Author: Nasir Zubairi
Here are the slides I used to accompany my story at the ALFI conference. The fund industry must really think about and action their innovation strategy to ensure their businesses are properly positioned to cater for the tomorrow’s world.
A member of the audience asked me a question related to regulation and the constraints it puts on their firms to innovate.
I have worked with and hired many lawyers in my time. The ones I liked best are not the ones who point out all the problems and issues, but the ones that took what I wanted to achieve and found legal solutions to make it happen. I think this is true with most things – we prefer proactive people to negativity. Regulation is a critical component of financial services, but don’t use it as an excuse, work with it to find solutions to achieve what you must.
A graphical summary of three key Fintech verticals – Lending & Credit, Payments and Wealth Management. Useful?
If we were the exec board of one of the UK banks, we would be on the phone this morning speaking with Apple and network providers.
If you missed it (not sure how you could), amongst all the glitz and wow of the apple launch last night (09/09/2014) Apple Pay, Apple’s foray into mobile payments was announced and showcased. It looked good. It worked great.
There are, as always, those that chose to find the flaws and felt misplaced pride in arguing, mainly through twitter, with anyone and everyone that Apple Pay fell short of what it could be. “Bah Hambug” they say.
We disagree with the killjoys. Although we have generally been less than positive on the existing mobile payment solutions and their potential impact on payments, we are happy to have changed our minds:
Apple Pay will fundamentally revolutionise the banking industry.
If we ran a UK bank, our eyes would be lighting up. Opportunity is what we see. Apple Pay will come to these shores sooner rather than later. Rather than be a follower and adopter, we would want to lead the revolution, to drive our customer acquisition and make our stamp as a bank for the future.
Apple Pay is not like previous mobile payment solutions. It is delivered by the handset manufacturer, not by a 3rd party. And we have all witnessed the power this particular manufacturer wields when it comes to consumer adoption and behaviour. Yes they have made a few mistakes in the past, but Apple Pay will not join them.
If we ran a UK bank we would want to be the first bank to distribute the iPhone 6 and Apple Pay instead of cards to our customers.
We are deadly serious; we believe this strategy would spur a massive drive in customer acquisition as well as light the fire for new and improved product development processes within our institution. Innovation would be ingrained to our brand.
Today, we are tied to mobile phone contracts to subsidise the cost of handsets. We pay these bills from our bank accounts. The device is independent of the financial services we receive. We can chose to use it to assist our financial management, banking, payments, but there is no real compulsion. Everyone sees the potential of mobile in relation to financial services, but the implementations have not yet fulfilled.
By issuing the phone instead of a card, we believe we would intrinsically tie the phone to banking and drive the use of services, none more so than payments and the supplemental and valuable loyalty and rewards that are overlaid. We would take ownership of the contract for the device, still delivered and serviced by the network providers, but channeled through our bank.
The cost for the handset could be met through fees (paid to the bank rather than the network provider) or perhaps even through minimum spend or balance obligations; nothing onerous and inhibiting (these are usual even today in many countries, including the US). Given data, we may look at our customer acquisition costs and see how our new strategy may allow us to contribute to the cost of the handset without increasing our overall spend.
Of course, we would be silly to just provide the handset to our customers without bundling some apps into the package. User friendly (The key) account view/management, offers/rewards, FX, wealth management, PFM….. An opportunity not to be missed; pre-supplied and ready to use on a device that is is psychologically tied to our bank in the eyes of our customer.
We would need to brainstorm, test and build these apps; fast – ready for launch. Well, build them faster and better than we have previously been able to do. All those proposals for new process and methodology that we have discussed to death; Lean, RAD, prototyping, outcome driven and disruptive innovation…. the transformation of our business and the implementation of new and better product development would be driven forward by our handset strategy.
We will emerge a better, more capable bank. We will have changed the way the industry competes. We will have improved services for our customers. That is real innovation.
If you would like to talk through our proposition; contact us. There is a lot to discuss around this intricate and groundbreaking proposition. But it is worth it; we can help you define, implement and win.
