Introduction: China, Europe, and the Future of Banking

HOST (Brett King):
Welcome back to Breaking Banks. In this episode of our Branch Tomorrow series, I’m joined by Richard Turrin and Paolo Sironi, two leading fintech thinkers and co-authors of the book. Together, we explore how China and Europe present very different models of digital disruption, what it means for branches, and how generational behavior, AI, and government policy will reshape the future of banking.

Key framing:

• China is now one of the most functionally cashless economies in the world.
  
• Europe is grappling with fragmentation, regulation, and customer behavior shifts.
  
• Both regions are redefining what “branches” mean in a digital-first economy.
  

What Sparked China’s Digital Disruption?

HOST: Richard, how did China move so quickly from card-based banking to a cashless ecosystem?

GUEST (Richard Turrin):

• 2014 was the inflection point, WeChat Pay and Alipay gave merchants digital payments without point-of-sale systems.
  
• By 2016, banks saw card use and loan businesses collapse.
  
• Banks lost not only transaction revenue but also customer data streams.
  

QUOTE (Richard Turrin): “If you want to talk about digital disruption on a scale unknown in the West, look to China.”

The rejection of Jack Ma’s original proposal for Alipay partnerships by banks is seen as a strategic misstep that cost them their payments business.

What Makes Super Apps Different from Banking Apps?

GUEST (Richard Turrin):

• Western banks often confuse “feature-rich apps” with super apps.
  
• A true super app (WeChat, Alipay) is open to mini-app developers, with no gatekeeping beyond security.
  
• This creates ecosystems that integrate into daily life, far beyond banking.
  

QUOTE: “In a true super app, it’s open to everyone. That’s the difference between a full-featured app and a true societal platform.”

Are Branches Still Relevant in China?

HOST: What role do branches play in a digital-first China?

GUEST:

• In Shanghai: branches have shifted from transactions to wealth management centers.
  
• In rural and developing regions: new branches are still being built due to demand from small businesses and cash reliance.
  
• Generational divide: Gen Z and Gen Y rarely use branches; older demographics still rely on them.
  

QUOTE: “It’s schizophrenic, Shanghai remodels branches into empty wealth hubs, while rural China is still opening new ones.”

Europe’s Transition: Revolut and Beyond

HOST (Brett King):
Europe’s challenge is different. Revolut now has 50 million customers and could be Europe’s largest bank by customer count within a decade. But scaling across fragmented markets is complex.

GUEST (Paolo Sironi):

• Branches are shrinking, but digital banking economics in Europe are not a free lunch.
  
• Profitability challenges arise because onboarding digitally does not guarantee strong revenues per customer.
  
• Customer expectations are shifting toward personalization, machine learning, and conversational banking.
  

How Does AI Reshape Customer Relationships?

GUEST (Paolo Sironi):

• Traditional branches allowed human touchpoints for customer service and cross-selling.
  
• Digital apps require data-driven personalization and increasingly, Generative AI for conversational banking.
  
• Banks risk losing customer engagement if AI conversations end without continued touchpoints.
  

QUOTE (Paolo Sironi): “Every time the client moves to a higher type of digital interaction, banks risk losing the contact—and the revenue.”

The Financial Inclusion Dilemma

HOST: What about populations left behind as branches decline?

GUESTS:

• Italy and the UK highlight the financial inclusion crisis.
  
• Governments are experimenting with post office networks and tax incentives to preserve access.
  
• Education and the rise of “silver surfers” (elderly adopting mobile banking) are helping close the gap.
  

Key Takeaways

• China’s disruption shows the speed at which payments innovation can dismantle legacy banking economics.
  
• Europe demonstrates the profitability and regulatory complexities of digital-only growth.
  
• AI-driven personalization is essential, but must avoid alienating customers who expect human-like interaction.
  
• Branches will survive in niche roles—wealth hubs in cities, financial access points in rural regions.
  
• Governments must address financial exclusion as branch closures accelerate.

Raw Transcript:

If you want to talk about digital disruption on a scale unknown in the West, look to China, because bankers here are still reeling today, because there is simply no way for them to recover the payment business that was lost. What is changing is fundamentally the process of engaging the client and basically doing transactions with the client. And if you don’t have economics that are sustainable, the branch definitely will not be sustainable.

Welcome back, folks. This is Brett King. And in this part of our series on the new book, Branch Tomorrow, we have my co-author, Richard Turin, joining us all the way from Italy today, where he is camping out.

He spends time between Italy and China. Richard, welcome back to Breaking Banks. Hello, Brett.

Hello, everybody out there listening. It’s a pleasure to be here. And yes, most of my time is still in China.

I’m only here a couple of months a year in Italy, but when I do come here, it’s wonderful. Yeah, fantastic. You know, I always love Italy.

I’ve been thinking about getting a place in Florence for a while. So that’s sort of a bit of a dream of mine. I think it’s getting more achievable these days because there’s this is sort of a side effect of, you know, you see the population decrease in both places like Japan and Italy and so forth now is providing some pretty interesting real estate opportunities in terms of the prices of places, particularly in rural cities is coming down and more affordable.

It’ll be interesting when we sort of shift into this experiential economy in the future, maybe powered by UBI or something like that. Maybe people will make those choices to live in places like Italy because it will be more affordable from a real estate perspective, at least. I don’t know how the real estate market is going to survive beyond, you know, the next 10 or 15 years actually globally.

I think, you know, it’s going to settle, but that’s just sort of a futurist thought anyway. Yeah, but this is a great point because a lot of the smaller Italian villages have an existential crisis. Their young people moved away for jobs in the big city.

There are no more jobs in the typical or very few jobs in the typical agrarian economies. So the towns have become deserts essentially. They’re abandoned.

