Accidental fintech: the Go-Jek example

As remarkable as these changes have been to watch, equally noteworthy have been the disruptions driven by players who began with a focus far outside the financial services industry and only later came to be considered fintechs. The Indonesian company Go-Jek is an excellent example of this type of “accidental” fintech. Go-Jek’s core business is ride-sharing, similar to Uber or Lyft, but primarily focused on motor scooters rather than cars. The experience is quite familiar in many ways: open an app and enter your pickup point, but instead of a car coming to your location, a scooter driver meets you, gives you a helmet to wear, and whisks you away, weaving through Jakarta’s dense traffic toward your destination.

A key challenge for Go-Jek, however, was to find a way to provide the same seamless payment experience as other ride-hailing services, but in an economy where 70 percent of retail transactions used cash and 65 percent of the population was unbanked. To overcome this challenge, Go-Jek developed an electronic wallet, fully integrated into their ride-hailing app and capable of being topped up not only by bank account but also by handing cash to the driver, which can then be credited to the wallet.

After some period of operating in a regulatory gray zone, Go-Jek’s wallet received the blessing of OJK (Indonesia’s chief financial regulator), allowing it to expand its functionality to include peer-to-peer payments. Concurrently, Go-Jek expanded its core business beyond motor scooter ride-sharing to include car-hailing, food delivery, house cleaning, and a wide variety of other services, all payable through its wallet application. Capitalizing on its growing popularity as a general purpose mobile payment platform, Go-Jek in December acquired three Indonesian fintechs in the payments space, including the nation’s leading gateway for access to credit card rails. Thus, in a little over two years, Go-Jek went from being a ride-hailing service for motor scooters to becoming the most disruptive payments platform in the world’s fourth-most populous country.

How to respond to the unforeseeable

Given the unpredictable nature of innovation, how can traditional financial institutions best position themselves to compete against upstarts that currently aren’t even on the radar as potential threats? While this question has no simple answer, two factors play a critical role in being able to respond effectively to unforeseeable disruption: (1) being informed, and (2) being agile.

• Being informed requires financial institutions to break down data silos within the firm to better understand customer behavior and needs, including the ability to anticipate unarticulated needs. Understanding the market also compels financial services firms to look externally to see what type of new experiences customers are gravitating toward and what they’re saying about their current bank, investment advisor, or insurance company. Technologies such as social listening serve a critical function in better understanding how customer attitudes toward financial products change over time, while fintech partnerships enabled through APIs provide an opportunity for traditional firms to learn what resonates with customers through experimentation.
• To increase agility, cloud computing offers multiple benefits that allow financial firms to move new ideas more rapidly from concept to implementation without the need to spend time and capital acquiring infrastructure. The cloud also provides on-demand scalability so that when a bank discovers that a new product is a hit with customers the infrastructure can grow to meet demand, in real time in many cases. Finally, the natural fit between cloud computing and DevOps practices (especially when supported by containerization) can dramatically reduce the time required to build, deploy, and maintain the software that powers a new financial services product.

Through both Microsoft first-party innovations as well as our support for open source software, the Azure cloud provides a robust set of options that make it easier for financial services firms to stay deeply informed about changes in customer preferences, while also improving the speed at which financial institutions can respond to these disruptions, even the ones that seem to come out of nowhere to make a significant impact on the industry.

For more on Microsoft’s perspective on the future of banking, please refer to The Future Banking Ecosystem: Innovation and Evolution in the Digital Era.

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The challenge of balancing usability and security

The nature of the system itself drives a range of choices about how to balance usability and security. In the context of retail banking, for example, customer-facing applications such as online or mobile banking tilt in favor of usability yet must remain above a minimum acceptable level of security (shown by the red line), which is still quite high compared to non-financial applications. Similarly, internal systems such as core banking or high value payments need to strike a balance in favor of security but must still exceed a minimum level of acceptable usability (shown by the green line). Other systems fall somewhere in between, such as teller workstations.

