March_April _2016_Disruption_Report.pdf

8/18/2019 March_April _2016_Disruption_Report.pdf

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© 2016 by Caneld Press, LLC. All rights reserved. www.caneldpress.com 1

MARCH / APRIL 2016

THE DISRUPTION REPORT

The biggest

transformation

ever

If you’re a leader in today’s world, whether you’re a government leader or a business leader,

you have to focus on the fact that this is the biggest technology transition ever. This digital era

will dwarf what’s occurred in the information era and the value of the Internet today. As leaders,

if you don’t transform and use this technology differently—if you don’t reinvent yourself, change

your organization structure; if you don’t talk about speed of innovation—you’re going to get

disrupted. And it’ll be a brutal disruption, where the majority of companies will not exist in a

meaningful way 10 to 15 years from now.

HOW TO ACHIEVE A SUSTAINABLE DIGITAL EVOLUTION

This digital age is the connectivity of going from a thousand devices connected to the Internet

to 500 billion. It will transform business. It will transform our lives, our healthcare system.

Business models will rise and fall at a tremendous speed. It will create huge opportunities—

probably $19 trillion in economic value over the next decade, incremental above what we’re

seeing today. That’s the size of the US economy, plus some.

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MARCH / APRIL 2016THE DISRUPTION REPORT

...you eitherdisrupt or you get

disrupted

THE NEW ERA OF DIGITAL GLOBALIZATION

But it will also result in tremendous disruption. And this is where it’s so important—whether

they’re countries or companies, regardless of their size—that you either disrupt or you get

disrupted. Probably 40% of the enterprise customers around the world will not exist in a

meaningful way ten years from now. When I said that two and three years ago, my CEO

counterparts said, “Hey, John, you called the other transitions right, but I think that’s way tooaggressive.” I think now most CEOs would agree. If they don’t change, they get left behind.

DIGITAL GLOBALIZATION CHANGES HOW BUSINESS IS DONE

Source: Digital Globalization: The New Era of Global Flows, McKinsey Global Institute, March 2016)




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MARCH / APRIL 2016THE DISRUPTION REPORT

...technologywill become the

company. This is

about exponential

change

When many people think about this, you want to think about the intelligence of an architecture,

where you can get access to any data, any point and time you want. It’s simple to describe, but

it really means you’re dealing with intelligent networks—a next generation of the Internet, if you

will. But connecting 500 billion devices doesn’t get the job done. It’s the process change behind

it. So you’ve got technologies like cloud or mobility and cybersecurity and the Internet of Things

that are very important. That’s actually the easy part.

The hard part is how do you change your organization structure? How do you change your

culture to be able to think in terms of outcomes for your customers? It’s all about speed of

innovation and changing the way you do business. The majority of companies will be digital

within ve years, yet the majority of their digital efforts will fail, which speaks to what a CEO has

to do differently.

She or he has to think much more outside the box. They have to reinvent themselves. They

have to reinvent their company. Not stay doing the right thing too long, if you will. That’s

what got companies in trouble in the past. But the rate of change then was much slower.

Today, you’re talking about digitization being an integral part of the fabric of a company’s

business strategy or the way it interfaces its supply chain with its customers. Not enabled by

technology—technology will become the company. … This is about exponential change.

John Chambers

McKinsey& Company’s Our Insights

March 2016

GLOBAL FLOWS INCREASE ECONOMIC GROWTH




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MARCH / APRIL 2016TABLE OF CONTENTS

HOW TO ACHIEVE A SUSTAINABLE DIGITAL EVOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . 1

THE NEW ERA OF DIGITAL GLOBALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

DIGITAL GLOBALIZATION CHANGES HOW BUSINESS IS DONE . . . . . . . . . . . . . . . . . . . . 2

GLOBAL FLOWS INCREASE ECONOMIC GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

GLOBAL DIGITIZATION 6

The new era of global digitization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

TRADITIONAL FLOWS OF GOODS AND SERVICES HAVE DECLINED . . . . . . . . . . . . . . . . 6

THE BIGGEST ONLINE PLATFORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

GLOBALIZATION: THEN VERSUS NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

INTERNET OF THINGS 11

The next industrial revolution: The Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

THE SIZE OF THE INTERNET OF THINGS MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

How will the Internet of Things impact the nancial services sector? . . . . . . . . . . . . . . . . . . . . . . . 13

How will self-driving cars change our way of life? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

DIGITAL BANKING 19

The epicenter of disruption: FinTech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

THE FINANCIAL SECTORS MOST DISRUPTED BY FINTECHOVER THE NEXT FIVE YEARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Neobanks—the banks of the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

TRADITIONAL VS. DIGITAL CAPEX COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FinTech is forcing banking to a tipping point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

FINANCIAL INNOVATION IS AT THE TIPPING POINT IN U.S. AND EU . . . . . . . . . . . . . . . . 23

PRIVATE FINTECH COMPANIES’ CAPITAL DEPLOYED BY SEGMENT . . . . . . . . . . . . . . . 24

Banking’s Uber moment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

COMMERCIAL BANK BRANCHES PER 100k ADULTS BY REGION . . . . . . . . . . . . . . . . . . 24

AT THE TIPPING POINT OF FTE REDUCTION (MILLIONS) . . . . . . . . . . . . . . . . . . . . . . . . . 25

BLOCKCHAIN POSITIVES AND NEGATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ATTRACTIONS OF BLOCKCHAIN OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ATTRACTIONS OF BLOCKCHAIN OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

FORMIDABLE CHALLENGERS: MARKETPLACE LENDERS . . . . . . . . . . . . . . . . . . . . . . . 28



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© 2016 by Caneld Press, LLC. All rights reserved. www.caneldpress.com v

MARCH / APRIL 2016TABLE OF CONTENTS

Innovation is not a part of the banks’ culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Who owns the future of nance? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

Will disruptive technology trigger the breakup of the TBTF banks? . . . . . . . . . . . . . . . . . . . . . . . .33



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MARCH / APRIL 2016GLOBAL DIGITIZATION

GLOBAL DIGITIZATION

McKinsey Global Institute wrote:

The new era of global digitization

The rapidly growing ows of international trade and nance that characterized the 20th

century have attened or declined since 2008.

l i i l i i i i

i i i l i l l l i i l

i l i li i i i i

l l l l i l i

i i li

li i l l l

i li i i l li i li i

li l l i l i i i i

l li i

i i i i l li

l l i i i l l

i l l l

i i i l i l li i

i i i l il i i i

l i l i i l l l i i l i

i l l l i

l l i li l i li i i i li l i l i

i i l i l i l

3937

38

4141

53

37

32

27

2423

22

24

2221

2324

26

2014

18

2830

29

9655

8

29

109

32

6

29

1990

24

5

10

643 433 333

980

3

10

32

2000

12 11

49

28

3735

22

17

41

32

46

2007

30 31

2421

13

26

SOURCE: UNCTAD; IMF Balance of Payments; Worl d Bank; McKinsey Global Institute analysis

Finance

Goods

Services

Flows of goods, services, and finance, 1980–2014

$ trillion, nominal All flows as % of GDP

-14 p.p.