So what government has done, particularly in the South, is they’ve gone to this one euro program where you can buy a house for one euro if you renovate it. And the response to that, particularly during COVID, was very strong because people wanted a quieter lifestyle. They had work from home.

And as long as they had internet, they could live in one of these villages. So you’re starting to see some, I’m not making a blanket statement here, but some of these villages are starting to make a little comeback because the quality of life is wonderful. Yeah, this is, I mean, this is really the big shift, right, is, you know, people need to focus.

If you’re interested in longevity or, you know, like you see the digital nomad movement now, you know, we talk about the blue zones. Of course, we have a lot of these blue zones in these Italian cities, but that speaks to quality of life. It speaks to the quality of food.

It speaks to the quality of lifestyle, the fact that, you know, you tend to walk around for transport and things like this. All of these things contribute to, you know, these longevity gains. But anyway, let’s get into the book.

We do this. We catch up. So, you know, one of the key elements of this is we’ve looked at is in the G20, you know, we’ve seen a decline in branch banking in most of the G20 economies now.

I do want to get into the specifics of China because you really did draw a schizophrenic picture of China with sort of two different types of demographical approaches to branches. But, you know, we have seen now decline of branches globally since 2015. And, you know, I remember going to China in 2012 and talking about how digital would impact, and this is with the governor of the central bank, talking about how digital would impact branches in the future.

And it was very much the response was, no, no, no, you don’t understand. This is China. You know, but having said that, this was pre Alipay, Ant, WeChat Pay, WeBank, etc., which has really dramatically transformed the market.

It’s dramatically transformed payments. China is one of the most functionally cashless economies in the world now. And that’s just happened in the space of a decade.

So things seem to be moving quickly there. But why don’t we start with, you know, what’s the landscape of banking and financial services look like in China today? And how has that changed over the last 10 years? Sure. It’s been nothing short of a disruption or a nuclear bomb going off in the midst of the banking industry.

But go back to 2000. If you were running the card business, which is all union pay, in your bank in 2013, everything was fine. The money came in.

You got some interchange fees. You had people getting loans. Everything was comparable to what you would see in the West, except, of course, most of the card schemes were union pay.

Yes, they had some Visa in there. Then 2014 hits. And both WeChat Pay and Alipay explode on the scene.

And they explode because they give merchants the ability to accept digital payments without having a paid-for point-of-sale system. So a normal point-of-sale system, 2014, is a little box. It needs a telephone line.

Sure, there may have been some digital versions. But a guy selling noodles on the street corner doesn’t have a point-of-sale system, and he doesn’t rent one. So he now has a means through his cell phone, his little smartphone, and he can now accept digital payments.

And this went like wildfire through the economy. So by the time that same banker was sitting there in 2013, everything was fine. By the time 2016 rolls around, his business has imploded.

The card use is down. Card loans, or the use of credit on credit cards is way down. It’s a completely new environment for him.

And then worst of all, just to make it more interesting, if you saw my bank statements in 2015 and 2016, which I no longer get, I have some digitally, but the bank statement would simply say WeChat, WeChat, WeChat, and a number. So not only were they losing all of their obvious revenue from card business, but they were also losing the data stream. They had nothing.

They ended up losing it all. Now, the irony, of course, of all this, I have to go back one step, is that when Jack Ma was starting Alipay, it was still part of Alibaba back there, he was very clear. He went to all the banks, and he asked them to become partners in this new electronic payment system.

He wanted a singular bank to partner with, and they all turned him down. And then however many years later from his initial overtures, the bankers are sitting there saying, oh my god, what happened to us? And then we get a couple of more years later to 2017 or so, and then we finally have the arrival of WeBank for Tencent and WeChat and my bank as part of the Alipay network, where we have the two of the world’s largest fully digital banks. So if you want to talk about digital disruption on a scale unknown in the West, look to China, because bankers here are actually still reeling today, because there is simply no way for them to recover the payment business that was lost.

Yes, certain banks have real-time payment systems that you can use, mostly regional banks, but there’s no way for them to recover this business that they have abandoned, and they’re still data poor. So they’ve been hit from every direction. Yeah, this is really an interesting part of the open banking movement in China that is quite different from the rest of the world, because the open banking movement, because of these changes around the wallets with WeChat and Alipay, forced the fintechs to open up their data to the banks, which is a very different motivation we’ve seen in the West, where open banking has largely been about opening up bank data to fintechs to use.

It was actually the other way around, because of this very thing that you focused on, Richard, is that all that data had changed because people’s habits changed, and there was no visibility on MCC data, we didn’t know what customers were paying stuff for, because it was all going to the wallet ecosystems, and the banks then wanted access to the fintech data. So this is, as far as I’m aware, I mean, I think this is implied by systems like UPI and PIX in Brazil and in India as well, but this is really showing how integrated fintech is into the Chinese ecosystem these days. Oh, absolutely.

And it’s sort of funny, because in my book, I write about how England then and EU, for example, had open banking by legislation, a rather organized process. And I laugh, because China had open banking by fiat. It just exploded on them.

They had no choice. Open banking became just something that you had to do. So it’s a very different world here in China, and all because of the disruption from the payment providers, and of course, from the many digital banks, what started, and of course, the biggest are, of course, MyBank and WeBank.

There are now many, many digital banks. And to give listeners an idea of how humiliating this was for banks, just imagine being a regional bank. Rather than have your own bank app, you actually have a mini app on WeChat as your bank app.

A number of regionals did that, because they were like, well, why bother with our own? Everybody’s on WeChat every day. We can’t fight them. So for those that don’t know, there’s something called the mini apps on WeChat.

