s a restriction from MasterCard and Visa. If we can get around that restriction, then it will be completely digital, without any physical distribution process at all. It’s a completely mobile signup, and we were the first bank in the U.S. — and the world — to offer that.
HV: How do you confirm someone’s identity when they sign up for their account on a mobile device?
BK: We have a sophisticated identity verification (IDV) process, that is 15 to 20 times safer than a bank that relies on a physical identity verification check in the branch. We use algorithms to verify the accuracy of your passport or driver’s license. The algorithms are five or six times better at picking up a synthetic driver’s license or passport — a false identity document — than the human eye.
We use facial recognition to compare a selfie against your Facebook profile, your LinkedIn profile, if there are pictures there. We check the physical address you’ve given us — your residence — against the IP address of your phone, so we can tell whether the phone is in a similar location to the physical address. If the phone registering for the account is in a different state, or on the other side of the country, that raises a red flag.
HV: The method of identity verification is one big difference between a downloadable bank account and a traditional account. Are there other differences?
BK: We think of Moven as a Fitbit for your wallet. It coaches you every single day, every time you make a transaction, whether you make healthy financial decisions or not.
It’s the gamification of your spending behavior, and it removes the need for a budget. We say, “Let’s have a game. Let’s compete against yourself every month to spend less money.” We do that by raising awareness, by helping you understand where you’re spending money that you don’t need to, or identify spending you can improve on. If we can coach you to reduce your spending over the course of a month, helping to make you aware where you’re spending money, and tidying up on that, then, obviously, you save. You don’t need a budget; all you need to do is spend money like you normally do, and Moven keeps track.
BK: Yes, but the banks that survive in this space are going to have new acquisition approaches. Many of them are going to partner with the likes of Facebook or fintechs that have cracked this problem.
Once you take the acquisition of customers out of the branch, the requirement for branch space that we have today will be dramatically reduced. Once the market sees that banks can do this digitally, without requiring physical space, then imagine how the stock market is going to treat banks that don’t have digital acquisition approaches, that still rely on the branch. For Moven, we acquire customers for basically $10 per completed application. The best banks in the U.S. are doing it for $250. Chase and Wells probably pay $350 for account acquisition through the branch.
At some point, the market’s going to say, “These guys can do it for 10 bucks, and you’re paying $350 to do it through the branch?” Acquisition of customers through a physical channel is just not an efficient mechanism. The business model doesn’t work anymore. Once the market makes that decision, we’re going to see banks with large branch networks being punished by the stock market.
HV: If you were in charge of innovation at a bank, what would you invest in to ride the current wave of fintech innovation?
BK: I would be all about three things: learning as much and as quickly as I can, and experimenting, trying different things. The third thing I’d do is to figure out how to deliver every single product in the business in real time, without a signature. As you go through that process, you would find opportunities to re-design those products significantly.
For example, once you start understanding you can deliver credit in real time in a store, then you no longer sell customers a credit card because this can be delivered in real time on your mobile. You just need a good credit risk model. It eliminates the way we sell credit cards. Instead, you have emergency cash or in-store financing. This is where these opportunities come.
You need to start by enabling your systems to be real time. In most cases, this is going to need a core system replacement. You need to be working with organizations that can do it quickly, and where you can experiment without having to bet the farm, which will require fintech or startup partnerships.
HV: What do you think is driving user experience changes in fintech?
BK: A lot of the way we think about products and services today doesn’t make sense in a real-time mobile world. We speak to fintech entrepreneurs all the time, and they say they’re trying to make the experience better and simpler for customers. Whether it’s blockchain or what Moven is doing with the downloadable bank account or roboadvisors with Betterment, we’re all trying to take friction out of day-to-day banking, and build a better experience. It ultimately ends up with designing something that looks a little bit like it used to, but works very differently.
HV: Of the current technology, what do you expect will play the biggest role in banking’s future?
BK: Real-time money movement is the most basic requirement for banking ecosystems, moving forward. I have my phone and I want to send you money. In Kenya, I can send it to you instantly, mobile to mobile.
We’ve heard rumors about Apple doing a P2P payment service. They have enough traction in the market to circumvent the current ACH network and provide a real-time payment capability. If that occurs, banks will complain they have to pay Apple for this service, when they could build this themselves. We must change the U.S. system so there are real-time payments between 6,000 banks, allowed by regulators, with the big banks on board. The problem is legacy systems, legacy regulation, legacy infrastructure that’s been put in place based on things like checks, which have no place in the 21st century world.
HV: You mentioned regulation a few times. What is the role of government and regulation in this disruption?
BK: In the past, regulators would say, “These are the rules. We’ve got these examiners to come out and make sure you live by these rules.” What they’re learning is that things are changing so quickly, especially when you use examples like the blockchain.
Regulators know they’re not innovative, so they shouldn’t be expected to able to tell the market which innovations they should make a bet on. As a result, the best regulators are going to be involved in the process from the perspective of, “We’re open to this. We want it to happen in a controlled fashion. We’d like to monitor it, and see how it works, and see if it represents the rest of the market or consumers. We’re not going to say that we should stop these innovations from occurring, to favor incumbents, because ultimately, what that would mean is that the economy that we operate in, would remain uncompetitive on a global basis.”
We’re starting to see regulators taking a technology-based approach. No economy will be able to survive globally and compete on the basis of the banking system in the future without the changing the way regulation occurs. The only question is, how quickly should that change occur? The regulators who are smart about this are forming fintech divisions. They’re working with fintech companies, and they’re not roadblocking this.
HV: It’s almost like these regulators are collaborative.
BK: They have to be. The good regulators are asking a lot of questions. I have not seen one regulator, anywhere in the world, say, “We’re gonna stop these fintechs from moving forward.”
HV: What insights will you share at Next:Money?
BK: I’ll talk about the most disruptive influences on the economy and on businesses over the next 15 to 20 years — how banking and financial services will be disrupted by these technologies, and what it means for the future of banking, payments, and credit over the next 15 or 20 years.
Join us at the O’Reilly Next:Money Summit, March 14-15, 2016, in San Francisco, where experts will explore the intersection of technology and finance, and survey the future of currency, markets, and transactions.