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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
An industry-specific guide to the applications of Advanced Analytics and AI to the banking industry Artificial Intelligence (AI) technologies help organisations to get smarter and more effective over time - ultimately responding to, learning from and interacting with human voices. It is predicted that by 2025, half of all businesses will be using these intelligent, self-learning systems. Across its entire breadth and depth, the banking industry is at the forefront of investigating Advanced Analytics and AI technology for use in a broad range of applications, such as customer analytics and providing wealth advice for clients. AI and the Future of Banking provides new and established banking industry professionals with the essential information on the implications of data and analytics on their roles, responsibilities and personal career development. Unlike existing books on the subject which tend to be overly technical and complex, this accessible, reader-friendly guide is designed to be easily understood by any banking professional with limited or no IT background. Chapters focus on practical guidance on the use of analytics to improve operational effectiveness, customer retention and finance and risk management. Theory and published case studies are clearly explained, whilst considerations such as operating costs, regulation and market saturation are discussed in real-world context. Written by a recognised expert in AI and Advanced Analytics, this book: * Explores the numerous applications for Advanced Analytics and AI in various areas of banking and finance * Offers advice on the most effective ways to integrate AI into existing bank ecosystems * Suggests alternative and complementary visions for the future of banking, addressing issues like branch transformation, new models of universal banking and 'debranding' * Explains the concept of 'Open Banking,' which securely shares information without needing to reveal passwords * Addresses the development of leadership relative to AI adoption in the banking industry AI and the Future of Banking is an informative and up-to-date resource for bank executives and managers, new entrants to the banking industry, financial technology and financial services practitioners and students in postgraduate finance and banking courses.
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Seitenzahl: 577
Veröffentlichungsjahr: 2020
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Table of Contents
Cover
Acknowledgements
About the Author
Introduction
CHAPTER 1: Prologue: Why Banking?
SUMMARY
INTRODUCTION
WHAT IS BANKING?
WHAT DO WE MEAN BY ‘MONEY’ TODAY?
A CASHLESS SOCIETY INCREASINGLY EMERGES
KEY BANKING FUNCTIONS
FUTURE JOBS IN BANKING
CONCLUSION
REFERENCES
CHAPTER 2: Imperatives in Banking
SUMMARY
INTRODUCTION
STRATEGY AND IMPERATIVES
CURRENT IMPERATIVES IN BANKING
FUTURE IMPERATIVES IN BANKING
CONCLUSION
REFERENCES
CHAPTER 3: Data and Analytics Primer
SUMMARY
INTRODUCTION
DATA MANAGEMENT AND ANALYTICS
CONCLUSION
REFERENCES
CHAPTER 4: Key Elements of Banking Analytics
SUMMARY
INTRODUCTION
OFFICE OF FINANCE MANAGEMENT
CUSTOMER ANALYTICS
RISK MANAGEMENT
OPERATIONAL EFFICIENCY
CONCLUSION
REFERENCES
CHAPTER 5: Machine Learning, AI and ‘Apps’
SUMMARY
INTRODUCTION
THEORY AND PRACTICE OF MACHINE LEARNING
APPS AND THEIR USAGE
WEALTH MANAGEMENT SYSTEMS AND APPS
THE BIOMETRIC MORAL ARGUMENT
CONCLUSION
REFERENCES
CHAPTER 6: AI and the Importance of Brand in Banking
SUMMARY
INTRODUCTION
BRAND VALUE AND EQUITY IN BANKING
BRANDING AND CUSTOMER EXPERIENCE INTERLOCKED
BANKS WILL USE AI TO BECOME LIFESTYLE MANAGERS
CONCLUSION
REFERENCES
CHAPTER 7: AI Leadership and Employee Transformation
SUMMARY
INTRODUCTION
LEADERSHIP IN AN AI-INFUSED AGE
FUNCTIONAL CHANGE AND ROLE TRANSFORMATION
CONCLUSION
REFERENCES
CHAPTER 8: The Bank of the Future
SUMMARY
INTRODUCTION
BRANCH MAKEOVER
UNIVERSAL BANKING AND BEYOND
BANKS AS THE CATALYST FOR CHANGE: ‘PEER TO PEER’
PAYMENT PROCESSES BECOME MORE CUSTOMER CENTRIC
FIVE SCENARIOS FOR THE ‘BANK OF THE FUTURE’
TRANSFORMATION OF THE INVESTMENT BANK
CONCLUSION
REFERENCES
CHAPTER 9: Open Banking and Blockchain
SUMMARY
INTRODUCTION
BLOCKCHAIN IN BANKING
CONCLUSION
REFERENCES
CHAPTER 10: Innovation and Implementation
SUMMARY
INTRODUCTION
IMPLEMENTATION
FINTECH FOR BANKING
BLOCKAGES TO INNOVATION
CONCLUSION
REFERENCES
CHAPTER 11: Cybercrime and IT Resilience
SUMMARY
INTRODUCTION
SAFEGUARDING THE BANK OF THE FUTURE: NEW CYBER SECURITY THREATS
AI FRAUD DETECTION IN BANKING
CYBER AND THE LAW
CONCLUSION
REFERENCES
CHAPTER 12: Epilogue
Appendix: Fintech in BankingFintech in Banking
CREDIT SCORING/DIRECT LENDING
ASSISTANTS/PERSONAL FINANCE
REGULATORY/FRAUD DETECTION
GENERAL PURPOSE/PREDICTIVE ANALYTICS
QUANTITATIVE AND ASSET MANAGEMENT
MARKET RESEARCH/SENTIMENT ANALYTICS
DEBT COLLECTION
INSURTECH
BLOCKCHAIN
INVESTMENTS
CRYPTOCURRENCY
SECURITY
FINANCING
PAYMENTS
ASIAN STARTUPS
REFERENCES
Index
End User License Agreement
List of Tables
Chapter 2
TABLE 1 Current Imperatives in Banking
Chapter 5
TABLE 2 Knowledge Requirements for Machine Learning
Chapter 6
TABLE 3 Brand Value of All Banks 2018
TABLE 4 Brand Value of Top European Banks 2018
TABLE 5 Brand Value of Top US Banks 2018
TABLE 6 Profiling of Millennial Groups (Based on BoA Data)
TABLE 7 Financial Characteristics of Millennials (Based on BoA Data)
TABLE 8 Development of Branding in Banking
Chapter 7
TABLE 9 Competences of Leaders in Analytics
TABLE 10 Evolution of the Banking Employee
Chapter 8
TABLE 11 Which Economies Are Most Technologically Ready
TABLE 12 Pros and Cons of Virtual Conferences
TABLE 13 Pros and Cons of Virtual Banking
TABLE 14 Pros and Cons of Universal Banking
TABLE 15 Inbound versus Outbound Payments (after SMA)
TABLE 16 Comparison of Mobile Banking vs Conversational Banking
Chapter 9
TABLE 17 Chinese Rankings of Cryptocurrencies 2018
TABLE 18 Top 2018 Cybercurrencies Ranked by Github Activity
TABLE 19 Populations in 2100
Chapter 10
TABLE 20 Essential Organisational Changes in Banking
TABLE 21 Blockages to Innovation
Chapter 11
TABLE 22 Various Levels of Cyber Security
TABLE 23 Six Levels of Cyberattack
TABLE 24 Table of Common Cybercrime Expressions
Appendix
TABLE 25 Examples of Fintech Companies Focusing on Credit Scoring and Direct ...