It’s truly a little app. And the banks put, you can access your account. You can do whatever you could on a normal app.

But they go through WeChat to get to it. And that’s humiliation on a level that’s not yet seen in the West. Yeah, it just shows how quickly things can change in these markets.

So because of that mini app culture, I mean, when I go to China these days, I’m fortunate to have had the Hong Kong bank accounts. I’ve had Alipay from Hong Kong integrated for many years. Of course, Alipay has recently opened up to foreign cards and so forth.

But if you want to access services in China these days, you’re really going to be using one of these two ecosystems, Alipay and WeChat in terms of that super app and then the mini app infrastructure. How has that changed behavior in respect to money and payments generally in China in sort of response to that sort of cashless economy? You know, it’s very hard to say. First of all, we’re used to it.

We’ve had this for since 2014. So everybody has simply adapted to it. What does it mean practically? That you can pay and refund for free instantly.

So some of the services and a great example of my favorite example of all is airline tickets. I can buy a set of airline tickets, realize that I’ve bought the wrong tickets, and get a refund all within the time it takes for me to click the buttons to say, send these tickets back. And literally, it’s literally within a minute that I’ll get the refund back on WeChat Pay or Alipay.

So it allows for fluidity of money that people do not quite understand. It’s because it’s instant. It’s because it’s free to make these payments.

So all I can say is it’s money like water. It just goes where you want it to go, where you will it to go. And it all happens immediately.

And it works right down to the small businesses. Like I have a great example. I have a friend, English guy who’s a butcher here.

And he has a mini app. His shop is run by his WeChat mini app. And that’s it.

So that’s the ecosystem. It’s gorgeous to use. But I’m going to challenge listeners out there.

I have a challenge. The term super app is widely overused. So the thing that people need to understand is that when WeChat Pay and Alipay opened their ecosystems for these mini apps, anyone could build one.

They threw the gates open to the entire of the Greater China Society. If you have an idea for a mini app, and we can help you, put it here. Now, the reason I’m saying that, and Brett, you can testify to this, I’m sure, is that every time you go to a conference or something, and you have a banking app, and it’s full, what I would call full featured, if you may give it some other term, and it’s got a lot of buttons on it, they say, oh, it’s a super app.

And my answer is, no, it’s not even close. Because the bank acts as the gatekeeper to those services that are allowed on its app. In a true super app, it’s open to everyone.

And other than security protocols, there’s no gatekeeping going on. And that’s a tremendous difference between full featured apps in a true super app economy that integrates into society. And that’s the big difference.

Interesting. So let’s get into the book itself, and particularly your take on what’s happening there. Because we have seen branch activity flatten off in China over the last three or four years.

And obviously, digital growth is still on fire there. You talked about WeBank and MyBank. I don’t know what MyBank’s latest customers numbers are, but I think the latest announced from WeBank is something like 430 million customers today.

We know a lot of those customers have acquired at very, very low cost. I’m talking about $0.75 US compared with what it costs in the US to acquire someone for a JPMorgan Chase, which is in the $350 to $450 US dollar range through the branch network. So scalability of acquisition is just so different when you’ve got those lower costs.

And of course, WeBank has been able to bring in many people that were previously unbanked. MyBank and Alipay, with their 310 initiative, have been able to lend to small businesses that would previously be very unattractive to traditional lenders in the market, but doing so at even lower risk because of their cash flow, data analytics, and things like that. So we are seeing a very robust digital acquisition model emerging there.

And how has that changed the way branches are being used in China for banking? Sure. I like the way you put it in your earlier comments that it’s schizophrenic, and it really is. So let’s take people through my life in Shanghai.

So my local ICBC branch used to be a big, big branch, and it used to have maybe six teller windows for it. So they just remodeled, and they’re down to two teller windows, and everything is about wealth management services now. And there’s nobody there.

So when I first started banking in China in 2010, six teller windows, I’m sitting down there. I may wait a half an hour. I go there, lots of papers going back and forth, and anybody who’s been or familiar with China knows they have the chops.

So lots of chopping of papers going on. It was a very involved process. Now, there’s nobody in the bank.

Now, what makes the schizophrenia? The schizophrenia comes in because there’s sort of two Chinas. There’s the urban center of Shanghai, where I live, and then there’s the rural China. And then there’s even, I would talk about, Shanghai has an island called Pudong, which is still being heavily developed.

It’s still a big city. It’s not in the middle of nowhere, but they’re still developing it. So when you talk about rural areas and developing cities or expanding cities, they’re still building a lot of new branches there.

It’s not that banking has gone away. So there’s still this need for branches. So it’s schizophrenic.

On one hand, you’ve got certainly far fewer people needing and using a bank. And when you do look in at these banks and the clients, oftentimes, they have very gray hair. You very rarely see young people going in there.

So that’s the one part that I see in the heart of Shanghai. And then when I go, my partner and I go hiking oftentimes into the rural areas, you’ll see new branches being built there. They are increasingly affluent.

There’s more money. Certain regions can now support a bank branch. So they’ll put one in.

So that’s the duality of China banking. Yeah. Is this a demographic issue or is this a, like, for example, with the Gen Zs and the Gen Ys, are they the ones abandoning the branch activity and it’s left to the older customers? Or is it more complex than that? I think it’s more complex than that.

Look, clearly, I never saw, very rarely do we see young people go to the bank. Maybe they get a car loan or something. But they’re the last groups that I would expect to see in the bank.

That said, you have to go to this rural areas. Because if you go to a rural area that’s developing, they have a lot of little businesses now. And these little businesses, some of them do probably take some more cash, because when you get into the rural environments, maybe there’s a little bit of cash use.

