Banks should leverage on the computer’s power to create value
At TED2013, MIT professor and prominent innovation researcher Erik Brynjolfsson described how the steam engine and electricity triggered the first and second industrial revolutions in the late 18th century and late 19th century respectively. While there was little improvement in productivity immediately after these technologies became available, manufacturing processes were gradually modified to harness the power of the new inventions that became what Brynjolfsson describes as ‘general purpose technology’:
“Electricity is an example of a general purpose technology, like the steam engine before it. General purpose technologies drive most economic growth, because they unleash cascades of complementary innovations, like lightbulbs and, yes, factory redesign. Is there a general purpose technology of our era? Sure. It's the computer.”
Highlighting Brynjolfsson’s TED presentation at a recent lecture of SMU’s Asian Financial Leaders Programme (AFLP), Robert Kauffman, SMU Professor of Information Systems reinforced the MIT academic’s point that “as computers get more powerful, companies have less need for some kinds of workers” and that the way to stay relevant was to “run with the machines instead of running against them”.
Running with machines
Maximising computers’ potential as a general purpose technology, however, requires skills that are not yet readily available. The AFLP participants, which consist mostly of senior executives in the financial sector, identified data scientists and data miners are major hiring gaps for positions that did not exist just five years ago.
“If you look at a lot of the innovation and disruption that we’re seeing, it’s destroying jobs and not creating jobs,” says an AFLP participant (all participants’ identities are kept confidential at their request).”In our industry, whether it’s the sales people or the back office, if technology matures in the next 10-15 years there will be a massive disruption to jobs, and there is nothing much we can do. How can we retrain the people we have? Maybe we might need another generation, wait for the current group to be displaced before the next generation takes over.”
Noting how tech-savvy – and threatening – fintech firms are, participants also pointed out how regulation of brick-and-mortar banks perhaps hinders digital innovation.
“Regulations are a double-edged sword,” mused one participant. “On one hand, regulations protect the industry in certain areas of banking, although maybe not in payments, from competition of fintechs who are not regulated. On the other hand, because of the capital requirements, regulations hold us back as well.
“Regulations hold us back in payments. Why don’t we decouple our payment services? Surely we have decades’ more experience than these startups, but at the same time we are held back by culture and regulations, etc. Deregulation could be done for wealth management advisory and payments where the balance sheet is not so important. We could move faster if we do that.”
“I think of this in terms of not just big data analysis, but in terms of fusion analytics,” Kauffman responded. “Think about the blend between machine-based methods and pattern identification coupled with explanatory methods so that people can make sense of what the data has to say. This is an opportunity for statisticians to come up with something with computer scientists, for people in research organisations to come together with corporations and banks.”
He implores, “Try, explore, experiment.”
Moving across and monetising the value chain
Thinking of ways to build on computers’ power as a general purpose technology requires imagination, which Kauffman noted is rather difficult when “you don’t know exactly what the parameters are for the changes that will occur”. The participants, however, point to something more concrete that stops them from innovating: the lack of a standard and the costs of creating one.
Said a participant: “When you want to introduce new technology, there is the cost consideration. The investment for any single bank is huge, especially if it’s a greenfield. If you look at mobile payments, it’s always a telco that’s setting the standard, and the banks make use of the standard. So cost is an issue, and the regulators are not setting what is acceptable technology.”
To make R&D worthwhile, participants pointed out the necessity of monetising the innovation. Said one participant: “How can we make the bank relevant to everyday life of consumers? People no longer come to banks for banking services. The banks have to be proactive and be relevant throughout the value chain, from the manufacture to supplier, to the retailer and finally the consumer. Very often, the banks only come into the picture after everything has been done, and it’s just for the payment. How does a bank make itself relevant right from the beginning such that it is plugged into the entire value chain?”
Another participant: “On its own, a bank is nothing more than a payment gateway. Banks allow payment to happen, but essentially payment happens after consumption. Banks are not in control of the whole journey or experience. For us to be part of the game, we need to step up the food chain. We need to fill the ecosystem to stay relevant, otherwise we will always be at the mercy of all this fintech or whatever possesses the technology.”
“I get what you say about the problems related to costs and infrastructure,” Kauffman noted. “But fintechs grab and swoop on opportunities that could have gone to banks. And the banks would be ok with that because they have to make choices about what to let go and what they keep, and my argument would be transaction costs. The firm doesn’t need to be really big, it just needs to be profitable in those central activities they’re focusing on.”
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Last updated on 27 Oct 2017 .
