Chapter 1: Getting Back to First Principles

Navigating the Future of Banking with the Institute of Bankers in South Africa

Welcome to the “Future of Banking” - a podcast by the Institute of Bankers in South Africa where we delve into the evolving world of banking and technology. Today we are diving into Brett King’s groundbreaking book, Bank 4.0, and we start with chapter one titled "Getting Back to First Principles. "

So, what exactly is first principles thinking? Brett King opens the chapter with a powerful quote from Mike Tyson: "Everybody has a plan until they get punched in the mouth. " This sets the tone for understanding that in the fast-paced world of banking, relying on traditional methods can often lead to unexpected challenges.

First principles thinking is about breaking down complex problems into their most fundamental parts. Instead of iterating on existing banking models, we should be asking ourselves: "If we were to design a bank from scratch today, given the technology we have, how would it look? "

King compares the evolution of banking to the advancements in rocket science. He discusses how the space race, particularly the efforts of figures like Elon Musk, illustrates the power of starting from scratch. Instead of building upon outdated designs, Musk applies first principles thinking to create revolutionary technologies.

This historical context is crucial. It reminds us that the banking system we have today is a direct descendant of models created centuries ago. For instance, the Medici family’s banking structure and the concept of paper currency are all iterations of much older systems.

When we apply first principles to banking, we must consider what a bank fundamentally does. According to King, traditional banks provide three core utilities:

1. The ability to safely store money.

2. The ability to transfer funds securely.

3. The ability to borrow money when needed.

These utilities are what customers truly seek, rather than specific products or services. If we redesign banking with these core utilities in mind, we can eliminate unnecessary friction and create a more seamless experience.

King emphasizes that the future of banking lies in creating experiences that are embedded in our daily lives. He introduces the concept of the "semantic bank, " which is always present, proactive, and aware of our needs. Imagine a banking system that understands your context and provides solutions without you having to ask.

This is a significant shift from traditional banking practices where customers have to approach the bank for services. Instead, the bank should come to the customer, offering relevant advice and support in real-time.

Now, let's talk about the implications for traditional banks. King argues that if banks continue to retrofit old systems and processes onto new technology, they risk becoming obsolete. The successful banks of the future will be those that embrace first principles thinking and prioritize technology over traditional banking practices.

He poses a critical question: If we were to start fresh today, would we even require physical branches or paper-based processes? The answer, as King suggests, is a resounding no. The real challenge for banks is to rethink their entire approach and adapt to the world where technology is pervasive and embedded.

Chapter 1 of Bank 4.0 serves as a powerful reminder that innovation in banking must begin with first principles thinking. By stripping away outdated practices and focusing on the fundamental needs of customers, we can create a banking experience that is efficient, seamless, and truly customer-centric.