During my address at the Huawei Global FSI Summit in 2017, I shed light on the factors that contributed to Kodak’s downfall, emphasising that despite their pioneering role in digital technologies, they faltered in maintaining their position at the top.
Drawing parallels between Kodak’s story and the current state of the banking industry, I acknowledged that banks are presently stable and profitable. However, I cautioned that the industry is undergoing a gradual transformation and revolution that is eroding its traditional foundations.
Banks are currently successful due to factors such as regulatory support, net interest margin business, and fees charged to customers. While innovation is being introduced to streamline costs, enhance distribution, and embrace digital advancements, traditional banks still benefit from protective factors like regulatory requirements and the necessity for customer payments to pass through the banking system.
Moreover, I recognised the ongoing digitisation efforts within the financial services industry, with institutions constructing networks and establishing standards to facilitate global transactions between banks and non-banks. Many standalone mobile banking initiatives have been assimilated back into traditional banks, enabling them to learn from these ventures and improve customer onboarding, streamline product offerings, reduce costs, increase productivity, and enhance service quality. Consequently, these mobile initiatives are now seeking acquisition by established banks.
I highlighted a prevailing trend in the industry towards greater personalisation, as banks are becoming more customer-centric and focusing on delivering services through a platform approach.
Overall, my speech highlighted the need for banks to understand and adapt to the ongoing digital revolution in the financial services industry. While banks may currently be profitable and protected by certain factors, they need to embrace innovation, customer-centricity, and personalisation to thrive in the changing landscape.
Here’s the transcript:
Good morning. Welcome to Beijing, our foreign friends. For today’s conference, we have a very tight schedule so I’d like to start very fast. We have a very busy schedule and it gives me great pleasure to invite all of us here from around the world to this amazing conference that is trying to push the frontier of the industry. Even if I introduce the conference to you, and even as I prepare the dialogue that we are going to have, let me make some initial remarks. Let me start by asking you a very important question. Why did Kodak fail?
The story of Kodak as being the world’s largest distributor of film for many years and how it struggled in its attempt to follow the digital revolution is a long story. It’s a 40-year story. It’d a story where the organisation did all that it could to keep pace with the revolution that it was creating itself and trying to dictate and still stay on the top over the years, but it failed. And it’s a story that started way back in the 1970s. In fact, if you ask this question, “Who invented the digital camera?” It was Kodak. “Who invented digital film?” It was Kodak. “Who invented the digital bank?” It was your bank. “Who invented digital finance?” It’s all your institutions, and yet, something can go wrong. Something can go terribly wrong if you don’t understand what it is that is required to take us to where we need to go. If we transpose what Kodak went through to what banks are going through today, it’s a very interesting story. Your bank is not going to fail today. Your bank is not going to fail tomorrow. In all likelihood, your bank is not going to fail in the next ten years, and many of you here who are heads of technology, heads of businesses and your bosses, the CEOs who are putting in place their respective strategies, you’re not going to fail in the time that they’re going to be in the profession.
Their careers are going to be alright, and yet, that transformation, that revolution that is going to erode the financial services industry as we know it today is slowly taking place, is slowly coming together, is slowly being taken out of your feet like a carpet under your feet today. It was in 1994 when Bill Gates first said, “Banks are dinosaurs”, but if you look at the return of investment in banking, with the 2008 crisis being an anomaly; for most parts, many of us come from countries where bank interest margins are still good. Banking is still the most profitable industry in your respective countries. Banks didn’t become dinosaurs. In fact, they continue to grow, they continue to morph, they continue to absorb the innovations that were being introduced in the industry and in all likelihood, in the next ten years, with all the innovation that is being put into finance in reducing your cost, in scaling your distribution capability, in absorbing the new digital technologies that are coming through, you’re going to be successful; and you’re going to be successful because the regulator is on your side, because you still gain from the net interest margin business that you’re running. You still gain from the FX charges that you are able to pass on to your customers and they have no clue what the FX cost are to yourselves. You’re going to gain because of the payment fees that you charge on everything from credit cards to corporate finance and so on. And yes, you will complain that these margins are thinning, but the competition is still there and the industry is still being protected by regulators. Yes, there’s a capital charge, in as much as it keeps you an expensive business, it keeps others from coming into the industry and competing with you. Yes, there’s a requirement for knowing your customers but that’s exactly why many of the new innovations in payments will not take place because customer payments platforms will still need to go through the banking system.
