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At the MIT Platform Strategy Summit, 2019 Geoffrey Parker (Dartmouth and MIT) and Co-Author of The Platform Revolution spoke with Barclays CEO Jes Staley as he described the moment he understood the power of platform business models and how the ‘The Platform Revolution’ may one day be regarded as having helped save the bank itself.
The key: looking at “our scale and scope – including eight million customers plus merchants – as our biggest assets,” rather than as liabilities.
All right, so it is my very distinct pleasure to welcome to the stage Jes Staley. Jes joined Barclays Bank as the CEO at the end of 2015, after you know a long and distinguished career with JP Morgan and is here at home I believe in New England. And so with that, please welcome Jes.
It’s an honour to be here. I grew up running around as a little kid on the campus of MIT for personal reasons and so it’s a real honour to be invited Geoff to be here.
Thank you so much for being with us. So Barclays has been operating since 1690, so when we think about an incumbent firm, you know, that would perhaps be one of the iconic ones and would it be fair to say that the bank has seen a sort of more change in the past thirty years or even perhaps the last five than the previous 300 and if you agree with that proposition, how do you and it is you manage to prepare an organization used to a slower clock speed if you will or a slower rate of change for such acceleration?
The answer has to be yes, I think the pace of change is it’s almost bewildering right now. Barclays has been generally fairly front footed in terms of innovation; we were the first bank in the world to use an ATM machine for instance. But I guess the way I would respond to it is I’ve been in finance now for 40 years. I don’t think I’ve ever been as sort of concerned by what I don’t know about banking today as I’ve ever been over those 40 years.
And also when I think about this industry, I give a little bit of attention to what’s going on at Lloyds, which is our big competitor in the UK and a little bit of attention what’s going on at JP Morgan Chase. We give an enormous amount of attention as to what’s going on with Amazon, and we give an enormous amount of attention with what’s going on with a company called Stripe. And all of a sudden, the competitive and offering challenges that Barclays face are so beyond what would hopefully be the narrower realm of banking.
And you know just a couple of weeks ago, you have a company called Facebook comes up, they want to create a cryptocurrency and they want to base it in Switzerland. And I’m still trying to figure out what does that actually mean, so there’s a tremendous uncertainty and then the pace of change that we have to get Barclays set up to execute is against something that we’ve never faced before.
So, let’s talk a little bit about some of the pressures, because you’ve sort of publicly announced in forums and have some management around this idea of an ambitious agenda around building platforms. Why? Essentially what are some of the competitive pressures that you’re seeing, and you’ve named a few, but how are you actually feeling that in the day-to-day operations of the bank? Are they starting to show up in the financials or are these more the gathering storm clouds you know over the horizon?
You’ve heard or you’re part of this storyline as you know so let me, we basically break the bank down into its wholesale part i.e. dealing with major corporations and whatnot and then where we deal with consumers, particularly in the UK where we have an enormous footprint. The gentleman, Ashok Vaswani, who is running our consumer business in the UK, has been thinking about these issues that you were just talking about for quite some time.
And trying to get the bank to accelerate its innovation to deal with what’s going on with technology and in digitizing consumer finance and I didn’t get it. And for well over a year he kept trying to push me to understand what the enormous opportunity that Barclays has around a platform and the enormous risk that Barclays has if we don’t engage in it and understand it.
And I again being in banking for a long time and just didn’t understand the issues that he was dealing with and I was about to go on vacation a little over a year ago and he’s okay, you know you’re not hearing me, so here’s a book you have to read or your holiday and it was “Platform Revolution”.
So, I got on the aeroplane with my wife and I started reading “Platform Revolution” and by the time I landed, I was texting frantically Ashok saying “What does this mean? What does this mean? What does this mean? And your book completely changed the direction that I was thinking about viz-a-viz Barclays and ever since the issues that that you’ve raised in your book are our principal focuses of the executive team of Barclays.
And in short, I went from thinking that our biggest risk in the bank is basically extending unsecured credit to UK consumers. And because of that, what we thought we would do is try to diversify our way outside of the UK actually. When you finally or when I finally understood I think enough of what a platform could do to transform Barclays, I also didn’t realize the scale and scope of what we have in the United Kingdom is our biggest asset.
