“This is not to do with dealing with unbankable people therefore, but more to do with banking for people who couldn’t get banked.”

On whether traditional banks can compete

“A traditional bank either has to cannibalize itself, start a new bank or try to straddle all markets badly.”

On whether the bank branch is dead

“The truly radical digital provocateurs will say that no one needs a branch … but that is not rational.”

Digital Bank is available at Amazon.com, Barnes and Noble, and other bookstores.

Finovate: Can you tell us a little bit about your background, as someone who has been involved in banking and finance for many years now?

Chris Skinner: Sure. I’ve been involved in banking and insurance technology since the 1980s when I worked for Wang Computers, the revolutionary word processing company at that time that then missed their mark and went into Chapter 11 in 1992 (that was a learning experience!). Since then, my time has been spent leading the strategies for various financial services technology providers, such as NCR.

Through the years, I’ve spent time analyzing and working with firms from investment banking and asset management through commercial banking and transaction services to retail banking and omni-channel management. My role has always been to look for the next wave of change in these companies, and try to visualize the state of the banking markets three to five years out. I’ve been providing this vision through two independent companies since 2002. Balatro Ltd, which is my research think tank, and the Financial Services Club, a networking group for bankers interested in the future of banking that is now established in seven cities across Europe.

Skinner: A digital bank is a bank built explicitly for the digital age. Not a branch-based bank or an Internet bank or a mobile bank, but a completely digitally focused bank from the ground up. It is a bank that assumes the relationship with the customer is 100% digitized and available 24/7. It goes further than this. It proactively and predictively server the customer, so that the client always feels the bank knows them intimately and is one step ahead of the game. Most banks were not built this way. In fact, most assume the branch is the foundation and Internet and mobile are channels to add to that structure.

The digital bank thinks the other way around. It looks at the ability to interact and communicate non-stop everywhere and even with what you wear, and works out how that differentiates their services and gives them more customer depth of remote relationship. As to which firms are doing a great job? Hardly any. It’s too early in the game and most of the new financial firms or innovative incumbents are focused upon mobile and tablet computing rather than digital banking.

The difference is that the digital bank does not think about devices, but about the capability to have the Internet embedded in everything. Walls, windows, chairs, ceilings, headscarves, handbags, jumpers, jam jars. You name it, you can digitally interact with anything today. That’s where the thinking really opens up the mind to the possibilities.

Skinner: There are massive opportunities in the Digital Age as a Digital Bank, but also massive challenges. These include legacy infrastructures and operations, internal resistance, the wrong vision, an inability to execute and implement, a management team (that is) divided, and more.

The easiest to overcome is all of them – if you have a leader who is completely committed to making it happen. Without a leader, and then a leadership team who are truly on-board and committed, you might as well just tinker around the edges and do a pilot project, which will fail, but at least you tried.

Skinner: It represents both and more. Since the early 2000s, I was being hired a research analyst and produced a book back in 2007 that talked about the future of banking. That book had some of the groundwork for this one, but this one goes far further. It includes a liberal sprinkling of thought processes distilled from the blog I’ve been writing since 2007, as well as many new ideas and insights and case studies.

There are case studies on everything from Bitcoin to Barclays Bank, and some of the new innovative banks that are out there like FIDOR in Germany and mBank in Poland. I’m pretty sure everyone will get something out of it, even if they think they know all of the things I’ve contended in the blog for some time.

Skinner: The key reason for focus upon emerging markets is that these markets are leapfrogging established markets. By way of example, almost half of all the GDP of Kenya is now moved through mobile text messages, a service that we’re only just getting used to thinking about through the roll-out of apps. It is also key to note that these emerging markets are all technology free. They have no infrastructure built for consumer banking typically, and so the digital age is offering them the first step toward automated services.

And what is really interesting in these markets is that the assumption has been that these folks are not bankable because they are too poor. When mobile banking began in Kenya, for example, only 2.5 million of the over 28 million adults has bank accounts. Now there are over 10 million. This is not to do with dealing with unbankable people therefore, but more to do with banking for people who couldn’t get banked. With mobile financial transaction histories, Kenyans are able to show their credit worthiness and that is why a quadrupling of the banked population has occurred in just over five years.

Skinner: Certain areas of the world are innovating and innovating fast. In Europe, Poland is the country to focus upon. In the Middle East (or is it Europe?), it’s Turkey. Africa, especially the southern countries, we are seeing innovation. We are seeing innovation in war-torn areas like Afghanistan and impoverished areas like typhoon alley Indonesia.

What is common to all of these areas is that the markets were ripe for innovation. The infrastructure and customer focus has only really geared up in the last two decades, and mobile financial services has allowed banks in these nations to rapidly deploy high speed, high service offering at low cost.

Add on to this that these nations have another common factor of high population density – Turkey has 70 million people, Poland 40 million and Indonesia’s population is as big as the USA, and you can see why banks are innovating in these areas. Innovation without legacy for mass market leverage makes absolute sense.

Skinner: That’s a little like asking how can the octogenarian Olympic athletes compete with the mainstream Olympians. They can’t. That means that a traditional bank either has to cannibalize itself, start a new bank, or try to straddle all markets badly.

Nevertheless, I have seen a few traditional banks that impress – Citi, BBVA, Commonwealth Bank of Australia to name a few. The common thing about these banks is that the CEO and Board are committed to innovation, invest in it, are prepared to break down their Berlin and Chinese walls to achieve it and really believe in going for an end goal that stretches. This is far beyond the usual incumbents, and the key is a culture of bravado mixed with a rationale for risk management. Taking a bet and derisking that bet is the hard part of any program to move from legacy to leadership. These are a few of the banks that seem to do it well.

Skinner: We will never see branches disappear. Sure, there will be banks that are branchless, but most banks will keep branches as they see that as the point of service. That’s true, but it’s not the real reason that banks will keep branches. The real reason is that their customers want them. Customers want branches because they worry that their money will disappear if there isn’t somewhere they can physically go and ask for it. More importantly, customers do want human engagement face-to-face sometimes. Moments of crisis, bereavement and change, or moments of happiness, marriage and birth. Moments of challenge, such as moving home or buying your first car.

Now I know that the truly radical digital provocateurs will say that no one needs a branch for even these moments of truth, but that is not rational. It may be rational for 90 percent of high net worth sophisticated financial users to manage their own mortgages, loans and credit services but, for 90 percent of your average Joe’s, they still like to talk to someone about their money when they have these moments.

Until that human need disappears, the branch is here for the long haul. Then we get into the question of how many branches, and that’s where you’ll see a radical change. Most banks have set up their branch network on the basis of 80 percent of interactions are branch-based and 20 percent are remote. Obviously today this is not the case. 80 percent or more of interactions are on an app and 15 percent are via an ATM or contact center. About 5 percent are in branch and that number is decreasing rapidly, even in the USA where branch network have been consistently growing year-on-year until 2012).

So give it a few years, and anything from 20 percent of branches in the USA will close (this will be slower than the rest of the world due to the USA’s high dependency on checks) to 80 percent in the Nordic countries of Europe where digital identities allow for account openings online without the need for a branch visit.