BankerVision

Doing consumer electronics

There is a revolution going on that - it seems to me -  banks haven't much noticed.  The revolution is in how low the barriers have become to create desirable consumer electronics. So low, that even if you don't know anything about what you're doing, you can do it.

I first stumbled on this last year when I was out at the Microsoft Research labs in Cambridge. They were doing lots of work that involved wearable sensors, and these things looked like you could just walk into a shop and buy them. I wanted to know where they got all their great looking hardware: "Oh, we just use an engineering firm down the road, it takes them a week to make anything we need". You would not believe the off-hand tone this researcher used, as if what I was asking was of so little consequence that the question was a waste of oxygen.

I was amazed, having imagined teams of people, just like the ones we have to have when we do software in the bank. So I subsequently investigated this claim and found it to be true. There are engineering companies that can turn around hardware for you in a week.

Actually, doing hardware is way less expensive than building software. It is in an interesting reversal of the otherwise universal maxim that bits are cheaper than atoms. Apparently there are all these standard "reference platforms" and they just throw them together in the form factor you need.

So we investigated some more, and discovered the whole industry has moved to an ODM - Original Device Manufacturer - model. You hand over the specification and design (that was likely done by some local engineering firm), and these contract production lines turn out the volume of product you need.

We wanted to know what it would take to miniaturise to an unprecedented level. Apparently you do something called custom silicon: they take your reference design and make dedicated chips or something. The price is higher than off the shelf, but nothing as high as you'd expect.

In other words, you can outsource everything about hardware. You can make sexy consumer electronics. And you can do it very, very cheaply.

Now, doesn't that pose some interesting options for banks, who are normally limited to utilising the devices that consumers have bought elsewhere?

The most famous example I can think of a of a bank doing hardware was 1950 when Bank of America collaborated with Stanford University to create the first business computer. That was a multiyear effort without any certainty of success. When you do hardware today, you don't have any of those costs or risks.

If I needed any reinforcement of this, it came when one of our favourite vendors responded to a query about biometrics with a custom device. I couldn't believe it. They didn't have exactly what we needed, so they made it for us - in about a week - and then furnished us with about a dozen of them for an internal conference we are doing today.

The fact that hardware can now be a sales tool implies that it has a very, very low price of entry. Low enough that banks could design their own consumer electronics to support the customer experience, if they wanted. You can imagine the situation: you choose your bank because its gadgets are the most desirable. Isn't that what happened with iPhone? People changed their phone company just to get one.

Innovation is about building new levers

Last night, I was at dinner with an innovator from another large company involved in financial services. We were discussing the optimum mix of incremental, disruptive and breakthrough innovation. In common with so many other people I've spoken to, it became apparent quickly that the feeling was that incremental was not necessarily the sort of things an innovation team should be working on. Big, bold disruption, that's what innovation teams should be doing!

But the real question comes down to one of risk: with a dollar to invest, do you take a gamble that might pay off hugely, or a more cautious approach where returns will be way more modest, but much more certain? My view is the younger the innovation programme, the less risky you can afford to be with the money you have. Get some runs on the board before you try for the big stuff. And, as I've said here for ages, make sure you can pay the bills. Incremental does that.

Anyway, the discussion swiftly moved to the regularly recurring old chestnut: is  incremental innovation or optimisation? In this case, my companion's thought was that incremental was very much business as usual, and therefore ought to be part of the work we all do every day. Optimisation, in other words. I disagree with this.

Optimisation is the process of moving various levers in a business process to get a better result. You decide where to set the levers by watching whatever measures you have on the process.

Innovation is quite different though, because the goal is almost never to move levers. The goal is to create new levers altogether, or to extend the range of movement of existing ones. The actual moving is best done by the business owners of whatever-it-is.

Conceptualised in this way, one no longer thinks about the mix of incremental, disruptive and breakthrough. The key strategic question is about the size and range of levers you decide to build.

A look back in time: prospects for home banking

You'll love this. I was going through past issues of the ABA Journal recently, and came across the October 1981 issue. It had an article entitled "Home banking prospects: A status report on explosive growth" (you can only get it now through various pay wall databases, I believe). Bare in mind the time scales. Web based online banking didn't really emerge until 1995 when Presidential Savings Bank was the first in the world to launch it. Videotex based systems had never really caught on, though they were available from 1979. And phone banking had been in limited pilots since then too, with broader adoption not occurring until 1982.

