Image courtesy of Deloitte Canada
Ripple Insights: Being at Deloitte gives you insight into how distributed ledger technology (DLT) innovation is affecting different industries. You’ve said that this innovation can drive real value in the payments space. Can you elaborate on why and what the key drivers are?
Michael Tang: Although blockchain gets talked about a lot for payments, the real value is in the technology. Global payments are an amazing use case, though, and it’s already happening.
A customer would never say, “Today I need to send an international email,” or, “How do I visit a global website?” But they do have to strategize how they’re going to send a global payment. On a personal level, I worked overseas for five years in New Zealand, and the NZ dollar is an exotic currency. As a customer, I had a terrible experience. I had to physically fill out a form, sign it in wet ink, visit a private banker, and then pay $55 for four or five days of turnaround through SWIFT. If I sent a payment, it cost the recipient another $20 on the other end.
The technology for better payments exists today. But another interesting use case is around digital identity. Right now, governments act as central agencies to issue digital identity. But, in the digital realm, my hypothesis posits central banks as ultimately operating cross-border identity, with enormous multinational oversight. Look at the large global banks, they know more about identity than most governments because they have to, because it’s in their best economic interests. Hundreds of countries will never agree on a standard of identity, but can provide a common set of requirements for payments purposes. I believe there will be a fundamental shift from control in the public sector to financial services. Identity is a game-changer; it underpins everything, including global payments.
What are customer expectations like today, when they’re looking at their bank?
MT: The narrative of customer expectations is shaped every day by other services. I remember recently I took a cab home from work and let myself into my house and immediately heard a knock at the door. My cab driver had followed me to remind me to pay. I’ve gotten so used to using Uber that I completely forgot. That frictionless experience has conditioned my expectations of all other services. Banks today cannot provide a frictionless experience to individual or corporate customers; they’re still knocking on doors trying to get paid.
Banks and other service providers today have to be GAFA – meaning good with data like Google, offering a simple and sleek UI like Apple, handle the social aspect like Facebook, and all with the efficiency of Amazon.
That kind of efficiency and user experience could disintermediate anything. Aggregators like Mint tell us that the average person has to juggle 9.2 financial relationships. When those relationships become a commodity, when people begin to reject having to manage that much information, the GAFA banks take over because they can do it all in one: paying bills, sending and receiving money, wealth management, retirement, stocks, everything. Customer expectations demand that kind of total makeover.
Imagine, instead of putting your bank card information into a form for Amazon, you gave your bank permission to give Amazon your account information and Amazon handled your payment on its own. To avoid getting cut out, banks must manage, take advantage, or risk becoming a utility.
You’re very attuned to the needs of the emerging new corporate. Do you think banks are prepared to serve those needs, to go GAFA?
MT: The new corporate really requires more than most banks can offer right now. Platforms like Uber with a two-sided marketplace allow both consumers and creators to operate. That’s the kind of thing that allows for exponential scaling, but payment services are not prepared to keep up. Global platforms match creators and consumers, whereas banks are limited to offering their same, safe and tested product. Payments challengers can afford to start with a minimum viable product and then iterate, iterate, iterate. Consumers, in turn, are now conditioned to accept products in development and iteration. But banks who are slow to launch a new service that may not be ‘perfect’ simply aren’t able to keep up with the demand. That’s where the real challenge comes from.
You’ve compared the dilemma facing banks trying to keep up with the new corporate to the story of the Three Little Pigs. What’s that about?
MT: The story of the Three Little Pigs can be viewed a lot of ways. It can be about careful, prudent planning; that’s when the brick house wins. However, I prefer to think of it as a parable about agility. Banks have these multimillion dollar programs, with the goal of achieving a target state. This is rigid, like a house made of bricks. If something better comes along, it’s really hard to add on or rebuild without knocking down most of your house. The truth is that in today’s world, demand changes, regulation changes, and you’re always trying to rebuild the perfect house. Bricks won’t work anymore.
The pig that builds with brick can’t iterate. He can’t move, adapt, or adopt and he’s trapped. You want the house of straw, so that you can make changes quickly. You’re better off in nearly every field being flexible, agile and nimble. Design your organization like an organism that can adopt, adapt, and move.
Taking that to a global scale, companies and governments in comfortable places will take fewer risks. The more competitive the markets, the more they encourage smaller banks and scrappy, bold newcomers who are willing to take a swing. Banks are dabbling in distributed financial tech, but not really in the game yet, because they can afford to wait out the storm in houses they’ve built.
So what’s the Big Bad Wolf in this story?
I learned something when I was at West Point called VUCA. VUCA stands for: Volatility, Uncertainty, Complexity and Ambiguity. The wolf doesn’t huff and puff anymore; he doesn’t have to. He waits for these forces to roll through and tear everything down— including those houses made of bricks. No matter how concise your training or tight your planning, VUCA occurs. Training and planning is worthless unless you can adapt it to the situation. Banks are dealing with a changing regulatory landscape, shifting customer demands, and innovative competitors. VUCA is the Big Bad Wolf, and the brick house won’t be enough to keep him out forever.
Michael Tang is a partner and the head of global digital transformation and innovation at Deloitte in Canada. This interview is part of our series on leaders in our industry. For more like this, please subscribe to Ripple Insights.