Banking Transformation in Digital Spacetime

Einstein’s Spacetime, Newton’s apple and Banking???

Warning: If you aren’t a physicist, the following equation can make you feel dizzy. More so if you are banker!


But I assure you, the effects will be over soon. There are no detailed derivations. Einstein’s Field Equations from General Relativity (GR) aren’t meant to be understood by us! But we can still learn our lessons.

It took Einstein 10 years to include gravity into his Special Relativity to propound General Relativity in 1915. It brought a whole new paradigm to the study of gravitation, much beyond what Newton had imagined. Pioneering as it was, Einstein’s theory has suffered from one problem-for lesser mortals, distortions in a four-dimensional spacetime aren’t easy to visualise! It takes more than a little stretch beyond our easy 3-D world!

On the other hand, an apple falling on earth is so intuitive. Newtonian gravity is simple and convenient. It has served us well for trips to the moon and numerous satellite launches. So why bother about Einstein? Well, the human ambition doesn’t stop at moon. It’s going interstellar.

While going any deeper into theoretical physics is beyond the realm of us bankers, we can surely pick our lessons. A closer look reveals that the paradigm shift in banking is as stark as Newton v/s Einstein.

The variables in the ‘classical theory of successful banking’ are well known – a license, a large branch network, cross-selling products, high Net Interest Income and all this leading to profits. It has worked for decades and may still help launch banks. Almost Newtonian!

Contrast this with the changing paradigm- rapid advancements in technology, Peer to Peer payments, automated customer service, blockchain, Crowd funding, digital-only banks and more. The ‘classical theory’ is inadequate to explain this ‘interstellar’ movement between branch-based banking to no-branch banking!

But it’s difficult to visualise how a bank can get customers, build relationships and increase income without a physical infrastructure and a ‘relationship manager’. The new equations aren’t easy to understand although may prove to be more effective!

In Einstein’s theory, there is a great reverence for speed of light. Speed of light is constant, no matter what. In Newtonian gravity, the emphasis is on the tangible mass of the body. Mass determines the force exerted on others- just like Big Banks have their pull (or push!).

But may be banking is also seeing the centrality of mass (or size of bank!) shifting to an intangible ‘customer satisfaction’. Light at the end of the tunnel?

From Ether to Spacetime: New ways of banking

While these old theories of bank’s size and scale, as a key determinant, may remain useful for some time, the real truth is shifting somewhere else. We are entering a new, four-dimensional spacetime construct and not floating in an archaic ether!

Juniper Research reports ‘Banks are becoming increasingly concerned that their market position is being undermined by tech-companies and pure-play vendors enabled by technology and regulations to enter the marketplace’ In UK digital banks like Starling, Tandem, Atom, N26, and Monzo, have started operations and a dozen more are seeking license.

On the mainland Europe, PSD2 mandates banks to Open APIs. This will bring in new age fintech start-ups and non-financial players to the arena, giving customers better choice at lower costs.

In India, while the excitement around Wallets tapers down, the advent of Payments Banks starts a new chapter. The mix of biometric authentication based on Aadhar and UPI enabled transfers is leading to one-of-a-kind transformation of this scale in the world. NPCI’s initiatives are making the payments market in India largely homogeneous, levelling the playing field for non-banking companies to take on large banks.

The form-factor has metamorphosed too. While movement from cheques to online transfers was slow, the transition to mobile has been rather quick. Wearables are the next big change, led by payment-enabled smart watches and other experiments, like the NFC enabled Contactless Payment Ring unveiled by Visa during the 2016 Rio Olympics. Even fitness and finance never seemed so compatible!

  1. Alipay tied up with Xiaomi to enable payments on the Mi fitness bands
  2. Jawbone’s has a fitness tracker, powered by American Express that supports NFC enabled contactless payments.
  3. Fitbit, another fitness band manufacturer, acquired wearable payment technology from Coin Inc in 2016.
  4. Barclays forayed into wearable bands with bPay Band and App, allowing customers to view balances and manage payments right from the wearable.
  5. Visa has tied up with watch manufacturer Swatch to develop payment enabled smart watches.

But before you go for that $300+ Apple Watch or the latest fitness tracker, do note that by the time manufacturers overcome the challenge of low battery life, world would have possibly moved to wearable patches, with real time diagnostics for both physical and financial health!

With IOT, the difference between phones, wearables, durables and all other gadgets may be immaterial. No matter what gadget you use, banking would still be possible. Even with washing machines!

Predictions are coming from everywhere. A Business Insider report forecasts 24 billion connected devices by 2020, up from nearly 7 billion today. Of these 70% would be payment-enabled consumer devices. While Techcrunch and Gartner report predict 500 Mn wearable devices by 2020 and Statista reports connected wearable devices are likely to double from 450 mn to 929 mn.