Given that, its surprising just how accurate some of these predictions are. Take this for example:

"Banking services are only part of a cluster of home information offerings that will set the pace for growth (of self service). Theoretically, an unlimited number of information providers could offer data bases of various kinds. Banks will be one class of information provider."

The article goes on to talk of a "communications switch" which makes the necessary connections between the user and database vendor. A single vendor switch was not what happened of course, as the internet evolved into a universal switch not owned by anyone in particular. But the concept, then, was clearly sound.

The slow follower syndrome is something we've been aware of in banking for ages now. Institutions don't like to be the first to try the new stuff. Neither do we always understand up front why the new stuff is important. At this moment, we're struggling with personal finance sites and peer to peer lending, but in 1981, bankers were having trouble getting the importance of self-service as a delivery channel:

"Many bankers not involved in any of the current tests (of home banking) may find it hard to get excited about providing new banking services that seem to have marginal value for customers just getting used to automated teller machines."

The biggest problems were technical in 1981. And the question was whether households would prefer telephone based terminals (i.e., a dedicated device embedded in the telephone) or screen based home banking using interactive cable. Screen based self-service were seen as preferable, but already institutions were leaning towards the phone, because of a projection that only 9% of households would have interactive cable by 1990. Of course, Internet was in its early stages for commerce then, and was about to zoom upwards in adoption. Nonetheless, everyone was pretty much set on the idea of terminal based access in the long term. Bank One, the first institution to pioneer phone based self service, stated that it expected that 60% of its customers would have a stand alone videotex terminal costing about $250, 20% would use decoders attached to their TV sets, and the remainder would use home computers.

But one of the most interesting things about this historical backtrack is that most of the nine institutions listed expected to be able to charge for their home banking services. Prices were based on a subscription model, and were up to $30 a month. It is obvious in retrospect, I suppose, that convenience doesn't pay. But you can see the evidence of dollar signs in the eyes of everyone talking about the offering then. Chase, for example, wanted to offer its correspondent banks a franchise opportunity. They would buy devices for about $200 each, and then sell them on to customers, with Chase getting about $6 per month from the deal for each.

And the article is insightful in one more respect: in 1981 it correctly foretells the features arms race that we've all been engaging in since self service became the business:

"any (home banking) convenience, such as home shopping or a sophisticated cash management service, could be the one that pulls an account away from your bank, if you don't offer it, to mine if I do"

So here is my key takeaway from this brief look back. We - banks - aren't as bad as it might seem at predicting the future. From a market and environment perspective, most of this was spot on. Admittedly the technology selections were going down a dead end, but they were overtaken by developments that weren't on the radar then.

It gives me a level of comfort that the course we are presently charting is likely to work out well in the end.

The new little server

I am presently in Canada, attending the latest TTI Vanguard meeting on technology trends. We're exploring how pervasive communications technologies will change art, influence science, and innovate business.

Yesterday, there was a particularly epochal presentation. We're running under Chatham House Rules here, so I won't disclose who was presenting, but the basic point was that the mobile phone will become a personal server in the immediate future.

We are all familiar with the phone as communications device, and are becoming more familiar with it as file storage and music repository. But at the moment, the phone is subordinate to our other devices, such as laptops. The short step in front of us is the reversal of that arrangement.

That's going to change the value of my phone compared to my wallet. let's face it, apart from ID and cash, the wallet is really just a place for a bank to live. IDs are just data anyway, and cash is in decline. NFC is just around the corner.

It is likely that when I have a little personal server in my pocket, I am going to ditch my wallet.

What evidence is there that personal servers are about to happen?

Firstly, while the phone itself doesn't give you an especially good experience (mainly because it has a small screen and microscopic keyboard), the environments around us are increasingly populated with screens and keyboards. They are pervasive.  All that's necessary is that the phone can reach out and use these devices to provide a decent user experience. Conveniently, most phones have Bluetooth now, so the hardware exists. Singapore airlines now provide screens and keyboards in seat backs on some flights.

Secondly, it is possible to run server processes on phones without actually degrading the performance of the voice function. During the presentation, a linux handset -bought over the counter - was used live. It was running a media server, a file server, a web server,  and a frame buffer server all on unmodified hardware.  The latter means that the phone can write to a separate screen over a bluetooth connection.

Thirdly, both the processor and the battery life of current generation devices are capable of doing interesting things.  Here's an interesting statistic: a typical phone can stream 4 hours of media to an associated screen at high frame rates. Intel is planning to put ultra low power PC class processors in mobile phone devices any time now. So you can then run Office and all your other apps that you presently rely on.

