Behind the Brand®

The Future of Global Banking with Miklós Dietz, Senior Partner, Managing Partner of Vancouver Office at McKinsey & Company
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Jeff Adamson: [00:00:00] Welcome to Behind the Brand, the podcast that explores how technology, innovation and other forces of change are reshaping age old industries and giving rise to new opportunities. Join me, Jeff Adamson, one of Neo Financial's co founders and an awesome lineup of guests to discuss how the world is evolving to meet the needs of customers.

In the next few episodes, we're focusing on the financial industry. In Canada, I'm Jeff Adamson. This is a space that has been dominated for decades by the big five banks who hold 93 percent market share. There's an incredible number of opportunities for innovation in this space. I'm particularly excited for this episode's guest.

This time on Behind the Brand, I sat down with Miklós Dietz. Miklós leads the global banking strategy and innovation team at McKinsey. He's also the managing partner of McKinsey's Vancouver office. Since joining McKinsey, Miklós has led more than 450 engagements across 40 countries and over [00:01:00] 100 financial institutions.

It doesn't stop at financial services either. Miklós has also served governments and regulators to support economic development, as well as help to telecom, technology, retail, consumer goods, And energy companies in starting and scaling up digital businesses. Miglos has written over 200 articles and reports that span topics such as banking, strategy, and digital transformation, including his recent article, springtime for Canada's FinTech industry, and is the author of the book, the ecosystem economy, which I have on my desk at all times, we talk about what banking systems look like.

Elsewhere in the world, how Canada's banking system is at its largest inflection point and why ecosystems are the business model of the future. I know you're not one that seeks praise or even likes praise, but I, I can't help myself. And when I was talking to some people about this, I said, he's literally the Aristotle of banking.

And then I got thinking, I was like, maybe he's more of an Oracle of banking because he's predicting the future are either of [00:02:00] those. Okay. For you.

Miklós: I think this is way too high a bar, but it is certainly true that my job is, and I had my career really is trying to look at. more longer term future of banking globally.

And I've been doing this one way or another for over 25 years. And I'm a little bit of a specialist of trying to stick two steps ahead, three steps ahead, not just one. I'm not saying so. And sometimes I even get it right. You know?

Jeff Adamson: Well, let's, let's start with your career with McKinsey because you've been at McKinsey nearly 23 years.

I know people that spend three years in consulting and, and they basically look like they may have aged. Five years, six years, ten years, walk me through the remarkable journey that you've been in, you've been on in consulting and then how you really started and what influenced you on that path.

Miklós: Certainly, I feel I've aged a lot. What helps is that I have joined from Merrill Lynch actually, so I already got used to, let's say, high intensity jobs, so everything is relative. We did [00:03:00] McKinsey relatively early on. I started to specialize on banking and banking strategy. It is simply because it's the largest sector in the world and it's going through its largest transformation ever.

So I argued, why not do the most exciting topic in the economic history of the planet? I started a specialized research center, which turned into its own company, IBM McKinsey. Relatively early on, it's 17 or 18 years ago, which became more big. It's called Panorama. It's a big global data center, and it started to collect banking data, market sizing, segmentation from all over the world, and it turned out to be incredibly helpful because Suddenly I got all these data and I've started to see patterns which are harder to see if you are just in one market.

I ended up starting a couple of things in McKinsey, such as McKinsey's global banking annual report, about 15 years ago, and it's always with a rotating group of authors. I always write with them so that there are very different viewpoints, but it every year [00:04:00] summarizes our thoughts about what is happening in banking.

I think I will soar. Started to write articles about more of the longterm future of banking. And then around 14 years ago, I also started what we call Mac is a global ecosystem hub, which was a direct reaction to the fact that we realized that barriers between industries are going down and the future of business is increasing the cross industrial platforms.

And we needed a new type of model to help. Businesses to expand into other sectors, think through orchestrating ecosystems, large number of partners in a very different index expected it. And they ended up doing a lot of work. I was just calculating recently, 45 countries, over 480 projects on all these topics, and we ended up even writing a book on what we call the ecosystem economy.

And right now, most of the work, what I'm doing. is at the intersection of these areas, uh, strategy, but also rethinking business [00:05:00] models in a really broad set, serving some of the largest financial institutions in the world, but some of the smallest ones and fintechs as well, because In some way, they all need to reinvent their business model.

Jeff Adamson: Well, let's jump into the ecosystem side because you literally wrote the book on ecosystems and we'll put a link in the description for your book, Ecosystem Economy. In your view, you've described the shift from traditional business models to ecosystem as the largest economic transformation in history.

Can you elaborate, Miklós, on why you believe ecosystems represent such a significant shift and how They fundamentally change the way businesses operate and deliver value.