TABLE 26 Examples of Fintech Companies Focussing on Assistance and Personal F...
TABLE 27 Examples of Fintech Companies Focussing on Regulatory/Fraud Detectio...
TABLE 28 Examples of Fintech Companies Focussing on General Purpose/Predictiv...
TABLE 29 Examples of Fintech Companies focussing on Quantative and Asset Mana...
TABLE 30 Examples of Fintech Companies Focussing on Market Research/Sentiment...
TABLE 31 Examples of Fintech Companies Focussing on Debt Collection.
TABLE 32 Examples of Fintech Companies Focussing on Insurtech.
TABLE 33 Examples of Fintech Companies Focussing on BlockChain.
TABLE 34 Examples of Fintech Companies Focussing on Investments.
TABLE 35 Examples of Fintech Companies Focussing on CryptoCurrency.
TABLE 36 Examples of Fintech Companies Focussing on Security.
TABLE 37 Examples of Fintech Companies Focussing on Finance.
TABLE 38 Examples of Fintech Companies Focussing on Payments.
TABLE 39 Examples of Fintech Companies in Asia.
List of Illustrations
Chapter 1
FIGURE 1.1 Segmentation of the Banking Industry.
FIGURE 1.2 Banking 4.0.
FIGURE 1.3 Stylised Organisation of an Investment Bank.
Chapter 2
FIGURE 2.4 Creating a Digital Bank.
FIGURE 2.5 Reimagine Banking.
Chapter 3
FIGURE 3.6 Hierarchy of Analytical Capability
FIGURE 3.7 The Route to Monetising Data.
Chapter 4
FIGURE 4.8 AI-Infused Customer 360-Degree.
FIGURE 4.9 Number of High-Net-Worth Individuals.
FIGURE 4.10 Number of High-Net-Worth Individuals by Top Countries, 2016.
FIGURE 4.11 Use of Analytics and AI in Fraud Detection for Banking.
Chapter 5
FIGURE 5.12 Identification Authentication.
FIGURE 5.13 Hierarchy of Speech Understanding.
Chapter 6
FIGURE 6.14 Distribution Channels by Segment.
Chapter 8
FIGURE 8.15 AI Centric Banking.
FIGURE 8.16 Transformational Cost of Branch Improvements (Based on Adrenalin...
FIGURE 8.17 Full Service Financial Institution.
FIGURE 8.18 Structural Shift of Banks to Disaggregation.
FIGURE 8.19 New Partnership Models in Banking.
FIGURE 8.20 Five Disruptive Factors in Investment Banking.
Chapter 9
FIGURE 9.21 Operation of Blockchain.
FIGURE 9.22 Africa's Fastest-Growing Cities.
FIGURE 9.23 Population of Top Megacities in 2010, by Millions of People.
FIGURE 9.24 Projected Populations of Top 10 Megacities in 2030, by Millions ...
Chapter 10
FIGURE 10.25 Artificial Intelligence Hierarchy.
FIGURE 10.26 Omnichannel Banking.
FIGURE 10.27 Typical Types of Fintech Innovators.
Chapter 11
FIGURE 11.28 Cyber Risk Management: Creating an Additional Accountability Fi...
Guide
Cover
Table of Contents
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“Tony is not only a renowned expert of the financial industry of his home ecosystem but he has exclusive behind-the-scenes insights into banks and insurers around the world. Therefore, I am pretty sure that this book will become a widespread best seller pretty quickly.”
–Dr. Robin Kiera, Internationally acknowledged digital thought leader
“This book is a superb resource for those keen to keep pace with the continuously evolving financial services sector. It discusses how AI and analytics impact banking, including Open Banking and Blockchain, and such insight will resonate with all who read it – from sector newcomers to seasoned professionals.”
–Francesca Breeze, UK Communications Consultant, Financial Services
“A modern guide on how technology is transforming the role of banking in our society and the relationship with the institutions – a must-read to understand the next steps of this revolution.”
–Marcilio Oliveira, Founder, Sensedia
“Tony Boobier provides extensive guidance and background on the digital revolution in Financial Services. A comprehensive sprinkling of the FinTech disruption makes this a must-have for anyone involved in the future of banking.”
–Richard Sequeira, Director - Financial Services, TELUS Canada
“Tony has done a great job putting AI and banking together. IT has been the machinery powering banking for a long time, and AI is the new brain. With his profound knowledge, understanding and vision, he delivers for the reader a clear, structured and thorough path from today to the future of banking.”
