FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research

NCFA Canada | Sep 28, 2018

FF E10 Paul Schulte banner1000 - FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research

Ep11-Sep 28:  How Amazon Bank is Dominating and Risks of a Digital Bifurcated World

About this episode:   On this weeks episode our host Manseeb Khan sits down with Paul Schulte Founder & Editor of Schulte Research, whose insights have reshaped the finance world for the past 30 years. They talk about how Amazon is the biggest bank in the world, China being 2 generations ahead compared to the West, and what his next book could be about it. Enjoy!

Host: Manseeb Khan, NCFA, Fintech Fridays show host

Guest: PAUL SCHULTE, Founder and Managing Editor, Schulte Research (LinkedIn)

SRLOGO - FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research

Bio:  Paul Schulte is founder of Schulte Research, set up in 2012 researching financial institutions and financial technology. He has spent 3 decades in research on financials. He has worked for all 3 branches of US government, including the NSC at the White House. He currently teaches in 3 universities, has written 3 books and authored hundreds of articles. He has worked for the Number 1 investment bank from US, UK, Japan, China & Switzerland starting in 1990.  He has taught on 4 continents. His focus is technological change in banks & insurance. He has been a source for the WSJ, NYT, Bloomberg, Nikkei, FT, Economist, Barron’s and Forbes. His clients include some of the largest sovereign, pension, mutual and hedge funds globally.

 

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Transcription of Interview

Manseeb Khan: Hey everybody how are you today. Manseeb Khan here and you are tuning in to another episode of Fintech Fridays. Today I have an incredible guest. He is a veteran in the industry. He's been in the industry for over 30 years. We have Paul Schulte. Paul thank you so much for making here today. I know I'm catching you in the middle between flights so thank you so much for taking time today to sit down with me and to chat.

Paul Schulte : You're welcome.

Manseeb Khan: So, Paul just for the audience could you just for a minute give us a little bit about who you are and essentially what your research firm does?

Paul Schulte : So, what I do is we look at we've been looking at financials and financial institutions, banks, insurance, broker dealers, investment banks for like 14 years and then about four years ago I wrote a book about that called a revolution in financial technology that's coming, and we decided that this was extremely important. So, I've been really taking a big turn and focusing much more on the ways in which financial institutions are being disintermediated by the explosion and financial technology especially of the Far East.

Manseeb Khan: So, could you talk a little bit more of what your research firm does. Are there any current trends that you guys are currently focusing on?

Paul Schulte : So, we work for. I work for sovereign wealth funds, hedge funds,  mutual funds, insurance funds and we do two things really work the boards of directors in terms of understanding their own needs for technology but also, I look at public equity of private equity activity and you know advise on you know what's hot. what's not. what's good. what stinks and you know what is. You know looks iffy. What is you know very interesting? And so, at the moment we just finished some work on the way in which Ali Baba, Tencent, Amazon and Wal-Mart are heading into India in a very aggressive way looking at you know where the winners and losers in India are. The sort of this big battle royale for the financial activity for payments, ecommerce, lifestyle, lending and so forth in India but also in Southeast Asia.

Manseeb Khan: Oh yes so kind of like how Wal-Mart recently acquired Flipcart to start making moves in the industry right.

Paul Schulte : So, looking at the strategies of Wal-Mart and Amazon and Ali Baba really are the three big players against each other. They're all doing slightly different things but they're going down of course very, very rapidly. And I think once again catching the banks by surprise.

Manseeb Khan: Why do you think that is. Is it because of because you were previously you did work with institutions. You have a very extensive background of being part of that world. Why do you think they're going to beat banks to the punch?