Finally, device storage is almost at a magic number: 10gb per square inch. That's the number, apparently, at which the amount of storage becomes interesting for most human applications (media, for example). Incidentally, recording audio for the entire life of one individual would take 3 terabytes of storage. Technology is not so far from that density in a mobile phone form factor.

So the world view being advanced here is that your digital life is your handset, which will make use of other devices it finds in its environment to provide a desktop class experience. Everything subordinate to the handset.

I think that most people would agree with me when I say that - today - if I had to choose between losing my wallet and my phone, I will choose to lose the phone every time. The level of inconvenience and risk involved in losing my wallet is considerable. I will be without my cards, without cash, and without ID.  My life, to a large degree, stops.

But when my phone becomes a server with all my data, that immediately reverses. I would much rather lose my wallet in that case. The wallet, despite the inconvenience, is replaceable. But the data on the phone doesn't represent just the financial slice of my life, it is everything about my life. With a built in data manipulation engine just waiting to be used.

Commentators, such as the prolific David Birch, have been discussing the migration of the wallet to the handset for ages. The fact of the matter, however, is that a personal server offers synergies rather more significant than the move of payment functionality from plastic. It co-locates bank functionality with the rest of my digital life.

Now I won't pretend to have thought through all the implications of that, but it is a very, very significant shift. It will change the way that banks activate their customers. And it will certainly change the way that customers choose to interact with banks.

Innovating work life balance

As at most companies, we have a focus on work-life balance. The other day, for example, I got to watch an interview with one of our most senior people at which the balance question was asked. The answer, and in fact, it seems to be a universal one whenever you get this question, is that work and life are kept separate. The decision of importance is the one which apportions time between work and life correctly given the personal situation at hand.

This answer to what is a very tricky HR question actually concerns itself with management of the balance between home and work which is a pretty critical part of stability in life. But it doesn't concern itself at all with investment, which is the other side of the coin here.

What do I mean by investment in this context? Investment is the set of compromises you have to make in order to expand your responsibilities successfully. That set of things you hate doing when you'd rather be at home. Or the onerous tasks you've left till the weekend because there simply wasn't enough time in the week. These are investments you make in your work.

You make them expecting there to be a payoff.

It is unreasonable for those who choose not to make those investments to get the same payoff.

The fact of the matter is that no matter what corporate policy you have surrounding work/life balance, there will inevitably be many people who choose to invest more substantially than you. Implication: they produce more, and therefore get greater opportunities. It is pointless to rail against this.

When you are faced with an unequal playing field - perhaps because you have children at home or a new relationship to support - trying to match work product for work product is not a winning strategy.

Some people can make few investments and still reap substantial rewards. What is their secret? I was watching such a person the other day to try and see if I could crack the code, and I think I have.

They are innovators to the core. Their first response to anything that comes up is to evaluate how they can spend their (limited) time doing whatever-it-is differently to everyone else. They don't waste time with a tried and true response - a brute force approach requiring a full working week and then some - they seek to optimise.

The new thing they invented is not always better than the old thing they could have done. That is irrelevant - the change gets noticed. And on those occasions where there is an improvement, the innovator tends to get the credit immediately.

That's in contrast to the standardised approach, where you are competing on a playing field that is not level. It's a strategy which rewards those who have the most time to spend on work.

When you treat every situation as a new one, thereby requiring an innovative response, you have a system that self-optimises. People who practice that habit just seem to be more successful, no matter how hard they work. And, of course, it makes their teams more successful too.

The democratisation of complexity

Everywhere you look, very complicated things are being done by people without very much training in how to do them. Have you noticed? Finance people are building super-complicated computer models without any formal training in computer science. They can do that because the tools of production of complicated models have been democratised in the form of Excel.

Elsewhere in the business, work-flows with complicated approvals and integration with other systems are being built by workgroups. Perhaps they don't call what they're doing workflow, but they are doing it nonetheless. Here too, the tools of production of complicated business processes have been democratised.

Actually, it is happening everywhere, and not just in technology. The other day, I cam across a document by an intern that featured super complicated monte-carlo analysis as part of a forecast. Not that this intern was especially statistically trained. It was just that the tool was easily accessible, so it was used. Complicated statistics democratised.

Somehow, all this democratisation of complexity has happened under our noses without us really noticing. But there is a significant take-away I get from this. What people want is not a specifically engineered function that solves a specific problem.

They want generalised tools they can use to solve problems for themselves.