And so, what we are trying to do in Barclays is to build a platform on the back of our mobile banking app, which is the most widely used mobile banking app in the UK. We have eight million consumers growing 80,000 consumers every month, but then we also have the biggest platform of dealing with merchants and small businesses.
And if we could bring the consumers of the UK together with the merchants and the small businesses in the UK together and then the businesses together with the businesses, we could build a platform and if we’re intelligent enough a network effect, and you talk about the use of data, we think we might have more data than any other entity in the United Kingdom.
And where we don’t have data that’s our own – two things we’re doing: one – we are partnering with people like Salesforce. We signed the largest contract Salesforce has ever signed in Europe to get information about what our consumer clients are thinking about doing, as opposed to what they’ve done, which we already have.
And then you mentioned a regulation which is a very big issue for us but you mentioned PSD2 – another thing that changed on the back of reading your book Geoff was I was always very worried about PSD2 – here we are one of the three large banks in the UK, we have all this data about what you do, where you spend it, how you spend it, you know, where do you live, what your marital status [is], do you have a job, do you… all this data and now with PSD2, you can come in and if you get my consumer clients approval, I have to share with you all of their data that rests with Barclays for the last three years.
And it was really the regulator’s attempt to try to break down the strength of these three largest banks and so whenever I thought about PSD2. well you know, how do we defend ourselves as every FinTech company and every challenger bank and can get all the data about our consumers, that’s our treasures is that data.
What’s happened because of the platform is I think it’s the inverse PST – is going to be a huge win for us, because we have the client base and we have the scale. In fact, we were the first bank to basically use PSD2 in APIs to get data from other banks.
So to give you that change in the value proposition, five years ago, the value proposition of the bank was to get an eighteen-year-old guy or gal to walk into a branch, open a checking account and then for the rest of the lives manage their finance around that checking account. The average consumer in the UK walks into one of our branches once every six weeks.
When they walk in, we really don’t know who they are, we’re not quite sure what they want, we don’t know what they’ve done recently until they introduce themselves and they talked to a teller. And if you go back to twenty years ago, basically a hundred per cent of the transactions we did with customers happened in a branch with a teller. Today it’s less than 1%.
So, the buyer proposition for us now is we have eight million consumers, they go on the Barclay’s mobile banking app on average every day. So, we’ve gone from walking into a branch once every six weeks to walking into Barclays digitally every single day. When they walk into Barclays digitally every single day, we know exactly who you are, we know exactly what you’ve done, we have an enormous amount of data and we’re pretty sure we know what you want to do today.
And then we can customize and engage with you immediately. What PSD2 does is we were the first bank that basically has two APIs, you can allow us to put on the Barclays mobile banking app your checking account at Lloyds, your checking account of Metro Bank, your checking account at the Royal Bank of Scotland and we can update it three times a day. Actually now, you could go into your Barclays mobile banking app and you can make a payment from your Lloyds account.
So, I’ll send the value proposition: I don’t really care where you have your checking account now. What I care is you manage your finances through our mobile app and it’s an utter reversal and change of the value proposition of the bank.
Yeah, that’s about as good a firm inversion story as I think Marshall could possibly have told. So let’s drill down a little bit on two things: one is you said we’re pretty sure that you know what somebody is going to want when they fire up the app. So, you have some idea of sort of where they are in their journey of wanting to purchase something, wanting to check accounts, wanting to move some money around, invest. What capabilities have you brought to bear that makes that possible? Because that doesn’t happen by accident, that took a fair bit of investment, I would imagine.
On one of our boards, we have someone who’s an extremely talented woman in technology and she and I actually spent a half a day earlier this week talking about this. We have an enormous execution challenge because if you sit back and think of all the things that we can do with our customer data, all the things that we can do connecting customers with merchants and merchants with customers, the data analytic challenge of Barclays now is just overwhelming and understanding where we are in the journey and what part of each puzzle has to be figured out first is also overwhelming.