–Rafael Funes, Executive Chairman, LOVIS
“What Tony provides is a deep narrative on what is and what should be. Both compelling and insightful. This book arms you with the desire to go forward and learn even more – and most importantly is a thoroughly enjoyable read.”
–Aiden Fernandez, Customer Analytics Leader and strategy and insight enthusiast
“The author's in-depth, wide experience comes through strongly. He achieves the difficult challenge of outlining clearly both the changing banking scenario and the transforming role being, and to be played, by AI emerging technologies.”
–Douglas Shillito, FCII, Editor and Publisher, Banking Newslink
“The statements contained in this book sets perfectly the scene of the banking sector. Our current focus on the cashless society and AI are some of many teeth in the banking wheels, a machine that always has, and always will move at its own particular pace.”
–Roy Soper, Solutions Consultant, Konica Minolta
“At a time when business as usual is no longer a viable option for banks, due to the industry being totally reinvented by the advent of digitization and AI, this book offers some highly valuable tips for organisational leaders on how to best navigate through these highly volatile and changing market conditions and develop a set of future proof strategic business imperatives.”
–Dr. Randeep Gug, Managing Director, Fitch Learning
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For a list of available titles, visit our Web site at www.WileyFinance.com.
AI and the Future of Banking
TONY BOOBIER
This edition first published 2020© 2020 John Wiley & Sons Ltd.
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Library of Congress Cataloging-in-Publication Data
Names: Boobier, Tony, 1956- author.
Title: AI and the future of banking / Tony Boobier.
Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2020. | Series: Wiley finance editions | Includes bibliographical references and index.
Identifiers: LCCN 2020004344 (print) | LCCN 2020004345 (ebook) | ISBN 9781119596127 (hardback) | ISBN 9781119596134 (adobe pdf) | ISBN 9781119596141 (epub)
Subjects: LCSH: Banks and banking—Technological innovations. | Artificial intelligence—Industrial applications.
Classification: LCC HG1709 .B66 2020 (print) | LCC HG1709 (ebook) | DDC 332.10285/63—dc23
LC record available at https://lccn.loc.gov/2020004344
LC ebook record available at https://lccn.loc.gov/2020004345
Cover Design: WileyCover Image: © PhonlamaiPhoto/Getty Images, © KTSDESIGN/SCIENCE PHOTO LIBRARY/ Getty Images
This book is dedicated to my grandchildren for whom, one day,coins and paper money might only be seen in a museum.
Acknowledgements
This is the third of my published books and personally the most challenging in terms of subject matter, breadth, and complexity. I hope I meet at least some of the readers' expectations, and at least encourage them to undertake their own research.
I first became interested in banking at a professional level nearly two decades ago but became personally engaged with banking over 40 years ago without really understanding what was involved. Perhaps many of us are the same.
With specific reference to my professional interest there have been many people who have helped with insight over that time. I owe a debt of gratitude to multiple people and organisations, and would especially mention Graham Cobb, Frank McKeon, and Laurence Trigwell, who started me on the road to being curious about the banking sector. I hope I have done them proud.
In later times, David Cummings of Tilney has been helpful in our discussions on the use of AI in wealth management, Gary Nuttall on the use of Blockchain, and Francesca Smith on the topic of Open Banking. Any weaknesses in my interpretation and understanding are entirely down to me, not to them. Craig Bedell, formerly of IBM, has also been a constant support.
There is such a wealth of information openly available that it's impossible to mention everyone, but I would like to pay particular regard to Doug Shillito at OnlyStrategic, who has provided a valuable source of insight and stimulation. With regard to everyone else, I've referenced my text for all of them to the best of my ability and I'm hopeful none have slipped through the net over the past two years, but if so I will be delighted to acknowledge them in later editions.
Throughout this book, various companies and products are referenced by way of illustration. These companies are mentioned without specific recommendation by me and readers are encouraged to make their own personal research. I have no commercial interest in any of them. Beyond this, the appendix also refers to various start-ups, but these are included for illustrative purposes only in terms of capability or longevity.
Thank you also especially to Gemma Valler and the team at Wiley, including Elisha Benjamin (Benji) and Gladys Ganaden (Syd), and the rest of the ‘hidden army’ who make stuff happen.
And finally, of course, to my family, especially my wife, Michelle, for her observations and advice, and leaving me in no doubt as to the meaning of ‘better half’.
About the Author
Tony Boobier is a former worldwide executive focusing on the application of technology for the financial services sector. With over 30 years of experience, he is a frequent writer and international public speaker. He possesses a deep understanding of how to apply business intelligence and analytics to enhance the management and delivery of products and services in numerous industries.
A recognised expert in customer analytics, risk, and operational effectiveness, he is a strong advocate for enterprise-wide analytics and the use of AI to improve service and reduce cost.
Qualified in engineering, marketing, insurance, and supply chain management, he is also the author of Analytics for Insurance: The Real Business of Big Data and Advanced Analytics and AI: Impact, Implementation, and the Future of Work. He lives near London, UK.
Introduction
At face value, addressing the two topics of artificial intelligence and banking in a single book might seem to be a challenging undertaking for both the reader and the writer. Artificial intelligence (AI) is an expression widely and extensively misused to represent what is, in many cases, the use of advanced analytics. Banking similarly is a generic expression for financial transactions of many types, and there are many different types of banks that are already using or need to use analytical approaches to run their businesses profitably. To effectively understand the interaction of both banking and analytics requires a knowledge of both even at a rudimentary level.
AI and the Future of Banking considers the many types of banking and how they use advanced analytics and artificial intelligence. It is predicted that by the mid-2020s, half of all businesses, including banks, will be using intelligent, self-learning systems. The banking industry is at the forefront of investigating and using advanced analytics, cognitive analytics and AI in a broad range of applications, including customer analytics, operational efficiency, risk management and providing wealth advice for clients.
