Chris Skinner: "The challengers have to come up with something different if they are going to ever get any traction"

Is the banking industry currently undergoing a paradigm shift?

I do not really like the phrase paradigm shift as it is over used, as is disruption, disintermediation and others. What is happening, and it has been bubbling away for a quarter of a century, is a fundamental change to how banking is distributed and served. Twenty-five years ago, banking targeted the elite and trading was over the counter; now banking is available to all and trading is completely automated. Tomorrow, banking will be just part of a fabric of structure, like electricity and water, and we will think more about how we value things than about money itself.

What is the biggest driver behind digital banking and innovation in the market?

Real-time networking. Ignore mobile and internet banking. It is all about the digital backbone of the world – the internet – and the ways to access that backbone via smart things. Today it is smartphones, but soon it is smart everything: cars, fridges, walls, handbags. As that happens, we will have trillions of transactions over billions of devices of very small value per transaction globally. The banking system knows it cannot handle this. It cannot handle real-time transactions in high volumes at very low values. That is a massive driver for change.

Which is the most innovative technology in the current banking scene?

Machine learning. I would like to say blockchain, but blockchain is just a shared database and the challenge is to create those shared structures. That is more an industry challenge than technological challenge but, once agreed, those shared industry structures based upon blockchains will be radical. However, if I were a bank CIO today, I would be more interested in machine learning as I can use that for immediate benefits inside the bank. Machine learning takes big data, data analytics and artificial intelligence and pushes it to the extreme. That is a data differentiator and any bank that can differentiate through its data is going to retain clients and win new ones.

How big is the challenge from the challenger banks ? Can these really disrupt the old order?

Challenger banks are challenging incumbent banks and the main difference between the two is that the new guys have no customers, no history, no brand, no trust and limited capital. The old guys have millions of customers, billions of capital and centuries of history. That is a tough challenge to shake up and wake up an old industry that has customers who are unwilling or unmotivated to change. The challengers really have to come up with something radically different if they are going to ever get any traction and, even if they do that and get some traction, give it a year or two and the sleepy giants with their billions of capital will come along and just buy them. So no, they will not disrupt the old order.

Is there any direction turning blockchain into a redefining factor for the banking industry?

As discussed, blockchain is a reimagining of banking but it will take time. The reimagining is moving old networks – the DTCC, the EBA, SWIFT etc. – to new ones. That may be through evolution or the banks might even create new networks, like Ripple and R3, to replace the old ones. These shared structures are redefining the industry as they will enable real-time transfers globally for low cost and, right now, much of the cost in AML and KYC. If we can reduce cross-border trust costs through blockchain to a tenth or even a hundredth of what they are today, then that is why this is important so yes, blockchain distributed ledgers are a redefining factor of the banking industry.

There has been a lot of discussion around a potential Uber of banking . Have you identified that company eligible for this title? If not, what features/business model etc. should such a company entail?

There is no Uber of banking today. The closest you are going to get is Ethereum. The reason is that Uber changed an old world of distributed vehicles into a global app. We do not have the same challenge in the banking world, apart from finding some way to connect our distributed networks through a cheaper new global network. Ethereum, as far as blockchain and distributed ledgers goes, is that company today. However, I would not be on them being the company tomorrow, after their hard forks and DAO hack issues, so no.

Can technological advancements provide the economic alternative to the banking system, say blockchain-based?

Potentially yes. A good example is bitcoin, which offers value transfer globally in near real-time with no bank or government involved. But there is the problem. As soon as you have no government involved, the government wants to get involved. So what they do is start to pick this apart and find a way that you have to declare what you are using the currency for. This is achieved mostly by enforcing that you cash in and cash out through a bank as the banks are the financial laws of governments.

Think of it another way: you have the police on the streets for physical crime; you have the banks on the internet for digital crime. If governments are unable to use banks to police online crime, then the whole system break down. That is the threat and opportunity of things like bitcoin and, given time, I am fairly sure that the banks and governments will work out a way to enforce it. If they do not, then we have a future of self-regulation which is both exciting and a bit scary. You choose: would you rather have Donald Trump, Hillary Clinton or your next door neighbor policing the world?

Three future trends of digital banking?

Machine learning, distributed ledgers and the internet of things but, over all of these, will be the bank elevating the digital banking agenda from a project to an internal transformation program.

What can banks do now to prepare for future scenarios/ breakthroughs which are set to transform banking?

Just ensure that if they refresh their structures from physical to digital and break out of legacy core systems and thinking, that they get to stagnate again. The hardest thing for most banks to do is to get their technology to be agile and breathing, as most of their technologies are legacy and dormant. If you refresh that dormant legacy into a living and breathing system for today, just keep investing to keep it living and breathing for tomorrow.

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About Chris Skinner

Professionally, Chris is interested in banking and technology. He consults about the future (www.balatroltd.com), and is a co-founder of Shaping Tomorrow. He networks through the Financial Services Club (www.fsclub.co.uk) in UK, Ireland and CEE. And, he speaks at lots of conferences. Specialties: Marketing, Sales, Strategy, Business Development, Executive Management of Technology in Financial Services.