Miklós: Absolutely. Let me start with stating that it's not that brave of a statement. If, uh, if you look at the 10 largest market cap companies in the world today, and you compare them to 10 or 20 years ago, 20 years ago, the largest companies in the world, ExxonMobil or some big banks, oil companies, all of them had one thing in common.

They were [00:06:00] in one industry today, the largest companies in the world, the apples, the Amazons, uh, Google's, even Tesla's, they are defying classical categorization. It's not just because of tech sector and the tech transformation itself. It's in almost every sector in the world. Leading companies are leading partially because they are going beyond their core industry.

And the capital market rewards them with trillions of dollars of valuation. In fact, if you see, The shift of valuations over the last 10 years, you have seen that this is the single biggest bet capital markets ever made in a business model. Essentially the multiples, the valuation on cross industrial platforms are huge.

And in every sector, let's say the leading, the largest insurance player, uh, in the world, the leading, uh, even toy makers, if you look at Lego or others with its movie or entertainment business and parks, it's becoming clearer and clearer that the winning business models, uh, Are not stuck into one sector.

Why is [00:07:00] that? That is not the old school called glomerate story. It conglomerates if anything turned out to be less successful in creating value, right? Even stories like G. This is more because of a very fundamental change. And that fundamental change goes back to history. Industry sectors were originally created when org, when specialized labor appeared in the, in Mesopotamia, like close to 6, 000 years ago.

And they existed. Because every sector require the different type of distribution model require different skills and expertise, different type of data, right now, these barriers between sectors are going down today because of technology revolution and customer needs, creating this self driving cycle. So, for example, now, with the existence of smartphone.

A smartphone can be a bank branch, an insurance agent can also be a retail center and a shopping mall at the same time. You don't need separate distribution anymore. [00:08:00] Used to have this great differentiator of, Oh, I have thousands of branches. It sets me apart. It's extremely hard to replicate this because you need billions of capital.

Now it doesn't exist. The second story come is come down as unique data and every sector data is unique in banking is especially if you really think about banking has been working as a very powerful financial intermediator because it has the ability to know who will go bankrupt and who will not very, where should I give the risk data.

Is what really at the very core, one of the core competencies of banking, uh, since the, those old books of the Fugers and the Rothschilds and Medici's in the Renaissance era. Right. But that one is boiling is, is going down to today. You can actually use telco data or retail data to create better Gini coefficients to forecast.

For example, consumer lending, probability of default and loss given default. Then [00:09:00] if you use banking data, why? Because people create so much data and big data is so much more advanced that with AI you can cut across industries very easily. So the classical data dimension of banking is also coming down.

And then, of course, there are systems again. Banks had a unique advantage because of all those expensive it systems, which were huge competitive. It was able to put them into a unique position, but that one is going down to because next generation solutions, cloud based solutions make it very, very easy to replicate them.

In fact, Sometimes those old systems are becoming more of a legacy problem, making it harder for big banks to compete with smaller players. So overall, what we are, and that is true across sectors, all sectors. And what it leads to is that today, technologically, it is vastly easier to create a cross industrial customer journey, or a cross industrial platform, or a cross industrial business.

Then it was 10 years ago. This beautifully combines with the fact that [00:10:00] this is actually what humans really want. Customers really want customers don't want traditional sectors. Traditional sectors doesn't exist because customers say, I want mortgages and home insurance as separate. They existed because that was the only way the industry could deliver it.

What customers really want is they have fundamental needs and they want an economy organized around customer needs. To give you a concrete example, no customer ever wants to have a mortgage or a home insurance. They wanna buy a house. They want a home. Yeah. They want a home. They want to live somewhere.

Yeah. Better buying or renting you, and you're absolutely right, Jeff. What does mean is that ultimately the actual solution to the customer need is not the word's best mortgage process, the fastest the payments, but is the process which actually makes it easier for somebody to find a home. Move in, live into it, repair stuff, ideally all integrated in one process, ideally easy payments, finding the right [00:11:00] services, finding the right

Jeff Adamson: Well, and even just to jump in there, it kind of begs the question, it's something that we, I think we often debate internally is when you think about the brand of a financial services company, it often seems like sometimes the banks are trying to insert themselves more in the customer's lives.

As opposed to getting out of the way of, of customers. How do you think about the role of a, of financial services in, in the sense that the value is in what you can do with it? Not in the thing itself, like the mortgage is to buy a house. It's not like no one's showing their mortgage and saying, Hey, this one's green.

This one's blue. Look at my mortgage. They just want to get a home.

Miklós: Yeah, I would separate two things. I would separate the actual mortgage service, right? And then the bank as an institution. I do believe that in many of these customer journeys, the banking product itself is not just commoditizing, but it's getting frequently disintermediated and potentially becomes invisible.

The most extreme and great examples. If you go to [00:12:00] China, China with all its uniqueness and different challenges, it's actually a good example of how a truly digital and very, very Customer oriented financial system and reinvents itself. Right. Or or including getting everything you want with a WeChat app

Jeff Adamson: that, that's the example of this cross industrial platform.