And yes, there’s a revolution taking place at the branch level. You’re no longer physical. You’re becoming more and more mobile, and you will continue to track all of the new channels as they become available. The current priorities in the financial services industry are easy to recognise and that’s why we are here today. We are all undergoing a process of digitisation. We are all trying to make sense of what it means to be a financial services business on the cloud. We are all building our networks. We are all setting standards so that we become ubiquitous, so that there are transactions taking place between institutions, between banks and non-banks; in country, outside the country, and on a global basis. You ask any number of consultants, you can look up any number of digitisation roadmaps under way. Your institution is probably going through one of those roadmaps yourselves. You know where you are and you know where you want to be. Many of the mobile-only initiatives that had been taking place in the last ten years, they’ve all been absorbed back into the banks.
They’ve learned a few things. They’ve gone into the market. They’ve figured out how to scale customers, how to onboard customers very quickly. They’ve been able to introduce simple products. They’ve been able to reduce cost. They’ve been able to increase productivity and service quality, but you’ve been able to absorb them all back and many of these stand-alone mobile banking initiatives, they are all going around and saying, “Will your bank buy us?” When we look at… when we try to make sense of the evolution that the industry has been going through, and some of you here—as CIOs, as CTOs—you come from generations when you remember when we were still trying to modularise the industry or modularise technology.
Then, we started to think a little bit about the integration with business, and then, we told about platform independence. We started creating platforms which will open and which will be able to integrate and interact with each other, and then we started looking at the applications themselves and started thinking about service-oriented architectures and now we talk about service and we talk about platform-as-a-service, banking-as-a-service, and so on. What we see happening in the evolution is a greater and greater personalisation of the industry. The industry is being taken away from the institution and being handed over by hand to the individual.
The individual is becoming empowered and the institution is becoming a slave. If we had this meeting three years ago, and we did, the conversation, the plead would have been, “Please, give up your core banking systems. Transfer them onto the server networks and do the same thing and be able to scale and integrate with other platforms and so on. Today we’re talking about multiple-server platforms and we’re talking about server platforms which have become machines, and we’re talking about machines starting to talk to each other, we’re starting to talk about machines starting to learn from each other. If you’re not part of the journey already, you’re late. If you’re not part of understanding how these technologies are starting to talk to each other, you need to move much quicker than you are right now. When we talk about IoT, we’re also talking about the relationships that banks need to refigure out in terms of how you integrate with customers. The customer is not thinking banking anymore. He’s thinking lifestyle. He’s thinking his own needs. He’s thinking travelling. He’s thinking leisure, entertainment; and somehow, the financial services industry needs to integrate into all of these requirements. There are few things that we’re trying to do, which helps us to figure out how we want to integrate with customers. We are putting out APIs, we’re saying to the customers, “This is what we want to do with you. Can you take a look at it and figure out how you want to interact back with us?” but that’s not how the customer’s thinking. The customer’s API is his lifestyle. It’s how he downloads music or entertainment. How he goes, plans a holiday. How he tries to work out his children’s needs, and so on. Then we keep moving and agenda is being put on us. We’re trying to put out bots in order to be able to speak to the customer, the point that he needs us, and so on.
Even in a technology conference like this, we’re talking about all of the infrastructure that needs to be put in place. In fact, later after my speech, there will be speeches from banks for putting in places these infrastructure and the journey they are going through in trying to make sense what needs to be done to get to the customer. The question that should be at the back of our heads is, “Are we popular with the customers? Is the community that we are interacting with, interacting back with us? When we create a bot capability on our short messages, are the customers coming back to us and asking us more questions? Are they interacting with us?” These are the things that we need to concern ourselves with. But even as you put in place the technology for the future, what banks are not doing is just as important and this harks us back to why Kodak eventually failed.
