#edGY: Disrupted: Why Borders' end is a lesson for banks

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BANKING and book selling are two vastly different businesses. But there’s something that banks can learn from the fate of four-decade-old bookstore Borders.

The lesson: The need to embrace technology and continuously innovate to survive in this age of digital disruptions.

Malayan Banking Bhd (Maybank) head of corporate development and innovation Amran Hassan has a stern warning for banks.

“As far as Maybank is concerned, we know we cannot fight the startup and technology world. We have a virtual banking department with a bunch of people in there but there are millions of programmers out there.

“The only way is to embrace the startup world. If you cannot defeat them, join them. If banks don’t realise that, they are going to be like Borders,” Amran said in his presentation at the Synergy and Crowdfunding Forum (SCxSC) 2015 in Kuala Lumpur last week.

However, Amran prefaced his presentation with a disclaimer. He reminded that in hindsight, it’s very easy to say, “Borders should have done this or that”. But still, there are some key lessons to take away from Borders’ bankruptcy in the US.

The first step is to realise that there is a problem.

“A lot of things are going on outside of our control and it’s a good start for banks. We realise that we are in turmoil and in exciting times with digital,” says Amran.

But back to Borders’ tale for a moment. The bookstore was started by the Borders brothers in 1971. In the 1970s, they were already using software in their operations and expanded quickly over the next few decades.

But the defining moment for Borders was in 1998 when it started selling products online, well ahead of the curve. But after a few years, Borders decided to focus on growing its branch network and outsourced online sales to Amazon in 2001.

Today, Amazon still exists but Borders went south.

Amran notes that Amazon is a large billion-dollar valuation company but it is not always profitable. But what Amazon does is that it spends a lot of money on acquiring technology and innovative startups to beef up its tech arsenal.

In recent years, there has been a lot of interest in finance technology (FinTech). There’s also a lot of interest in fast-growing non-bank entities that offer banking functions. Amran cites a few examples in Asia.

There’s Alipay, a third-party online payment platform launched in 2004 by Jack Ma’s Alibaba Group. It is said to have almost half of China’s online payment market, with over 300 million registered users.

“So, in China, Alipay had a prepaid card which was not deposits per se, but actually it is a deposit. Bank of China stopped it last year and all the bankers were like, ‘Eh, you see, they stopped it!’ but now Alipay has a banking licence,” Amran says.

There’s also WeBank, an online-only bank owned by China internet giant Tencent, which also owns social messaging platform WeChat.

There is a difference between banks and banking functions. The reality is that you do not need a bank to do banking functions. “People just need a bank account to put their salary into. You can pay for stuff using PayPal and so on. So, what do banks need to do?”

Amran also warns that banks can no longer expect the regulators to protect their turfs. “All these non-bankers are far superior than all the banks put together. Some people say, ‘Don’t worry lah, Bank Negara [Malaysia] protects banks’ but Bank Negara will support whatever is best for consumers, not the bankers.”

So, what are the options for banks? Amran reckons there are two paths they can take.

One is the pure digital path where banking is done mostly online, at customers’ convenience. The other is where banking becomes more like a utility.

“For example, you can see that Tenaga Nasional Bhd is providing the power but you just want lighting and do not care that Tenaga is providing the electricity. We could disappear as physical banks, we are just a functional layer,” says Amran, adding that the second path is unlikely to be adopted.

But yes, for banks, it is a time of reckoning.

Quick Take with Amran Hassan

#edGY: You ended your talk with a warning that if banks don’t take note of digital disruption, they’ll end up like Borders. How urgent is this warning?
Amran Hassan: I think, realistically, we have maybe five to 10 years.

Do you really think we have 10 years?
I don't think it'll change overnight. There are a lot of banking functions that will still be in our domain. What you won’t see, though, is banks disappearing … there’ll be new players coming into the banking sector.

You said there are two ways that banks can go. One is banks going digital and the other is being more like a utility company. What is the most likely scenario for Malaysian banks?
I think banks becoming more like a utility is farther down the road. I think there is a trust issue as far as customers are concerned. They do like to know where their money is going to go. Behind that needs to be a big brand or a physical presence. You've seen that in the US in ING Direct. Even though they were a fully digital bank, they started opening some café-type branches just to give the comfort that ‘look, this thing is real’. Having said that, there is no such thing as an Amazon store. Everyone trusts that Amazon is there and it's fully digital. So, it's gonna be both.

What kind of banking functions do you think will be transformed first?
I think payments for sure. We're already seeing it like in the case of Google Pay and Apple Pay. Mortgages and loans are still quite traditional in Malaysia and the region.

When it comes to digital, are the banks working in silos?
Yes. Today, it is in silos. At the end of the day, it is a competitive landscape.

Are bankers having conversations about digital?

Enough conversations?
Never enough. But I don't think the issue is ideas or conversations. I think the challenge is the commitment to put the money in. When I say digital, I don't just mean the front-end mobile app component. A lot of what makes digital is the back end, those processes. And to do all that in digital is the key challenge. And to integrate from the front to the back.

In Maybank, you are part of an innovation. Is that filtered down to the entire banking group? For something like this to work, every single part of the bank has to buy in.
Correct. That's a question of culture. As I run the innovation department, we cannot expect it to drive all innovation across the group. Innovation has to happen across all our businesses and geographies. It's about education and culture building. We're not there yet.

Ten years from today, what will banks in Malaysia look like?
As a bank customer myself, I hope it would be very, very convenient. I would like to do everything in terms of banking at my convenience and my preference.

How is Maybank working with startups?
Maybank has started doing an incubator called Maybank FinTech. We went across the region looking for startups. We have 21 teams, many of them flying into Malaysia for three days, and we will be helping them develop something.
One thing: There are a lot of ideas out there, a lot of startups, a lot of money. What’s short is industry knowledge. That’s why Maybank wants to provide the industry with feedback that startups may not have access to unless they are ex-bankers.
We are fully committed to FinTech. It’s not just about giving money. It’s also about offering mentorship education and support. For example, we could leverage our reach in terms of customer base and bank network.


This article first appeared in #edGY, The Edge Malaysia Weekly, on June 22 - 28, 2015. Read more here