Then we do have one big challenge given that roughly a third of the GDP of the United Kingdom goes through our payment systems every day. One of the things that we can’t allow, and the regulators can’t allow, we can’t fail. If you’re a start-up fintech company and something breaks in the morning, who cares? If we break in the morning, we can bring the British economy down. So, you have to match an incredible pressure to innovate. I think the biggest online banking competitor in the UK for us now is Monzo.
They download a new version of their banking app two to three times a week. This time last year we could download a new version of our banking app at best without breaking the whole system once a month. If you think about that, we are toast if our competitor can download a whole new service two or three times a week and we’re worried about bringing down the UK economy if we download a new one once a month.
We now have got it down to we’re doing it once a week and we feel pretty confident that we’re not going to bring down the British economy. So, there’s this balance of executing at pace in a very broad way, but also we have to keep the system resilient, safe. We have to deal with cybersecurity which has taken enormous dimensions.
Fraud, the other thing about your networks and whatnot, it is a field day for fraud. And so how do we protect our consumers and protect ourselves from fraud? All of the different issues are mind-blowing. But then there’s a new law in the UK about authentication, so everyone’s worried about fraud.
So, if I make a payment or I buy something north of 30 pounds (GBP), I basically have to prove three ways who I am. But there’s a footnote to it: if I use a payment channel which has a very low level of fraud in that channel, I can take that 30 pounds and move it up to 300. One of the only platforms in the UK that meets that low fraud threshold is Barclays.
So, we can go to all these merchants, anyone who sells something north of 30 pounds and what they want to do is they want to make the client experience really easy. I go on a Pinterest site, I see a dress I want to buy, I click on it, one authentication and the dress is on its way. We have a very unique capability to bring this authentication to the merchant who sells that dress.
And one of the big things in the UK is loyalty cards. There are millions and millions and millions of loyalty cards and what they do is they sit in drawers. And no one ever uses them, so there’s a whole avenue and we’ve teamed up with a fintech company and essentially what we want to do is just utterly change the experience of a loyalty card by connecting it with the mobile banking app.
You talked about Uber. One of the big areas of development for us right now is Uber in the UK. In many ways, Uber is a unique payment system and so there’s a lot that we can do by bringing our network, combine it with the Uber network and the execution of all of this is daunting and again for someone who spent his life with assets and liabilities and loans and securities, this is an utterly new world.
So, I’m reeling a little bit, because that’s really good picture setting and there are a couple of things I want to probe further on and it’s around recognition that PSD2 is a way to make partners out of organizations that were previously competitors. And the other is this notion of how do you change the organization?
So, I’ll go back to the beginning, which is you’ve got all this change but now you have a strategy, it’s very different than the 40 years of the past. What sorts of changes are you thinking about or what have you already done to try to get the organisation ready for that? Because every time I work with a company, there are antibodies to change. There’s incredible channel conflict, there’s sort of protection of resources, there’s concern over maintaining existing revenue streams. How do you balance those interests in the need to protect the revenue streams that fund the business while also creating the paths for the future?
So I think Geoff if I could give a clear enough answer, I would probably mention three things. One is we have tried to pivot the bank from being product-centric. So we thought of the bank as we provide credit cards, we provide mortgages, we provide savings accounts, we give investment advice, we underwrite securities for companies. So we always thought about these product slices.
And what we’re trying to do now is completely get away from that and just think about the customer or the consumer and become completely consumer and customer-focused. So what are we doing with the consumer? It’s as simple as if you are a consumer in the UK and you banked broadly with Barclays and you got into trouble, you fell behind in your mortgage, we had a collections department for mortgages.
So, the collections department would be calling you up saying “you got to pay us back”. We have a collections department for the credit card, so the credit card collection department would be calling up “you’ve got to pay your credit card back”. We have a collection department for overdrafts in your checking account. None of them talks to each other.
So God forbid if you got into financial difficulty in banking with Barclays, you’d be bombarded! And we had no idea of the picture of a customer. We knew what the product and mortgages looked like, the credit card etc, but we didn’t have the view of the customer. Now as we collect data and use data and manage the services of the bank, the vision is: “what’s the customer engaging with Barclays and what does that look like?” as opposed to the product. That’s the first one.