Yet this balance can be challenging to maintain in the face of rapidly changing requirements within the financial services industry. PSD2 and open banking, for example, will require financial institutions to expand access to customer information as well as payment rails to external entities. Such regulations will also enable customers to choose from a marketplace of front-end applications that ride on top of bank-provided APIs, such as more powerful personal financial management (PFM) solutions and peer-to-peer payment apps that seek to optimize usability, potentially at the price of lowering security.

Expanding the frontier of choices

Given that the security/usability dilemma is intractable, how do banks and fintechs continue to innovate in order to increase employee productivity and customer satisfaction, while maintaining appropriate levels of security? Success will require financial firms to expand the frontier of possible choices, as shown below.

Shifting the trade-off curve outward creates a new range of possibilities: more usable and more secure, more secure but equally usable, and so forth. For banks, this is familiar territory, as previous waves of innovation (public key cryptography, Kerberos, and many others) have continually made the frontier larger, allowing now commonplace experiences such as online banking.

Cybersecurity solutions for the next phase

The next phase shift will require a new set of enabling technologies that address contemporary security concerns while allowing innovative customer experiences to flourish. Cybersecurity solutions leveraging artificial intelligence and machine learning will be essential to providing robust security that invisibly sits behind employee and customer interactions, watching for signs of compromise. Azure Active Directory Identity Protection provides a good example of such a tool, intelligently analyzing login activity to spot anomalies that may indicate compromised user credentials.

Accurate threat intelligence also plays a key role, allowing financial institutions to focus their efforts on threat actors targeting their industry by understanding the tactics, tools, and procedures of the most relevant threats. Microsoft’s suite of cybersecurity tools leverages a common baseline of threat information derived from the massive amount of telemetry we collect from Windows desktops and servers, Xbox, Azure, and Office 365, allowing us to provide our customers a unique level of insight into the threat landscape.

By combining AI-powered technologies for protecting user identities, timely threat intelligence, and the industry’s most secure compliant cloud platform in Microsoft Azure, financial institutions can provide employees and customers with the best possible combination of usability and security for a wide range of applications, today and into the future.

At Microsoft, our approach applies technology in unique ways—with a trusted cloud platform, tools, and services that empower business agility and enable a new vision of cybersecurity for the industry. As your trusted technology partner, we offer both industry know-how and enterprise-grade solutions. We can help no matter where you are on your digital transformation roadmap.

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One of the key ideas in Platform Revolution is that by matching buyers and sellers, platforms allow their operators to earn returns on assets that they don’t actually own, such as the way AirBnB earns revenue from property it doesn’t own. For banks, this idea is not new. Indeed, although modern banking institutions have become large and complex, the core function of a bank has not changed: to match holders of idle capital with borrowers of that capital. Borrowing short to lend long has been the business model of banks since the Early Renaissance.

In exchange for taking on the liquidity risk inherent to this type of maturity matching, the bank derives its most essential revenue stream via the spread between lending and borrowing rates. To protect the public’s explicit (via deposit insurance) and implicit (via moral hazard) risk exposure, public institutions place regulatory burdens upon banks and in exchange for meeting those requirements bestow upon firms the coveted banking license, which conveys a level of public trust that non-bank competitors cannot match.

The income earned from the spread between borrowing and lending rates financed the creation of a diverse set of products, services, and lines of business. Then around 2008, everything started to change. One by one, the monolithic set of banking services which were once inextricably tied to one another came under assault both by substitutes and by complements. Don’t like your bank’s lending terms? Try a substitute, like SoFi or LendingClub. Can’t manage your budget easily through your bank’s website? Try a complement, like Mint. Not wealthy enough to qualify for an advisor? Try Betterment.