TRADITIONAL FLOWS OF GOODS AND SERVICES HAVE DECLINED

Yet globalization is not moving into reverse. Instead digital ows are soaring—transmitting

information, ideas, and innovation around the world and broadening participation in the

global economy.

• The world is more interconnected than ever. For the rst time in history,

emerging economies are counterparts on more than half of global

trade ows, and South-South trade is the fastest-growing type of

connection.



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• While ows of goods and nance have lost momentum, used cross-

border bandwidth has grown 45 times larger since 2005. It is projected

to grow by another nine times in the next ve years as digital ows

of commerce, information, searches, video, communication, and

intracompany trafc continue to surge.

THE BIGGEST ONLINE PLATFORMS

User bases on par with populations of world’s biggest countries

Active users of online platforms vs. country population

Million

205

256

300

300

320

321

400

407

650

1,000

1,000

1,314

1,372

1,590

China

YouTube

Facebook

India

WhatsApp

Alibaba

Skype

Brazil

WeChat

Amazon

Indonesia

Twitter

United States

Instagram

Countries2

Online platforms1

1 4Q15 or latest available.

2 2015 population.



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• Digital platforms change the economics of doing business across

borders, bringing down the cost of international interactions andtransactions. They create markets and user communities with global

scale, providing businesses with a huge base of potential customers

and effective ways to reach them.

• Small businesses worldwide are becoming “micro-multinationals” by

using digital platforms such as eBay, Amazon, Facebook, and Alibaba

to connect with customers and suppliers in other countries. Even the

smallest enterprises can be born global: 86 percent of tech-based

startups we surveyed report some type of cross-border activity. The

ability of small businesses to reach new markets supports economic

growth everywhere.

• Individuals are participating in globalization directly, using digital

platforms to learn, nd work, showcase their talent, and build personal

networks. Some 900 million people have international connections on

social media, and 360 million take part in cross-border e-commerce.

• Over a decade, global ows have raised world GDP by at least 10

percent; this value totaled $7.8 trillion in 2014 alone. Data ows

now account for a larger share of this impact than global trade in

goods. Global ows generate economic growth primarily by raising

productivity, and countries benet from both inows and outows.

• The MGI Connectedness Index offers a comprehensive look at how

countries participate in inows and outows of goods, services,

nance, people, and data. Singapore tops the latest rankings, followed

by the Netherlands, the United States, and Germany. China has surged

from No. 25 to No. 7.

• Although more nations are par ticipating, global ows remain

concentrated among a small set of leading countries. The gaps

between the leaders and the rest of the world are closing very slowly,

but catch-up growth represents a major opportunity for laggingcountries. Some economies could grow by 50 percent or more over the

long term by accelerating participation.

• Many companies grew more complex and inefcient as they expanded

across borders. But digital technologies can tame complexity and

create leaner models for going global. This is a moment for companies

to rethink their organizational structures, products, assets, and

competitors.



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Countries cannot afford to shut themselves off from global ows, but narrow export strategies

miss the real value of globalization: the ow of ideas, talent, and inputs that spur innovation

and productivity. Digital globalization makes policy choices even more complex. Value

chains are shifting, new hubs are emerging, and economic activity is being transformed.

This transition creates new openings for countries to carve out protable roles in the global

economy. Those opportunities will favor locations that build the infrastructure, (Digital

Globalization: The New Era of Global Flows, McKinsey Global Institute, March 2016)

GLOBALIZATION: THEN VERSUS NOW

I :



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Seeking Alpha’ s Timothy Taylor wrote:

What’s the bottom line on these changes [caused by global digitization]? It’s

already true that international trade in goods has shifted away from being

about nal products, and instead become more a matter of intermediate

products being shipped along a global production chain. Now, information in

all its forms (design, marketing, managerial expertise) is becoming a bigger

share of the nal value of many physical products.

Moreover, a wired world will be more able to buy and sell digital products.

New technologies like 3D printing will make it easier to produce many

physical products on-site, wherever they are needed, by shipping only the

necessary software, rather than the product itself. The greater ease and

cheapness of international communication will presumably strengthen many

person-to-person cross-border ties, which is not just a matter of broadening

one’s social life, but also means a greater ability to manage business and

economic relationships over a distance.

It’s interesting to speculate on how these shifts in globalization, as it

percolates through economies around the world, will af fect attitudes about

globalization. Imagine a situation in which globalization is less about big

companies shipping cars and steel and computers, and more about small

and medium companies shipping non-standard products or services.

And imagine a situation in which globalization becomes less faceless,

because it will be so much easier to communicate with those in other

countries - as well as so much more common to visit in person as a student

or tourist. Changes in how globalization manifests itself seems sure to

shake up how economists, and everyone else, view its costs and benets.

(SeekingAlpha, Timothy Taylor, 03/23/16)



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MARCH / APRIL 2016INTERNET OF THINGS

INTERNET OF THINGS

The next industrial revolution: The Internet of Things

The Internet of Things (IoT), which is often touted as the next Industrial Revolution, consists of a

vast and growing network of connected objects able to collect and exchange data using embedded

sensors, which allow businesses, governments, and consumers to monitor and control remotely.

“From a productivity, efciency, and innovation perspective, we believe the IoT, ultimately, will be as

transformative to society as was the Industrial Revolution,” wrote BI Intelligence’s John Greenough

and Jonathan Camhi. “By the end of 2020, we project an installed base of 44 billion IoT devices

worldwide, up from 4.2 billion in 2015. 11.2 billion IoT devices will be installed in enterprise settings,

7.7 billion in government settings, and 5 billion in consumer settings.” An estimated $6 trillion will

be spent on IoT solutions over the next ve years, which will lower operating costs and increase

productivity for governments and businesses. BI Intelligence projects the $6 trillion investment in

IoT will generate $12.6 return on investment over the next decade.

THE SIZE OF THE INTERNET OF THINGS MARKET

ii

I l i ll i l

i

ii i

i il i

-I i

-5

10

15

20

25

30

2015E 2016E 2017E 2018E 2019E 2020E

D

e v i c e s I n s t a l l e d

( B i l l i o n s )

41%CAGR — total

IoT devicesinstalled

24BILLIONThere will be 24billion IoT devicesinstalled by 2020

$6 TRILLIONINVESTED

$6 trillion will be investedon IoT solutions over the

next five years

$0 $1 $2 $3

Connectivity

Security

Data Storage

System Integration

Device Hardware

ApplicationDevelopment

USD (Trillions)

AmountSpent2015-2020

$0

$2

$4

$6

$8

$10

$12

$14

Compound Investment2015-2020

ROI 2015-2025

U S D (

T r i l l i o n s )

$13TRILLION ROITotal investments overthe next five years willgenerate $13 trillion

by 2025



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Today, there are more than 1,211 IoT companies across 22 categories, including IoT city/

infrastructure, home, toys, healthcare, tness, jewelry, agriculture, trackers and lifestyle and

entertainment. Collectively, Silicon Valley has raised more than $17.4 billion for these IoT startups.