This book aims to allow for the varying depth of knowledge of readers. Some will have considerable insight, whereas others will have limited or no experience. Some readers may be experienced in banking but have little knowledge of the topic of AI and advanced analytics. Others may be analytical experts with minimal knowledge of the banking industry. In either case, some readers may already be mature practitioners wishing to expand their knowledge, whereas others might be those at the start of their careers trying to gain insight before committing themselves to a professional pathway. AI and the Future of Banking aims to provide new and established industry professionals with the essential information on the implications of data and analytics on their roles, responsibilities and personal career development.
The aim of this book is not to provide a detailed and complex technical manual but rather a reader-friendly guide that is readily understood by any banking professional with limited or no IT background. Equally it will help IT professionals entering the banking industry to understand some of the many different facets of such a diverse industry.
One of the main issues for many senior professionals in financial services is that of technology advancing more quickly than their own personal learning. Some organisations are supportive in that they provide adequate training, perhaps in the form of continuing professional development. For others, some employers will expect understanding and self-learning at an individual level, whereas in reality some individual employees are being left behind by jargon, the pace of change and an inability to find a single source of work that is comprehensive, relevant and relatively clear in the use of language. For that particular group it's not just a case of ‘old dogs learning new tricks’ but rather that today's professional needs to be aware of the issues of the developing marketplace, perhaps more than ever before. To fail to be up to date means at least three things: professional irrelevance and redundancy; inability to add value to their organisation; and becoming a victim of change rather than an active contributor.
This book has been organised into three main sections:
The first considers banking as an industry that invites us to consider the meaning of money and its digital transformation, and the importance of both.
The second investigates AI and advanced analytics, which invites readers to reflect on the entire ‘data agenda’.
The third explores the future of banking itself, where we will not only be provocatively futuristic but also consider the road to the future by looking at some of the issues of implementation.
This approach will enable readers to ‘dip in’ where it is most appropriate for them at a personal level, although hopefully the other sections will also be worthy of examination. To do this, we will try to keep away from industry jargon, abbreviations and any duplications wherever possible.
In terms of the specifics of the book itself, the first three chapters are foundational and aim to consolidate the reader's existing knowledge and at the same time encourage them to think about the future of banking and the impact of AI. Chapter 1 provides an insight into the evolution of money to what has now become perhaps no more than a form of digital commodity in a near-cashless society, and offers the reader an understanding about current banking roles and the likely impact of AI on these in the future. Chapter 2 considers current imperatives within the banking industry, comparing and contrasting them to imperatives in other key industries of retail, telecom and healthcare and suggests a set of future imperatives for the banking industry going forward. Chapter 3 is a data and analytics ‘primer’ to help readers understand not only the hierarchy of analytics but how value is extracted from data.
The next three chapters take the reader deeper into the subject of advanced analytics and AI specifically for the banking industry. Chapter 4 discusses the key elements of banking analytics, covering issues such as financial performance management, customer analytics, risk management and operational efficiency, and gives readers a strong insight into the importance and current usage of analytics for banking. Content is organised by imperative rather than type of bank. Chapter 5 takes the insight to a higher level, providing a background to the development of the concept of AI and then leading on to machine learning and its applications, including apps used in banking. Chapter 6 focuses more specifically on AI and the importance of branding in banking. The chapter links strongly to the customer analytics element of AI. It recognises that different generations currently have different expectations of banks and that these will be fulfilled by both the brand and ultimately by the bank's service extension. The chapter paints a picture of banks getting much closer to the consumer through AI and considers the issues involved.
Chapters 7 and 8 are about change at a personal and organisational level. Chapter 7 considers the impact of AI on issues of leadership and employee transformation and discusses leadership in an AI-infused age, the attributes of AI-infused leaders, training and personal coping strategies. It also deals with the evolution of the banking employee and creates a persona for a banking employee of the future. Chapter 8 is about how banks might change physically, especially at branch level, and gives five scenarios for typical Banks of the Future, including transformation of the investment bank.
Chapter 9 deals with the topics of Open Banking and Blockchain, both of which are major issues in the banking industry in their own right and which will be affected by the impact of AI. The chapter also considers the impact of banking expansion in other continents.
Chapter 10 looks at issues of innovation and implementation, broadly considering topics such as new job roles, bootcamps and how banks work with Fintech companies. It also reflects on why innovation and implementation fail and provides possible mitigation strategies. Chapter 11 rounds off with the difficult area of cybercrime, recognising that its management is a critical factor in the implementation of AI. It provides a broad explanation of the problem together with mitigating tactics, and concludes by looking specifically at the use of analytics and AI in banking fraud.
The appendix provides a list of over 100 Fintech companies, without recommendation, but in order to illustrate the breadth and depth of AI-type start-ups in the banking area at the current time.
Overall, the book aims to provide a heavily referenced, informative and up-to-date resource for bank executives, managers, new entrants to the banking industry, financial technology and financial services practitioners and students on postgraduate finance and banking courses.
There's no hiding the fact that there is already an abundance of information out there that is readily accessible online, and where possible online links are shown in the references for personal learning. Not everyone has the privilege and ability for such levels of access; others do not know where to start their search and the rest just simply won't have the time. If the industry recognises that information is critical to the future, the other side of the coin is that there is too much information. It's sometimes a battle to find out what to look for and where to search, and to be comfortable that the information obtained is both realistic and impartial, especially from technology vendors. This book, which is vendor agnostic, will hopefully provide trusted and impartial advice. The entire topic of AI and the Future of Banking is not a definitive statement of the eventual outcome of the industry but simply part of a more expansive journey on which we are all travellers.
The depth and breadth of each of the three areas of AI, banking and human engagement means, inevitably, that there needs to be some intellectual trade-off, with certain assumptions being made regarding knowledge and understanding, and for this the author begs forgiveness in anticipation. However, there must be a starting point, and in this case it is one of assuming that the reader has little or no knowledge in any or all of the sectors.