They're bored of doing requirements and testing, and the cost load-up that comes from formal projects. They can solve an increasing percentage of the problems they have themselves. And the pace of things has moved along so much that now, there are sometimes few choices but to go it alone to meet market demands.

I think that we're getting close to the time when what we build to run our financial institutions will not be monolithic feature sets, but platforms that our people combine together to do new and interesting things. We will have little understanding in advance of what those things might be.

If anyone doubts that end-users are capable of this, one has to look only at the rise of FaceBook in this area. When they launched their platform a year ago, there were hardly any applications. But now there are thousands, and all built by users. Same story with SalesForce.com, but in a corporate context.

I'd imagine there are two steps in the ultimate journey for institutions who want to take advantage of all this democratisation of complexity.

The first is to realise that in the relatively short term, systems that can be customised by their owners have significant competitive advantages compared to those that can't. Parameterised core systems are a key example. When you can roll out a new product on the say-so of a product manager without a huge IT fuss, you are going to be in a much better position than otherwise. Parameterised systems are good, of course, but really amount to handing over the levers of a system to its owner. The real key is to let system owners themselves make new levers. Doing so makes it possible to harness the democratisation of complexity and drives an innovation agenda.

But the second step is more radical by far. Let customers make levers too. Let them mash their banking services into new and unexpected things. Do it from within a walled garden so that the key service provided by the bank is safety and trust.

Then, what you have, is an institution that is successful not only because it has the best people, but because it has the most engaged customers. Customers that choose to co-create the bank. The sort of customer you'd definitely want to have working with you, and not against you.

A new kind of event please

I have an appeal for vendors everywhere: create events that are unique and interesting.

In our line of work, we get many invitations, and we go to some of them. But there's a definite trend, I think, to homogeneity of all vendor events around several issues only.

For example, not so long ago, practically every event that hit my in-box was about multichannel integration. "That old chestnut", I used to think every time someone told me about an event concerning on this topic.

Before that, it was the Internet channel and how to make billions with cross-selling.

Presently, the hot events we're getting are all about Green IT, New Payments, and (not surprisingly) innovation in all its forms. Now really, there are only so many ways we can be told to save power, or consider contactless, or reconsider our innovation process.

And there are only so many formats these events can take.

Firstly, there is the discussion dinner (not usually a lunch in the UK). Depending on the vendor, in some case a rather lovely restaurant (or for more exclusive clientele, a private dining room), a moderator is brought in, and the people round the table talk about the issue in question.

There is the presentation plus drinks format, usually with a much bigger crowd (invariably clutching their "VIP" invitations). At which there will be one or two speakers, (one will be a crowd-drawing speaker with interesting content, the other will be a vendor with a sales pitch).

And there is the all day, possibly including lunch, event, which features many presenters, possibly some stands with interesting gadgets, and a drinks option at the end.

I've pretty much stopped going now. We are practically never told anything new, and there are very few vendors that can make events work without the obvious sales pitch. So here is my plea: please tell us something that can justify our investment in time and that will help us do our jobs. Challenge us and change our thinking.

For example, I'd like an event that would tell me how to run a bank in the cloud. Now I realise that its not something that can reasonably be done right now, but it is vendors who will work out the major problems. And, for extra marks, tell us how to establish a MIPS market so that we can buy our compute in advance like airlines do with fuel. Share your thinking with us!

I'd like a new format too: what about a debate between you and your top competitor (with, of course, your best thought leaders) on the topic? Let us have some crowd-pleasing disagreement with the cleverly clothed sales pitch.

With so many invitations, I'd expect that the vendor that cracks the code of this will be pretty much inundated with acceptances. In the end, the difference is the same as that between a great television show and the ads that pay for it. We'll watch the show, but timeshift the ads.

Policing social media

As we continue our social media experiments, one of the biggest questions we've been trying to answer is just how, exactly, do you manage bad behaviour?

This is a new medium, and our employees haven't had as direct a path to an audience before. What if this new means of communications gets abused? It makes people nervous.

Here is why social media is very challenging for a financial institution: there are lots of people, namely every single person in a branch besides the many in corporate offices, who know things they are not allowed - by law - to talk about. That's a lot of trust you have to delegate. Tens of thousands of opportunities for something to go wrong.

On the other hand, these are the same people entrusted with access to core systems and actual cash.

The power of social media is that things get very public, very quickly. Delegating that requires a leap of faith. The belief that most of the time, most people will use the tools to further their work lives is a core prerequisite to a rollout of the technology, and if that's not there, social media tools aren't for you.