Data monetization is the top IoT revenue driver, but only 8% of businesses are using more than

25% of their IoT data, according to Verizon. “The view has been that IoT is a mashup of complex

technologies used only by early adopters,” said Mike Lanman, Verizon’s SVP of IoT and Enterprise

Products. “In the past year, we’ve seen compelling examples of how IoT is being deployed by

a wide-range of enterprises, entrepreneurs, municipalities and developers to address relevant

business, consumer and public needs. Meanwhile, consumers are more willing to try new

technologies and apps that introduce a better way of life. The end result will not only give rise to

thousands of new use cases over the next two years, but will also create an accelerated pipeline fo

innovation and a new economy.”

Here are the ve ‘macrotrends’ that will dominate the IoT market in the future, according to Verizon:

• In an IoT-enabled world, consumers are beginning to understand and

expect that their mobile phones can do more. In 3 to 5 years, consumers

will experience a much higher level of automation in their daily lives,

thanks largely to the ability to engage with IoT applications through a more

simplied interface. Today, 81% of IoT adopters in the public sector believe

that their citizens increasingly expect them to offer enhanced services

from data and IoT

• Data monetization will become a required competency in the private

sector. Nearly 50% of businesses expect to be using more than 25%

of their data over the next 2 to 3 years. Data analytics will evolve from

descriptive data collection to a more sophisticated model of predictive

and prescriptive data analytics. As industries seek to derive meaningful

insights to benet their customers, there will be a paradigm shift from “big

data” to domain experts with deep understanding of the business’ products

and/or programs.

• Changes in the regulatory landscape will continue to bring ecosystem

partners together to help establish industry standards more quickly. An

example is the Drug Supply Chain Act, which gives drug manufacturers

until late 2017 to implement systems to electronically transfer and store

transaction histories for their prescription drugs including shipment

information across their distribution and supply chain. The law is designed

to thwart counterfeit drugs, which cost the industry $75 billion annually

according to the World Health Organization



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• Network connectivity, low power devices and IoT platforms will

democratize innovation by creating more tools for developers and enabling

businesses to scale their IoT deployments from millions to billions of

connections more cost-efciently using 5G, the next-generation of wireless

technology; 5G not only promises to make autonomous solutions such as

cars and robotics a reality, but will also usher in new categories of uses,

such as virtual and augmented reality for IoT deployments.

• Security experts are keeping up with the development of technology

by looking to arising threat vectors—some old, some new—that will

impact IoT deployments and ongoing operations. (Business Insider ,

John Greenough and Jonathan Camhi, 03/1/16; The Internet of Things:

Examining How the IoT Will Affect the World , John Greenough and

Jonathan Camhi, November 2015; The Internet of Everything 2016 , BI

Intelligence, April 2016; Venture Scanner, 04/08/16; State of the Market:

Internet of Things 2016 , Verizon, 04/07/16)

How will the Internet of Things impact the nancial services sector?

The rapidly growing Internet of Things (IoT) is reshaping the world’s economy and impacting the

nancial services industry on data security, the use of sensors and big data analysis. Gartner

projects approximately 25.0 billion IoT sensors will be installed by 2020, creating opportunities for

all industries, including banking. Approximately 33% of the sensors deployed today could be used

by the nancial services industry, rising to about 50% by 2020, according to Deloitte Center for

Financial Services.

Today, branch-based IoT applications include video tellers and kiosks, where sensing technology

monitors the customer and takes action on his behalf. Mobile geolocation and beacon technology

can “introduce” the customer as a pre-quing device to improve service.

Real-time data on consumer spending can provide loan underwriters valuable information to

assess risk. Data on the customer’s residence, including crime statistics, wise use of water and

electricity and exercise regime will help underwriters prole the applicant’s responsible behavior

and increase the likelihood of a loan approval at more affordable interest rates.

Connected devices will be widely used in the payments space, as monitors trigger the automatic

order and payment for goods, as needed. Ultimately, handheld scanners or mobile phone apps will

be used to scan bar codes of items placed in a grocery basket, allowing the checkout and payment

process to be streamlined. In 2015, Mastercard introduced the Commerce for Every Device

program, which enables any accessory, wearable, automobile or gadget to become a payment

device. As everything becomes connected, customers will have an unlimited number of options on

how to make payments, as the devices begin to work together seamlessly over time. Technology



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that allows Internet connected cars to make payments is expected to be rolled out in 2016, after

which it will be expanded to markets in other parts of the world. For the IoT to reach its full potential

in the nancial services industry, establishing identity for the devices and ensuring the devices’cybersecurity will be essential. Over the next decade, the way a consumer views nancial services

and how his identity is connected to an account will be completely disrupted.

The insurance industry has begun to use sensor to improve customer communication and expedite

insurance claims. Wireless communication from the automobile’s computer is helping insurers

collect and analyze behavior data to better assess risk and allow customers to pay on a behavior—

e.g., use—basis rather than at annual premium. Sensors can be used to monitor clients’ health,

track carbon monoxide levels in the home, monitor water leaks or res—all potentially lowering

insurance premiums and improving the efciency of the insurance industry and lowering costs to

consumers.

“There’s no question that the Internet of Things has a dramatic effect on the way nancial services

companies will collect data, how they operate and how they interact with customers,” wrote futurist

Richard van Hooijdonk. “Succeeding in this era depends on how well these new technologies

are deployed. While the IoT offers new opportunities, it also has the potential to disrupt the

marketplace. It will facilitate the development of new business models and new competitors. In

order for the nancial services industry, or any industry for that matter, to yield value from the

Internet of Things, we need to adapt, rethink and address factors such as privacy concerns and

cyber security.”

“By enabling the collection and exchange of information from objects, the IoT has the potential

to be as broadly transformational to the nancial services industry as the Internet itself,” said Jim

Eckenrode, executive director of the Deloitte Center for Financial Services

“Within the next 10 years, we’ll launch almost 100 billion IoT devices onto the world’s stage,” said

Brett King, CEO of Moven. “Whether an autonomous, self-driving car driving for Uber, a smart

fridge that orders your groceries, a solar-powered car recharging station that requests a payment

or your automated assistant on your smart device booking your airline or movie tickets, the vast

majority of payment and nancial transactions around the globe will be fully automated within a

decade. …[T]hese are transactions that don’t involve a plastic card, NFC chip or checkbook, and

these are accounts that you won’t nd listed on the website of a retail bank. The Internet of Things

means the way we think about bank products and services and how we marry an identity with an

‘account’ is going to be completely undermined over the next decade. Regulators and bankers

better get ready for a new reality.”



