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October 15, 2016

#Fintech: Bot Banking

lumosbot

In our inaugural Fintech post – Millennials, Trust Scoring and the Future of Financial Services – we touched on ‘Bot Banking’ and the future potential for early upstarts such as MyKAI by Kasisto:

my-kai

> Kasisto.com/MyKai

Recently, MyKAI launched via partners RBC in Canada and DBS in Asia, and is available on mainstream messaging platforms such as Facebook Messenger, Slack and iMessage. It shows that the idea Banking Bots may not be as far out into the future as we thought – the question is, will it stick?

That’s what we are going to look at in more depth in this post, as it seems despite the future upside of Bot Banking, it’s just not quite ready for primetime.

What’s driving Bot Banking?

The rise of bots in tech media over the last six months is comparable to the hype cycle around apps when the App Store launched on iPhone. But it’s not simply the rise of bots that can explain the buzz around Bot Banking, it’s also the realization that banks need to develop entirely new experiences to engage millennials:

“Despite the ongoing efforts of banks to attract millennials, they are still failing to make an impression. According to Gallup, only 23% of millennials are actively engaged with their bank, making millennials the least engaged generation.” Can a Bot Help Your Bank Speak Millennial

Bot Banking enables asynchronous communication, something that fits perfectly with the millennial lifestyle – “Millennials enjoy being able to choose the timing and terms of their communication.” There is also an issue with trust, as 71% of millennials would rather go to the dentist than listen to what their bank is saying. Bot Banking gives banks the ability to white-label these new platforms and engage millennials in a more intuitive and conversational way, in turn allowing them to build trust with what is now the biggest generation in history.

lumosbot

Despite the rich data that can be gathered from these platforms – especially Facebook Messenger – this is data that a lot of the banks already have. In most cases, the bot is querying the bank’s database for transaction history and current balances. The data side of the Bot Banking story is important, but it’s not the key factor for a bank.

What’s more important to millennials, and is missing from today’s financial institutions, in an implicit awareness of the social contract that millennials sign:

“Millennials consciously or unconsciously recognise that in a digital age, their personal information is currency. It is an asset. They are happy to enter into a contract to gain assets for this asset.” How Banks are Failing to Uphold Their End of the Bargain

A Banking Bot won’t fix this, but it may help banks learn in real-time what the expectations of this generation actually are.

Bot Banking Disruptors

‘Disruption’ is so overused and cliché in the current world, but in the case of #fintech, it’s still the best word to describe the ambitions of certain companies who want to eat the bank’s breakfast, lunch, and dinner.  A well-crafted, long-term Bot Banking strategy could be the answer.

Whereas companies like Kasisto actively partner with banks and use their customer base as a distribution channel, other companies are looking to build from the bottom-up and become the banks of the future themselves.

Chip is a UK-based Bot Banking platform that is built entirely as its own ecosystem ie. you download it as an app, it’s not found on Facebook Messenger, Slack, etc.

chip

The vision for Chip is:

“to be able to offer a range of financial services that are price transparent and help the customer have a happier and healthier financial life.” These Chatbots Want to Help You Manage Your Money

Currently, they are taking from the Transferwise Playbook of integrating with banks. But in the future, they will probably start to find ways to bridge in with other fintech players and build their own proprietary platform for managing the movement of money, just like Transferwise is currently doing:

“Transferwise says it is “peer to peer,” pairing customers who are sending money to or receiving it across borders. It charges a small fee to make the match and exchanges money at the prevailing market rate.”  Fintech Startup Transferwise Moves Away from Banks

Despite the obvious potential of Bot Banking, they simply are not ready for primetime:

“Forrester conducted a test of banking bots, finding that the bots either failed to complete a request or provided an awkward experience in about one-third of chats. Bots even found some small tasks problematic – for example, Forrester asked the bot how much money it had available before making a transaction, to which the bot replied that “you have undefined money remaining” Bots Not Ready to Become Bankers

Much work needs to be on the AI (Artificial Intelligence) and NLP (Natural Language Processing) in order to create fluid and instantaneous conversations with customers. That’s where players like Google and Facebook could step in in the future. Unlike a platform like MyKAI, which uses specific algorithms to define how the service will work, companies like Google and Facebook have more advanced machine learning/deep learning capabilities developed in their core businesses that could be released in the future.  This would give the bot a predictive power in the future. So not only would the bot help you know what you spent, who you sent money to, etc. it would also know what/where you are likely to spend in the future.  Whether or not millennials will trust Facebook/Google for banking remains to be seen, but given their expertise and emerging firepower in AI, it’s certainly not out of the realm of possibility.

The Future of Bot Banking

Despite the initial hurdles around bots, we see Bot Banking become a major part of our financial lives in the future. This is because research demonstrates that we make better financial decisions after seeing a “computer-generated visual representation of our future selves.” Money is an emotional object in our lives, so our decisions tend to be emotional – rather than rational – more often than not. With banks becoming less trusted than ever, it seems logical that we will at least partially rely on bots and other fintech services to advise us on matters related to money.

Many services across the fintech ecosystem – especially in robo advising, a digitized form of wealth management – are developing computer models to help us visualize our future selves:

In the current banking model, banks are incentivized to sell customers more products/services in order to meet quarterly profitability targets. Despite the marketing, banks don’t have their customers best interests at heart.

While there are many questions surrounding the business models of these new services – such as robo advising – they are unquestionably more aligned to the customer’s wellbeing and their long-term financial health. For millennials, it all comes back to the social contract:

“Until banks enter into social contracts with their customers, trust in their services will continue to erode and they will remain ripe for disruption.” How Banks are Failing to Uphold Their End of the Bargain

As we have recently seen with the Wells Fargo scandal, what banks are really doing is using data to cross-sell/up-sell services. It’s not just happening in the US, it’s happening everywhere, as the banks still view the customer experience as something that should be transactional rather than relationship oriented.  Until there is a shift in mindset, millennials will continue to look to companies outside of the traditional financial services ecosystem for products, advice, and future guidance

As new fintech players across the ecosystem start to form partnerships and bundle services, we will start to see integrated offerings that give customers access to a broad range of products and services comparable to today’s banks. Imagine a robo-advisor partnering with a bot-based platform to help funnel savings into a monthly account, which is then automatically invested in a bespoke fund based on the future needs/wants of the individual.

The upswing of the bot’s front-end conversational ability, coupled with the development of the robo’s back-end modeling capabilities, will create an entirely new range of product/service possibilities in the future. Because of the low margins and high cost per customer acquisition (CPA) of early fintech players, we believe that most pureplay fintech players will be forced to partner-up with other fintech players; otherwise they will burn through investor money or be acquired by mainstream players.

In the end, our relationship with our financial service providers comes down to trust. For the millennial generation, trust in mainstream institutions is at an all-time low. That trend is unlikely to reverse given the underlying incentives for banks to focus their efforts on quarterly profitability versus the long-term needs of their customer. With a world awash in debt and trust in banks plumbing to new lows, there is a once-in-a-generation opportunity for platforms such as Bot Banks to help craft the future of financial services.