The second one which is one of the biggest organizational shifts I’ve ever seen in an institution of our size do, again we were very siloed by products. We made it customer-focused as opposed to products, but then we utterly changed the organizational structure as well. There are 85,000 employees at Barclays.
And they were all driven by the credit card business to consumer banking business, a small banking business, etc. We turned the whole organization on its side, and we moved 55,000 out of the 85,000 away from servicing a product area to working in what we call a transaction cycle. And there are 29 transaction cycles that are part of a service company of 55 out of the 85,000 people.
So, one of the transaction cycles, which are basically processes that go across all of our consumers, so one of the transaction cycle is collections. So now we run collections as a transaction cycle in a service company, where the credit card people draw from and the mortgage people draw from etc.
And again that’s what allows us to have a customer focus because now it’s this service company with these transaction cycles. So fraud is a transaction cycle, cybersecurity is a transaction cycle, cuts across the entire bank.
And then the third one I would say which is also completely novel is almost everyone we compete with now is a partner, and almost every partner we have is a competitor. We were the first major bank to wholesale start moving data to the cloud. The cloud we’re using right now is AWS is Amazon and as I said I think Amazon may be the biggest competitor for us in in the UK.
So we love what Amazon is providing us, we are going to be a very big client of theirs and they scare me, and I think we probably scare them. You take someone like Stripe, they give me a lot of concern in the UK. Someday make a lot of sense that we’re a partner with them in the US.
And so all these companies are both leveraging off of each other in trying to take a little bit of each other’s turf. And so it’s a very odd relationship, like when I think of my old firm JP Morgan Chase, Jamie who I like a lot, he’s sort of the competitor. In this case, the people at Amazon, you send them birthday cards and stuff like that, because you need them, but don’t underestimate the competitive threat that they pose!
So customer versus product completely changed how the organization is run in this whole dynamic partnering and competing with people in this ecosystem to try to build what would be our most effective platform.
I’m really glad that you zeroed in on sort of the big tech because that’s clearly as you say a frenemy because they’re providing this low-cost infrastructure, which makes sense to use and lots of access, but also have the ability to enter markets.
That’s when this whole issue around regulation is such a very big deal because we are massively regulated. Amazon’s not. I think it’s interesting what Facebook has done, because if you want to get the interest of a regulator talk about Facebook cryptocurrencies in Switzerland! I think the regulatory response to both fintech and large tech moving into the payment space at the speed that they are, it’ll be fascinating to see the regulatory response to that.
So we’ve talked primarily about Europe, the UK and the US, but of course, some of the biggest firms on Planet Earth have emerged in China. So, a couple of weeks ago I was in Hangzhou at a conference and of course, Alibaba was front and centre. What do you see as the contested space that’s likely to emerge, in particular things like payments? How do you protect that? How do you partner – what’s over the horizon on that?
If you’re a banker and you want to get really scared, you go to China, because the big tech companies in China have basically really relegated the banking industry to irrelevance. So there is the second-largest economy in the world is a great example of what could happen to Barclays if we don’t adapt to this pace of change, particularly around payments. So we go to China fairly often to learn what they are doing and to see what potentially might happen and how might Barclays respond to that real-time in the UK or in the US.
The other country that’s mentioned which is also very advanced is India. So it is fascinating that the two most populous countries in in the world are to a large degree the most advanced countries around using technology in the payment space. And there’s a very big lesson to that. I go back the other way in terms of the regulatory issue. I think countries are going to be very concerned about protecting their data and so I don’t really worry about the Chinese tech companies coming into the UK, because that’s probably in some ways more of a challenge then SAP coming into the UK, for instance.
But no, these emerging market countries are these large populations, how they’ve been able to use these networks to basically take over the payment space. You don’t see Visa or MasterCard in China, so I think you know if you’re Visa or MasterCard and you live on the basis of a global network for confirming payments and in this second-largest economy in the world, you effectively have no footprint. So that’s the dynamic that’s going on in the lesson that we need to learn from looking at countries like China and India.