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Bradley Leimer, head of innovation at Santander, N.A. said:

The growing IoT opportunity manifests itself in an augmented world

of sensors and connected smart devices that can have a tremendous

implication for nancial services. I can eventually see our personal identities

and payment mechanisms become part of this broader information network,

much in the same way the web and smartphone have impacted our daily lives

already.

Our connected home will grow to include an expanding array of security and

home monitoring devices that provide feedback and an improved quality of

life, while transmitting insight to our trusted partners in real time. For banking,

this insight will impact insurance, lending opportunities and even savings

offers.

Our connected businesses will be impacted in areas like trade nance, a

$22 trillion market where embedded sensors can determine the location and

condition of goods shipped, often between previously unconnected parties.

Smaller businesses will be able to ship goods more efciently on a global

basis as data is disseminated by trusted data providers.

These behavioral changes will impact the way we spend, the way we are

paid, the way we run our businesses, and our interactions with banks. In

addition to efciencies, I’ve long argued that the growing IoT ecosystem

should be embraced by nancial players as they help us save the most

valuable commodity of all … time. (The IoT and the Disruption of the

Financial Services Industry, 03/01/16; How Financial Services Can Make

IoT Technology Pay Off , Jim Eckenrode, 10/13/15; The Financial Brand , Jim

Marous, 10/20/15)

How will self-driving cars change our way of life?

By 2020, an estimated 10 million self-driving cars will be on the road. “This [has the potential to]

dramatically reduce the number of cars on the street, 80% of which have people driving alone in

them, and also a household’s cost of transportation, which is 18% of their income – around $9,000

a year – for an asset that they use only 5% of the time,” said Robin Chase, the founder and CEO of

Buzzcar, co-founder and former CEO of Zipcar.

The adoption of this revolutionary technology will reverberate throughout the U.S. economy,

dramatically impacting:



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• Automakers, suppliers, dealers, auto nanciers, auto insurers

• Parking lot companies (and land use)

• Oil companies

• Auto repair companies

• Personal injury lawyers

• Health insurers

• Government gasoline tax revenues

• Government licensing fees, trafc tickets, taxes and tolls

• Government infrastructure, including roads, bridges, trafc signals, etc.

Collectively, self-driving cars are expected to (i) save 42 lives daily lost daily caused by auto

accidents and $576 million of related damage to autos; (ii) eliminate $14 million paid annually for

speeding tickets; and (iii) reduce daily gasoline consumption by 35% (420,000 barrels).

In its 2015 10-K ling with the SEC, Allstate Insurance warns that automous cars could disrupt their

business model. The company wrote:

Other potential technological changes, such as driverless cars or

technologies that facilitate ride or home sharing could disrupt the demand

for our products from current customers, create coverage issues or impact

the frequency or severity of losses, and we may not be able to respond

effectively.

“However it plays out, these vehicles are coming – and fast,” wrote Joseph Dallegro. “Their full

adoption will take decades, but their convenience, cost, safety and other factors will make them

ubiquitous and indispensable. Such as with any technological revolution, the companies that plan

ahead, adjust the fastest and imagine the biggest will survive and thrive. And companies invested

in old technology and practices will need to evolve or risk dying.” ( Investopedia, Joseph A. DallegroMay 2014; Driverless Car Watch, 03/03/16; BusinessInsider , John Greenough, 07/29/15;

AUVSI.org)

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On LinkedIn, RedFin’s Glenn Kelman wrote:

Most of what we buy — bubble gum, blouses, books, baseballs — is destined to last days,

weeks, maybe years. But we think of houses as investments rather than consumable goods

because houses last decades or centuries. Over that time, what makes a house valuable

doesn’t change much: we’ll always like plenty of square footage, views, and mostly prefer

living in cities with nearby restaurants, train stations and jobs.

And we love parking. Where we live, work and even eat is shaped by where we can park

our cars. A car has been the pet that Americans insist on accommodating, in numbers ten

times higher than modern parts of Asia like Hong Kong.

But now a change is at hand. Tesla CEO Elon Musk predicts that cars will drive themselves

in two years. Chris Urmson at Google estimates it will take ve years. Already Lyft and

Uber have shifted millennials’ home-buying preferences: who needs a garage, or for that

matter a kitchen or a living room, when transportation, food and even a social life are all

available online and on-demand? This is why, even as urban home prices boom, we see

couples with one car or no cars preferring smaller homes with fewer amenities but a high

Walk Score and nearby transit.

In our lifetimes, and the lifetimes of our mortgages, the self-driving car could change the

shape of the American city even more profoundly. Unlike the cars of today, which areparked 96% of the time, self-driving cars will be in semi-continuous service except in the

wee hours; we’ll need far fewer cars overall, and those that remain will leave town at night.

A third of urban real estate is devoted to parking garages that could become parks;

there are eight U.S. parking spaces for every car in operation, for as many as two billion

U.S. spaces overall. Thirteen percent of every lot for a typical single-family home is now

dedicated to a garage that could be converted into an ofce or a mother-in-law apartment;

with the income provided by AirBnB and other property-rental sites, single-family homes

could thus become 13% more affordable. Perhaps a decade from now, architects and

contractors may offer xed-fee garage-conversion services, in much the same way that old

houses were once converted en masse to use modern furnaces and plumbing.

Self-driving cars will also change homebuyers’ location preferences. Data from Lyft and

Uber already show that when private transit becomes signicantly cheaper, public-transit

use also increases: many carless households replace the car with a mix of private and

public transit. As cars become a service rather than an asset, proximity to bus lines may



18/33



become less important, but subways and trains that can bypass car trafc altogether will

only grow in popularity.

How should this affect your home-buying decisions today? Perhaps not much; the average

lifespan of a car is 15 years, so it may be 2035 or later before nearly all cars are self-

driving. And we’ll still need at least some parking, not to mention a place for our skis and

lawn-mower.

But our guess is that the future, which usually doesn’t come to pass at an even pace,

will happen faster than that; there will be a tipping point, driven in this case by the

overwhelming convenience and safety of self-driving cars, and by the likelihood that only a

small proportion of cars need to be self-driving before real estate prices begin to anticipatea world where most cars are that way.

Regardless of when you want to prepare for the future, here’s our take on what to do about

it:

• Don’t pay a premium for a garage. Today the same home with or

without a garage costs an extra $50,000 per parking space. A decade

from now self-driving cars will make urban homes with less parking

more attractive.

• Do pay a premium for proximity to a subway station or rail station.

Today proximity to transit adds 30% to a home’s value. As the number

of partially or completely carless households increases, we believe that

premium will be closer to 50% in a decade.

• And last but not least, consider the possibility that a home next to an

unsightly parking garage may one day be situated next to a new park

or a new block of coffee shops and restaurants.