WeChat. Yes. And then the banks have. Been disintermediated by getting more into the back end as opposed in the front end is just owned by WeChat and these platforms.

Miklós: Exactly, but I would argue that's not the only possible outcome and I would actually argue banks are right to try to do more for customers.

I think the nuance here is that banks. That mortgage itself as a product will not be the differentiator, but banks can still make a huge difference on a housing journey, for example, and we just, you know, we chose one example here and we can go to others, but on a housing journey, for example, home journey, for example, ultimately, banks are in a privileged [00:13:00] position.

They are not just the financers, they have unique amount of data, lots of understanding, they have the capital, they have the scale, they are a natural orchestrator if you think about it. It is absolutely valid for banks, or maybe I would say for certain banks, or certain financial institutions, certain fintechs, to argue that I want to do much more.

I want to serve your whole end to end need because by reducing fragmentation, streamlining process, creating transparency, I'm actually making your life so much easier. And this is an incredibly good business. I mean, globally, purely just the home ecosystem is a 5 trillion business. And right now, it is one of those.

Journeys which haven't really been digitalized versus others. Let's say them digital media, which already have seen huge transformation, big tick tocks and the Netflix is of the

Jeff Adamson: world. Let's talk about data. You mentioned that data was a critical dimension in the building of ecosystems and actually just a quote from your book [00:14:00] here.

The amount of data created, captured, copied and consumed in the world increased from 1. 2 trillion gigabytes. Yes. To 59 trillion gigabytes and almost 5000 percent growth between 2010 and 2020 so when you thinking about the success of ecosystems discuss if you can help me understand how can companies leverage technology to enhance their ecosystems and why is data considered the key weapon.

In owning customer relationships in this new economic landscape.

Miklós: Yeah, I think the short logic to this is if you reorganize global economy from traditional industries to this new ecosystems orchestrated on customer needs. So everything coalesces around customer needs. The winner is. Whoever owns the customer.

The winner is whoever can create truly personalized customer experience. Whoever have the access to the customer or the unique differentiator. Now, how do you create this unique personalized customer ownership? Is by knowing so much about the customer [00:15:00] that you can serve, uh, them the, at the right time, at the right space, with the right offer, at the preferred channel that you almost like predict their needs before they.

No, I tried that. Create an amazing experience. How do you do that by data? It's very simple. The more you know, the more data you have someone, the more you can create truly personalized journeys. So in this whole game, there is a global race right now for customer ownership across this major customer needs the home ecosystem.

Commerce ecosystem, the health ecosystem, the small business, business services, ecosystems, and companies from very different industries, telcos, retailers, tech companies, banks, insurance companies are all racing, racing to go beyond the industry, racing to really have the most data and therefore the most unique customer relations.

The reason why this is especially working, Jeff, because you can create in this business an incredibly powerful, self fulfilling prophecy, a positive spire. [00:16:00] If you get a lot of, it's the data traffic love circle. If you have a lot of data, sorry, traffic data love. If you get a lot of traffic on customer relationships, you get a lot of data.

If you get a lot of data, you can create personalized services. Therefore, you get great customer experiences. Maybe even a network effect. Customers are drawing each other in. Therefore, you get even more traffic. Therefore, you get even more data. Therefore, you can even more love. Once you get on a path like this, It becomes unstoppable and the trillion dollar business models today all in some way benefit from that Right.

I mean if you're looking at a story on amazon looking the story at apple, it's all Once you really log them in Customers have to go there and then you solve and then you create this Incredible size. You solve the chicken and egg problem by just simply becoming so big. And the dream of every single business in the world is to find one of these positive spirals, because the moment you are on it, it also creates a positive spiral in terms of [00:17:00] valuation.

And therefore you can get the best talent. And so it creates another positive cycle with the

Jeff Adamson: yeah, there's multiple network effects.

Miklós: Yeah.

Jeff Adamson: And even when you blow up what Amazon looks like, you know, in your book, you You outline all the different pieces within the Amazon ecosystem. It's just, it's breathtaking just how massive that ecosystem is.

I don't, I don't know if, if people can truly comprehend the scale of Amazon and where they're playing and how each one of those different units fits into the network effect. Would you say that that's peak ecosystem, uh, Amazon, or would you say there's bigger ones out there?

Miklós: I wouldn't be cautious. We have a little bit of a vision of the generations of ecosystems, and I would argue there are no players today who are.

Getting even close to peak. In fact, I would say most players are more like a step three on a five step journey or two And the reason for that but but to be fair, it's the reason for that this is still evolving this [00:18:00] You see there is still True personalization hasn't been achieved yet. It's partially a computing problem.