In short, there is no going to the bank. Banking happens where the customer is. There is no pull, just a need-curve in the spacetime!

Smart watch may just be the right symbol for this financial service ‘spacetime’ continuum!

9.8m/s2 to 300 million m/s*: Moving to real-time Embedded Banking

 With AliPay, WeChatPay, Google, Facebook and many others joining the transactions mainstream, it’s becoming possible to have banking without banks! Having linked with a wallet, payments for Uber are done automatically. And if Amazon Go experimentation is any indication, queues for swiping your card on that EDC machine may soon be over. No longer waiting for the cheque book to come by snail-mail!

The biggest challenge for the penetration of digital banking has been the reliance on multi-level authentication, primarily done through transaction passwords and OTPs. This required a certain level of technology comfort and therefore was limited to a section of population. With biometric authentication, even those users who are not comfortable with the advancing technology trends are now able to participate in the digital economy. They can now do transactions instantly.

In lending, the advent of newer data points, algorithm-based assessments and use of digital distribution and application processes are challenging the traditional credit assessment methods of the banks. Peer to Peer (P2P) and Crowd funding are getting formalised into mainstream. Although still experimental in most parts, these are serious alternatives to raising capital, especially for Small Enterprises. They may soon have the liberty to raise the money, when the business requires.

Developments in NLP (Natural Language Processing) and consequent improvement in Chatbots will make those painfully long IVR calls to banks, history. Customer would access the service when they need it.

Blockchain can potentially upend the whole range of banking processes- transaction processing, documentation and even the currencies in circulation. With the recent rally, Bitcoin still remains the flag-bearer but cross-border Trade Transactions seems to be an apt use case. The documents are executed, when they need to be and transfers are done in real-time.

The message is clear – Banks need to be there where the transaction is. Embedded and in real-time.

*9.8m/s2 is the gravitational acceleration on earth, a key Newtonian calculation, while speed of light is ~300 million m/s, as referred by Einstein. The paradigms of motion are different for both!

 Mass α Force exerted but Big Banks aren’t that important.

The pull of the large body over a small object, in Newtonian physics, is like a love affair. As if the poor apple on the tree was longing to meet the earth! I heard, people fall in love too! But should the customers be in love with their banks?

The ‘pull’ of the great banking institutions and the virtues of trust and loyalty have been hyped by the bankers. But these never really benefited the customer. It’s surprising that banks rarely feature in Top 10 (or 20!) brands, given banking is all about ‘trust’. Customer’s rely more on a smartphone (interestingly called Apple!) than the ‘custodian of their money’!

The ‘What’ and ‘When’ of customer’s needs are fairly simple- they need a channel to facilitate transactions and at the time of transaction! Its convenience and not a romantic relationship that they seek. But what they get instead is long queues, delayed transactions, never ending documentation and paying for bank bailouts from their hard-earned money.

How long should they carry the burden of this one-sided ‘relationship’? Should they even care which bank they bank with?

It is the transaction between buyer and seller that’s more important than how the payment is made. The success of transaction should be agnostic to the method of payment. However, if the method of payment is complex, much time goes in resolving it. This is a non-value-add to the transaction per se.

But, if you still see people standing in the line for a Demand Draft or cash withdrawal or waiting for the cheque book to be delivered even after a week, it is clear that someone has made banking more important than it should be! No, that ‘someone’ isn’t Newton!

It’s time banks realise that size may be relevant but Customer service is even more critical. Their processes need to customer centric. Else, I’m sure apple will be happy to be liberated from this daily ‘pull’ of the earth, someday!

It’s not Newton v/s Einstein

Newton was as great a scientist as Einstein. But his outlook on gravity was possibly best suited for his age and time.

The issue here is not about the Banks. It’s about the ‘legacy-mindset’ that blocks many of them to move beyond their archaic models. And all this at the cost of the customer.

With increased democratisation of banking services, thankfully, the customer convenience is getting the long overdue importance. The size of the bank cannot be the determinant of what, how and where of the service being provided. If you have dealt with a large or ‘legacy’ bank as a customer you would know the pain they can cause.

Nutshell, Banking needs to be embedded in the service or transaction. It cannot remain a non-value-add chore, requiring elaborate preparation. It’s a backend facilitator- a service that is provided when a customer needs it.

Banks cannot remain arrogant about their glorious legacy and big size. It’s worthwhile to remember that every action has an equal and opposite reaction. Customer may desert you soon. And that’s the lesson from Sir Isaac Newton’s 3rd law of motion.

By: Amit Balooni


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