A bit of fun for a slow August. We promise at least 20% Return on Equity (ROE) if you help fund this particular startup bank idea; most established banks are giving 4% to 8% ROE. Internal Rate of Return (IRR) of around 100%. Get in touch if you are interested in learning more about and investing in this or one of our other, perhaps less zany, bank concepts!
- We employ some currently unemployed bankers (adding value to the economy).
- We raise £1 billion of equity (fuelling capital flows, perhaps even internationally).
- We use the £1 billion to purchase as much high-grade securities as we can (minus set up costs), paying circa 4-5% coupon (Supporting the Govt/Treasury).
- We use the securities as collateral to borrow £9 billion from the BofE at overnight rate of 0.5% (Providing revenue to the Treasury).
- We buy another £9 billion of securities at similar rates as the first batch. At this rate, we are earning at least £400 million per annum from the interest payments alone.
- We continuously roll the overnight position with the BofE, pledging more of the security pool in collateral if required on margin calls.
- We go public. After costs, the bank is earning at least £200 million a year with a high capital ratio (10% equity-to-debt), and the balance sheet will be clean (all low risk securities). Potential valuation of 20-times earnings: £4 billion. We sell 25% of the company for £1 billion. (Give the man on the street an opportunity to share in our success and realise a return for investors)
- Put the £1 billion raised to good use – go back to Step 3
- When market cap hits £10 billion, sell another 10% of the company for £1 billion. Go back to Step 3 again.
- Expand to US. Fed is lending at 0.25%. Repeat formula.
- Start focusing on PR and social issues, buy branch networks from defunct banks and start making actual loans to retail and corporate consumers (Social, Economic and Cultural good).
- Exit for a ridiculous valuation. Everyone wins! 🙂
Originally published in the FinanceEstonia International Forum 2014 E-Journal in June 2014. As last year, this publication is a treasure trove of insight on the future of the financial services industry from leading industry practitioners.
Prior to the FinanceEstonia International Forum, Aare Tammemäe, Chairman of FinanceEstonia spoke with Nasir Zubairi, Founder and Principal of New Buckland. The discussion considered financial industry consumers and what they really want, the newest disruptions in the FinTech industry and how the “old” and “new” in FinTech can play together.
Aare: Considering the financial industry, what does the consumer really need? Do we even know?
Nasir: That is a big question and there are a broad set of requirements because the mass market is so heterogeneous, both in a big population such as the UK (a core financial market) and within the small population of Estonia.
One conclusion I have reached is that the mass market does not want a fragmented set of services, nor do they want something particularly “disruptive”. To affect the most people I believe the service has to look, feel and behave like a bank – we are not ready to accept a drastically different model for financial services but we are ready for improvements in the quality of service we receive.
We want our money to be stored safely, we want to use our money to pay for goods, we want ways to access credit and investments to increase our purchasing power, we want to perform transactions both domestically and inter- nationally with the least amount of friction and cost possible. And we want it all through a single channel – banking as an enabler of transactions today and trans- actions tomorrow, not a set of products in their own right. That is how we need to frame the business strategy to come up with the right solutions.
Today we have a very fragmented system. Though FinTech firms are doing the right thing by focusing and building core capability in specific niches, the overall friction for customers is arguably getting worse and acting as a barrier to wholesale adoption of the new services. For example, I access TransferWise to perform international payments; I separately access Zopa to make investments and, if needed, borrow money; I access my bank to deposit money and use my card to make payments. Each service has its own access channel and sign-up process; it is too much.
Banks are sticky, the top 5 UK banks still share 85% of business banking and 90% of retail banking. The reason? Even though they are more expensive than the set of FinTech challengers and their user experience is still far behind, they are a one-stop shop for services. Easy, simple, frictionless access is absolutely critical to winning. We have all these brilliant FinTech projects but they need to be homogenised, delivered as a single service to customers.
What might be the concept of financial services in the future? Do you think these new banking-like ventures will be more TransferWise type initiatives or will they merge into this complete service package?