The old regulatory barriers that had kept competitors at bay no longer seemed to work. Some bank competitors emerged that simply did not care about regulation and intentionally sought to thwart it, such as bitcoin and the payment ecosystem that built up around it. Others began offering the large (and growing) accredited investor community the ability to loan money to individual borrowers through marketplace lending platforms. Rather than coming to banks’ aid with new types of protections, regulators having been badly burned in the 2008 Global Financial Crisis have thus far in fact encouraged competitors with measures such as PSD2, UK Open Banking, and the US OCC’s proposed fintech charter. Unbundling of banking services have become yet another tool for the prudential regulator to employ in combating moral hazard.

Thus should banks consider the move toward unbundling irreversible. What remains is the need to understand how to best approach unbundling in order to thrive in the platform economy. Within the context of Microsoft’s Digital Transformation Model, four areas of focus come to mind:

• Engage your customers: Meet customers where they are and be the bank that plays well with others. Customers will increasingly seek to interact with their financial institutions through variety of experiences, across channels and devices. The customer experience may be provided by the bank, or may be a third-party experience that leverages the information and functionality the bank provides through APIs. Successful digital banking platforms will be those that integrate almost invisibly into the background of the customer’s preferred digital experience: mobile, social media, hologram, and new experiences not yet commercialized.
• Transform your products: For a bank seeking to become a digital platform, the product is no longer defined by type of account but rather by the customer’s journey as they seek, acquire, and use they product over its lifetime. “The flow” to use the authors’ term becomes the product, powered by services (APIs) that the platform provides. Differentiation comes from removing friction from the flow and by providing governance (including security) along the journey.
• Empower your employees: Banks hold vast amounts of intellectual capital, much of it embodied in the people they employ. This vast store of knowledge about customers and business processes gives the bank an advantage over upstart competitors, but only if that knowledge can effectively be harnessed across the organization with the right set of collaboration technologies.
• Optimize your operations: Likewise, focusing human capital in places where it is most needed only becomes possible by automating routine front, middle, and back-office tasks. Mixing person-to-person interaction with automation at the right points along the customer journey will be critical for successful digital banking platforms. Streamlining regulatory compliance to effectively manage risk will continue to be important, as recent examples have demonstrated the cost of losing customer trust.

The rewards for banks that establish themselves as leading platforms will be great. As the Platform Revolution authors point out, platforms beat pipelines because they scale much more efficiently and benefit from “platform effects,” growing in value with growing use. Unfortunately for banks, platforms by their nature dislike gatekeepers and tend to dispense with them quickly. Transforming from a gatekeeper into a digital platform will challenge banks to rethink both processes as well as technology, but ultimately customers and the industry as a whole will benefit.

If you’d like to learn how Microsoft can help your bank along this journey, as always you can contact me at jabrian@microsoft.com!

Read more on the Microsoft Banking & Capital Markets and Insurance blogs.

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1. Proliferation of chatbots
2. Broad use of AI & machine learning
3. Changes to industry and organizational structure
4. Open API banking
5. Blockchain

Horton’s trends line up well with those identified by other analysts, and also align closely to the type of work my team at Microsoft has been doing with our customers around the world. As part of the Microsoft Services organization, the Financial Services Industry Architecture team seeks to partner deeply with our customers in banking, capital markets, and insurance to make the dream of Digital Transformation a reality. For me, this is the best job in the world, allowing me to go deep on both technology as well as (in my opinion) the world’s most interesting industry while engaging customers to deliver transformative business results.

The five banking industry trends cited above each stand to gain from the investments Microsoft has made in empowering Digital Transformation across our product line. Our Digital Transformation vision rests upon 4 pillars: Engage Your Customers, Empower Your Employees, Optimize Your Operations, and Transform Your Products. I’d like to briefly explore how these pillars apply to the top trends banks will face in 2017.