A hundred years ago, the car was the reason that cities became something entirely

different than villages, with sprawl, painful commutes and gated communities. Now the self-

driving car may bring the old idea of a village back to the future. (LinkedIn, Glenn Kelman,

03/30/16)



19/33


MARCH / APRIL 2016DIGITAL BANKING

DIGITAL BANKING

The epicenter of disruption: FinTech

The digital revolution in banking has just begun. Today, the industry is in phase one of

this evolution, offering customers high quality web and mobile sites and apps. New digital

technologies are reshaping the value proposition of existing nancial products and services,

placing up to 28% of banking and payments business and 22% of insurance, asset management

and wealth management services at risk to disintermediation, according to PwC.

THE FINANCIAL SECTORS MOST DISRUPTED BY FINTECH

OVER THE NEXT FIVE YEARS

,

.

, ,

.,

,, .

,

,

,

.

Source: PwC Global FinTech Survey 2016

Consumerbanking

Fund transfer &payments

Investment& wealth

management

S ME b an ki ng B ro ke ra geservices

Property& casualtyinsurance/

Life insurance

Commercialbanking

Insuranceintermediary

Marketoperators &exchanges

Fundoperators

Investmentbanking

Reinsurance0%

20%

10%

30%

40%

50%

60%

80%

70%

Which part of the financial sector is likely to be the most disrupted by FinTech over the next 5 years? – All industries Banking and capital markets

Asset and wealth management

Insurance/Reinsurance

Fund transfer and payments

Consumer banking and fund transfers &

payments are likely to be the most disrupted

sectors by 2020

“Although a high level of disruption triggered by FinTech is already beginning to reshape the

nature of lending and payment practices, a second wave of disruption is making inroads in

the asset management and insurance sectors,” wrote PwC. “Annual investments in InsurTech

start-ups has increased vefold over the past three years, with cumulative funding of InsurTechs

reaching $3.4bn since 2010, based on companies followed in our DeNovo platform. The pace

of change in the global insurance industry is accelerating more quickly than could have been

envisaged. The industry is at a pivotal juncture as it grapples with changing customer behavior,

new technologies and new distribution and business models [including self-directed services,usage-based insurance, and remote data capture and analytics to evaluate risk etc.). The

investment industry is also being pulled into the vortex of vast technological developments.”

“…Blockchain is a new technology that combines a number of mathematical, cryptographic and

economic principles in order to maintain a database between multiple participants without the

need for any third party validator or reconciliation. In simple terms, it is a secure and distributed

ledger. Our insight is that blockchain represents the next evolutionary jump in business process



20/33



optimization technology. Just as Enterprise Resource Planning (ERP) software allowed functions

and entities within a business to optimize business processes by sharing data and logic within the

enterprise, blockchain will allow entire industries to optimize business processes further by sharingdata between businesses that have different or competing economic objectives. That said, although

the technology shows a lot of promise, several challenges and barriers to adoption remain.

Further, a deep understanding of blockchain and its commercial implications requires knowledge

that intersects various disparate elds and this leads to some uncertainty regarding its potential

applications.”

“… In our view, blockchain technology may result in a radically different competitive future in the

[nancial services] industry, where current prot pools are disrupted and redistributed toward the

owners of new, highly efcient blockchain platforms. Not only could there be huge cost savings

through its use in back-ofce operations but also large gains in transparency that could be very

positive from an audit and regulatory point of view. One particular hot topic is that of ‘smart

contracts’ – contracts that are translated into computer programs and, as such, have the ability to

be self-executing and self-maintaining. This area is just starting to be explored, but its potential for

automating and speeding up manual and costly processes is huge.”

“Innovation from start-ups in this space is frenetic, with the pace of change so rapid that by the

time print materials go to press they could already be out of date. To put this in perspective, PwC’s

Global Blockchain Team has identied more than 700 companies entering this arena. Among them,

150 are worthy to be tracked and 25 will likely emerge as leaders…. Distributed ledger technologies

offer FS institutions a once-in-a-generation opportunity to t ransform the industry to their benet, or

not.”

“…FinTech companies are not just bringing concrete solutions to a morphing consumer base, they

are also empowering customers by providing new services which can be delivered with the use of

technological applications. The rise of ‘digital nance’ allows consumers to connect to information

anywhere at any time, and digital services can address their needs in a more convenient way than

traditional nine-to-ve nancial advisors can.”

“The main impact of FinTech will be the surge of new FS business models, which will create

challenges for both regulators and market players. FS rms should turn away from trying to control

all parts of their value chain and customer experience through traditional business models, and

instead move toward the center of the FinTech ecosystem by leveraging their trusted relationships

with customers and their extensive access to client data. …FS players might not recognise the

nancial industry in the future, but they will be in the center of it.” (Blurred lines: How FinTech is

Shaping Financial Services, PwC, March 2016)



21/33



Neobanks—the banks of the future

An alternate approach to the traditional bank model is a purely digital delivery of nancial services

via online delivery of products and services—the so-called neobank—an app-only bank that is

springing up across Europe. A successful startup that is using the neobank model is Number26,

a Berlin-based app-only bank launched in January 2015, which was named one of the hottest

European startups to watch in FinTech50 2016. Since its formation in January 2015, Number

26 has signed up 160,000 customers and expects to attract 240,000 new customers in 2016—

making it the fastest growing bank in Germany. This startup has “rebundled” nancial services

for its customer by forming strategic partnership with other FinTechs, including Barzahlen and

Transferwise. Number26 is well on its way to creating a borderless bank in Europe, reaching

customers in France, Greece, Ireland, Italy, Slovakia and Spain, and becoming an essential

nancial gateway across Europe.

TRADITIONAL VS. DIGITAL CAPEX COSTS

Traditional Digital

100–120

25–45

Depreciation

Upfront capex incurred IT maintenance opex plus depreciation

Traditional Digital

–20

35–45

15–20

20–25~15

~5

Opex

IT costs, USD million

In a Business Insider interview, Number26 CEO and cofounder Valentin Stalf described how his

bank differs from traditional nancial institutions:

What we’ve been doing is banking as it should be in 2015 and 2016. We try to reimagine

how a bank should work and we tried to build something that is like using Uber or Spotify or

any of these apps you love to use. We said rst it should be mobile and secondly, if you use

it, it shouldn’t be something that you hate.

Also, we’ve spent a lot of time on how can you be more efcient in building or doing

banking in general. If you look at a traditional bank they’ve got a big branch network and



22/33



they’re using technology out of the 1980s. We tried to make a backbone, together with the

app that we have, that is much superior to the traditional banks and give you a product at

a free price for the base account and then be much superior in the things we build around

that.

We started with a fairly niche product—an account and a card. Now we’ve gone from

there to a FinTech hub around that where we try to leverage the innovation… If you do an

international transfer, it doesn’t have to be done like it has been done 30 years ago. Maybe

it can be done through TransferWise. We’ve integrated with TransferWise so you can use

it but you don’t have to leave the app. We’re doing that for savings and investment. We’re

planning to do that for consumer credit products in the future.