They have a need for a local bank branch, just like anybody in the West would. So I don’t see it as being, or while I see the likelihood of a Gen Z going to the bank branch as being significantly reduced, it does not eliminate societal need for a couple of branches here and there. So that’s the short of it.

So where do you see this going over the next five to 10 years, given this trend? I mean, we see in the US now, branches have been in decline since 2008. There’s obviously some argument amongst pundits and analysts in the US over where that’s going to go. Chase is still opening some branches.

But in my view, most of what Chase is doing is what you described earlier, remodeling, doing smaller footprint branches. So they’re opening new branches to replace old ones that were much larger footprints, for example, optimizing their network for cities, removing more rural support, and things like that. Where do you see this going over the next 10 years in China, given the strength of the digital finance landscape? Oh, sure.

It’s really funny. Flip what you just said. Yes, I agree.

Same in the big cities. It’s the same transition to experiential banking. We don’t need teller windows anymore.

We need high net worth individual cross sales and different products. The only difference, of course, is that while you said that in the West, they’re closing rural branches, China is still opening rural branches. So that’s the biggest distinction.

Where are we going to be in 10 years? So the need for me to go to my bank branch is dwindling. In fact, it was a little slow on this, but it was, I guess, three years ago, maybe four years ago, ICBC Bank basically put all foreign exchange on the app, which was the last thing that I used to have to go for. So maybe if I sent money in dollars to a dollar account in China, I’d have to go to the branch and change it over.

So I essentially never go to a bank branch anymore, and as does most of the population. So I think where I see this going is those marginal services and foreign exchange for 1.4 billion people, not everybody has money coming over in foreign currencies. I see those ancillary services all going digital one after the other.

They’ve already picked the low-hanging fruit. Now, they’re going to go further, higher, and further out on the branches. And there’ll be essentially no reason to go to the branch except one, and this is going to be the interesting one, and that’s digital identity.

Right. So where I did have to go to the branch, must, had to, was during COVID, I guess it was four or five years ago. When the branch input me long ago, in 2010, they didn’t have character maps for my full name.

So the character, because Chinese names are short in characters, right? So they didn’t have a full name, room for Richard Peter Turin, so they put Richard P or something, right? So I actually had to, so- And that created an identity problem later. That’s very interesting. It’s the first time I’ve heard this.

Exactly, because I was under my passport name, Richard Peter Turin, and the two conflicted. But the point is to say that banks are, in China, I think are going to be on the forefront of enforcing identity. They’re the agent.

I don’t want to say enforcing it. They’re the agent, service agent, to identity checks, just as in China, the cell phone company is. So if I, as a foreigner, if anybody wants a cell phone number in China, you go to the cell phone shop, you have to give an ID, in my case, a passport, or a local person, a local citizen, an ID card.

You can have as many numbers as you want, it doesn’t matter. But each number is tied to a person. Each bank account is verified and tied to a person.

So if you’re going to have this instant payment system running huge volumes of money across society, you can’t do it without a digital ID system. While it’s not called specifically a digital ID in China, for practical purposes, that’s what it is. We have it.

Yeah. And given the success of platforms like WeChat and Alipay, and success of initiatives like 3.1.0 and Yui Bao, which is more sort of contextualized financial services rather than traditional products, how is that reshaping the bank’s positioning, banking experiences, and sort of trying to integrate the bank into people’s daily lives? Oh, that’s a great question. So what the banks are left with, they’re left with two avenues.

Number one, a lot of push advertisement on the various social media platforms. So if you’re a Gen Z, and you’re not going to the branch, how’s the bank going to interact with you? Well, they do it through advertising on all the digital video platforms. That’s their, I don’t want to say primary, but that’s where I see them the most.

By the way, bank advertisements, and this I haven’t even really haven’t even thought about it, Brad. It’s actually kind of funny. I used to see big billboard style advertisements for ICBC, Pudong Shanghai, Pudong Shenzhen Savings Bank.

I don’t see a single advert for a bank anymore, actually in physical. Oh, this has gone all completely digital. Yeah.

Yeah, because they’ve gone, they’ve just realized that, okay, so you see it, so it makes an impression. It doesn’t matter. They have to get you on the phone.

Yeah, it’s engaged. You’re able to click a button and make a contact. So the points of contact for the banks have radically changed into this digital world.

It’s a new territory for them. All right, so here’s a question for you that I’ll ask, because if we look at what’s happening in Asia, Revolut is on track to become the largest bank in Europe over the next few years, at least in terms of customer numbers. Who do you think is going to be the biggest bank in China in 10 years? Ah, well, that’s sort of a loaded question, because the digital banks are by and large personal accounts and SMEs, small, medium enterprise accounts.

So they’re never going to overtake the likes of Bank of China or ICBC, where you have entire state-run industries run through those banks. If you were to segregate out the personal accounts from the business, certainly WeBank and MyBank have personal accounts larger than probably the top, the bottom, from 0% to 80% up to scale. But I’m not sure they’re going to be.

But Brett, here’s the thing. You don’t care who your bank is anymore. And that’s the psychological distinction.

Yeah, there’s no primary banking relationship anymore. You treat, particularly with this sort of mini-app ecosystem, you treat financial services like you treat your apps. What do I need to get this thing done? And oh, there’s a financial service provider I can use for that.

There’s no loyalty to the bank per se anymore. So who’s going to be the biggest? I can’t really tell you. Well, I can.

Ready? It’s going to be MyBank and WeBank. Look, those are the two primary payment methods. So you like it or not, nobody as a digital bank is going to overtake them because they are digital masters.

They’re the first in the market. Everybody already has them. So you’re not going to have XYZ.