In as much as Kodak was inventing digital in the future, there were things about itself, about the physical nature of the film business during its time that it wasn’t able to give up. We still think product, product, product and why do we know that? Because when you look at your organisations, the single, most important skillset that you have in your organisations are the sales people and you have an army of sales people that cost a lot of money and every morning, your bosses wake up and they start to figure out how to make sales works. A lot of our products are still balance-sheet focused. We’re still interested in the intermediation business. In other words, that when we look at the payment infrastructure, we are trying to figure out how to keep the bank in the middle of the payment process. We don’t understand that today, with an app, the customer doesn’t need you.
The payer and the payee can just download the apps and interact with each other. They don’t need you. When we think about bitcoin or when we think about ledgers, we think about ways in which the bank is still in the middle of the transaction, the purveyor, the organisation that holds a trade transaction and so on. We’ve got very bad habits. We don’t give our customers the information they need on their transactions. We give them physical credit cards which doesn’t tell them anything about how much money they have in their bank account, how many times they have transacted, when we could easily do that on a mobile device every time they transact. We engage in price wars with each other as the reason for succeeding in the business. In other words, yes, we invest in so much technology, but at the end of the day, when it comes to winning the mortgage war, or to build market share against another bank, it’s a price war. We reduce prices. We do not improve technology. We have high cost structures. Banking is still, in many countries, the profession that the highest, the most expensive people; expensive ordinary people who, if they worked in other places, would not be paid as highly as in banks. We have hierarchy co-organisational structures. Why do you invest in server technology that breaks down hierarchies and still have matrix reporting structures in your organisations and we still insist on being profitable?
When will the real beginning of the end be? The real beginning of the end, the part, the phase where in the story of Kodak, the share price went up and then started to disintegrate. Let me try to construct for you the beginning of the end by telling you another story. The story of ice. The ice that you have in the glass that you drink outside of this room. The ice that you have in the refrigerator in your home. That story started sometime in the 1700s with a man called Fredric Tudor who, in the Boston area, had this interesting idea. He looked at the ice that was created in the lakes and he said himself, “Why can’t I export this ice to other parts of the country?” And so, he started the ice trade and he had it exported to New York first, and later, he thought, “I should be able to export it to Havana in Cuba, in the tropics.”
So, that as you export this ice on a boat, a lot of the ice gets lost even as it arrives to Havana. And guess what? He also tried to export it, and he did, to India, because Fredric Tudor’s family was what we call a “Boston Brahmin” and they have some religious connections to India and to the UK and so on. Can you imagine this crazy idea of exporting ice? The railway companies and the shipping companies that took the ice that he was exporting onboard laughed at him and said, “You think this thing will survive?” but in that process, slowly, other people started to think about how to make that ice survive a long journey, so we started to have Thermos technology, sodas, and other things in order to keep that ice alive as long as possible. And over time, high society in New York, in London, loved the idea of having ice in their gin and tonic and ice in their Bacardi rum in Havana and it became a social status symbol. An ice had a value, and with that value came the investment on technology, in Thermos, and eventually, into the manufacturing of ice. At the height of the ice industry were the ice merchants. All of you in the financial services industry, today, you’re the ice merchants of the finance industry. If you’re a bank, you’re an ice merchant. You’re the wholesaler that tries to put together the industry and make it available to the men on the street.
Then came the real revolution, and that real revolution is a scientific technology called chlorofluorocarbons, or CFCs. CFCs are synthetic chemicals that absorbs heat, and when it does that, it enables the environment outside to cool down. They use that in refrigerators and they use that in air conditioning for a long time and of course, today, we know that chlorofluorocarbons are also dangerous to the ozone and so they’ve started to look for alternative technologies. But because of CFCs, ice became highly personalised. It became a technology that became available in your kitchen. It became available in your living room. It became something that you did not even think about in your daily life. What will the banking industry’s chlorofluorocarbon be?