Paul Schulte :  I've worked with you know Credit Suisse and ING and Lehman Brothers, and then you know went Nomura bought Lehman Brothers. I worked with Nomura as well. Fundamentally I think it is an issue of shareholders. the shareholders of banks expect and want and will not tolerate anything other than a dividend you know of somewhere between 3 and 5 percent. And this means that the banks have to pay out 30, 40, 50 percent of their profits get paid out in dividends. and Amazon and Ali Baba pay out zero. And so, you're looking at you know billions of dollars in extra R&D you know investment spending that these guys have relative to the banks. So, if the banks really want to get serious about competing they have to go to their shareholders and say we're just not going to be able to have a payout ratio of 30,40, 50 percent of profits. The second thing is that you know banks fundamentally aren't allowed to collaborate and are not allowed to collaborate because of regulators. So, it's good to be regulated because you're sort of a cartel, you're a protected cartel. But on the other hand, you miss out the capacity to change quickly to collaborate to open up your ecosystem to the outside world where regulators are very you know hypersensitive. So, banks are coming out of a period where they've been in the doghouse because of all this bad behavior 10 years ago. And so, the regulators are putting them on a very short leash. So, these are all the reasons why the banks are having a very difficult time adjusting to these new realities. And then it just tends to be a sense of you know entrenchment and legacy. You know history institutional inertia that also work against you.

Manseeb Khan: So that they're just taking  advantage of it essentially. You recently posted a video on how China is pulling ahead of the U.S. in the battle of AI. Could you explain a little bit more the reasoning behind it and it is because like what people think of AI they don't China's not the first place that really comes to mind. Right. And secondly how do you see Canada's role in this battle being that it's there's been a lot of buzz that Canada does have a booming AI market.

Paul Schulte : Yeah Canada does Canada that was one of the first people to do quantum computing that there was a very active you know great stuff going on in Toronto. I think the smart city initiatives the Toronto house are great. So yeah, I think Toronto's fantastic. But West has you know a lot of things against it. The West has a 50-year-old legacy system of credit cards and  sort of antiquated payments that were there to put all these fancy apps on top of that. So, this is always going to be a problem with us. Regulators Attorney General upstate and the FCC. and we know  Washington D.C., regulatory bodies, and lobbyists you know who don't want this to happen. So, you know I was giving a talk to one of the well with the Minneapolis Fed group and you know what I was talking about China and all the stuff that China is doing. You know the guy stopped me and said hey wait a minute you know we're still trying to get people stop using paper checks. So you need to slow down here in terms of trying to think of what the U.S. can do to catch up to China. China is one the two generations ahead and payments, e-commerce. the integration of payments and e-commerce to civic activity like people paying tickets, fines, entertainment travel, movies ,lifestyle, leisure, venture, travel all of this has been integrated into one stop shopping for the entire system. And this is, and this also includes insurance, peer to peer lending, money market invested in  tax. It's all that everything is online and everything's integrated and everything's in one place and people have the choice of looking at Alibaba or WeChat. But Ali Baba tends to have the one of the best integrated platforms and this is the way in which we're seeing this go into you know Southeast Asia now and  Alibaba so all these problems going into Paytm in India. It's going into Tokopedia, Masada and Indonesia and so Alibaba is really gluing itself into you know another country with a billion people and another country with 350 million people. And so, you're looking at having a pretty good chunk of the world. you know covered in you know you know India Southeast Asia; China the U.S. hasn't done any of this.

Manseeb Khan: Yeah that's kind of what I want to touch on next. How do you see the western world kind of adopting? Right. would be like working with regulators would be working with lobbyists and lawmakers and everything would it be more of like hand-holding situation?

Paul Schulte : No. No, I don't think that's the case. We should have expected that. But I think Amazon's done something that's really unique and brilliant. They just said we're just going to go outside the US. We're going to start and do all this in a country called India and so Amazon has been laying out billions of dollars in very aggressive impressive expansion both in terms of indigenous internal organic R&D implementation of different types of structures for services for MSR customers but also making a lot of acquisitions in the last 18 24 months. So, from a standing start two years ago where Amazon was nowhere and was being highly criticized for being the. you know as I should be the biggest bank in the world two years ago it was nowhere. Two years later in India it has a compared to Amazon offerings to the standard chartered India offerings and quite frankly standard Amazon has everything a standard traveler can offer or basically 18 months and so from a standing start Standard Chartered can't hold a candle to what the offerings of Amazon. I believe Amazon has very aggressive ambitions to export that to many other emerging markets and potentially export that back into the U.S. This is what I am thinking.