But when I look at the UK from having the merchant acquire relationships where a third of all merchandise goes through our payment pipes with having eight million consumers, you put those two together and what you can create is quite extraordinary. Then for us in the US, our major business here is what’s called co-brand cards, we’re the co-brand credit card for Uber, for American Airlines, for the NFL. Here will be a disruptor. We don’t have the waterfront that we have in the UK. We have the footprint of these partnerships with people like Uber, Apple and American Airlines. What can we do to use technology to disrupt the financial system in the US given what we learn and know from the UK?
So we have time for a couple of questions, and some have come in and I’m going to pick and choose. so we’ve talked a lot about sort of the platforms that you’ve stood up to face the consumer side, not so much on the wholesale side or the enterprise side, and if you could comment a little bit about how some of those strategies might or are already playing out.
Where it’s beginning to play out for sure is the gig economy has an enormous potential for us, small businesses connecting the large businesses has enormous potential for us. We’ve created a business-to-business payment mechanism through a virtual credit card. It’s not fiscal ones but you can you fascinating things with the receivable and payment system between an airline and the people who sell it jet fuel. You can do all sorts of interesting things around managing that payment flows which use our payment pipes and use virtual credit cards which is a new processes that we’ve laid out.
Then also you know the business-to-business is us to those businesses, you know one of the things that we’re launching as we speak when you go online and you buy something or you drag it into the cart and you press a check out what I’ll say is do you have an account, do you want to open an account? And you say I want to open an account and what pops down are more fields that you have to fill out, your name, your address, your checking account number, where you live, your passwords and you know all these sort of things. In sixty-seven per cent of the time, people give up the purchase because they don’t want to fill out the fields.
One of the biggest things we want to do is we want to combine with those merchants so you go online to buy a Microsoft laptop and you go to open an account, they’ll say “do you want to have Barclays help you open an account?” and we can take that from twenty fields down to three. And if we can move that dropout rate from sixty-seven per cent to thirty-seven per cent, think of the economic benefit that we can bring to Microsoft.
So the whole business-to-business side as well but I still go back and feel it is much more B2C because one of those interesting things that I think is happening through technology is businesses are connecting more directly to their consumer. So if you think about selling Coca-Cola, what really mattered was: “did I have a good relationship with the store to get my Coca-Cola in the right shelf space to maximize sales?” Now it really is iCoca-Cola can connect because I’ve got the data and the ability to connect with the person who’s drinking my Coca-Cola and I can start connecting directly with them and if we can be a participant in that relationship, it’s massive.
And so you go back to the co-branding thing, what we were talking with American Airlines about what we can do with American Airlines through their applications and our applications to directly reach their consumers and widen out the offering of American Airlines, the possibilities just keep growing and growing. The issue is do we have the engineering expertise and the managerial approach to execute and to totally change the nature of Barclays.
And so, I’m going to close on a question that came in that really speaks to that. So the question was around the allocation of your internal capital if you will and I would then extend that to say what are the metrics by which you measure your own success toward these and how do you deal with the analyst community? If you’re doing things and starting to generate value in ways that are completely non-traditional, that’s got to be a puzzle of messaging with the investor base.
Before I answer them, I also just want to end and to thank you Geoff and all that goes on here, because it was your book that maybe someday when another book is written may have helped save Barclays.
I can’t beat that!
We’re trying to get another 328 years! What scares me about one of the charts that you put up there is, and we’ve tried, I don’t think Barclays could afford to lose money for the next six years to build out our platform. In fact, under huge pressure to make money every quarter. We’re making roughly 1.3 billion dollars every quarter and our market cap is a lot less than those guys that are making no money every quarter.
Now if I could get Geoff Parker selling the value of my platform to a venture capitalist out in Palo Alto, they might try to buy Barclays right now, which might not be a bad idea, but there definitely is this competitive pressure that we have a current shareholder base, we got a current business model, we have an obligation to our shareholders to deliver a level of profitability and we are massively regulated.
And we were campaigning against people that don’t need to make money, that have a much lower cost of capital than we do and have no regulatory oversight at all. That’s a hell of a competitive position to be in. What I think we have, however, is we’ve got 328 years of trust, we have an enormous loyal consumer and corporate franchise around the world. So, we have a scale advantage what we need to make sure is we don’t lose on the innovation side.
So on that, thank you so much, that was great.
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