You will need quantum computing or vast other technological improvements to really create a perfectly differentiated service to Jeff Adamson, right? You would need, you would need to connect more dots. There are, there are customer usage pattern issues. There, there are still things to happen. The true end game vision here is Extremely sophisticated, perfectly personalized, smooth, probably truly next generation AI, not today's AI, but like true next generation AI.

It would be amazingly predictive. It would be also very heavily regulated, which is a regulatory story is still ongoing, and it would embed into customers everyday life and would create incredible customer value and at the same time, of course, incredible value for customers. No company has achieved yet that, but the beauty of this journey is even if you start on this journey, capital markets already want you.

So why no company has achieved [00:19:00] that many company are on this positive spiral, which eventually will lead them to this unless they make a mistake.

Jeff Adamson: What impact do you think AI is going to have on the formation of ecosystems On the surface, my gut tells me that it's going to accelerate the formation, but is that how you see it as well?

Miklós: Yes, with some colors. First and foremost, again, I'm a huge AI fan. I have data science background. At the same time, I want to be very cautious. What we have today, generative AI, is not true AI yet. It's, it's, it's, it's getting there. It's, it's, it's creates a lot of value. It also has certain challenges from biases and hallucination to regulatory.

I do believe though, that. It accelerates the ability for cross industrial platforms to work even better, to personalize even better. What it also does do, it does create also the opportunities for new players to jump in. It opens up competition. Gen AI is in some way the great equalizer. Relatively small companies relatively quickly can roll out solutions based on that.

[00:20:00] I mean, we ourselves in McKinsey, my, my team took us six weeks to build a whole AI enabled tool going straight. Millions of articles to find out innovative ideas for any subsector took us six weeks from, it's a total game changer. And that actually opens up competition. It can actually disrupt some positive spirals, start others, and it can give an opportunity for players, including in combat players, including traditional to come in this game, leapfrogging.

In fact, exactly as to your question earlier, because no ecosystem have achieved the true stage five or even stage four level. There is plenty of room for players to come in. They need to leapfrog though. Trying to replicate what ecosystems do they have, starting from behind, is wrong. You need to do something, you know.

Jeff Adamson: Yeah, jump to, you know, you don't, if you want to beat MySpace, you don't build a better MySpace, you build Facebook and so on and so forth.

Miklós: Extremely well said, or to be [00:21:00] Canadian about it, you don't go where the puck is, you go where the puck will be, right?

Jeff Adamson: Well, and you've mentioned that in the book as well is, is, you know, you want to go to where the puck is going.

And you, you mentioned that in the reference to what roles people play in these ecosystems. And I think, I think many people will be thinking, okay, well, how do we build our ecosystem? Rather than saying, how do we participate in an ecosystem? And these are strategic choices that companies have to make.

What do you see as the key factors that companies should consider when deciding whether they should be the orchestrator of the ecosystem, a participant, Or take on some other role within the ecosystem.

Miklós: I would say first and foremost, companies may have different answers to different ecosystems, right? So I'm working with a lot of banks and tech companies and industrial conglomerates, and many of them are coming to very different conclusion ecosystem by ecosystem and the way how you do it.

It's in some ways logical, right? Is where is your starting position? Where are you in the value chain? What very important, what type of [00:22:00] data do you have? What type of customer access do you have? What type of capabilities do you have? Are there natural integrators already in the sectors? That's a, In the digital media universe, we already see incredibly advanced end to end platforms.

Why? Partially because it's customer base tends to be very young, very much quickly evolving in digital. You mentioned the home ecosystem, which is the other, on the other end, it's more education and talent ecosystem. These ecosystems are much slower to transform. So you basically decide based on what do you have, a starting position, and what do others have, to decide how much of a competitive advantage.

You can have, I think in general though, and this is a great question. You were asking companies tend to overestimate their capabilities. So my general advice is if you are not sure whether you are an orchestrator or a participant, you're probably not an orchestrator because it's very hard to be an orchestrator.

Jeff Adamson: And so just to, just to kind of make it more clear, would you see [00:23:00] Amazon as the orchestrator? Um, would you see Apple, Google, Meta? Those are all orchestrators.

Miklós: Well, yes, again, I mean, it's obviously dangerous to try to use like one word to describe these companies, but I do see them to be orchestrating their own ecosystem, having the power, having the strengths, the platform access to customer.

But I also see very small companies orchestrating their own mini ecosystem, very niche players from, you know, from pet foods to. Home services just in a few villages, the regional players, there are small players as well. We're very, very successful in orchestrating others. So it's not just the size. It's also your ability to actually reach out to the customer.

In fact, what we are seeing is that it's it's also a there's a huge first mover advantage here, right? So if you if you go to some markets, like I mentioned how in China, um, Tech platforms really moved ahead of banks and became the customer owners and banks became tech offices. But if you go to Scandinavia, You will find that [00:24:00] banks there move pretty early.