If managing these three areas is not difficult enough in itself, a fourth element will also be introduced, one of time itself, as the future of banking is considered. To do this effectively, it's important not only to think about what will happen but what has happened in the past that has provided us with the banking industry that currently exists. Not only will we try to consider how technology will change the operation of banking but also how changing consumer demands – evident in retail purchasing for example – will mould the future shape of the industry. Where appropriate, examples of best practice will be provided by way of proof points that are already in the public domain.
Even at this stage, it is tempting to make the bold statement that all banking will be infused with AI to some degree within the foreseeable future, but one big issue to address is how the industry will get there from a practical point of view. What are the challenges of implementation and what are the possible solutions? Do they rest in external organisations like start-ups in the Fintech community, or can banks innovate internally themselves? In either case, what are the key building blocks of change? How quickly might all this happen, and how is change resisted at an organisational level?
As a caveat, it should also be recognised that the future of banking is not just all about analytics and AI, although these will play a major part. It is important to reflect on some of the other contributing factors of change, such as those of customers' behaviour and their greater expectations, as well as advances in other industries that will inevitably have a ‘knock-on’ effect.
CHAPTER 1Prologue: Why Banking?
SUMMARY
This section will look briefly at:
What is meant by the concept of money especially in the digital world
What is banking in a digital environment
The breadth of the banking industry, and the key functions within banks such as HR and operations
Some of the present and future roles in an analytically and AI-infused banking world
It's not intended to be a comprehensive guide but rather to help set the scene in terms of the breadth and width of the banking industry, and how the elements of advanced analytics and AI form part of a concept that will be described as the ‘Bank of the Future’.
Technology Is Changing the Way We Manage Our Money
The popularity of convenient webchat services like Twitter is making banks invest in similarly fast capabilities as customers embrace online support. Britons (as well as many others around the world) are increasingly turning to their smartphones; 22 million were using a banking app in 2017, up from 19.6 million in 2016. There were over 5.5 billion log-ins to banking apps in 2017, an increase of 13% on 2016. Stephen Jones, Chief Executive, UK Finance, said: ‘Over the next few years Open Banking and artificial intelligence will change the relationship we have, not only with our banks but also how we fundamentally access and utilise financial products and services’.1
Beyond this, the chapter considers some of the present key functions in banking and speculates on what might comprise ‘jobs of the future’ with some indicative job titles and descriptions of what they might entail.
INTRODUCTION
‘Money, get away
Get a good job with good pay and you're okay
Money, it's a gas
Grab that cash with both hands and make a stash'
Roger Waters, Pink Floyd, ‘Money’
To consider the future of banking, in whatever form, we need to think also about the future of money and that in turn needs us to think about what actually is ‘money’. We already think we know the answer to that question.
Everyone, except an economist, knows what money means, and even an economist can describe it in the course of a chapter or so.
A.H. Quiggan. A Survey of Primitive Money: The Beginnings of Currency2
We're obsessed with money. Admittedly, there are some who view the topic as a necessary evil, but ‘necessary’ it certainly is. Its pursuit dominates a large part of our lives in that concept we call ‘work’. Beyond that alone, money provides a mechanism for escaping from work through the funding of leisure or, ultimately, retirement. The process by which we normally gain access to money is that of banking and because of this the topics of money and banking are irretrievably interlocked.
But money is much more than it seems at face value. For most, it represents coins in pockets, notes in wallets and numbers on bank statements. We think of it as the reward for labour and effort extended and as a medium of exchange to be passed on to another party in return for a service or product. Entire disciplines – such as economics – have been created on the strength of it and even these attempt to take the subject to higher levels through more granular subsets such as macro- and microeconomics. Our understanding of money seems almost commonsensical, intuitive and understandable but there is one fatal flaw, which is that our understanding is incorrect.
In his book, Money, the Unauthorised Biography,3 Felix Martin takes us through the history of money and concludes that it represents no more than a set of ‘tokens’, themselves representing a system of credit and clearing, all ultimately based on trust. The management of these tokens has been reinforced through what he describes as three key quasi-technological breakthroughs:
Mankind's ability to be numerate
The capability to write and therefore to record
The concept of accountancy, which has allowed both individuals and groups to keep records efficiently in a standardised way, permitting quantities to be tracked
The tokens themselves are a reflection of something deeper, that of universal economic value, which through standardisation has allowed trade to happen throughout the ages. The idea of ‘universality’ isn't confined to the topic of money but is considered to be a reflection of a spirit of a particular era, especially that of the golden age of Greece, which overall allowed humanity to take a more objective and measured view of itself. The evolution of money therefore is argued as being seen to be one more piece of evidence of a ‘fundamental intellectual revolution’ that was taking place at that time.
Other writers such as Nigel Dodd suggest in The Social Life of Money4 that there are other origins of money and that it ‘must have started somewhere’, but he distinguishes between the origins of monetary forms (such as coinage, for example) and the history of money in general terms.
Dodd suggests that there may well have been multiple origins:
As a form of barter exchange system
As a ‘tribute’, such as a form of payment (alongside various debts and fines) to religious and political authorities
As a method of quantification, where we use the concept of money to quantify ‘value’
As ‘mana’ or gifting, which in turn relates to the social interaction between giver and receiver, and the importance of money in the nature of social relationships
As a form of universal language, where money is compared to a ‘system of signs’. Karl Marx described money as ‘the language of commodities’.
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As a stimulant for violent or conflicting behaviour, not only in respect to power, politics and war (where money seems to sit hand in glove with these concepts) but also in the perceived conflict between employer and employee, buyer versus seller and creditor versus debtor
As we think about the continued evolution of money and banking, it's important also to position it in the context of further technological breakthroughs and intellectual revolutions. How will the concept of money change in an era of AI? The Greeks had already established the notion of economic value and that the economy could be considered as an objective space rather than a hypothetical notion, but there was still a practical need to organise money in such a way that prices could be agreed, credit and debt accumulated, and balances of payment reconciled. This could be done through mutual credit networks or the issuing of local currencies, but there was the continued risk of these localised arrangements defaulting.
