Can banking survive “augmentation”?

“My six-year-old son Thomas won’t need a driver’s license to own a car and it’s highly likely he won’t even own a car; he’ll simply rent car ‘time’ instead. Throughout his entire life, he will never be without a smart device which will soon tell him when to go to the doctor for advice (and his insurer will require him to wear it), he’ll live in a smart house where robots clean and fridges or a household AI order groceries (delivered by a robot), he’ll never use a plastic card or checkbook to pay for anything (and likely no cash either) and he’ll interact with hundreds of computers that don’t have a mouse or keyboard. … [i]f you had predicted these changes 100 years ago, it would have simply been called science fiction”—from Brett King’s Augmented

Brett King is one of my favorite authors. I have read all of his books, which mostly have dealt directly with the future of banking. His insights have helped to guide my bank’s technology strategy.

King’s latest book, Augmented, represents a new direction for him. Yes, Augmented deals with banking, but it also addresses the impact that technology will have on many other aspects of our lives.

King covers four broad, basic areas where technology is bringing rapid changes: our homes and the way we live; transportation; medicine; and banking.

“While it is true that humans have been adapting to technology continuously, in the next two to three decades more changes will be thrust upon humanity than in the last 1,000 years,” King writes, in testimony to how fast technology is changing.

Will you be ready for these changes? And more importantly, will your bank be ready for these changes?

Can tech broaden banking’s base?

Banking as an industry was one of the early adopters of computers. In fact the first mainframe was built for a bank. Banks themselves used computers to enhance and speed up legacy processes that already existed. Now banks have direct competition from fintech (a technology firm that delivers financial services), companies that are introducing completely new ways of delivering financial services to customers.

The mobile phone has radically changed the way many customers choose to do their banking. In fact, in some parts of the world, it has allowed people to do banking—it has opened up the opportunity for people in developing countries to actually have a bank account.

The World Bank states having a bank account is one of the core ways for individuals to step out of extreme poverty, and that it actually helps to elevate their level of income. FDIC released a study in May 2016 titled, “Opportunities for Mobile Financial Services to Engage Underserved Customers.” In that report agency agreed that the accessibility and financial tools included in mobile banking applications can provide much-needed banking services for the underserved and unbanked in the U.S.

However, regulatory protocol and technology haven’t necessarily stayed in synch. King points out that the U.S. rules requiring banks to know the identity of their customer—which usually includes having a drivers license or similar identity document and completing a new account application within a branch before anyone can open an account—will actually increase the likelihood of financial exclusion of the unbanked.

What will augmented financial services look like?

The U.S. continues to see a decline in the number of people with bank accounts over the last few years, but has one of the largest networks of branches in the world, so it isn’t a problem of accessibility.

Bankers and regulators are going to have to work together to figure out how to allow more access to the banking system to bring customers into the banks. If not, there are many other options available to consumers to store their money electronically that are totally outside of the banking system and regulation.

Consider that the stored-value accounts of iTunes, PayPal, and Alipay (associated with the Chinese Alibaba shopping site) serve 1.2 billion account holders. King points out that that is twice the number of individual customers with bank accounts held by the five largest banks in the world.

And he also points out this wrinkle: “For over ten years, people have been using PayPal without requiring that their deposits be guaranteed. PayPal isn’t going out of business anytime soon, and the number of people who have issues with PayPal accounts is very small compared with the daily transactional activity…”

Within ten years, it is predicted the number will increase to 2 billion accounts and 75% of these accountholders will never visit a bank branch.

African bank makes fintech partnership work

Clearly, in King’s view, banks will need to develop partnerships with fintech companies to retain customers.

One such example of a successful partnership between a bank and a fintech comes out of Kenya, where fintech M-Pesa opened up money accounts by allowing credits on mobile phones. Since 2006, financial inclusion in Kenya has grown to 85% as a result.

At first the banks in Kenya fought to get M-Pesa shut down, but the Commercial Bank of Africa decided to work with M-Pesa.