I don’t believe in having three different apps—one for credit, one for savings, one for

managing your cards. I think you should have everything you want in one app and get

everything that you need with one click. It makes more sense to build a marketplace — the

FinTech hub — and lets everyone buy things in one place

I’m a strong believer that if you have the best product, obviously you will be superior in

winning customers. We have lower overheads and better engagement with our user, giving

us lower customer acquisition costs, and we have the better offers on the platform in the

future.

I personally think that in the long run the better products will survive. Maybe in the

beginning it will be early adopters but still. Today there is no reason to sign up to an

account that is more expensive and has a worse app.

Today we are the fastest growing retail banking product in Germany, with competition that

puts more than €50 million in marketing every year. I think the time is right now that people

are moving away.

Maybe we don’t have to get the non-digital natives. Maybe we start with the digital

natives—there are around 60 million in Europe. If we win 6 million out of that, 10%, I think

it’s going to be pretty successful.

Obviously we’re not going to replace Deutsche Bank but the question is where are the

future customers? Are they with us or are they with Deutsche Bank? (Business Insider ,

Oscar Williams-Grut, 04/06/16; Building a Digital-Banking Busines, Sonia Barquin and

Vinayak HV, April 2016)



23/33



FinTech is forcing banking to a tipping point

“FinTech is changing the world of nance,” wrote Citi analysts. “In the US and Europe, we are at

a tipping point, especially in consumer banking. The banks have clients and scale but the new

FinTech entrants usually have the innovation edge, especially at the ‘client experience’ interface.

To remain competitive, banks need to get innovation before the FinTech companies get scale.

In China, by contrast, we are past the tipping point: FinTech companies have both scale and

innovation. India is the next biggest opportunity.”

FINANCIAL INNOVATION IS AT THE TIPPING POINT IN U.S. AND EU

Impact of digital disruption on US Consumer Banking Revenue

Revenue impact from

digital disruption

Total banking

consumer revenue

$850 billion $870 billion

$1,050 billion

$1,200 billion

2015 2017 2020 2023

1.1% 5% 10% 17%

Source: Citi Digital Strategy

i i

i i

“Investments in nancial technology have growth exponentially in the past decade — rising from

$1.8 billion in 2010 to $19 billion in 2015 — with over 70% of this investment focusing on the

‘last mile’ of user experience [e.g., at the point of sale] in the consumer space,” they continued.

“Although FinTech companies have the advantage of new innovation, incumbent nancial

institutions still have the upper hand in terms of scale and we have not yet reached the tipping

point of digital disruption in either the US or Europe. Given the growth in FinTech investment, this

isn’t likely to continue for long.”

Over 70% of FinTech startups have been made in the personal and small and medium enterprise

banking space, which accounts for about 50% of the industry’s prot pool and a higher proportion

of the sector’s equity value, according to Citi.



24/33



PRIVATE FINTECH COMPANIES’ CAPITAL DEPLOYED BY SEGMENT

Area

Personal &SME73%

AssetManagement &

Wealth10%

Insurance10%

InvestmentBanking

4%

LargeCorporate

3%

Digital Currency3%

EquityCrowdfunding

2%

InstitutionalTools3%

Lending46%

Money Transfer 3%

Payment23%

Savings &Wealth10%

Insurance10%

Banking’s Uber moment

“[FinTech] will compel banks to signicantly automate their business” and “that the number of

branches and people may decline by as much as 50% over the next years,” said Barclays CEO

Antony Jenkins. Citi analysts project that the number of bank branches will decline another

30% to 50% in developed markets, largely driven by mobile Internet banking, increased FinTech

competition, and sluggish revenue and protability growth—particularly in a low interest rate

environment.

COMMERCIAL BANK BRANCHES PER 100k ADULTS BY REGION

-

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2018 2020 … 2025

Euro area United States

East Asia & Pacific (all income levels) Latin America & Caribbean (all income levels)

Nordics

Forecasts

-33%

-45%

-50%



25/33



Citi expects the banking industry will reduce staff an additional 30% between 2015 and 2025. “If

the banking system in Europe, Japan, and the US operated with the same cost/income ratio as

the best-in-class Nordic region, it would remove $175 billion from their cost base (or 23%) and add39% to the pre-tax prot of the banks in 2016,” wrote the Citi analysts.

AT THE TIPPING POINT OF FTE REDUCTION (MILLIONS)

Source: ECB, United States Bureau of Labor Statistics, Citi Research estimates

2.93

3.26

2.57

2.89

1.80 1.82

0.00

1.00

2.00

3.00

4.00

US Europe

Peak 2015 2025

-40% -45%

“The recent mobile Internet and smartphone revolution has created a game changer in consumer

and SME nance and payments,” wrote the analysts. “Smartphones in the US and Europe are

increasingly part of the SME and micro-enterprise payment space (e.g. Square or iZettle). Apple

Pay and Android Pay debuted in 2014 and 2015 respectively and allow consumers to make

payments via phones, tablets or watches. The original mobile device based payment service,

M-PESA, launched in Kenya as far back as 2007.”

“Technology does not just change distribution models and service patterns. It is not just a question

of fewer branches and more apps… The denition of nancial products themselves may need to

be rethought. John Stumpf, Wells Fargo CEO, noted in late 2015:

…We’ll probably be the last generation to use the term credit card and debit

card. It will probably be debit access and credit access and it will be likely

loaded on to a mobile device.”



26/33



“…[Blockchain technology]could replace the [banking industry’s] current payment rail of centralized

clearing with a distributed ledger for many aspects of nancial services, especially in the B2B

world,” wrote the Citi analysts. “Blockchain positives are based around its characteristics includingdecentralization, programmability, and immutability. It could also be a catalyst for the transformation

of many existing legacy systems that operate with a high degree of robustness but may not be the

most cost or capital efcient way of doing business.”

BLOCKCHAIN POSITIVES AND NEGATIVES

Source: Citi Research

Positives (+) Negatives (-)

• Decentralization: Direct transfer of digital

assets based on a distributed ledger. Allows

counterparties to transact without the need of

(multiple) intermediaries.

• Programmability: Enables pre-programmed

contracts to be executed once agreed

conditions are met (e.g. smart contracts in

insurance/hedging)

• Immutability: Maintain an audit trail. that

tracks the ownership of the asset from

origination (e.g. property rights).

• Cost/Capital Efficiency: Could be a catalyst

to drive a transformation in existing

processes that would ultimately result in

lower cost and higher capital efficiency from

new business models.

• Lack of Scale: High marginal cost

relatively to existing systems (e.g. Visa or

SWIFT) because of a lack of scale and

network effects at the moment.

• Bleeding Edge: The technology is not

mature relative to the current financial

infrastructure. Robustness for large

volume transactions is yet to be

developed.