Actually, there’s a lot of work undergoing right now to discover that chlorofluorocarbon in banking today. What are that work? There are peer-to-peer players that are trying to get credit to the lowest customer, to the poorest customer in as cheap as manner as possible. The credit scoring models that we have which are like the ice merchants which makes credit expensive and available only to a few people, that’s been disintegrated because with a lot more information and a lot more intimacy with the customer, you can actually make small amounts of credit available to a larger amount of people around the world. In payments today, there’s a lot more infrastructure that makes it more transparent and quicker and where you can make quick, small payments as quickly as possible. The interesting thing about the demise or the eventual bankruptcy of Kodak is not that it didn’t invent the digital camera or it didn’t invent the digital film. Actually, these things were invented in the 1980s. It gave them a long time to make that transition into the new world. The funny thing is that, from the year 2000, a few things happened. Even as digital was being invented, digital was being networked.
In other words, people were able to share data, you know, at the backend of the digital film industry. And digital was becoming personalised, you don’t need to carry a camera. In 2007, when the iPhone was created, it just increased the quality of digital, and made the camera completely unnecessary. And so, it was lifestyle, it was networking, it was personalisation, those were the elements that made digital technology revolutionised the film industry that eventually killed Kodak. It was not the product. It was not the product itself. And yet, when you look at every banks’ website today, you see product. You see product. You see product. You see product. All we’re concerned about is the product that we sell. We are not concerned about the intimacy, about the interaction, about what it is that we’re learning about the customer. And think about the organisations that are making a difference today.
The organisations that are truly revolutionising finance. Think about WeChat. When WeChat introduced the WeChat red packet, the “hóngbāo”, they didn’t introduce it because it’s a product, they introduced it because within WeChat, there were people trying to send red packets to each other on Chinese New Year’s Day, but thought that to send so many red packets was so difficult. And so, as a fun exercise, they said, “Hmm, can we do this electronically?” And they did it electronically. They did that because it was fun. Because it was something that they would do otherwise, anyway. And when they released it in the market, the first year they had a million red packets, in the second year it just took off and today, it’s in the billions.
And in that way, there are many things that we might not want to own. Even today, some of us would value our ability to travel well on first class, rather than sit at home and maybe, buy a new furniture, because travelling is much more an expression of our wealth, than having a large number of furniture at home. And things like that. And so, the value of the next generation is changing with all that technology is making available to them. In your respective banks, and in the conversations that we’re going to have afterwards, we’re going to be talking about things like retention cost, we’re going to talk about cross-sell ratios, we’re going to be talking about customer-level profitability, but I need to caution you this – that the reason for these conversations is the result of succeeding with the customers. It’s not the cost of building relationships with customers. Don’t think like an ice merchant.
Think like a refrigerator. And so, the finance industry’s chlorofluorocarbon, eventually will be an industry, which empowers the customer, that personalises to the customer. That makes the customer makes finance a part of his everyday life. So, is your bank working to avoid its own Kodak moment? It’s a question we want to keep at the back of our heads, as we get in to the rest of this day’s conversation. I wanted to start this meeting with these points, so that we remember where we are in this journey to digitisation. That we remember the end goal that we need to reach eventually, that is authenticity with customers, that is integration with the customer’s lifestyle, that is listening to the customers, and creating products that demonstrates that we actually derive them from what the customer wants, because the new players that are making this a reality are showing us that it is possible. In this country, the non-banks have built the payment infrastructure to $600 billion before the banks even realised that it was possible. In other countries, in Africa, in other parts of Asia, non-banks, the payment companies, the supply chain companies are creating huge flows, that do not at this moment affect the banking industry, but eventually the banks come back and say, “Oh my goodness! There is a huge business that we had missed out. And now we’re trying to reintegrate to.”
When we think about WeChat, when we think about Alipay in China, that’s exactly what we are thinking about today.