TransferWise has done fantastically well, but is there really any competitive advantage and uniqueness in their technology product? Not really, what they have is great marketing. A number of the new FinTech challengers to traditional banking are not really delivering anything more than innovation in process and some innovation in business model.
If you want to go large and change the game in a mature market such as the UK then something more creative is needed, something which changes the basis for competition in the industry and delivers product and business model innovation that is defensible. I don’t think the current wave of FinTech firms have quite the right model for sustainability, I doubt they are the firms that we will be talking about in 5 or 10 years time.
I think it is still early days in the evolution of financial services. Great things are happening and will continue to hap- pen. I think we will see greater collaboration in the future between financial services firms to deliver better access to customers and reduce friction. I believe we will have more clarity on the industry’s development within the next 3 years.
Are there any other technological ideas around which might change the way we interact with the financial industry?
I believe the insurance and asset management/pension fund sectors are in need of a hack. The insurance sector in the UK is essentially a peer-to-peer network, it works, but in an almost hysterically inefficient manner. The UK asset management and pension fund sector makes billions in profit each year but there is cataclysmic crisis brewing in people not having enough funds for retirement. Obviously there is also still a lot going on in the e-money and payments sectors. I’ve been reading about Facebook’s potential entry into e-money and international payments; that would be an interesting move.
Can you elaborate a bit more on asset management and insurance please? What could the possible disruptions and their impact be on today’s financial industry be?
The overarching problem is that there is a complete lack of transparency in both sectors. I don’t really know why am I paying X amount of money to insure my house, the only thing I know is that it seems like a lot and the price goes up each year. The average man on the street has no idea how it actually works and why the costs are what they are. Likewise in the pension fund sector, no one really understands what is being done with their money.
Transparency sounds very simple, but it’s always quite difficult to achieve. How could it work in reality?
It doesn’t matter if customers actually delve into how each business works, what is being done and why the costs are what they are, but it’s important that customers can easily find out if they want to. It’s about a company’s willingness to show and explain to us how it’s done.
Take the pension fund industry, I’ve had a fund for many years and even I, as an ex-banker, trader and finance professional, get very confused. Why does my pension fund go down at times when there are portfolio management techniques to protect the capital invested and provide a minimum return each year? Why am I charged a 2% administration fee?
Once in a while I receive a written report about what’s been happening with my pension. I don’t understand why I can’t access this information online in real time at my leisure and why it can’t be written in simple English? A rule of thumb for all this financial literature should be that an 11 year old can read and easily understand it (see the Flesch Reading Ease test). My fund has billions under management so I wonder how many customers they have and how many of these glossy reports are being sent out. It is very inefficient and costly in this modern day and guess who pays?
Workplace pensions in the UK are a key channel for retirement savings. People go through multiple jobs during their career and each new employer will undoubtedly utilise a different fund manager for their pension provision. Most people I am sure, as I, would like to consolidate their pension funds at each step to the pension provider of our newest employer. However, transferring funds from one pension fund provider to another is a ridiculously opaque process and the fees charged for consolidation are staggering. I understand there are costs involved in fund redemptions but, again, there is little transparency on why the costs are so high.
Many pension funds, such as mine, invest in overseas assets to spread risk. Each time they purchase or sell these overseas assets they require foreign currency. The funds, due to lack of diligence and specialism, are often charged up to 10bps on the currency exchange by their custodian (Russell Research report 2012) – think about that, it’s crazy! I am certain there are other areas where costs can be significantly stripped out to benefit the customer. Saving 1% in costs and increasing performance by 1% in the UK pension fund sector as a whole would lead to a 25% increase in the total value of pensions, that’s something worth striving for!
Should we wait for the insurance companies and pension fund providers to figure it out and make changes themselves?
Just as in banking, large firms in the insurance and fund sectors have stopped caring about the customer. They have delivered innovation but the value of these innovations has been captured internally and boosted profits. Innovating for profit is fine, but you should always share the profit of innovation equitably with customers to protect market share for the long-term. No business is ever safe.