There are XYZ digital banks out there. And I’m sure they make money and they’re fine. But they’re never going to overtake the two major digital platforms.

But going back to this whole thing is you don’t care. The bank is simply a place where theoretically the money sits there because I know there’s a number on it. And beyond that, there is no advantage to having ICBC over Bank of China over Shanghai Plutonic Savings.

OK, maybe one might give a 0.1% more or less interest on it. But frankly, you don’t even see. It’s really interesting because I don’t even think about this stuff so often.

You don’t actually see bank battles over interest rates. I’m sure there’s a slight difference. Yeah, it’s funny because when Yui Bao was so successful at garnering all those deposits, when it got to near $300 billion as a deposit pool, the Western commentators were all arguing it’s because of their interest rate.

And that showed a fundamental misunderstanding of what it was, right? And I think that’s a great way to end this conversation, Richard. Thank you for your contribution to the book. It’s highly valued.

The book is out in mid-September, of course, so we’ll be able to celebrate the launch of it together. But what’s next for you in China? Oh, so I’m trying to think of the next book and the next one will likely be stablecoins. But it’ll be a hype-free version of stablecoins, guaranteed to kill the blood of a reader.

Because I actually like stablecoins. I actually do like them. But the hype surrounding them is so insane at this point that it’s not sustainable.

Interesting. Well, we look forward to that, Richard Turin. Thanks for joining us on Breaking Banks and thank you for being a contributing author to Branch Tomorrow.

Welcome back to Breaking Banks. I’m your host, Brett King, and this week we’re doing another deep dive into my new book, Branch Tomorrow. Hope you guys don’t mind that.

And my friend and co-author and a guest on many occasions on Breaking Banks, Paolo Saroni, welcome back. Buongiorno, buonasera a tutti. Buonasera.

So first of all, I noticed today in some of the messaging that we’ve got out there, we’ve assembled quite a good group in terms of the authors. I think everyone that has contributed is in the top 20 fintech influencers, right? Maybe the top 10. Yes, indeed.

It’s a nice group of people that have a lot of experience and exposure to the market, talking to banks and to fintech. It comes from very different geographical places and actually they were very different perspectives. So I like the fact that we could combine them all together and this book was an opportunity to reflect on a common topic and common trend and came out with something which is compelling and unique.

I mean, we wrote it, we read it, it’s a wonderful book and I’m sure that everybody in the audience will be mesmerized when they get a free copy, a real copy, in their hands. Very cool, very cool. So, you know, we dived into a bunch of topics in the book.

Obviously, you know, we’ve discussed this a few times. I want to talk about the European situation specifically, because that’s the chapter that you and Effie did, obviously, but you contributed to other sections of the book, such as the functionally cashless chapter and others. But here’s my question.

We’ve seen fairly clear evidence of this sort of modality shift. This is really the core raison d’etre for the book, right, is that the core of the message is that the way the broad consumer market accesses financial services has changed, that digital onboarding is now the primary way that people choose financial services. And as a result, it’s radically changing the economics of customer acquisition.

And in that environment, you know, you have now Revolut in the EU, that is a 50 million customer bank. I don’t think there’s any doubt that Revolut will be the largest bank by number of customers in 10 years time. I mean, if you don’t agree with that, Paulo, tell me.

But that in itself is a pretty significant change, you know, because Europe’s old banking, right? I mean, the original Medici Bank comes from, you know, Italy, of course, you know, this is a foundational elements of banking. So to have the largest bank in Europe as a player without branches, is that, do you think that’s a good illustration of the changes that are occurring in the European market in respect to branch use? Or is it more that we’re trying to find out where they still fit? Well, the common trend in the book is that everywhere in the world, branches are shrinking in terms of number and what they do. There are differences, however, between Europe or, for example, Brazil, that means for Nubank was easier than for Revolut to scale to 120 million customers because they had them at their disposal.

Europe can be at 250 million citizens place, but they’re all segmented and fragmented in different regulatory environment. Although there may be a more homogeneous bank regulation, in reality, the practices are different. So it’s more complex to scale up the same way.

And that also means that the way the digital economy enforces properties will not be the same. So the configuration will be slightly different in the way the digital economy generates revenues, opportunities for banks, but also in the way these opportunities can be limited by the way consumer access financial services. You said something important.

Clearly, the customer acquisition has been going down and these new banks are proving that that can be done at scale for a lower price. But the problem lays somewhere else. Once you have onboarded your consumer on your digital app or digital bank, how much money can you make with the consumer? So that is where the things become tricky.

You have to diversify. Yes, so you have to figure out in every market it’s not necessarily the same because the scale cannot be the same. So what you can do in Brazil, you cannot do in Germany or across Europe, which makes the task of Revolut a bit more complex compared to the one of Nubank or other markets.

So the point for me is the following. It is true that consumers show the preference to do a lot of banking activities on digital. And of course, banks also had the opportunity to follow those consumers because they also wanted to reduce the cost.

So rationalizing banks was a consequence. But that doesn’t mean that the profitability that banks had in branches 20 years ago moved, quote unquote, on the digital app because it’s more complex on the digital app out of scale to do basically a good business and a profitable business. So the essence here is that the fact that they’re shifting is a necessity, but it’s not a free lunch.

So still banks have to do a lot in order to understand how to really engage the consumer once they are now coming through the branches or they have to transform what they do with the branches in a way that is synchronous with what the consumers can do on the digital app. And I can give you an example for this. I was talking to a client in the Nordics a couple of months ago, and Nordics is definitely a cashless society, one of the most digital societies in Europe.