Manseeb Khan: You did recently write an article. the article's title fintech is emerging with the internet of things that aim to challenge banks. How entrenched interests can prepare. Banks are not only the western world banks and institutions are not only losing opportunity in the expanding markets like China and Indonesia and India like you've mentioned. how unprepared are they in terms of A.I like we're hearing institutions starting to earmark for crypto and block chain? How prepared are there for this whole AI revolution?

Paul Schulte : Well I think I think it's getting a little bit better. You know I believe HSBC has at least a dozen and could be up to 20 plus blockchain initiatives currently. I think the one bank who gets it you know better than anybody else is Goldman Sachs. I think you know Citibank and JP Morgan  are pretty much rushing ahead. I think the European banks just don't have the capital or the spending power to be able to engage in this right now and so banks like Deutsche Bank are barely standing on two feet. And so, they're being knocked out of the game. And then you have you know some of the other banks that just are where they need to be. You know Barclays and so some of the regional banks are just not in a position to be able to spend. You have to spend a lot of money on this stuff, if you just want to do nickel and diming you're going to get left behind.

Manseeb Khan: Do you think it's more of like a is it because more of like a legacy thing that they're not nickeling and diming it or is it. They don't really believe the hype. What's your take on that.

Paul Schulte : Well you know I was reading this book chapter 7. They called the innovator's dilemma. It's the Christensen book and in chapter 7 it talks all about how the corporates of the 70s 60s and 70s with America were like these mighty engines of innovation and you know technological growth. top line growth. And they just stopped doing that. He was talking about corporates and then I when I read that article I was so struck because this is just absolutely applies to banks and so there's just it's institutional inertia. There are fewer positions are available people today and they just are becoming yes men because there's fewer promotions available. So, they shut their mouths and they don't know, and they don't dare innovate because if they make a mistake they get fired because there's always an excuse to fire people and try to reduce costs. And so, when you go down that rabbit hole of trying to reduce costs as your number one goal rather than improve innovation you're dead. And I think a lot of banks are going down this road. So, this is a problem right where you have a terrible return on capital. You have shareholders demanding a very high dividend and you just don't have a lot of money left over in absolute dollar terms or a dollar stand against Alibaba which has like a billion dollars to spend. Amazon is spending in India alone which is spending 5 billion dollars. And so, you're looking at a tremendous capacity for spends and a lot of different areas. Plus, Amazon is also moving into a farm to market food distribution as well. So, when they start to get all these different businesses you've got a tremendous synergy of business of agricultural, financial, lifestyle and civic activity together which gives you know a real unbeatable combination.

Manseeb Khan: So essentially, it's very much a evolve or Die mentality when it comes to compare to banks and to Amazon and Alibaba and all the other companies like that right.

Paul Schulte : Yes, exactly that system and that's life that we all we all have to do that even as adults in our 30s and 40s we have to keep on learning if we don't keep on learning where we're in real trouble. I think the times of getting a four-year degree or getting an MBA is that those times are over. Right. There's a constant need for learning and it's painful and I say to people I have two jobs. I'd have my old job which is looking up financials but also, I have another job which is learning to understand financial technology which has been exhausting but also very stimulating and exciting and interesting.

Manseeb Khan: I totally agree that it's kind of funny because I just came back from writing my accounting exams was kind of hilarious that we talked schooling. You’re probably a little bit more closer to understanding AI and seeing its evolution other than just in the banking space. Where else do you see it just making a massive impact?

