By Bernard Lunn

After a few days of reflection on many days of conversations over a 4 day marathon event here are my 6 takeaways from SIBOS 2015 in Singapore:

1. Fintech is leaving the Yellow Brick Road and going to Kansas.
2. The one subject that got heads nodding in both echo chambers was the move to real time.
3. Blockchain is at the top of the hype cycle.
4. The dream of the great core system renewal turns into the nightmare of end of life maintenance.
5. The credit cycle will not save traditional lending models.
6. Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

Fintech is leaving the Yellow Brick Road and going to Kansas.

For years Fintech labored in obscurity. A few pioneers preached the message that everything was going to change. In the last 12 months the message was received loud and clear – as was evident at SIBOS this year.

It was a great journey “off to see the Wizard” on the Yellow Brick Road.

Some Fintechers remain stuck in the Yellow Brick Road era, still preaching the message. Investors, customers and partners have already got the message and it is time for Fintechers to stop preaching and start delivering.

This means heading back to Kansas (in the “show me state” of Missouri). This is when Fintech ventures have to show serious financial results. This is when focus shifts from prospects to contracts, from long term forecasts to this quarter, from pre revenue metrics to revenue, from revenue to quality of revenue, from revenue to gross margin, EBITDA & free cash flow, from forecasts to actuals. Many ventures are doing this, but too many of the new entrants seem to believe that the hype will make it easy.

Numbers is the language of business. In Singapore at SIBOS 2015 we had two echo chambers – bankers talking to bankers and their IT vendors and Fintechers talking to Fintechers. There was some dialogue between the two, but very little. By Geneva (SIBOS 2016), this common language of numbers should enable real conversations between Bankers and Fintechers.

——————–

The one subject that got heads nodding in both echo chambers was the move to real time. 

Real time is not just faster. Going from 3 days to 1 day is good. Going from 24 hours to 2 hours is good. But none of that is real time.

Real time does not need to get bogged down into techie discussions about how many fractions of a millisecond constitutes real time. That is just engineer “mine is bigger than your’s” talk. Or to put it another way it is machine real time.

Human real time is a few seconds. Human real time drives user experience and adoption. You cannot define human real time theoretically, you can only observe it practically. Growth hackers try to figure this out in their market experiments, because it will change within context. It might be vary between C2C, B2C, B2B – but only by a few seconds because humans are involved with all those interactions.

The fundamental mind shift is accepting that humans operate in real time (if you don’t you get run over by a bus) but that businesses operate in batch because of a legacy of old technology that could only operate in batch mode.

That legacy constraint has gone. Now businesses can operate in real time. That is a big deal. That changes everything.

You heard this expressed in different dialects across the echo chambers at SIBOS 2015, such as:

• The language of market infrastructure and messaging standards.

• Financial language (real time eliminates credit and market risk so that we can reduce spreads).

• Fintech language (real time banking enables new user experiences and merges with social media to fuel real time analytics).

The fact that everything is moving real time is becoming accepted. The debate now shifts to the second order impacts. What new solutions become possible when the platform is real time? This will change market risk, credit risk, fraud and other bad guy detection, regulatory compliance and well – just about everything.

Whole departments of people processing work in batch will be cut. Whole new platforms and business models will be enabled by the move to real time. $ billions will be made and $ billions will be lost during this transition.

————

Blockchain is at the top of the hype cycle. 

We know how this plays out:

• SIBOS 2016. The Blockchain folks are too busy implementing to attend. Attendance at Blockchain sessions is way down. Eeyore is heard muttering “I told you so”.

• SIBOS 2017. Attendance at Blockchain sessions are way down and skeptical questions dominate and a post about “Blockchain is dead” gets a lot of Twitter action. Eeyore is asked to give a Keynote speech. Rumors float in private conversations about a game-changing case study that cannot be revealed.

• SIBOS 2018. One case study gets released. A post entitled “too early to bury Blockchain” gets a lot of Twitter action.

• SIBOS 2019. Blockchain 2.0 sessions are standing room only. Tigger is asked to give a Keynote speech referencing Blockchain.

• SIBOS 2020. “Are you telling me our xx system uses Blockchain. How weird. Can you  explain how it works? Is it like TCP/IP?”

The arcane debates around blockchain technology (permissioned or permissionless, altcoins or sidechains) and between platforms (Ripple, Stellar, Eris, Chain, Ethereum, Blockstream) are important but they will play out in different forums. Few people at SIBOS care which wins; they care about the application of technology not the lower layers of the stack.

I view Blockchain within the context of the move to real time. Blockchain is either an enabler for that move or it will fade away. I am in the camp that it will be an enabler for the move to real time, but I have also seen promising technology fade as it gets lost in standards battles rather than focusing on solving real world platforms. Only time will tell.