As Horton points out, chatbots hold enormous potential for providing customers new ways of communicating with their financial institutions. Likewise, chatbots could allow banks to scale 1-to-1 customer service in real-time, through channels such as SMS and Facebook which many customers prefer to branch and call center for routine transactions and inquiries. Within Microsoft, bots are a key component of a larger vision we call “Conversations as a Platform,” which includes the Bot Framework, connectors for services such as SMS, Facebook, Skype, and others, as well as a directory that makes bots discoverable via Cortana, Bing, and other Microsoft services. Combined with the Azure Bot Service, which provides scale-out serverless infrastructure for running bots, the Bot Framework brings the vision of 1-to-1 service for an infinite number of customers one step closer to reality for banks and financial institutions. Bots will become an increasingly important way for banks to engage customers as part of a multi-channel customer experience.

Beneath the covers, artificial intelligence and machine learning will provide the cognitive computing muscle to power bots and a wide range of other transformational applications within banks. Just as bots promise to provide a more efficient mechanism for handling routine customer interactions, an emerging new class of AI-powered tools in the category of “Robotic Process Automation” (RPA) holds the potential to optimize middle and back-office operations. RPA builds on top of advances in areas such as optical character recognition (OCR) and natural language processing (NLP). Through Cognitive Services, Microsoft provides scaleable web-based APIs that speed the development of RPA-style applications by offering ready-made solutions for computer science problems such as text, image, and speech recognition, allowing our customers to focus on tying these services together to streamline business processes, even those involving handwritten fields on a paper application.

Of the five items on Horton’s list, changes to the industry itself present the greatest challenge for technology to address directly, but even here there are opportunities to help financial institutions navigate a changing political and macroeconomic environment by improving banker productivity and collaboration. Tools such as Yammer and Skype for Business can allow banks to begin breaking down internal silos in order to compete against nimbler challenger banks as well as fintechs. Likewise, partnering with fintechs has become increasingly important for large banks looking to quickly realize the benefits of Digital Transformation. Standard Bank provides a great example of a financial institution that was able to take greater advantage of collective wisdom across the bank to respond to changing market conditions quickly.

Regulation continues to be a source of change to which banks must respond, including regulations such as Payment Services Directive 2 (PSD2) within the Eurozone. PSD2 represents a categorically different type of regulation than banks have seen in the past, such as requirements around capital reserves or lending practices. Over the course of 2017-2018, PSD2 will require traditional banks to allow third-party access to account information as well as payment functionality via published APIs. The net result of unbundling a previously monolithic set of banking services and allowing consumer choice in areas such as personal financial management (PFM) and payments will be nothing short of a transformation in the definition of a “financial product” itself. From a technical perspective, Microsoft offers a number of tools including Azure API Management, Azure App Service, and advanced analytics via Azure HDInsight that can help traditional banks as well as new types of service providers to take advantage of open API banking.

Finally, in the area of blockchain Microsoft has invested in the creation of a platform we call Blockchain as a Service, which aims (among other things) to make it easy for financial services firms and others to create private or consortium blockchains on the Azure cloud. In addition, Microsoft has contributed a new piece of IP called Cryplets to the blockchain ecosystem. Cryplets provide a mechanism for securely calling off-blockchain functions and using the result as input into additional Smart Contract processing (an improvement to the current practice of consulting an “oracle” off chain). As Horton points out in his post, “many financial institutions don’t know where or how to start” when it comes to blockchain. The combination of Azure’s infrastructure, a robust set of blockchain partner solutions, and Microsoft’s first-party contributions to the ecosystem via Project Bletchley promise to provide banks that have “blockchain FOMO” (fear of missing out) with a way of quickly running proofs-of-concept without investing in computing infrastructure.

In summary, the four pillars of Microsoft’s Digital Transformation vision provide a solid base of support for banks looking to take advantage of key industry trends in 2017. As a Digital Architect working at the intersection of banking and technology with customers around the world, I’m incredibly excited about what 2017 has in store for the industry! If your bank is interested in learning more about how Microsoft can help you along your Digital Transformation journey, please feel free to reach out to me, jabrian@microsoft.com.

Read more on the Microsoft Banking & Capital Markets and Insurance blogs.

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