They develop their own platforms, including swish payment platforms. They are also very

Jeff Adamson: quickly

Miklós: digitalized. So right now I would argue banks are doing a lot more in orchestrating end to end customer journeys in other markets. Again, telcos were the first mover. So there is a lot of room for players to define this game because ultimately.

The single biggest reason why an orchestrator wins is because that orchestrator was the first to really create a truly orchestrated customer journey.

Jeff Adamson: So, so in the context of financial services, Miklós, uh, and in the context of a participant within an ecosystem, what role does financial services play within ecosystems?

From, from what you've seen from, from a global context, what you're seeing around the world, you know, are they typically participants? Are they, you know, are they orchestrators? And within those ecosystems, what, what role are they playing?

Miklós: First and foremost, what's, what's role does finance play in these ecosystems?

In some way, it is the one common theme. [00:25:00] Across all customer journeys from health to government services to large corporate services and wholesale marketplaces is they all touch finance. They all touch payments, they all touch accounts, but they also touch products, financial services. What is also common, though, that this is never the part of the journey which is the single most important for the client.

That's not where the great emotional connection happens. Whether it's payment or getting a mortgage or getting a loan, it's a tool. Because, again, customers don't want to have a credit card. They want to buy product. Credit is a tool, uh, you are using to get there. So that puts banks and financial services in a unique position.

Because on one end, they are the best positioned in the planet to orchestrate. And on the other, they have A huge disadvantage when it comes to customer relationships. What they have though is data. The single most valuable data for most customers is what we call the holy grail data. It depends on ecosystem by ecosystem.

But in many ecosystems like the commerce ecosystem, for [00:26:00] example, it's how much money people have and what they are spending it on. And when and how, right? That's more valuable than your website tracking history, because, you know, you may be clicking on those ads. It doesn't mean you actually can buy a Ferrari, right?

In other sectors like health, there are also other stuff like DNA data for personalized medicine and so on. But this, knowing the actual spending habits and the actual, is the single most valuable data. And banks still more or less have it, although usually not at the SKU level, usually not very well orchestrated, but It puts banks in a unique position.

They have an ability to go to an unusually broad set of ecosystems, but they are starting from a little bit behind. So what we are, what I'm seeing in markets is that some financial institutions have been incredibly good in playing this game, right? They moved in early. They use the fact that they are connecting to all payments.

To actually transform themselves. So there are extreme examples. I [00:27:00] frequently use, for example, the example of Cosby, which was a consumer finance bank in Kazakhstan. I think it was, it was not even one of the largest banks in Kazakhstan was not exactly. It's a, it's a, it's a quite advanced country in terms of digitalization, but not exactly a rich or big country, right?

At least not in terms of population. And Cosby, It is an excellent example of how it was able to reinvent itself to a true e commerce player, government regulatory technology player. It became the necessary super app for every customer. And now it's running over, I don't know the latest numbers, but spectacularly high, like 80 to 90 percent ROE.

They have done a 17 and a half billion dollar IPO in New York stock exchange recently. They are more valuable than any other tech companies from the region, not to mention any other banks. They were a small bank, right? So that's an example of how extreme you can reinvent yourself. There are. Plenty of more mundane, but still interesting examples.

In fact, if you're looking at the highest [00:28:00] valued banks in the world today, region by region, the banks who are trading at a premium to the rest of the market, whether it's in Australia, like or in Singapore, or even in North America, you will find that the leading banks usually are the ones who are going beyond banking and their customer journeys.

And let me give you an example, concrete example. Just trying to sell credit cards hard because it's undifferentiated and the real customer journey is the commerce player, right? In many markets, commerce players are already winning the consumer lending game because they own the journey. But there are many banks who are using their own loyalty programs and rewards programs and personalized services, coupons, vouchers, location based services, e gifting marketplace to build their own marketplaces.

These banks, stand way above all the others, right? Because they can actually create through differentiated journeys. And they are winning that market. And they are also getting, of course, a much higher multiple. So they start their little positive spirals. The same way, look at, you can look at the home journey or small [00:29:00] businesses.

Another excellent example, like there are banks who are now integrating end to end customer journeys. Uh, for small businesses from starting up a business and doing web design and registry to growing a business, getting the telecom administrative services, healthcare banks have in some way, the most interesting situation, Jeff, in this universe, they have the most to lose and the most to win.

They have the biggest, they have the biggest opportunity to truly reinvent themselves, but they also are facing a huge challenge because if they are not doing that, The one thing which is common about all big tech platforms, they're all going into financial services. That is whether you are looking at Alibaba or WeChat or whether you're looking at the big Silicon Valley companies, it doesn't matter where they come from, they're all going after financial services because financial services is so much touching every journey.

So if banks are not moving enough, they can Really become white label back offices, and of course, it doesn't mean the disappearance of [00:30:00] banking, but it still means a model there. There will be banks. Who are essentially utilities running, hopefully very efficient, but definitely relatively low ROI businesses in the background, still, still, still taking care of the balance sheets and the highly regulated business, because nobody wants to get the highly regulated business.