One thing that seems useful is turning off any features which allow user generated content in anonymous mode. It seems that people are way more likely to be moderate if they have to stand by their convictions in public. Dissent is expressed constructively, and the tone of the conversation usually winds up a positive one.

On the anonymous Internet, things are not so positive. Which, I suppose, is why user generated content efforts by financial institutions to date seem to feature moderation so often.

A lesson I've taken away from our work so far: social media tools used inside the firewall are culturally very different to ones outside it. People behave differently. In answer to my question that started this post, then, it seems that our social media is largely self regulating. No huge investment in management of behaviour required.

Best practice

The other day I was in a meeting where I was told that something was “best practice”.

I hate it when I’m told this. When one digs further, you almost always find the statement covers up something that is certainly not best. In my experience, best practice is usually a defensive statement rather than an accolade.

There are two problems with best practice.

The first is getting to accurate data about best in the first place. One trick that’s used frequently is getting an analyst to assess your capabilities in some dimension and have them make the appropriate pronouncement. That, however, is a path that is fraught. Analysts, as pointed out by Chris Skinner, are frequently not as well informed as might be imagined.

By the way, if you’ve slavishly copied a white-paper, assuming one exists, you’ve not implemented “best”, only “same”.

So how to prove best? The only reliable way is to ring everyone up in your peer group and ask.  That’s assuming you know whom to ring, and that what you’re asking about isn’t commercially sensitive.  Naturally, if one is bothered enough to be rolling out the best-practice defence it almost certainly means that whatever-it-is is commercially sensitive.

Getting the data to prove best is problematic.

But the second problem with best, regardless of whether it’s easily proved or not, is that it makes it harder to argue for improvements. Why on earth move forward when you already have an advantage over everyone else that you can keep just by standing still?

Investment cases are so much easier to support when you have to achieve “parity” with competitors. When you are already better than them (at least, you are saying you are), the money is better spent elsewhere.
It is always possible to make incremental improvements. Toyota is one of the leading car manufacturers in the world, and all on the back of incremental innovation. Does anyone imagine they are stopping the process of improvement?

Never use the term “best practice”. It is a defence of the indefensible, followed by long term lock-in to the same.

A bank account uses more water than making a litre of petrol

Last night I went to an event at NESTA, the peak body fostering innovation in the UK. One of my key takeaways was a fresh realisation of the value of water. It's suggested, in fact, that in the next few decades, fresh water will become one of the most valuable commodities on Earth. Wars will be fought over fresh water

Did you know it takes seven litres of water to make one litre of beer? Ten litres of water to create a litre of petrol. 1000 litres of water to make a television set. 8000 to make a pair of jeans. And 40,000 or more to make a car. You can read the interesting facts in detail here.

A great deal of attention has been focussed on the copious use of power of any industry that uses data centres. In our organisation, we're swiftly moving the thinking model we use to build our systems from one where power is effectively unlimited, to one where we recognise that power is a primary constraint that we must manage across our application portfolio. No matter how advanced your green technology, there is an upper limit beyond which it simply isn't possible to shove any more compute into a certain amount of space.

But until last night, it didn't dawn on me that, just like power, water cannot be considered an unlimited resource. If it takes 40k litres of water to make a car, how much must be used up building us just one of the many mainframe computers we run?

It takes, according to this site, 45.4 litres of water to make a computer chip. I did some rough, back of the envelope calculations. Let us assume that a typical bank data centre has 400,000 chips. That's assuming that the data centre is one of a reasonable scale and has about 20,000 CPUs across all the possible platforms deployed, and there are about 20 other chips supporting each CPU. That's probably a low order number, but it means that the compute in the data centre took 18.16 million litres of water to create. I'm not even factoring in the data storage, the cooling, and the construction costs (in litres) of the actual facility.

If you're a typical bank, you'll be cycling your platforms every couple of years. Let's say everything is refreshed every three, for our purposes here. That doubles the water consumption across a three year time frame for a huge 36.32 million litres of water, just for the chips.

If you are a bank with that sized data centre, you'll probably have some millions of customers – let's say 10 million. And at that point, we're talking about 36 litres of water every three years, or 12 litres of water per year per customer to have a banking relationship.

That's a very low order number, given the assumptions above. Clearly, the real number of litres will be much, much higher.

In other words, you can make a litre of petrol with less water than it takes to run a bank account for a year. Going back to the initial point of this post, if water becomes one of the most valuable commodities on earth, using that much just to run a banking relationship is going to become uneconomic. It also goes to show that green agendas are, as predicted by practically everyone, just good business sense.