Paul Schulte : In the area of Block Chain  is all about digitizing assets and only a very tiny portion less than 1 percent of the physical asset world in digitized. So, what we have is a world where when you digitize assets you do three things you turn it into a provenance right and then that's the whole foundation of auctions. auctions and auction houses whatever they are Kristie. Sotheby's big banks guarantee that this thing is true and real and is owned by X is being sold to Y. That's what blockchain does for physical assets. Number two it's a sense of collateral. collateral is what you use to create a loan. And number three and most important of all one of the greatest things that we can Digitize and one of the greatest values we have is that our parents spent you know between 500000 and 1 million dollars to get us to become 22-year-old educated people our body. And this is the area of insurance. And so, I think that insurance is probably the most it is going to be disrupted more than anything else. As more and more of the parts of the human, our cells become digitized and become a real value. so, we can be given the identification independent of government. We can be given Providence we can be given a sense of collateral and we can include 1 billion people who currently don't even have an identification or a bank account or you can include millions of that SME's on by three four five people you know all across the world who previously had to go to loan sharks to fund themselves. So, the possibilities are endless and of course lastly and most importantly in terms of our lifespan in terms of current kinds of things that we can learn about our bodies to employ preventative medicine to improve our life expectancy and to get you accurate pricing on insurance for physical movement and for our life.

Manseeb Khan: Yes, speaking of Insurance I should remind my dad that I need a life insurance policy. So, thank you for reminding me of living.

Paul Schulte : You are going to live to be 100 don't worry.

Manseeb Khan: Could we. Other than the articles and research papers that you say they produce regularly are we expecting a book anytime soon. If so what would like what are the topics that are frequently passing through your head that you'd probably want to put on paper or digital paper in this case.

Paul Schulte : Well we're yeah to a book with Professor David Lee in Singapore who is one of the leading thinkers in the world. Block Chain and we're doing some work on blocking insurance. We're doing some work on the movement of these Chinese financial technology companies out into the outside world into Southeast Asia and South Asia and we're doing an update a deep dive into what PingAn's doing. PingAn is  I think one of the most innovative companies in the world and we're also going to write a chapter on something that's very important which people need to be paying attention to. Right about now which is quantum computing because the cyber security implications of quantum computing are very important.  And last but not least we are looking at something that's really important. I think it's going to be the most core issue of 2019 and that is the way if the US increasingly goes on its own and sort of alienates Canada and alienates you know Europe and alienates China is it going to go along a road trying to bifurcate, trying to cut the digital world to have a Qualcomm. Qualcomm, Amazon, Google, Apple world, a Huawei. Amazon, Tencent digital world. And I don't think it's possible to do that. But trying to do so could be quite destructive know example I would give you is that Microsoft and Amazon have 31% market share in the cloud business in China. What if says you know you've invited out Huawei and you were basically expelled Ali Baba out of the U.S. Well how come we're letting Amazon and Apple. I'm sorry Amazon and Microsoft have you know a 31 percent market share in the cloud business for AWS and of Azure. and I think questions like this come up and so this is going to become problematic if this thing continues down a road of increasing tension between China and the U.S. So very important topic I think it's the number one topic of 2019.

Manseeb Khan: Right and that's you have mentioned in the past that's why you're seeing companies starting to enter emerging markets just in case something like that happens. They have remote offices they have remote sites, subsidiaries just in case those kinds of things may happen right.