And my last point on this one is what we need to not forget is that banking, yes, banking is a regulated business and banking has a regulatory mode, but the regulatory mode is not protecting every piece of banking equally. Banking has actually two businesses, the classical core heavily regulated asset liability management balance sheet type of business, which is actually very low profitability and tech companies don't need to touch that.

The other part of banking is all the customer relationship, the services, the fee revenues, the distribution part. You can easily go and cherry pick the interesting high value pieces of banking without actually going into the heavily regulated one. So you can, we can end [00:31:00] up in a universe when banks exist.

But they are not owning their customers and all the value creation shifts to other players.

Jeff Adamson: So there's a couple of things I want to read back to you because I think they're important for listeners to pull out of this. There's just so many things you're saying, Miklós, that are so valuable. But the one that, or the few that jumped out at me were financial services really being that common theme across all ecosystems, the holy grail of data, basically understanding how much money people have.

Where are they spending it? Maybe even if it's not SKU level, it's still very valuable to have. And so because banks have this, they have such a huge advantage and opportunity that's in front of them. But if I know anything about banking, It's that banks have their own culture, their own language, their own way of operating and then you have things like marketplaces, which is what I did before banking and that's a totally another different type of way of operating a different language and culture and everything as well and so [00:32:00] it's, it's that kind of that interesting moment, that interesting challenge of, Can, you know, who's going to get there first?

Are banks going to go more towards a marketplace or in, in kind of offer that cross industrial customer journey centered around solving those customers problems, or are the marketplace is going to go closer to the banking and then embed the banking side and start generating massive amounts of profit, like, like, uh, in Kazakhstan with, uh, Caspi.

And then, and then being able to flow some of that profit into the core business of offering. You know, ride hailing or grocery delivering or e commerce such an interesting time right now in banking.

Miklós: You're absolutely right. And you actually set up the issue and the next and the big question brilliantly.

So the challenge for banks is how to is. And we are looking at examples, for example, I mean, I mentioned one example. Maybe it was a mistake just to mention one example, but there are dozens of examples of banks being successful and also dozens who are not. [00:33:00] Then you really analyze what is the primary reason whether banks succeed or fail.

It's not about technology. It's not about customer access. It's not about data because they all have data. It's about governance and culture. So you kind of spot on on this. The challenge for banks is how to maintain a robust, very, very heavily focused classical banking culture, which they have to because of regulators.

It's not that banks are, you know, dumb. They have to operate a certain way because there are expectations towards them. How to maintain this robust, very well controlled, extremely low risk, highly discovered culture. And then the same time take on big risks, fail fast, innovate, go after clients, start new businesses, call them, close them.

These two doesn't really fit very well together. So the financial institutions who win. They win because they can sort out this and they usually sort it out this with ensuring a two speed or three speed organization. They enable different types of cultures coexisting because it's [00:34:00] just simply not fair to expect from a banker to, you know, to be all these so many different things.

They have different compensations, different training. The solution is, or can have different type of organizations with different acceptance of failure, with different compensation system, with different type of talent. Transcribed With different type of incentives to go after the different type of opportunities with very different speed.

And that's the realistic model. That, however, requires banks to reinvent their governance and organization. Traditional matrix is not ideal for this.

Jeff Adamson: Such a massive opportunity for everyone, especially customers. Specific to the, to the banking system, Miklós. Just how big is this transformation?

Miklós: Wow. It's a great question.

Can I start? Let me start with a couple of numbers. Okay. Banking is huge. Banking intermediates over 400 trillion has revenue pool of close to 7 trillion and the profit [00:35:00] pool of close to 1. 4 trillion globally, right? Even in markets like Canada, total revenue pool of banking in Canada is close to 140, 150 billion by now.

These are incredibly big business. But it's also interesting to see, to just get the scale of the upside, is banking today, even with high interest rate, even with, uh, recently improved margins, is the single lowest valued sector in the world. If you are looking at price to book, for example, also price to earning, but price to book is maybe the even more telling story.

If you look at every industry in the world, you will find that the only major industry trading Willow one price to book is banking. And again, there are reasons for that. They have regulatory capital and so on, but it doesn't matter. The fact is a fact, banking today trades at oh 0.8 to oh 0.9. The global economy on average trades at a 2.7 price to book the even utilities trading at 1.5.

Even real estate businesses trade at 1.1 0.2, right? Even very traditional retail businesses. [00:36:00] Almost all businesses in the world are highest valued than banking, which is very interesting, especially if you take a look at, yes, banking may be not super profitable, but it's gross rated, ROA, it's not vastly behind some of these other sectors I mentioned, obviously not the tech sector.

And the reason for that. It's future expectation. Today, basically capital markets are betting against banking at the scale of trillions, right? That banking doesn't have a future proof business model. The banking in the future will be less profitable, have less growth. What I learned in my career at Merrill Lynch is never bet against the markets.