With the sovereign or state being by far the largest transactor of money, it became increasingly popular to link the management of money to the sovereign or state itself. This doesn't suggest that the sovereign or state itself is beyond defaulting – as happened in Greece, for example, in 2008 – but it creates a higher degree of stability even if this is at a cost of forging a political link between money and power. This political linkage can, however, be subject to exploitation and manipulation. By medieval times, sovereigns had recognised this connection as a way of raising money from the populace through manipulation of the monetary standard, a process known as seigniorage. Coins were by then being minted without any written indication of their nominal value, only with the face or arms of the issuing party, so it was easy for the sovereign to reduce the ‘tariffed amount’ of the coin, and in doing so in effect create a one-off wealth tax. This approach – together with debasement, which was, in effect, a process of reducing the precious metal content of a coin to reduce its tangible value – continually served to erode trust in ‘money’ itself. Even today we are sometimes unsure about what it actually is, and this is likely to get worse as increased digitalisation affects us in all areas of life.
Such exploitation, together with relative chaos, created an atmosphere in which the topic of money might be better addressed. Nicolas Oresme (1320–1382) was the Grand Master of Navarre, which was one of the most prestigious schools in Paris. In his paper called ‘A Treatise on the Origin, Nature, Law and Alterations of Money’, addressed to the French Dauphin Charles in 1360, he asked two questions:
Was it right that the sovereign should be able to manipulate the money standard?
If it was, then in whose interests might it be done?
He suggested a radically different viewpoint: that money was not the property of the sovereign but rather of the community that uses it. If there was a role for the sovereign, he argued, it was as the ‘executor of a public ordinance’.
Put another way, Oresme's argument was that ‘money’ – or at least the concept of money – is owned by ‘us’. Everyone else are merely custodians and intermediaries.
WHAT IS BANKING?
The term ‘banking’ is generic and wide-reaching, so it is first important to recognise the different types of bank. (See Figure 1.1.) Generally, these types comprise:
Retail banks: These focus on consumers or the general public as their customers. These are the banks that provide checking and savings accounts, as well as other services such as credit card and personal loan services.
Commercial banks: These banks target business customers but the services they offer are more complex and normally the amounts are much larger. They may need to deal with payment from customers and to provide lines of credit to help their clients manage their cash flow.
Investment banks: These help businesses operate in financial markets, such as if a business wants to raise capital or to go public.
Merchant banks: Historically, these banks deal in commercial loans and investments. Originally their purpose was to facilitate trading in commodities, which were mainly fabrics that involved ‘merchants’, and hence the name ‘merchant banking’ arose. In more recent times, the term ‘merchant banking’ has tended to refer to banks that provide capital to companies in the form of share ownership rather than loans, and also to provide corporate advice to the firms in which they invest.
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Central banks: These are typically the US Federal Reserve Bank or the Bank of England, which manage the monetary system for a government.
FIGURE 1.1 Segmentation of the Banking Industry.
Credit unions: These are similar to banks but are mutual organisations, owned by the customers, as opposed to external shareholders.
Online or internet banks: These are typically retail banks but with no physical presence to visit.
Mutual banks: These are like credit unions because they are owned by their customers (or members), as opposed to outside investors.
Saving and loan companies: These are organisations whose dominant purposes are to take savings from one type of customer and make loans to another.
Non-bank lenders: These are technically not banks but provide a similar service.
Increasingly the expression ‘challenger banks’ is coming to be used for new banks, usually retail, which seek to threaten the larger more established national banks by either:
Giving better interest rates
Offering new banking ‘propositions’
Providing enhanced access either to their physical site (through longer opening hours) or online
Any combination of all of these
Regulatory change and deregulation have allowed ‘challenger banks’ to be able to enter the market through an easier process.7
Some suggest that there is also a massive ‘shadow banking’ system, which comprises finance companies, structured investment entities, securities lenders and others. These perform similar functions to banks but are not regulated in the same way and don't have the protection of central bank support or government deposit insurance.8
The traditional role of many banks as intermediaries (between savers and depositors) is thought by some – for example, Susan Strange in her book Casino Capitalism (1986)9 – to be on the decline and that they are increasingly focusing on ‘creating, buying and selling credit money’ through innovation and the use of so-called ‘money substitutes’. This, she suggests, is leading to them increasingly operating beyond the reach of central banks and governments. Money substitutes are described as highly tradable commodities as an alternative to ‘paper money’, such as ‘token coins’ or even a credit card. Strange suggests that the develop of ‘money substitutes’ encourages the ‘imprudent expansion of credit with increased profit to the banks but increased risk to the system of financial panic and collapse’, and even gives this notion a name: ‘overbanking’.
Susan Strange also warns that through credit cards, the individual consumer is at risk of overspending to the point that the debts incurred may not be recoverable by the bank. In the UK, for example, more people are likely to hold a debit card (51m) than a credit card (32m), but those holding credit cards are likely to spend higher than debit card holders, as much as 39% more. According to UK figures, credit card write-offs were as much as £3.1 Bn per month in 2010, although in more recent times has ‘settled down’ to a more reasonable £1.6 Bn per month. Such write-offs might be considered to be dead money.10
It almost seems as the banks encourage overspending beyond the means of their customers by passing the burden of repayment of credit card and loan debt onto a relatively uninformed public. This is made worse by the complexity of the banking industry and the jargon that describes its activities. No wonder that the general public are mistrustful of the banking industry. The topic of ‘trust’ underpins not only the concept of banking but the concept of money itself. Georg Simmel, author of The Philosophy of Money in 1874, refers to money as being a form of ‘socialized debt’ in which money is expected to be used to settle debts as it is part of a wider ‘social community’.11
It's inevitable that we have to ask ourselves, ‘What is a bank?’ in today's terms. And in looking for that answer, what therefore might a ‘future bank’ look like? The banking sector has far more complexity than it seems at face value, and our views of the future of banking might be mainly limited to our own personal expectation of what a future bank on the High Street might look like, even after a little cosmetic ‘polishing’.