So if you think about digital banking success, you might think of the Nordics because a lot of elements on the consumer side that play also in your favor. So what a client told me is that when they started the journey and started moving the clients on digital as the clients wanted to go digital, initially it was complicated because the clients didn’t necessarily want to do all the banks thought that they would want to do on the digital. But in the end, the client started engaging on the digital app, so they realized that they had to start playing catch up.

So at first they were a bit too advanced, and then they realized that they had to catch up and innovate much faster. But they realized that as they lost the touchpoint with the client in the branch, they were not capable of reaching out to customers, being effective with marketing, with propositions the way they were before the clients were on digital. And in fact, I called this phase in my IBM research, digitalization to core.

So basically the time they primarily thought of moving what they had in a branch on digital, so they had to invest in infrastructure. So shall we use cloud? Can we have APIs in order to serve that interaction out of the branching, out of the on-prem into a foreign territory? But as they learned that they couldn’t talk to the client in the same way they were talking in the branch, they had to learn how to invest in machine learning. So there’s a second phase called personalization.

So they thought, OK, I need to understand the client on the app, I need to make the journey more seamless on the app, and I need to reach out with the notifications in a way that when I understand that the clients can be inclined to look at a certain proposition, I can be there and the client can basically consume the proposition that creates a transaction on the platform. Though that remains more constrained on, I would say, the entry point on the economics, there is payments, like credit cards also, right, and other aspects in deposits or short-term lending. What is happening now, they’re telling me, is that as now they are pressing in transforming the relationship with the client through conversational banking using Generative AI, so it’s all about how do I now engage the client on the, let’s say, the chatbot, to use a simplified term, but on a conversational interface, instead of having the client navigate through the app to find what they need.

But the problem with that is that once you have a conversation with a client using Generative AI and the conversation goes to the end, the client is out. So they’re like, how can I expose my notifications to the client and still engage the client in terms of consuming financial services with me instead of going somewhere else? So in essence, every time the client moves to, you know, a higher type of interaction that is powered by the digital economy, the bank risks to lose the client contact and therefore lose their profitability because they can generate revenues. So that means they have to innovate a lot more to follow their growth.

That’s a complex element. It is, but I think the part of the problem here is that the way Gen Z’s and Gen Y’s, the way they consume financial services today is like the way they consume content and apps. You know, they don’t have only one platform that they go to.

The concept of a primary financial institution for a Gen Z would probably be alien to them. So I don’t think, I mean, I do think if their father and mother took them along to the bank and introduced them to the banking system in that way, but I think these days, you know, kids are a lot more functional. It’s like, oh, I need to buy a car.

So I need to do this. You know, where do I get the funding for that? Can I give you a lesson back? So I was, I’ll give you an example with one of the top four banks in Toronto last year, and they asked me to address a digital transformation to a larger audience made of 400 younger guys that they just got in the intake to the bank. So it’s like people that were between 23, 24 years old, basically.

Okay. So digitally inclined, young guys, very dynamic. And I showed them a question that I addressed to 12,000 consumers the year before about what is the primary thing that inclines them to define a bank like their primary bank, so that if they have a relationship, they might move into another one, right? Or they prefer this one compared to an alternative.

And they have a list of things there. And 98% of people, 98% of people said good customer services. So like, I know it’s a question, but that means that the limit that they’re finding on the digital app is still a limit for them.

It’s not just the fact that they do it. But that’s how they assess customer service, right? It’s the utility that’s provided through the app. They don’t necessarily, they’re not talking about human service, right? Because… Well, yes and no again, because clearly at the time you didn’t have the capabilities of Generative AI to engage clients with customer services.

Now we see that mounting more and more. But the point is that they needed a point of contact for a conversation, which is a resolution of a problem or, you know, something else, another example. In a survey across industries, we looked at all the firms that is a survey of three months ago that use Generative AI to power our customer services.

And we asked them then if due to the usage of Generative AI, they increased the Net Promoter Score. It’s not an easy question because the Net Promoter Score has different elements, right? Many elements. So now only 14% of the institutions said that the Net Promoter Score increased after they transformed customer services with more automation with Generative AI.

So we had to understand that. So I went to the banks and quite a number of banks told me, well, look, there are some parts of customer services that we transform with Generative AI, and we see that the client is handled from the beginning to the end perfectly. So the conversation is nice.

There’s no hallucination. There’s no bias. It’s very good.

And the client resolves in due time the problem that they needed to resolve through customer services. Yet, we received many emails saying, why do I speak to a computer instead of a person? And that was across the whole population, not just the old people, but also the young people. So that means that… But I think we’re going to get to the point conversationally.

It is going, but banks need to calibrate carefully the capability to create and support the activity of the customers in a way, basically, they can get the comfort. What some banks are doing, for example, is if they have any human interaction with the client, for example, they showcase that they use the same channel using Generative AI power capability to resolve the problem. But Paolo, let me give you two pushbacks to this.

Let me give you two pushbacks to this. The first is a fairly simple one, which I like, which is a quote from Henry Ma, who is the CIO of WeBank, the biggest digital bank in the world, 430 million customers. And they’ve shifted 98% of their customer support now to AI.

And this is what he says about the need to speak to a human. He says, if you need to speak to a human because something’s gone wrong, that’s actually a design failure rather than a good thing. Right.

You know, so, I mean, I think that’s the point is traditional banks, you often need that because the processes and the policies that are embedded, you know, they’re not very flexible. And as problems arrive, you know, arise, it’s difficult to get a resolution. That’s the first point.

Second point is that you won’t be able to tell that you’re speaking to a human and not an AI in a very short period of time. So maybe this discussion is a moot point because, you know, I mean, I will defy anyone in five years time to be able to tell me if they’re speaking into a real human on a telephone or not. Okay.

But, well, the ontologically, you might want to say that, but that may be a different story. Let’s go back to the first comment you made. It’s very right.