There needs be an incentive for change to occur. The government in the UK is pushing for some reform and this could be a catalyst for innovation and improved service. New entrants also pro- vide an incentive for change by providing more competition, pushing existing participants to deliver more accountability and transform their practices. However the barriers to entry into the insurance and investment sectors are significant – can any new entrant make a dent big enough to start a wave of change within the industry?
I believe in starting small. Resolving any large problem starts from focusing on a small piece, fixing that piece and moving onto another piece, eventually you solve the whole problem. Like a big jigsaw puzzle – start with one corner, solve the corner, move onto the next corner, etc.
It’s an open opportunity for FinTech then, there is no one battling this cause.
As most people, I just want to see my pension fund go up and have confidence that I will have enough money to enjoy my retirement. The service providers’ job is to fulfil this need.
I am sure there are ways to better fulfil this need. The Government needs to be more actively involved in fuelling new innovation and ideas in the sector. We are sitting on a ticking time bomb – what will happen to society and the economy in 20 years when people cannot afford to retire? The problem is actually even more acute in the US, the average American only has $10,000 saved towards retirement.
Is there an opportunity for the “old” and “new” players to work together? As you said, the newcomers’ impact today is still very small.
They will absolutely work together. Spanish banks are doing some interesting things with innovative FinTech firms; Morgan Stanley is actively looking to partner with best in breed FinTech firms to enhance their capabilities and State Street partner with FinTech firms to broaden the range of services they offer clients. HSBC have just set aside £200m to invest in new innovation projects and partnerships.
Traditional firms will not disappear as long as they adapt and embrace new ways. I can see a world where a number of banks focus on being the “smart pipes, the plumbing of financial services” providing a foundation for other industry participants to sit on top, in turn allow- ing them to focus more on servicing customers.
If banks decide to innovate in their business then shouldn’t they find the companies out there which are already solving these problems?
They need to develop a capability regard- less of whether they build in-house or look for partners outside, they need a skill set in innovation. Experts need to be brought in to build the capability. All banks need to be investing in new talent that understands and can implement innovation processes. I have no doubt that we are nearing a fundamental change in the way customer’s use and access financial services, nobody really knows the entirety of what that change is yet, but it is coming. Banks need to be prepared to respond to the new threats, to have agility in process and, ideally, be the ones driving the change. Those that do will be the businesses of tomorrow.
In relation to Estonia, could that possibly be a small Estonian bank with good marketing and other tactical skills? Could such a bank become successful in Europe if it had the right offering?
Of course! With an aggressive and well thought through strategy there is no reason why an Estonian Bank couldn’t be the next generation leader in financial services across the world. In this day of technology businesses can scale so rapidly it is shocking. There are many examples from other industries where small firms, largely ignored initially, have quickly risen to lead.
Honda is one of my own favourite case studies. Though they had quickly become a large domestic producer of motorcycles nobody outside of Japan had heard of them. In the early 1960’s they began mass producing the Super Club, a 50cc moped now considered the “Model T” of motorcycles and the biggest selling motorcycle in history. They exported this model to the US, a country dominated by big bikes and by a big manufacturer, Harley Davidson. American Honda Motorcycle Company took control of the US motorcycle market by the end of that decade by really understanding their customers and using that knowledge to drive innovation in product, process and business model that blazed them past incumbent industry participants.
New Buckland founder Nasir Zubairi has been named one of the top 40 movers and shakers in financial services within EMEA by Financial News and the Wall Street Journal. He’s in good company with a raft of major players from London and abroad, including:
Eric van der Kleij (Head of Level 39)
Taavet Hinrikus (Founder of Transferwise)
Sean Park (Founder of Anthemis)
Nick Hungerford (Founder of Nutmeg)
Oliver Bussman (Group CIO at UBS) and
Jan Hammer (Partner at Index Ventures)
to name but a few!
Another one of our shares in the spirit of transparency and helping.
The below (click to access the whole document) is a marketing questionnaire we ask our customers to complete prior to a first brainstorm. Just going through the questionnaire gets them in the right mind-set and leads to new ideas and fresh perspectives. We hope it can help you.