• Inherently More Costly: A distributed

ledger system is more costly to operate

than a centralized system (higher

computation power required).

• Consensus: Without an intermediary, a

super majority is required to reach

consensus. The design of the consensus

mechanism affects transaction speed

“However, there are also considerable negatives associated with the technology, not least of which

is that it is currently still ‘bleeding edge’ and lacks the robustness of existing payment systems

such as Visa or SWIFT. But even if Blockchain does not end up replacing the core current nancial

infrastructure, it may be a catalyst to rethink and re-engineer legacy systems that could work more

efciently.”

“… If the Internet is a disruptive platform designed to facilitate the dissemination of information,

then Blockchain technology is a disruptive platform designed to facilitate the exchange of value.

Blockchain has a few clear advantages relative to the current system. First of all, it disintermediatesthe middleman. It enables direct transfer of digital assets without the need for an intermediary.

Moreover, since no middleman is required, a Blockchain system has the likely benet of fast and

low cost settlement. Another promising innovation that leverages the Blockchain is smart contracts

and tokenization. Smart contracts automate and execute pre-agreed conditions once they are met.

And lastly, Blockchain provides irrefutable proof of existence, an important feature to maintain an

audit trail that tracks the ownership of the valuable asset being transferred—this is crucial from a

business and a regulatory perspective.”



27/33



ATTRACTIONS OF BLOCKCHAIN OFFERING

Source: Citi

Enables direct ownership

and transfer of digital

assets without need for an

intermediary

Disintermediation

Faster settlement on a

relatively cost effective and

efficient network

Speed & Efficiency

Programmability enables

automation of capabilities

on the ledger (e.g. smart

contracts)

Automation

Provides irrefutable proof of

existence, proof of process

and proof of provenance

Certainty

“Blockchain technology could be applied more broadly than crypto-currencies. In the currency

space, the Bitcoin rail could be used to facilitate cross border payments or supply chain and

trade nance. Because virtually any type of information can be digitized and placed onto

Blockchain, theoretically any information of value could be transferred in the Blockchain world.

The programmability of Blockchain makes it suitable for smart contracts: a contract that executes

once pre-agreed conditions are met. Blockchain could also be used for data management such as

identity management. Determining the optimal Blockchain use case is often the most challenging

part of Blockchain adoption, especially as an ecosystem needs to be developed for the adoption

of the new system. The technology is not industrial grade yet in the view of many in the banking

industry.

ATTRACTIONS OF BLOCKCHAIN OFFERING

Source: Citi Research



28/33



“Apart from faster processing times and lower borrowing costs (due to branchless model), P2P

lenders help service customer segments that are not ordinarily viable for banks,” wrote the

analysts. :On the other hand, lenders enjoy higher returns vs. other traditional bank products andhave the opportunity to diversify their investments (as a single lender can choose to invest in

multiple projects, thereby funding only a part of the whole project and diversifying his risk).”

“Prominent P2P platforms in the West are Lending Club and Prosper in the US and Zopa in

the UK. They currently account for a miniscule share in the total credit pie (


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“The addressable market for P2P lending potentially includes revolving credit card loans, student

loans, and loans to small and medium businesses. We estimate in the US, this market totals

$3.2 trillion, of which $1.3 trillion is held by commercial banks and the rest by non-bank nancialinstitutions. Citi analyst Mark May estimates the target market for Lending Club and its peers is

about $254 billion—around 8% of total addressable US total consumer credit market.

“…Given the growth and outlook for the online alternative lending sector, there are a large number

of companies and signicant venture capital invested in this space. While there are increasing

institutional money seeking P2P as an alternative asset class, which provide valuable liquid

funding for the platforms, the long-term success of the companies would increasingly be based on

the efcacy of a company’s marketing and branding.”

“…The marketplace lenders have only been around for a decade. They are currently benetting

from a record low interest rate environment that resulted in lenders/investors in search of yield

and drawn them to its marketplace. The borrowers are also enjoying the lower debt servicing cost

in a low rate environment. But the business model is yet to be tested against interest rates and

credit cycles. There is concern that higher rates resulting from Fed tightening could negatively

impact business models levered to consumer credit such as Lending Club. The Fed rate hike in

December 2015 already resulted in a correction in the share price of US P2P lenders.”

“As it stands currently, the alternative lending space has generally avoided falling subject to

restrictive regulation that would impede alternative lending business models. That said, it is

difcult to rule out increased regulatory burden for Lending Club and similar business models,especially if the asset class was to exhibit meaningful underperformance or sizeable defaults. We

think likely impacts of increased legislation could include: (1) risk retention requirements, similar

to those made of sponsors of asset-backed securities under Dodd-Frank; (2) minimum capital

requirements to help alternative lending platforms withstand nancial shocks, which are required

in the UK; and (3) heightened disclosure and reporting requirements that could become more

burdensome and expensive.” (Digital Disruption, Citi GPS: Global Perspectives & Solutions, March

2016; American Banker , Kevin Wack, 04/08/16)

Innovation is not a part of the banks’ culture

“These banks have to realize that these banks haven’t innovated in a long time,” said Sallie

Krawcheck, CEO of Ellevest. “…[I]s the last innovation that you saw in consumer banking the ATM

[that was invented 1969]? When I was at these companies [Bank of America], everybody thought

the CDOs-squared were an innovation and they turned out to just be increased risk, wrapped in

complexity. So they’re not great at innovating—it’s not part of their culture.”



30/33



“It’s very tough because they have these old proprietary systems and every time we would go

through [a discussion]—can we just replace them? It’s billions of dollars, huge risks, client data.

And every t ime you look at it—you know what—we can’t make it work. It’s gett ing to the pointwhere we have like six guys, who understand the programming on the core code. I’m not kidding—

I’m not kidding. When I was at one of the banks, they were worried about them dying—literally

worried about them dying.”

“You’re starting to hear some things that are not just changing around the margins—it’s like a

radical rethinking of the banking business, said Bloomberg’s Michael Moore. “There’s been talk that

some banks are going to have the client relationships and they’re going to do that solely through

tech and some [banks] are just going to be balance sheets that other banks rent. They’ll just be

these pools of capital that don’t have any interaction with the ultimate client. And that’s a major shift

in the way that people are thinking about how banks work [in the future].” (Bloomberg Surveillance,

04/04/16)

Who owns the future of nance?

In the 2016 Letter to Shareholders, JPMorgan Chase president Jamie Dimon discussed the

bank’s efforts to innovate. In FY2015, JPMorgan spent more than $9 billion in technology with

more than 30% dedicated to “new investments for the future.” The bank employs more than

40,000 technologists, ranging from programmers and analysts to systems engineers and

application designers. JPMorgan operates 31 data centers, 67,000 physical servicers globally

and 29,920 databases. “There are many new technologies that I will not discuss here (think

cloud, containerization and virtualization) but which will make every single part of this ecosystem

increasingly more efcient over time,” wrote Dimon. The bank has thousands of digital projects

under development to enhance and expand mobile delivery of services to consumers, global

wealth management, commercial banking, small business and commercial term lending.