But that means it’s not that you can lift and shift the bank as it is, put it on digital, power it up with generative AI and make it work. You need to redesign that bank. And to redesign the bank means, first of all, they need to redesign it for simplicity because a lot of banking processes and products are very complex and they will create a lot of debt for certain reasons, but they don’t confirm anymore with the way things are to be consumed on digital.

So if you do not have a cleaner process and you put it up there, that means that there are a lot of things that can go wrong. They don’t need to discuss with a client. And for those things, human is needed more than the conversation with generative AI for a set of reasons.

But it also tells you that people are inclined to deal with technology for the simpler things. The moment they go a bit off and it can also be developed, they will need to speak to a human because otherwise they cannot resolve it. So that goes, quote unquote, with everything that comes with the digital interfaces and banking, because as you need to move beyond the easy things like the problem when I access my money, when I look my transactions, when I don’t know if the money is being wired or not, and you get into investment management, insurance more complex, that becomes more complicated because you elevate, in any case, the tone of the discussion.

So that requires you to be more deliberate in the way that you propose the digital solution by creating the habits in the client. I can give you another example. That’s okay.

I think that’s fine. I think that’s fine. Yeah.

But that is an important element. Otherwise, banks don’t get the return investment and they don’t understand why. They need to understand the real reason for that.

The second example I want to give you is this one. So there is this bank that thought of using conversations to allow people to send money around. So clearly that’s powerful.

But what happens is that they realize that a lot of clients walked out of that. So sort of opposed, you know, and send them feedback that was not positive. So they didn’t understand why.

And they were saying, like, maybe we need to call that chatbot with a name of a female instead of a male to make it more attractive or reassuring. And I said, that’s not the point. The point I told them is that on digital, the real economic unit is not individual, but it’s a center of affection or family, the way you want to call it.

So you need to help the client to build that habit, to wire the money differently. Because what the client was saying is that, who’s that agent, this agent that is touching my money? Can it be that once I give permission, something happens that I’m not in control anymore? It’s like 20 years ago, when we started paying with a credit card or digital, we didn’t have the habit. And then we learned the habit.

So those that will be capable of identifying how to build those habits are those that are winning. For example, I said, don’t position your opportunity outright, like for everybody, for every type of payment. Just position to the client in a space where they have more comfort.

The moment the client is used to send the money to their children, their friends, right? Then they can be more inclined to use that habit beyond that. Okay. I think we’re getting stuck in the weeds Paolo.

This is the thing is, Revolut has 50 million customers and those 50 million customers have chosen Revolut over that traditional form of customer service you’re saying. So the numbers are fairly convincing that there is been a behavioral shift. Yes, I think there’s still a role for some time for that human connection, but we’re seeing 350 digital interactions for every one human interaction today in Western developed markets.

So clearly most people are getting more comfortable with digital, but here’s the concerning element is that we are going to see some issues arising with this digitization for financial inclusion. So we had one, I can’t remember the geographical region in Italy, but it’s been quite affected by the loss of branches there. Calabria.

Because yeah, Calabria. And thank you. And we are seeing the same thing in the UK right now.

So the proposal in the UK has been to use post offices as post office bank bases. But the key problem we have with this is as digital is becoming more and more successful and the cost of acquisition is plummeting through digital, then the economics of the branch get under more and more pressure because acquisition is done digitally and branches just become a service channel as you pointed out. So they’re just a cost.

They’re not actually generating revenue in the same way. That’s why we see banks getting rid of real estate. But we have this financial inclusion problem.

You can’t compel commercial organizations to keep banks open. So how does government policy decrease the stress of financial exclusion because of this digitization? So let’s make a step back and then forward again. So the problem of economics is the same on digital as well as on the branches.

Because we said at the very beginning, if you cannot scale to tens or hundred million customers, given the type of activities that people are inclined to do on digital, you cannot have a good economy model. So any bank that remains confined in Italy, in Spain, in France and do a total digital bank will have an issue. So they need to figure out how to scale cross-border.

That’s why it’s more complicated in Europe because there are still divisions compared to a large country like Brazil that has the same regulation, the same habits. So once you say that, the point is, which is the model that needs to support either digital or the branch? Branches clearly, in places like core Europe, have a harder time of justifying the cost. And that is particularly due to the fact that most of the products either moved to the digital app or they don’t have marginality like interest rate margins because interest rates are very negative.

So that means that other banks transform the branch into something else for the customers or they cannot justify it. Now, when it comes to the inclusion, it happens that there’s a lot of people, especially elderly people, that will not be a special part of the banking client population that consume higher margin financial services. And therefore they need instead a human relationship and they get trapped in the middle.

And that’s what we saw happening. So how basically the question is, you keep on remaining closer to the clients as the habits change and it is not instantaneous. And that’s definitely an important element that banks also have to consider.

I mean, how do you, banks have to consider it, but, you know, are they going to get tax breaks from the government to support? Because you’re asking, we’re asking banks to support social infrastructure. I believe that the regulators and the policymakers need to understand that and facilitate that in a way that the economics of the branches, when they remain open, right, they justify that effort until the shift basically is fulfilled. I mean, I don’t know what the solution is.

Yeah, no, it’s not happening as now, but, you know, I mean, look, the other solution is education. You know, we know silver surfers are the fastest growing segment on, on, on, you know, mobile banking right now. So, no, but there is evidence that it’s changing.

In this case, for example, we’re talking about pensioners. Now what happened in the UK happened in Italy as well, Poste Italiane is the largest distributor of financial services in Italy. And the reason is because a lot of pensioners, they have their money collected by Poste Italiane that has an account available for them.