In 2012 the bank began offering a savings account linked to M-Pesa. In the three years that followed, 4.5 million customers were added to the bank’s customer base and they added $2.2 billion in deposits. The key was to make the process as frictionless as possible for the customer to open the account.

The identification technology in smart phones should be considered as verification of identity for opening new accounts in the U.S., argues King. Many smart phones can recognize fingerprints and soon everything from retina scans to heartbeat detection will be added to their capabilities. This would allow new account opening to take place entirely by mobile means.

By 2020 it is estimated that 50 billion devices will be connected to the internet. Everything will be smart, including your car, which will drive itself, and your refrigerator, which will automatically “shop” by reordering when your food runs out.

What will a “bank” be?

King predicts that banking will also have to evolve into a smart mobile application featuring real-time payments; contextual advice about spending—like a banker on your shoulder; and value storage.

Banking will become an experience, King maintains, rather than a service. A consumer’s banking app will give warnings if the customer is spending more than their budget or beyond the balance in their account before the purchase is made. More purchases will be made with the tap of the mobile phone, increasingly occurring already, but soon, possibly by just walking out of the retail store. The store’s computer and the mobile phone will have already communicated and transferred value for items purchased.

Whatever uses are developed for the mobile phone of the future, the banking industry is going to have to be able to adapt to the new technology.

But King doesn’t think banks will be able to adapt.

“Banks are increasingly being pushed out of the payments space,” writes King. “The main reason why is that they were just way too late to the game; most banks in the United States, for example, don’t offer anything near to real-time payments or link to wallets on a mobile phone. They’re still stuck in a era where checks are considered one of the most efficient forms of payment.”

King predicts that only the very biggest of banks will have any real role in the future payments ecosystem.

As a community banker, this statement disturbs me. But for community banks to offer these products, we depend on our core processors to be our innovator and provider. The question is, can they fill that role?

Our increasingly augmented lives

Other sections of the book address the changes technology will have on our everyday lives in the future. For example, there were 6.6 million robots sold in 2015 and by 2020 the estimate is 31 million. These include everything from robotic vacuums to drones.

Robots are being developed for the health care industry because the U.S. and Japan will begin to experience a shortage of nurses as baby boomers begin to age. It is estimated that 1.05 million additional nurses will be needed in the U.S. by 2022. Robots can provide the constant monitoring of a patient and never need a break.

Healthcare in general will dramatically change with the use of technology. King discusses how IBM’s Watson was fed 20 years of medical publications relating to cancer. Watson was then provided with data on individual patients’ symptoms, which it could accurately diagnose specific cancer types and propose treatments 90% of the time. By comparison, oncology specialists with 20 years of experience treating cancer patients were only accurate 50% of the time.

Such developments could be huge in early detection and treatment of cancer, which significantly increases the survival rate of the patient.

The most exciting impact technology will have on medicine in the future is to change medicine from treating the patient for illnesses to preventing the disease altogether through monitoring devices worn or even ingested by the patient.

Google’s self-driving cars have driven 2 million driving miles without causing one accident directly. (There have been accidents, but it was when the human drivers were driving or other driver’s vehicles ran into the Google car.) Autonomous cars right now are ten times safer than those with human drivers, King maintains.

He cites predictions that within 15 fifteen years, major cities will prefer self-driving cars. Faster modes of transportation are also being developed. In 2015 Japan introduced a new maglev (magnetic levitation) train that travels at speeds of 375 miles per hour. Maglev technology uses magnetic fields to suspend the train about 10 cm from the electrically charged magnets that become the track.

Currently our homes are equipped with personal assistants such as Jibo and Echo. They use the voice-based technology of Google Voice or Apple’s Siri to answer internet-based questions. Within 20 years these personal assistants will be capable of monitoring our physical and financial health plus make appointments and booking airline tickets.

I highly recommend reading this book, although at times looking into the future can be frightening. However, I believe it is better to face the future armed with knowledge as opposed to blinders!

Earlier this year BankingExchange.com presented a chapter excerpt from Brett King's Augmented. Read it now