Paul Schulte : Yeah pretty much. I think that's right. And I think that Amazon is truly an international company. Right. So, I don't know what political weight. They pull in Washington D.C. but I'm sure that there are  opposition forces at play in Washington D.C. to counter this desire for the U.S. to isolate itself. I think that's a minority opinion and it's not part of the mainstream and yet it seems to be having an immense cast has immense momentum right now. And so, it's very disturbing to watch this. You know what was played out yesterday at the U.N. and especially when you look at it from the Far East people are aghast at why the U.S. is doesn't have you know America first policy it's basically America alone policy. And I think there's no people who are more like gob smacked by this than the Canadians. And so, we've got to be very careful about where this is all going. If power is some of the powers in Washington want to bifurcate the digital world because I think it's impossible to do that. I think we've gone down we've gone too far down the road on this. And so, I'm just wondering what this all means. I think the physical bifurcated world has already occurred right the manufacturing world is already the supply chain already been broke about past tense but the digital world is a very different world that just doesn't lend itself to being broken into.

Manseeb Khan: Right. Because the whole the world the whole the pull for is the whole globalization rights that everybody is on the same team. We're here to help everybody and if a country is going to try to isolate itself from everybody else then it's going to be kind of hard of work with them. It's kind of like work like everybody playing in the sandbox where we have the one kid that like we're trying to include you doesn't want to come with us. It's kind of hard to like feet won't we'll can ask him so much.

Paul Schulte : Yeah that's right. That's right. That's right. Well thank you so much free time I have to jump on a plane. I'm going to a retreat with actually people from Monash University to discuss this topic in terms of the future of education. OK so this is important. This is an important topic for universities as well as universities risked being sort of cut out. Well if they don't change faster. And so, I personally have a similar problem with the banks.

Manseeb Khan: That's interesting. Well  Paul thank you so much again for your time. Enjoy your flight enjoy your treat. I'm very excited to see what you've learned, and I can't wait to have you on the show again.

Paul Schulte : OK. Thank you so much.

 

End of Podcast

 

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Funding meeting - FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research
Forbes | Biser Dimitrov | Aug 13, 2019 2019 is the year when the blockchain ecosystem and the crypto industry as a whole had to get sober. After a wild 2017 and a bear 2018, the blockchain space is back on an upwards trajectory with new developments. There are no more Initial Coin Offerings (ICOs) to distract the crypto ecosystem and the building mentality is back on. This post-ICO and post-useless-PR-partnerships age urges the blockchain community to be less focused on the current price of bitcoin and more focused on producing meaningful services and advancements. Big projects from established enterprises like Facebook Libra are taking all the media space now and this is net positive for the enterprise blockchain space as well. The first half of this year was full of blockchain developments led by large enterprises in almost all important sectors, including insurance, financial services, supply chain, healthcare and trade finance. There is a huge benefit in joining a specialized industry-focused blockchain consortium because you sit at the same table with your main competitors but at the same time you work toward the same goal. You are not alone in figuring out the benefits, implementations and roll-out of distributed ...
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Blockchain and enterprise - FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research
Wired UK Gov | Information Commissioner's Office | Aug 12, 2019 Reuben Binns, our Research Fellow in Artificial Intelligence (AI), and Valeria Gallo, Technology Policy Adviser, discuss some of the key safeguards organisations should implement when using solely automated AI systems to make decisions with significant impacts on data subjects. This post is part of our ongoing Call for Input on developing the ICO framework for auditing AI. We encourage you to share your views by leaving a comment below or by emailing us at AIAuditingFramework@ico.org.uk. The General Data Protection Regulation (GDPR) requires organisations to implement suitable safeguards when processing personal data to make solely automated decisions that have a legal or similarly significant impact on individuals. These safeguards include the right for data subjects: to obtain human intervention; to express their point of view; and to contest the decision made about them. See:  How Data-driven Strategies Can Improve Impact Investing Outcomes These safeguards cannot be token gestures. Guidance published by the European Data Protection Board (EDPB) states that human intervention involve a review of the decision, which “must be carried out by someone who has the appropriate authority and capability to change the decision”.  The review should include a “thorough assessment of all the relevant ...
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Automated AI decisions - FINTECH FRIDAY$ (EP.11-Sep 28): How Amazon Bank is Dominating and Risks of a Digital Bifurcated World with Paul Schulte, Founder of Schulte Research