Right. And then through that, they allow them to invest in Italian treasuries, right. So the BTPs, for example, so, so the same thing happens.

So the Poste became an entry point to maintain financial inclusion in financial services, while the banks had to retrench from those territories because for them was more complex to basically justify the cost. In between, you have all the local banks, the small banks, regional banks, because what happens is also consolidation. So part of the story that dictated the reduction of branch is the fact that a lot of banks have to consolidate themselves.

And the reason is because if you’re a small bank and it cannot afford the cost of getting a sales force that discusses, for example, investment management, because it’s more specialized, that the branch itself does not generate the value out of the basic transactions because they’re all moved to digital. So the bigger banks will be able to mix and match the model when they transform the branches in terms of the relationship with what they sell, while the app gets more and more business, you know, as people get more inclined and comfortable in their conversation as generative AI becomes more powerful and so forth. The small banks basically are strangled.

And I think this is going to happen anytime soon in the US. AI, I think is, I mean, AI, as it becomes more automated, our payments become more automated and so forth. You know, the fact is you can’t sell to a human anymore because they’re just going to let their AI agent do the work for them.

Right. So, I mean, how many banks have the capability to market to a genetic AI, you know, like as an example. Right.

So it’s a very different competency. Yeah, but it’s a different story. I don’t believe.

And I’m talking about the condition by which the future can be realized. So the fact that it can create some automation doesn’t mean that that automation can be effectively applied and trusted by everybody to touch our money and to move money around. Also, because of the amount of vulnerabilities around that is increasing exponentially.

Yeah, but you could say the same for credit cards when we started using credit cards on e-commerce. And today, no one even thinks about that. Right.

No, it’s different because there’s a higher level of control. In fact, it goes again. I think it’s a generational shift.

This is interesting because this is the debate we had in the book, right? The real client, I told you, what happened to the client when their customer said, OK, hold on a second, why do you now allow me to have an agent I talk to that moves money around? Is that when AI eliminates uncertainty from the conversation, from the operations, from the system, everybody embarks with more comfort. But in this case, AI added an element of uncertainty because the guy didn’t know what it meant. They don’t know who was really managing the tool that was allowed to move the money around.

So they basically they walked out. And so we need to be very careful because when it’s not transparent and you don’t get a sense of control, you basically walk out. Now, what we learned with a credit card is that we had that element of control anyway.

Of course, people can steal your pin, people. But then we learned that we have new methods to use and protect the password and so on and so forth. But still, you have a perception of control and you know that something happens is one occurrence and you can call back basically your card or your bank and you are sure to get the money back.

But if that is completely decomposed, that increases the level of uncertainty that people have to deal with. So there’s a real problem in terms of seeing that happening, mass market, in terms of the full automation process. And you can go beyond that in terms of the problem of building intentionality inside of the IAM to control that.

But that doesn’t mean that these capabilities are not growing. Right. It’s just that it takes time before everything is put in place in a way that that can happen.

But do you think they can grow enough to maintain branches at some point? What’s the point where we get to a minimum number of branches and the regulator and the banks decide this is it, this is the minimum number of required branches? What happens is that the products that the banks will sell, the product set will be very different going forward because it will not be able to maintain that number of branches out there. So either they transform that into a network of individual entrepreneurs like advisory processes or they will not be able to. But that means they need to be ready to change the portfolio of products.

The example is the Netherlands has one of the lowest bank penetration in Europe. But in the Netherlands something has happened. It happened that the regulation for investment management and wealth management, the MIFI2, was implemented more thoroughly.

That means that the kickbacks that banks get when funds are sold to consumers were eliminated. So they cannot basically be imposed. So they change completely the economics of the process of selling people to people through the branch.

So the bank didn’t have the capability to justify the branch. So the network of personal advisors grew up and they have to strike a different deal in terms of dealing with the partner process. So what is changing is fundamentally the process of engaging the client and basically doing transactions with the client.

And if you don’t have economics that are sustainable, the branch definitely will not be sustainable. Banks in Germany also reached out to the regulators saying, hey, if you basically ban the kickbacks, we will have to close the branches because that’s what we do, is advisory. In reality, maybe it’s not more advisory, it’s more brokerage than advisory.

But everybody is basically seeing that the real justification of the branch in a digital world is to cater that relationship where people are not yet able to sell that themselves. I mean, I think, you know, advisory relationship and so forth, I think it’s also going to be heavily affected by AI. But anyway, let’s wrap because we’ve run out of time, Paolo.

But just to give a brief summary for you, what do you take away from this book as a highlight, you know, that you would pass on to other operators and bank executives in the world that you make? Digital is growing and branches are diminishing. That is a fact. And I take away that this is not a free lunch.

Just being on digital doesn’t mean that you can make your hands meet and your business model will fly. So banks need to carefully think about how they shift from a branch-centric model to a digital-centric model, because the bank has to be very different. In the end, I do believe that branches will remain or relationships, but it will be different compared to what we see today, because we’ll be transformed in terms of the content and the quality.

And then, God knows, as technology keeps on growing, right, so they will eat more and more space in front of the consumers. But the portfolio of financial products that clients can consume will be totally different tomorrow compared to today to comply with a more automated, AI-oriented digital world. Well, I get that.

That sounds, makes sense to me. Paolo, thank you for your contributions on the book. Thanks for joining us today.

If you’re interested in finding out more about branch tomorrow, go to branchtomorrow.com. It comes out on 15th of September, initially on Kindle, then in a softcover version. We can do hardcover as well for large orders. Check it out, and thanks for joining the conversation.

You’re listening to Breaking Banks. My thanks to Paolo Cerrone for joining us this week, and we’ll see you on the next episode of Breaking Banks.