If you would like to take it to the next step, contact us and we can set up a session to delve into your answers and start the process of building a robust and practical marketing strategy to take your business forward.
Originally published in The Huffington Post on 02 April 2014.
Fact: The more we understand about the lives and environment of our target customers the better we are able to market our products to them and accelerate adoption.
Focusing on the use of technology by a market and their “Normal” level of technology sophistication can provide significant insight into the likelihood of that market’s adoption of new technology products and services, allowing firms and stakeholders to better define their target market and to refine their product offering for greater customer take-up.
Markets are complex and fascinating. Understanding how they work and how they pertain to and define your product or service are critical to the success of your business. “Will customers buy my product/service?” “Why will they buy?” The concept of “adding value” is core to any business case.
Generally and particularly so in the tech industry, your peer group – the guys you hang out with in Tech City, the guys you sit next to in your shared workspace – are not the right benchmark for your product to succeed. They are not representative of the mass market. If they think your idea is great and they are likely to use it, you really really need to double check whether less tech orientated consumers will adopt your product. There are early adopters but there are also too-early adopters. Niche products proliferate amongst tech folk, many of which will never get to the mainstream. There is a “market perception bias” due to peer group and the pressure to deliver cool innovation relative to localised behaviour. The product/service misses the mass market as it is too cutting edge.
The Adoption Curve
Most people are familiar with the Adoption Curve (The Bass Diffusion Model to give it its proper name – find out more on Wikipedia) that describes the penetration of a new product in a population. Be it subconsciously, it defines our forecasts when launching new products and, by inference, investment decision-making and capital allocation.
An issue with the model: keeping all parameters constant while varying the size of the market, the length of time to fulfil 100% market potential is always the same.
Estimates of the key parameters are made on existing sales data or synonymous comparables data. The size of the market variable is arbitrary – there is no prescribed science behind it. You can make it 1000 or 100 million and the key output, the estimate of customers, do not change except in scale relative to the initial input.
I hope you agree, this does not make sense. A firm launches a product, it is selling well. They then incorrectly assume that their existing customers are a sub-set of a very large market and build marketing strategy and estimates on sales revenue on this misplaced market definition. It will take them forever to “own” the market; it cannot be that the length of time to saturate a large, more heterogeneous market is the same as a small and more appropriate one.
Market segments are defined by habits and behaviours as well as in many cases, law. They are not defined by demography – age, location, density….though, in certain cases, demographics may act as a good proxy.
Banks don’t sell mortgages to the “UK market” they sell mortgages to people in the UK that are looking to buy property, a need driven by the behaviours the people within that group and in this example, the laws that apply, which further segments the broad market; commercial mortgages, investment mortgages, first-time buyers, etc. More granular still, individual mortgage “products” are defined to appeal to specific customer groups that are driven by even more granular behaviour; e.g. their level of risk aversion, their accumulation of wealth, their use of time.
Broadly (and maybe controversially?) speaking, I believe it is good practice for young businesses or for any business launching a new product to focus on a very small market segment, really understand it, own it, then broaden the market definition and leverage their experience and brand credibility from previous success to sell to new target customers.
Understanding your customer’s normal level of technology use is key to marketing and success
First, lets get everyone on the same page with a couple of definitions:
“Technology”, does not just relate to computers or electronics. It is more broadly defined as “The application of scientific knowledge for practical purposes” this could relate to machinery, pipes, a saucepan and even a comb.
“Innovation“, is not just invention, is not just a new product or service, I define it broadly as “something new that adds value”. This could relate to a process, a product or service, a business model.
Combining the two, “technology innovation”, therefore is the application of scientific knowledge to create something new that adds value.
Lets say there is an arbitrary line that represents the technology innovation that is available to us. The further along the line the more “high-tech” the product and service. We can benchmark a “Normal” (mean) for the sophistication of technology people within homogeneous groups are comfortable using on a regular basis. Either side of this Normal, is a range that represents the inferior and new technology that we are willing to utilise today. For a very large market definition, this is, unsurprisingly, normally distributed.
