An interview for “Piata Financiara” Romania — on bank branches, cloud, 2008, 2014

We see here the dynamics of a field being fundamentally disrupted by technology. The growth of broadband internet access, cloud computing and mobile devices/smartphones have made possible technology solutions that allow banks to deliver the same and better services to their customers without requiring a visit to the branch. Even account opening, that many bank still enforce being done at the branch, in person,  for KYC (know your customer) reasons, is possible online at some banks using video conferencing and scans of documents. So there is really no impediment to conduct all banking activities online. And still old habits die hard, and people go to bank branches for a variety of reasons — feel that the transaction is “more secure”, don’t know how to use online services, the online service is not reliable, or for advice. For a bank, the physical branch is costlier than delivering the same service digitally, however banks need to keep them going for the segment of customers that prefer to use a branch. It has also been reported that physical branch presence in a neighbourhood increase the level of trust in the bank, and therefore the market share of those banks more visible in the real world. It may be, in the future, that the physical bank branch cost will be the price to pay to show stability and trustworthiness, even though the banking services will be delivered mostly online. Almost a branding exercise…

The behaviour of banks in recent times are a direct reflection of the analysis above, and the zig zag we have seen is the tactical response to each market and bank situation. It makes sense for a new, unknown bank, to build branches to get customer mindshare, while a more stablished bank should optimise its branch network, reduce their numbers where they have good market share, keep them even when losing money as cost of keeping customers. And of course all banks, small and large, should aggressively move to provide a full set of digital services to their customers.

We have seen the same pattern all over the world, as new entrants use new technologies to attack the banking franchise from the payments end. Regulation is key to level the playing field and protect customers from losing their money. Many times, the new entrants use different names for similar products, and customers need to be aware of what exactly they are buying or what service they are using. As an example, when you “load” your web wallet, you are actually making a deposit with the wallet provider, and you entrust your money to them for a potential future payment. Once regulation is enforced, the winners will be the customers that will get a better, faster service, either from new entrants or incumbents that use similar technologies. My view is that the banking industry, as a whole, will soon adopt these new digital technologies for payments, and new entrants will face strong competition from many established players.

We have seen a lot of liquidity being created, and not deployed. Regardless of public declarations, the only real lesson learned by many banks is to drastically reduce lending, for lack of better systems to asses risk. There are also new, better developments — the crisis has forced many banks to rethink their risk methodologies, and some are working hard to develop better ways to drive the business, based mainly on big data techniques.

It is clear to me that the official measuring and reporting framework needs a careful inspection — and numbers that are not aligned are not credible, inside and outside the country. At the macro level, better/more business and personal credit would be a good indicator for both economic growth and and level of confidence in the Romanian economy.

I am convinced that adopting new digital technologies is the only way to survive for financial institutions. We have seen industry after industry being disrupted/changed fundamentally by digital technologies, and I believe that the financial industry is close to being next in line. Of course there are problems, adoption is and will be uneven, some banks will succeed and some will fail. But the trend is clear, and the question will not even be asked in 5 years from now. Special mention regarding “cloud computing” — I advocate for banks to use cloud computing technologies inside their data centres, for major cost reduction, increase reliability, and unmatched agility. This is different from moving banking applications to cloud providers, that will most likely not happen.

My belief is that cheap smartphones and cloud services are the key to drastically reduce the unbanked population around the world, including Eastern Europe. The move to wide-scale adoption of smartphones is well under way, and many banks and new financial service providers are already taking advantage of these capabilities. If M-Pesa was able to bank most of Kenya’s population in several years, I don’t see any reason why the same transformation would not be possible in Eastern Europe.

There is one clear difference between countries in the region, and it is the Russian banking system. The bank I work for, Sberbank, is a very large bank, with 100 mill customers, competing at par with other major international banks. The amount of business activity driven by Sberbank and other major russian banks is much larger than the other countries in the region, and it directly influences the level of maturity of banking processes and systems. Banks in smaller countries have the advantage of being able to be nimbler, and adopt new technologies and operational processes faster, unfortunately not many take advantage of this opportunity.

I think we have seen the worst, and, as economic activity is picking up in Europe and around the world, the financial system will pick up steam as well, in a positive correlation. I expect better years ahead, starting with 2014.