The market is not usually stupid. The market knows what it's doing. Now to give a little bit of scale, banking, total market evaluation. If you are looking at traditional banks, it's around 10 trillion today. With this 0. 9, they have capital of around 13 trillion if they would trade even at the level of utilities at the one and a half price to book, that would already mean close them to an 18 trillion valuation.

So [00:37:00] we are speaking about. Value creation opportunity in the scale of trillions of dollars, or if you translate it to Canada in the tens and hundreds of billions of dollars, still very, very high number. And again, I hope this kind of answers a little bit. This is. The lowest, the largest profit pool in the world is the lowest value sector in the world facing the largest potential upside or also the largest potential downside.

Jeff Adamson: You know, one of the things I love about what you do Miklós is the framing of the opportunity that is in front of, of people and what does a promised land look like when you put it that way, it's just, I don't know, it gets me amped up just thinking about it because especially right now in Canada, uh, You know, we've got so many things that are on the cusp of happening and over the course of this recent series on Behind the Brand, we've talked to many different leaders in financial services in Canada.

You know, many of our listeners know what it's like to use these banking products in Canada and they may have heard about open banking, [00:38:00] but they really have no idea what it'll mean for them. That global perspective, that understanding of the opportunity that's in front of us that you have, can you just give us a bit of context around what do financial systems look like around the globe, and how does that really compare to what's available in Canada right now?

And what do we really have to look forward to in Canada, you know, specifically to real time rails that might be coming and open banking that we've talked about earlier, but even just broadly when you just narrow it in on Canada, what do you think we have to look forward to?

Miklós: Let me start with saying that we frequently see Canada.

When you do the global compression as the last island of tranquility, what we frequently call is a Canadian paradox is our country has the highest number of tertiary educated people in the world, one of the highest digital usage of the Scandinavians. Yet we are at the very bottom when it comes to digital banking usage or fintech usage or even business in general.

There are reasons for that. History [00:39:00] regulatory technology, but at the very heart of it, there is this gaping hole between how Canadian customers behave when it comes to, I don't know, social media usage or online streaming usage versus. Digital banking usage. This is fact number one. Fact number two, it's very easy to see where the future is if you just go to other markets.

And the issue sometimes is for Canadians, the comparison point is always the U. S. And the U. S. is probably the only other market which is very much behind for very good reasons. But let's say you go to Northern Europe. Or let's say you go to Eastern Europe. Or you go to Turkey. Or you go to China. You go to India.

All of these markets are already more digitalized. And in many ways, more disrupted than the Canadian banking system. And the best way to illustrate it, let me tell you my story. I'm a newcomer to this country, and I always chat with other newcomers who come from all over the world. And we always start our conversation by discussing how amazing this country is.

But [00:40:00] literally, guaranteed, always the second or third bullet point is that by the way, in banking, it's still medieval. Right? Let me give you examples. You have to go to a branch here to open an account, sometimes spending one, one and a half hours. It simply doesn't exist anywhere else. In, uh, for most European countries, uh, you can open an account online without ever seeing the bankers or anyone.

You obviously have to show your ID and share something. Stuff for to have anti money laundering and know your customer regulation. Second example. In many countries where people, taking a mortgage takes less than a day. Right? In some, in some places like Iceland, you can get in 15 minutes. Sometimes it costs as much as 24 hours, end to end mortgage journey.

Here it takes weeks, right? Payments, we still use things called checks, which is amazing, right? For anyone outside of North America, the fact that this 1920s technology has somehow survived. I mean, it's, there are, you can find checks in museums and people are making photos of them in other markets of the world.

So again, this is not [00:41:00] criticism, this is the recognition markets evolve very differently. You have this huge gap between customer experiences and banking sectors existing in other markets. Now, I see this, and where will it lead? I don't actually expect that we will get to some magical, enormous, earth shattering, disruption, skies are falling type of thing.

This is not the Canadian way. It's gonna be slow. But the most realistic story is that we will start to converge to the rest of the world. Canadian style, a little bit so very elegant and sometimes self apologizing, but we will converge to the rest of the world. Open banking, real time rails, more fintechs are just pieces of it.

But ultimately, they're very, very hard because most of Canadian population growth is coming from newcomers. The vast majority of newcomers are coming from markets already more advanced. At the same time, we obviously have young people who are very much ready. We will see this move on the demand side and on the supply side, we will also see moves and on the regulatory side, we will have moves and [00:42:00] economic cycles and many other things.

We have seen this in Australia, how it's panned out and how regulation, for example, a lot of changes and as a combination, what we are expecting. Is a very exciting next decade in Canadian financial services, but I think in a funny way, it can be a win win for everyone, right? It will definitely be a win for the customers, but it will also be a win for potentially banks.