As time goes on and users accept and use more innovative technology, the normal shifts to the right, i.e. the normal level is at a level of more sophisticated technology tomorrow than it is today. This is usually an incremental transition and takes time. There are very few “disruptive” products or services that have led to a large shift in the normal level of technology utilised by a market. “New and Improved” trumps disruption every time. To ensure you acquire rapid acceptance and use of your service or product, you need to target somewhere to the right of the normal line. Excellent – all fits well with the adoption model.
But wait, we know there are more distinct groupings within the population. What if we were to consider the habits and behaviours of “technophiles” and “technophobes” as exogenous to the mass market?
To generalise, technophiles are more likely to adopt new technology innovations and will be less accepting of inferior technology, while technophobes are less likely to adopt, relative to the mass market. The chart is likely to look like this, with technophile and technophobe adoption of technology skewed appropriately.
Now let’s make this more useful; let’s multiply the y-axis by the size of each market segment to give us a representation of the number of consumers likely to use the product:
Where do you want your product to sit?
To me, it’s fairly obvious that, for a product to be successful in the mass market, a business should be targeting the technology sophistication of the product to be slightly inferior to the normal level of technology sophistication acceptable to a market of technophiles. I.e. if the guy sitting next to you in google campus or a.n. other tech workspace thinks your product is cool and innovative (for them), it should ring an alarm bell in your head – check, re-check, and check again what is normal for your mass market.
Originally published in The Huffington Post on 5th March 2014.
Although I agree that Banks and Financial technology firms should be looking to partner and work together where possible to improve the proposition for customers, I don’t necessarily believe that this strategy will make banks more innovative and provide better services for you, I and our businesses.
As I have stated before, innovation occurs at 4 levels correlated with increasing returns for the business and customers:
- Business Model
- Industry – changing the way participants compete
My experience in financial services is that banks are pretty good at Level 1 – by buying in tech to improve process – and not too bad at Level 2 in certain areas.
Just look at the advances in process and products around capital markets such as electronic trading, algorithmic trading and prime brokerage. They are pushed to be innovative in these areas as the buyers, other financial institutions, hedge funds, etc. have significant power.
Downstream, in commercial and retail banking, there is less evidence of innovation in practice; chip and pin was a startling improvement that put the UK ahead of most other countries, but then we look at areas such as international payments, where the correspondent banking system from the 70’s is still in place, or invoice finance, where I have personally seen green screen terminals in a bank that run core processes.
It is still far too common that banks, rooted in tradition, try and keep the benefits of innovation for themselves rather than sharing with the customer equitably. This has to change; when it does, it will be the foundation of a new evolved industry.
For banks to become more innovative requires them to adopt a change in approach (be it slow and adaptive) to the way they do things, to the way they frame their role as a service provider, to they way they define and then execute their strategy.
This change requires buy-in from the top, from the board. It will take time and needs to be planned and controlled to fit with the bank’s culture and to avoid widespread disruption. Openness and collaboration with the rest of the bank is key; not just for others to see the benefits in the new approach, but to be inclusive and create a stakeholding. Segregating the (innovation) team is the biggest mistake that can be made – it will stir resentment that will lead to failure.
The CEO of one of the larger European banks I have worked with put it to me quite eloquently,
“Our business is like a large oil tanker, it takes a lot of effort to make it change course. What we need are a few agile speedboats that buzz around the tanker. Eventually, as more speedboats catch the tanker, the wake of these boats will help make the tanker turn more easily.”
We have not really seen a major bank challenge the industry with innovation at Level 3 and 4. Saxo Bank and Well Fargo are recent examples of business model innovation, but it has not called the larger players to account.
I am certain that, as has occurred in other industries over the past 20 years, a new entrant or existing player will grasp the reigns of innovation, be it organically, or, more likely, acquiring capability through external talent, so wholeheartedly that it fundamentally changes the way the industry competes – Level 4. This is where real value is delivered to all – Apple (Music industry), Ryan Air (airlines), Skype (communications). We are on the verge. I am so excited to be involved in the new dawn of financial services.