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A View From INSEAD

Smart Machines, Smarter Humans : The Evolution of Banking in a Digital World

Professor Jean Dermine

Jean Dermine, Professor of Banking and Finance at INSEAD, Programme Director for both Strategic Management in Banking and Risk Management in Banking programmes, discusses the impact of digital innovations on banking and how business leaders should adapt.


Over the past five years, we’ve heard a lot about the disruptive force of digital technologies. How do you see this disruption taking shape in the banking sector, with the arrival of FinTech players?

I think some areas are more likely to be transformed than others. Some banking services involve pure data processing, for instance the payment system with debit and credit of accounts. In this area, banks have no competitive advantage whatsoever. Any technology company that knows how to move data quickly and securely can take over the process. That’s why most of the innovation coming from the FinTech sector is on the payment side. This is being made even simpler by the opening of bank application programming interfaces (APIs), which allow third-parties to find new applications for banks’ transactional data.

Then there are other banking functions that require more complex data handling and analysis. When a bank lends money to a small business, for example, there is a lot of risk assessment and management to be done. This type of analysis requires specialist knowledge, experience and even some intuition. It’s entirely possible that FinTech companies will be able to disrupt these specific areas at some point, but right now I think they still require banking and finance specialists to be conducted properly.

Could peer-to-peer banking take over some of these more complex processes?

I don’t think so. I think in this field some of the FinTech hype is completely overblown.

Take the case of Lending Club, which was one of the biggest peer-to-peer lending platforms. On its board were some very smart and successful people: Larry Summers, who was Secretary of the Treasury for President Clinton and an economic advisor in the first Obama term; John Mack, the former CEO and Chairman of the Board at Morgan Stanley; and even an INSEAD alumnus!

Lending Club was poised to completely bypass the banking system, revolutionising the very fabric of lending and borrowing. It raised a billion dollars in what became a record-breaking initial public offering (IPO) in the US. And then its stock price fell astoundingly, by more than 60 per cent between May 2015 and May 2016.

The problem, I think, was in the company’s business model. It’s easy to create a platform for people lend money to each other. But that’s only one aspect of lending. The problem is that there’s no mechanism to get the money when people don’t pay back. There’s no mechanism to monitor the way money is used or passed around.

There’s much more to money lending than simply allowing borrower and lender to connect; there’s risk and collateral monitoring, renegotiating loans and other specialist activities that go beyond designing user-friendly interfaces.

More specifically in Asia, is there a trend or technology that you think we should be keeping an eye on?

There’s the interesting case of Alipay, Alibaba’s payment platform. Alibaba started off as an e-commerce website, but it has grown extremely quickly and now has 450 million customers in China. As a result, Alipay has become a separate company.

What I find particularly intriguing is whether Alipay will be able to go beyond China. The company has already signed agreements with payment companies in Thailand and India, and it is now in the process of buying the US company MoneyGram. It’ll be very interesting to see how that company operates abroad and whether it can disrupt markets outside China. I’m especially curious to see how it does in the US, with Trump’s new protectionist policies.

What about artificial intelligence? Is that an area that could completely transform the way we bank?

This is a field that I find fascinating. Advanced artificial intelligence and machine learning are starting to pop up in private banking, allowing new internet-based private banks to offer completely automated services to clients, including portfolio and asset management.

And it doesn’t only apply to banking and finance, it’s across the board; some 30 per cent of today’s jobs are expected to be replaced by advanced machines. I have two children who are medical doctors, and this is a real question for them too; will computers soon be able to do what they do? Will a machine be able to make diagnoses, prescribe medicine and give patients the kind of personalised attention they need? I know there are a lot of talented people out there working very hard to make that happen!

So is it a matter of time before banks are obsolete?

I personally don’t think so. Banks have already started to adapt, just as they’ve done before. Some of them have started innovating in-house, expanding their functions to include the development of innovative technologies. Others have started investing in innovative start‑ups and incubators, looking for game-changing solutions.

It’s important to remember that banks have always adapted and kept their heads above water. When telephone banking came along, people said banks were obsolete. When internet banking came along, people again said banks were obsolete. If anything, technologies help banks get better at what they do, which only solidifies their overall position.

Do you see the bank of the future being completely automated?

There’s an important psychological aspect to keep in mind here: user adoption. Just because you disrupt the field with a very advanced form of artificial intelligence doesn’t mean people will trust it with their accounts, passwords or life savings. Yes, many people will welcome the change, but I strongly believe that the human touch will always remain important to some people.

In fact, human interactions may one day become a rare value-added feature, something that the high-net-worth customers are willing to pay extra for, while the less well-to-do have no choice but to have a fully automated account with no personal service.

So how can people – including business leaders – navigate these changes?

Technologies are constantly changing, but so are the social and behavioural codes that allow us to use those technologies. Banking regulations, for instance, tend to change as fast as new banking technologies appear. This makes it even more important for business leaders to keep up with the changes.

Business schools such as INSEAD are already adapting accordingly. The way business executives and leaders are taught and trained has to change, as they have to acquire an entirely new set of skills to proactively and strategically manage the banks of the future. I teach the Strategic Management in Banking programme, so I’ll have to modify some of my curriculum to include these new developments. We already cover things such as reacting to competitive environments and putting customers first in a context of digital transformation, but we may very well have to add modules on doing business with robots!

To sum up, banks are not going to disappear, but they’ll definitely evolve and adapt?

Yes, I think it’s not just about banks surviving in an increasingly digital world; it’s about them guiding the direction of the transformation process, determining where the technologies take us based on the different uses we can give them.

In the end, I believe we will cohabit perfectly as a cohesive whole: smart machine meets smarter human.

For more details of INSEAD’s Strategic Management in Banking executive education programme, download our brochure.

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