More importantly, the question of what a future bank is like starts to address a deeper complexity, one that is linked to the concept of increased ‘financialisation’ – a broad term that embraces multiple the idea of financial instruments – or more simply, how will we deal with and ultimately manage our money across our entire financial ecosystem?
Increasingly we are forced to consider the concept of ‘Banking 4.0’ (see Figure 1.2), that is, banking for the Era of Data in what is often described as the Fourth Industrial Revolution.
FIGURE 1.2 Banking 4.0.
WHAT DO WE MEAN BY ‘MONEY’ TODAY?
Although we usually equate money with physical cash, this only comprises about 3% of the total amount of money in circulation. More than 97% of the money used by people and businesses in the UK exists in the form of bank deposits at commercial banks.
It's important to understand that banks are not only financial intermediaries but also have the ability to create new money (in the form of the numbers that appear in the bank accounts of customers through the accounting process used when they make loans) and also to make money disappear from the economy (as loans are repaid by the customer).
According to the Bank of England:
When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.
Just as taking out a loan creates new money, the repayment of bank loans destroys money… . Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.12
Bank lending therefore creates money. At the same time, more or less, money is also created by central banks to support and facilitate this creation of private money.
Money is constantly moving around in a massive accounting exercise. Let's look at the situation regarding a ‘simple’ ATM (automated teller machine) or ‘cash point machine’, typically one embedded into the wall of a store or on a street corner. When physical cash is taken from the machine, the customer's account balance is reduced by the bank, and the physical money is handed over. Because of this, the balance sheet of the bank gets smaller as it loses both an asset (which is the ‘cash’), and also loses a liability (the bank deposits). Customers can only withdraw money if they have a positive balance of demand deposits or an agreed arrangement such as an overdraft. This means that before any payment can be made, a bank needs to have created ‘money deposits’, which are in effect legal obligations by the bank to the depositor who has transferred legal title to the cash. The cash becomes an asset to the bank, but also a liability to the bank as well. It's only in this rather convoluted way that anyone can obtain physical cash from the ATM.13
Almost as a ‘sublayer’ in the process, the central banks hold money reserves that act as the final settlement between banks and other financial institutions. Also, when households and businesses make payments between each other, processes such as BACS in the UK, for example (previously known as ‘Bankers Automated Clearing Services’), queue these payments and calculate the net differences of the payment flows in each direction. Then at the end of the clearing cycle, the net difference is transferred from one bank to another.14
Whilst the notion of banks creating money might sound to be a modern concept, its background is not a new idea. The Romans had a well-developed banking system, but there is more knowledge of the Italian Renaissance cities and later in Amsterdam and elsewhere in Northern Europe. People wanted a place where their coins could be kept in reasonable safety and the best bankers were the goldsmiths: the profession that seemed to have the strongest strongboxes. Bankers discovered that they could also lend this money to someone else and earn interest. Usually the borrower was given hard money or a deposit that they could draw on, but more often than not was given a piece of paper certifying that the borrower had money ‘on deposit’ at the bank. They were able to pass on this piece of paper for a purchase, in a form still recognizable today.
The original saver still had money in the bank, and the borrower now had a piece of paper that also represented that they had money in the bank by way of a deposit. In reality it was the same money but it had in effect doubled. To that extent the bank had ‘created’ money or capital, and so it has been ever since. Creating an overdraft or credit loan on a plastic card has the same effect, which is one of ‘creating money’, as has the idea of providing finance for any new purchase such as a car or home.15
A CASHLESS SOCIETY INCREASINGLY EMERGES
When this author visited China in 2014, cash seemed to be king, at least in the major cities. By 2018 it seemed that the urbanised areas of the country had rapidly moved to almost a cash-free society, mainly in favour of systems such as AliPay and WeChat Pay, which are at the centre of 80% of transactions. Even street vendors now seem increasingly reluctant to deal in hard cash. Of course, this doesn't necessarily relate to the whole of China as its geographic diversity leads to different characteristics on a regional basis, but the rate of change of the use of ‘money’ – especially in the Tier 1 and Tier 2 cities – seems extraordinary, and predominantly driven by two payment platforms:
Alipay
: A third-party mobile and online payment platform established in 2001 which overtook PayPal as the world's largest payment platform in 2013. With over 870m users (2018), it is the world's number one payment service organisation, representing an over 54% share in the third-party payment market in mainland China.
WeChat Pay
: With WeChat as a messaging and social media app, having over one billion users, and sometimes described as the ‘app for everything’, the development of WeChat Pay as a digital wallet has not only allowed transfer of money between individuals but also can link the user to other bank accounts. Unlike AliPay, the transfer isn't instantaneous but is at the user's choosing.
Whilst the scale of both these platforms is astounding, especially when coupled with increasing international adoption, two other especially interesting aspects are:
The speed at which these changes have happened
How quickly consumers have become comfortable with these new entrants (in comparable terms) to the money marketplace
Already these companies are being considered as competitors to Amex, Mastercard and Visa.16
Elsewhere in the world, the move towards a cashless society increasingly marches on. In the UK, over half of transactions in 2015 were cashless.17 In the US and other countries, the picture is less clear. According to a correspondent in USA Today:
The Federal Reserve cites cash as the most frequently used form of payment, accounting for 30% of U.S. consumer transactions, ahead of all other payment methods. Unlike alternative forms of payment, cash requires no fees, no passwords, it can't be hacked and it's not vulnerable to identity theft, crashing IT systems and power outages. Cash safeguards our personal information, so each of us can decide whether or not to share the details of our spending habits. Digital payment technology makes it too easy to surrender our privacy.18
Beyond this, there also seems to be an ethical viewpoint. ‘Growth of cashless society leaves US poorest sidelined’, shouts another headline, with the subtext adding that there is ‘Concern that growing number of stores and restaurants that do not accept physical money will further marginalise low-income people’. These worries may prove to be no more than a rearguard action. Physical cash adds to the cost of processing by as much as 10% of overhead costs. Payments expert Richard Crone forecasts that in the US, a quarter of retailers will soon be operating in a cash-free manner, up from 17% in 2018.19 That figure is still likely to grow.