——————–

The dream of the great core system renewal turns into the nightmare of end of life maintenance.

I used to sell core-banking systems (Misys and Temenos a few eons ago). This feels like AA – my name is Bernard and I sell core-banking systems. We always dreamed of a catalyzing event that would make banks convert their old systems to something new. Customers demanding real time seemed like that catalyst, except for two problems:

• Time. Core system change costs many $millions (no problem) and many years (big problem). The reason it is a big problem is that banks no longer control the pace of change – Fintech ventures do. No sensible Board will sanction a project where they have to put all user facing change on hold for the years until the new core system is ready. If user-facing changes are NOT dependent on a new core system, it begs the question “why bother doing this project at all?”

• Fintech shows that there is an alternative. Bankers are seeing that these upstarts have no core banking system and it does not prevent them launching new services. The API economy changes everything.

The new Fintech services simply bye-pass the core banking system. Banks cannot switch off the core-banking system – existing users and services depend upon it. So you move them to the end of life maintenance bucket where the only criteria is cost. You keep looking for cheaper vendors to maintain the system. At some point you move the remaining laggard users/services over to some new minimalist cheap core system.

This is happening at the same time as the big switch to Cloud. By the time it comes to switch the remaining laggard users/services over to some new minimalist cheap core system it will be in the cloud based and even the most conservative bankers will accept that Cloud is as secure if not more secure than their own data center.

Core banking vendors face the same innovators dilemma as their customers. They can take the traditionally cautious path of squeezing as much cash as possible out of locked in customers and locked in data. Or they can take a radical path and become relevant to the new world by opening up their system and data and making their system as a platform for external innovation.

————–

The credit cycle will not save traditional lending models.

The best bits in a conference come when speakers depart from the script

Great moderators know how to make that happen. The moderator in the Future of Money session (incubated within Innotribe for many years in relative obscurity, on the main stage at SIBOS 2015) did an excellent job at this. They had Fintech ventures (all focused on lending) on the main stage and Banks at the back (visible on main screen so the audience could watch the drama unfold). One of the bankers made the quite reasonable point that Fintech has not been tested in a down cycle but then said something along the lines of these ventures being in the lending business and that credit is also about being in the much tougher collections business. This prompted one of the Fintech panelists to go off script and say something like:

“Of course we are in the collections business, that is just ridiculous”.

Downturns will test any model or team that is weak. That is what downturns do. Fintech ventures will fail, but so will banks. Any bank that thinks a downturn is their friend is dreaming. Fintech was born in the 2008/9 downturn. In a downturn, customer will want cheaper credit. Only radical automation can deliver cheaper credit and it does not matter whether that radically cheaper automated credit comes from a bank or a Fintech.

———–

Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

 

(Image courtesy of the always excellent Richard Gendal Brown)

It is fashionable to say that Correspondent Banking is dead. This conflates the current incarnation of Correspondent Banking which is batch based with the concept of Correspondent Banking itself. I am convinced that Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

I am grateful for this insight to one of those serendipitous conversations where you leave the echo chambers. The serendipity arose from casual chatting while sharing a taxi. My companion was what I would describe as core SIBOS, from a regional bank far, far away. She described how SIBOS was the most important week in the calendar when she could a) learn the new stuff efficiently and b) renew the personal relationships that underlie the Correspondent Banking network.

I then sought out other core SIBOS attendees along these lines during lunch and breakfast sessions to see if this was a random point of view or if there was a pattern. I can best describe this pattern by a hypothetical customer-centric story.

A mid sized company in mid sized country wants to do business in another mid sized country in a totally different region. For example, imagine a Malaysian company wanting to do business in Poland. Note that this is NOT big market to big market. This not an American company wanting to do business in China or a European company wanting to do business in America. Nor is this nearby countries with existing relationship channels; it is not a Malaysian company wanting to do business in Indonesia.

That is where banks in both places – Malaysia and Poland in our hypothetical – facilitate the relationships and make a profit from doing that. The banks can do that because a relationship of trust – nurtured over many lunches and other socializing – exists between those banks. The technology makes it efficient. The old mantra is “schmooze offline, transact online”.

Anybody who thinks that you can replace that only with technology is dreaming. At some point a new real time cross border platform will emerge (many were touting their wares at SIBOS). At some point SWIFT will go real time. Those 9,000 member banks will keep the human relationships and just switch over to a new system.

In summary:

• Fintech is leaving the Yellow Brick Road and going to Kansas.

• The one subject that got heads nodding in both echo chambers was the move to real time.

• Blockchain is at the top of the hype cycle.

• The dream of the great core system renewal turns into the nightmare of end of life maintenance.

• The credit cycle will not save traditional lending models.

• Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.