Digitization of Banks and Financial Health. My Soapbox

Think of this as a Hyde Park Corner moment. I get passionate about things. It drives my wife crazy.

As a long-time banker and technologist, I want to see banking transformed by digitization. As a human being, I want to see relevant and affordable financial services for everyone.

Sometimes these two passions have seemed to be in conflict. Banks view digitization as a matter of profit, and even of survival. Financial inclusion specialists often dismiss the big banks as megalithic institutions for the wealthy.

This is a false dichotomy. Banks need to rethink their social charter – few would disagree. They are accountable to regulators. They are accountable to shareholders. But they are also accountable to the communities in which they work. For the biggest global banks that means the whole world. But it has significance no matter what the bank’s size, even a one branch local community bank.

Digitization of Banks

Why do I care about seeing banks transformed by digitization? Because I hate waste, and love to see potential realized. Banks have so much going for them as providers of value to their communities. Managed right, they can’t be beaten. Think of the centuries of trust, the petabytes of data, and the billions of customer relationships across the world. Banks understand risk as well as anybody. (After all, that’s banking at its core – the business of managing risk.)

And yet, there is tremendous waste in banking. Some of it is historical, some is political. Some of it is due to conflicting demands (regulators, shareholders, customers). But most of it is ultimately solvable.

Digitization presents amazing opportunities. You know most of them. Significant cost reduction is possible without brick and mortar infrastructure to maintain. The opportunity to simplify can improve speed, responsiveness and efficiency. The ubiquity of mobile phones creates a unique opportunity. Digitization gives the ability to reach people in rural areas, who are not close to brick and mortar branches.

Fintech for Social Good

A couple of days ago, I attended a San Francisco Fintech Meeting entitled “Social Good in Fintech”. This excellent panel discussion talked about Fintech firms established primarily for social impact. All the panelists are engaged in funding or delivering a range of financial services to people not served by traditional banks.

One of the panelists was John Langley, CEO of Bay Area based startup Dobot. John and his partners had highly successful careers in premier financial services organizations. But they started to view success in social impact terms, rather than financial. So they formed Dobot to help struggling consumers to develop financial health. This includes management of spending behaviors, saving, goal-setting, appropriate investment strategies, and mutual support.

After the discussion, I asked John whether he saw Dobot and similar companies acting independently of banks. He agrees that banks have not stepped up to the challenge of providing meaningful banking services to the huge number of underbanked people in the US (and throughout the world).

But John also said that in the long run, he sees Fintech firms as enablers for social good in traditional banks. Fintech can provide banks with cost-effective ways to address financial health issues. In this way, Fintech can leverage the huge reach and scale of banks to further social impact agendas.

Fintech Helping Banks Help People

Why don’t banks offer meaningful financial services to poorer members of their communities? Is it because they are evil and only care about the bottom line? Of course not. Most bankers love to do good. Most bankers are uncomfortable with the way they are labeled. But most bankers know their duty. They are bound to maximize long-term profitability and sustainability for their companies.

Imagine this conversation with a senior banker:

You: Why aren’t you helping the poor to become more financially healthy? Don’t you care?

Banker: I care just as much as you do. But I have a job to do. If I focus on financial services for the poor I will reduce the profits of my company, and then I’ll get fired.

You: How would adding millions of new customers get you fired?

Banker: Our infrastructure was designed for the banking of the past. We have fixed costs (like branch staffing and compliance) to add a new customer. We also have high variable costs to process transactions (like interchange fees and customer service). Poor customers don’t leave enough money with us to cover those costs. And we can’t charge them what it costs to do their transactions. So we’d be adding millions of loss-making customers and I’d get fired. And another thing. Developing all these capabilities would take a lot of investment. This would distract us from meeting our horrendous regulatory requirements.

You: What if I developed technology and processes that would reduce the cost of onboarding new customers? What if that cost fell below the value of their deposits or loans? What if I could show you ways to make payments for them that would be profitable no matter how small the amounts? What if you were handed on a plate a set of apps and products that are designed specifically with the poor in mind?

Banker: Then of course I’d be interested. If we could improve our return on equity and at the same time improve quality of life in our community, I’d jump at it! But I’d need proof!

Many Fintech firms are developing solutions that leverage modern technology. These solutions bypass fixed infrastructure costs and reduce per transaction costs. Like Dobot, many are designed specifically to address the poor financial health of the majority of people around the world. 

The Soapbox Appeal

Here are my appeals:

Consumer and Small Business Product Executives: don’t assume that it will always be unprofitable to provide appropriate financial services to the poor. You want to have a social impact, I know you do. Start looking at what Fintech firms are doing and realize that they can close the gap for you. Take the time to become familiar with them.

Banking CEOs and CFOs: don’t lose sight of the fact that an increasing number of your shareholders care about the impact you have (positive or negative) on your communities. Not many of them are millennials – yet! But as millennials start to invest, their investment decisions will consider social impact as well as financial return.

Fintech Founders and CEOs: you can easily feel superior because of your focus on social impact. You may think of bankers as terribly mercenary but you would be wrong about most of them. You may be tempted to set yourself up in self-righteous opposition to banks, but your impact will be limited and slow. You need the reach of the banks to reach scale rapidly. If you are really concerned to maximize your positive social impact, you should partner with established banks.

Getting off the Soapbox

Banking in itself is not bad. Banking services are essential in any complex society. But banking should be for the benefit of society as a whole, not just the wealthy few. Most bankers get that but don’t know how to make it happen. Socially-focused Fintech firms can help banks to create positive social impact. Banks can then serve their communities as well as shareholders, regulators and wealthy customers.