There are other consequences. Tipping and charitable ‘bucket’ collections, which rely on emptying pockets of loose change, are being inevitably affected. Some charity collectors on the subway are already taking donations using contactless cards. As that increasingly happens, how long will it be before relatively speedy and casual transactions are abused either by the wrong amount being donated or directed to the wrong recipient? The increased accessibility and low cost of technology is increasingly allowing even street beggars to accept digital donations. And where, at the end of the day, will it leave the Tooth Fairy, whose business has relied on hard currency in the form of coins being left under the pillows of children?
As we consider the future not only of retail banking but of money, it seems that for at least the immediate future there will be a two-lane approach comprising a sort of hybrid of the use of physical (or ‘analogue’) money, and/or a digital model of money. As a result, perhaps inevitably in the short term, banks will also need to adopt a hybrid model that manages both physical and digital money. In doing so they will provide a service not only to those such as Millennials, who prefer the digital model, but also those ‘silver surfers’, who still prefer the relative comfort of a stuffed wallet.
The banking and money ‘story’ is not confined to retail banking but also to those commercial banks and financial institutions. Financial innovation has led to a transformation of the process beyond the physical handing of gold or bullion where once precious metal had been dug up, melted down and made into coins. Now it has become a modern monetary system that comprises the management of ‘brokered’ relationships between creditors and debtors, intermediated by what we still call ‘banks’.
As Niall Ferguson describes it in his book The Ascent of Money:20
The core functions of these institutions [is] now information gathering and risk management. Their source of profits [lies] in maximizing the difference between the costs of their liabilities and the earnings on their assets, without reducing reserves to such a degree that the bank becomes vulnerable to a run.
KEY BANKING FUNCTIONS
In considering the use of advanced analytics and AI in the banking sector, we should therefore allow for all three banking models – android, digital and a form of hybrid. Typically, the generic functions found in all these types of bank comprise:
Finance and Administration: Finance is a broad term covering the topics of how money is managed and the process of how funds are acquired. Typically, students and practitioners of this function would also be required to understand Managerial Economics, Bank Management, Investment Fundamentals, Monetary Theory, Financial Markets and Microfinance.21
Risk and Compliance: Risk management teams are often described as the ‘second line of defence’, sitting between the roles of management and audit. Banking compliance and risk has become one of the most significant concerns for financial institutions, especially as new laws and regulations continue to emerge, along with the need for banks to ‘comply’ with issues such as conduct-risk, next-generation Bank Secrecy Act and Anti-Money Laundering (BSA/AML) risks, risk culture, and third- and fourth-party (subcontractors) risks, for example. All banks differ in the way they operate, but one thing they have in common is the management of risk and the undertaking of the compliance function.22
Acquisition Management: This term can be slightly ambiguous in that it might relate to ‘customer acquisition’ (i.e. growth of a profitable customer base), which may in effect be a form of sales, marketing or account management function. Increasingly customer acquisition is being digitally driven and practitioners in this area increasingly need to be not only marketing experts but must also be technically competent in the use of CRM (customer relationship management) and other relevant software.
Alternatively, the expression ‘acquisition management’ may also relate to the acquisition or merging of one bank with another. The probability is that nearly every mid-sized bank is looking to acquire or be acquired and it is critical that any ‘fit’ is both appropriate and timely. Mergers and acquisitions occur to fill operational gaps, allow rapid expansion or to achieve economies of scale. But it is often more than just about ‘numbers’. Effective acquisition requires effective consideration of operational alignment, shared visions and matching of cultures. In an increasingly technology-driven business environment, it also requires alignment of operating platforms, which may not be easily undertaken. In a risk-averse industry, the potential for problems in merger and acquisition activities invariably remains for operational, systematic or procedural failures (which we also describe by the umbrella expression of ‘operational risk’; see Chapter 4).
HR and Corporate Services: As with all organisations, HR (human resources) and corporate services underpin the effective running of the banking business. Perhaps once thought of as the ‘employee's friend', increasingly the HR function has taken on the mantle of dealing not only with recruitment, staff retention and development (aka ‘talent management’) but also the legal interpreter and implementer of the employment contract. Increasingly advanced analytics and AI systems are being used as primary tools in the recruitment process, especially relating to selection of candidates.
In more recent times, one particular demand of the HR function has been to try and restore the integrity of a banking industry that had suffered from lost trust, especially in the last decade. Employee behaviour, which was often ‘coin-operated’ or commission-driven, has been forced to change and HR is often seen as the ultimate custodian of that cultural shift, which in many cases has led to a loss of people from the sector.
Specifically in the banking and financial services sector, the new regime of compliance coupled with technological change has also placed increased pressure on the HR function. Going forward, as work roles and functions inevitably change as a result of the infusion of technology into operational processes, the likelihood is that the HR function will itself increase in complexity. In summary, a profession once thought of as being based on ‘soft skills’ is increasingly becoming the vanguard – a position at the forefront of new ideas and developments – and occupying a leading position in the transformation of the industry.
IT and Operations: The operational function within a bank, especially a commercial bank, is sometimes described as the ‘engine room’ of the business. In what is referred to as the ‘back office’, the operations team manage vast amounts of data and transactions and ensure that money and transactions continue to flow smoothly. The operations and IT team are a crucial part of the banking business yet are often seen as a cost to the organisation rather than a profit centre. Being a ‘cost’ to the business places pressure on optimising, usually reducing, the cost of manpower. This has also led to the use of contractors, an approach that has been prevalent in the sector, and one that allows operational flexibility in a volatile marketplace, even though it carries the risks of inconsistency and occasional bad practices.
Some IT and operational centres have also been used as a ‘shared service’ between different banks in a form of quasi-outsourced basis, although there are invariably issues regarding risk, security and privacy to contend with.23