Because as I said, Canadian banks have the upside of banking. Getting this right is huge, right? And I do believe it's going to be a win for the broader ecosystem. In fact, service companies, because An economy of this size and sector of this size transforming, right? The enormous amount of upside and downside we are speaking here will create a lot of opportunity.

And the reason for that is because of competition. Because we can say whatever financial sector is actually highly competitive. Yes, we have a few banks with large market share, which is by the way exactly the same in every market in Northern Europe. [00:43:00] The market share of the largest five banks in Canada is not actually bigger.

Transcribed Then in the UK or France or Scandinavia, right? In reality, competition is there. And then competition really kicks in. And when people start to move, the shift will happen.

Jeff Adamson: Yeah. I can definitely see how this is a no, there's no downside for consumers in this, in this new transformation. And some, some banks I think are gonna, are gonna capitalize and some will be, will fall behind.

One of the hot topics right now, Is productivity and I see financial services as really being this grease on the wheels of the economy. How do you think that this transformation will impact productivity in Canada? You know, a lot of people look at productivity and are very concerned. Bank of Canada is very, very concerned.

It's a political issue now. Is this going to be a force multiplier on productivity in Canada if we can transform banking or do you see this as kind of a drop in the ocean?

Miklós: No, I actually think it makes a [00:44:00] huge difference. First and foremost, I do believe people like to worry about productivity. I am definitely worried about productivity, but of course, I'm a paranoid central European.

So, but, I, I do see how GDP per capita fell behind, and I do see how we are falling behind, not just the rest of G7, but the rest of OECD. When it comes to productivity growth, right? And, and, and now I, and what I also see is that financial services have a huge role to play here. If you think about the efficiency of an economy, whether it's efficient capital allocation, whether it's the cost of transactions, you know, the lower cost of transaction, the better increasing the velocity of the economy by ensuring that people, you know, easily transfer money, move money quickly.

They all tend to increase productivity. Allocating capital is especially an issue because if you're really scratching the surface of our productivity problem, it's not because Canadians don't work long hours. It's not because Canadian sectors or Canadian companies are just bad. It's a large part of it is a [00:45:00] capex issue.

Investment over the last decade in Canada did a unique thing. Instead of going into productive Corporate investment. It decided to go into residential real estate in a couple of places like Toronto and Vancouver, right? We did this crazy switch when we, as a nation just decided, you know what? Let's not give capital to businesses.

Let's just, you know, pay more and more for the same nice houses in some nice leafy neighborhoods that can self correct easily. And the moment is self corrects. We have the rest. We have talent. This country has unbelievable talent. We actually have decently good. Sectors, we have education, we have, we have all of the pieces.

So I, well, I actually expect what you need is investment through that. And on that one, of course, financial sector has a huge role, although I would say I would not blame banks because it's not banks who decided that people are investing into real estate, that much more complex. effects of co causalities and connection.

And what I would also say [00:46:00] is that I gave you an example on the fact that in many markets in the world, you can get like mortgages within the day, these type of things. And of course they only work because there is huge price transparency across homes, for example, as you can imagine, that leads to much easier transfers and much better pricing and less inefficiency in the market.

And therefore more people getting to homes. That's. you know, one of, one of the examples how technology development, banking sector development can really increase the velocity and the quality of the services.

Jeff Adamson: Yeah. It's, it's a, it's a complex issue, but the, the opportunity is just absolutely massive.

Listen, Miklós, I could keep going here for a long time, but I know that you're a busy man for those interested. I've got the book right here, the ecosystem economy. It's a must read in terms of helping position your company. Uh, in your career, um, future proofing it. Miklós, where should people follow you and listen to you?

Miklós: Well, I think first and [00:47:00] foremost, if people have survived this barrage of unconnected thoughts delivered with a terrible accent, then, um, hats off to them. I really, it's, you should see how my kids are making fun of my accent. I really hope that, I really hope that at least some of these Was interesting, but this is actually, these are topics actually McKinsey is publishing.

We had different things including With a few of my colleagues that just recently published a article on Kintex in Canada We are writing every year of global banking and your reports And I'm also obviously happy to you know, share thoughts with anyone who is interested in this It's as you clearly got It, I may not be knowledgeable, but I'm definitely passionate about this topic.

Jeff Adamson: You are certainly both. And, uh, you know, just sincerely super grateful for your time. I appreciate you coming on and, and I appreciate you Miklós.

Miklós: Well, thank you. Thank you very much, really. And thanks a lot for your patience.[00:48:00]

Jeff Adamson: Thank you for tuning into behind the brand. If you enjoyed today's show, please subscribe and leave a review on your preferred podcast platform. If you're interested in learning more about neofinancial visit us at neofinancial. com behind the brand is. It's a production of Neo financial and media lab YYC hosted by me, Jeff Adamson strategy research and production by Philippe Burns, Dario Betcher, and Kyle Marshall.