Dimon addressed the impact of FinTech on the banking industry, writing:

If you look at the banking business over decades, it has always been a huge

user of new technologies. This has been going on my entire career, though

it does appear to be accelerating and coming at us from many differentangles. While many FinTech rms are good at utilizing new technologies, we

should recognize that they are very good at analyzing and xing business

problems and improving the customer experience (i.e., reducing pain

points). Sometimes they nd a way to provide these services more efciently

and in a less costly manner; for example, cloud services. And sometimes

these services are not less expensive but provide a faster and simplied

experience that customers value and are willing to pay for. You see this in

some FinTech lending and payment services.



31/33



It is unquestionable that FinTech will force nancial institutions to move more

quickly, and banks, regulators and government policy will need to keep pace.

Services will be rolled out faster, and more of them will be executed on amobile device. FinTech has been great at making it easier and often less

expensive for customers and will likely lead to many more people, including

more lower-income people, joining the banking system in the United States

and abroad.

… All businesses have clear weak spots, and those weaknesses will be—

and should be—exploited by competitors. This is how competitive markets

work. One of the areas we spend a lot of time thinking and worrying about

is payments. Part of the payments system is based on archaic, legacy

architecture that is often unfriendly to the customer.

Right now, we are one of the biggest payments companies in the world

(across credit and debit cards, merchant payments, global wire transfers,

etc.). But that has not lulled us into a false sense of security—and we know

we need to continue to innovate aggressively to grow and win in this area.

The trifecta of Chase Paymentech, ChaseNet and Chase Pay, supported by

signicant investment in innovation, has us very excited and gives us a great

opportunity to continue to be one of the leading companies in the payments

business.

…In conjunction with six partner banks, Chase is launching a P2P solution

with real-time funds availability. The new P2P solution will securely make

real-time funds available through a single consumer-facing brand. Chase

and the partner banks represent 60% of all U.S. consumers with mobile

banking apps. We intend to keep P2P free for consumers, and the network

consortium is open for all banks to join. We are absolutely convinced that the

trifecta—Chase Paymentech, ChaseNet and Chase Pay—will be dramatically

better, cheaper and safer for our customers and our merchants. (Letter to

Shareholders, Jamie Dimon, 04/06/16)

In a Bloomberg interview, Dimon expanded on his thoughts about the disruption that’s occurring in

the nancial services industry:

…[At JPMorgan Chase,] we use technology to make it cheaper, better, and faster for the

client. And then if you have the most ow, you can win. Now, having said that, Silicon

Valley wants to take on this business. They think they see an opening. … Other Internet

companies such as Amazon, which have large user bases, may also want to monetize



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their user data to grow into the lending business. Many payment companies… are growing

consumer and SME lending.

Let’s look at lending, where they’re using big data for the credit side. And it’s just credit

data enhanced, by the way, which we do, too. It’s nothing mystical. But they’re very good

at reducing the pain points. They can underwrite it quicker using—I’m just going to call it

big data, for lack of a better term: “Why does it take two weeks? Why can’t you do it in 15

minutes?”

For example, they might lend to one of our customers who’s got a $200,000 JPMorgan

Chase loan, and this person wants to get another $20,000 for a new truck or a piece of

equipment. And what does he do? He goes with them, because he gets it in 15 minutes. Ifhe goes back to the bank, he may have to go through this whole big long process for that

$20,000.

Can we do something like that? Of course we can. I’ve asked our people, “Why don’t we

just put a revolver on top of our basic loan?” Make it easier for the client.

If you ask me, the biggest risk will be in the payment systems. I think the banks are pretty

good at using digital technology to make it easier for customers. We have 23 million

customers who bank on their phones now. It will be a challenge for anyone to be better,

faster, cheaper than us. But some people think branchless banks can compete, and that

can prove true in some cases.

…For the most part I think those things [e.g., equity, debt, deposit accounts, et cetera] will

still be taking place in the banking system, although some will maybe move on. I’m hoping

not the main payment systems and deposit businesses, but it’s possible someone comes

up with something great.

…One of the issues with some of these [FinTech] lenders is going to be, where will their

provider of credit be when there’s a crisis? That’s why some of these smarter services,

to support their operations, are courting more permanent capital. They want a source of

longer-term funding that can survive a crisis.

… [I]f they become big and signicant, they’re going to be regulated, too, eventually. The

government isn’t going to say, “We’re going to regulate banks, but we’ll leave these other

companies alone.” I think the regulators want to make sure that they have some form of

regulation on anything systemic. We like our hand. But, you know, honestly, who owns



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the future? Just because you have a good hand today doesn’t mean it’s good tomorrow.

And some of the things we’re doing may become very disadvantageous at some point.

(Bloomberg Markets, John Micklethwait, 03/01/16)

Will disruptive technology trigger the breakup of the TBTF banks?

In a surprise move, Neel Kashkari, president of the Minneapolis Federal Reserve (and former

Goldman Sachs executive), called for the break-up of the Too Big to Fail banks, arguing that the

TBTF institutions have a risk that can’t be determined by the Fed and threatens the stability of the

U.S. nancial system. On Project Syndicate, Simon Johnson, former chief economist of the IMF

and professor at MIT Sloan School of Management, agreed with Kashkari’s call to break up the

TBIF banks, writing:

…Kashkari’s timing coincides with the arrival of new ‘blockchain’ technology,

which makes it possible to organize nancial transactions in a more

decentralized way. Various versions of this technology are either already

available or currently under development— and there is a very real prospect

that this will reduce transaction costs across much of the nancial sector.

…Most important, blockchain technology has the potential to reduce

substantially, or even eliminate, the value of being a trusted intermediarysuch as a large bank.

Kashkari will lead the way to rethinking—and, one hopes, ending—the TBTF problem in traditional

big banks. In a blockchain world, he and his colleagues are likely to work hard to prevent any

variant of TBTF from reappearing. (Project Syndicate, Simon Johnson, 02/29/16)

“Technology is upending established workows and processes in the nancial services industry.

Tasks once handled with paper money, bulky computers, and human interaction now are being

completed entirely via digital interfaces,” wrote BI Intelligence’s Evan Bakker. “Given how

pervasive nancial services are across the globe, the disruption opportunity for FinTech startups

is massive. Startups, some of which have garnered blockbuster investments, are re-imagining

almost every type of nancial activity. Meanwhile, the old guard is trying to solve the puzzle the

FinTech revolution presents—how can incumbents benet from the rise of digital, and how can

they avoid obsolescence?” (The FinTech Ecosystem Repor t, Evan Bakker, 12/17/16)

March_April _2016_Disruption_Report.pdf

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Transcript of March_April _2016_Disruption_Report.pdf