Ask Me AnyFin with Christian Kranicke: How to Digitalise Financial Services?

Why Ask Me AnyFin? At Code & Pepper, we believe in testing assumptions and leaving no stone unturned when getting to the bottom of complex issues. But what are the right questions to ask? Now, that’s when things get really interesting… There is no one magic formula for a FinTech company. That’s why I’ve decided to sit down with founders, innovators and disruptors from different sub-sectors and with diverse backgrounds to look for the bigger picture: together.

FinTech specialist says: ‘Ask Me AnyFin’ and is not afraid to answer…

Experience and turning points

Adam Pogorzelski: Thank you for accepting our invitation for this interview. Your experience in the financial sector and achievements are very impressive. Please introduce yourself to our audience.

Christian Kranicke: Thank you for the opportunity to speak with you. My name is Christian Kranicke. I’m originally from the United States but I have lived in Switzerland for more than 25 years. During that time, I have worked extensively in the financial sector. Among other things, I co-founded a company that worked actively in the interbank market, providing brokerage services to the interbank trading community. Members of this community included all the major financial institutions in London as well as those in the local markets that we served.

The work itself is quite interesting because it brings you very close to the banking community: to people, to trading operations, to the post-trade and transaction settlement process. Thanks to that, one can really understand the mechanics behind these transactions.

During my time with that company, I was initially very active in the field of trading, notably in the trading of all interest-rate related products: from overnight deposits to longerduration products such as bonds, structured products and derivatives. As the company grew though, my role shifted. Over time, our company developed significantly; we were no longer a young and small company; we became a very well-established and well-oiled machine.

So, I moved into the area of corporate strategy and development. At this point, my work was centered on finding ways for the company to continue to diversify, develop and grow. I was able to step back from daily operations and see a larger picture. That gave me the ability and opportunity to better see what was transpiring in the (financial) world. That was around 2011 to 2013. At that time, expressions such as “FinTech” or “financial technology” didn’t even exist.

Expressions like “FinTech” of “financial technology” didn’t even exist a decade ago. That shows how much we have accomplished in recent years.

I should mention that throughout my career I have always worked in the emerging markets: in Europe in the CEE region, in Poland for example, as well as in the former Soviet Union and in Sub-Saharan Africa. When I was working on one particular project for one of my previous companies, I began to see at the local level how ordinary people were able to execute rudimentary financial transactions electronically.

For example in West Africa, I saw how people were able to send money very easily from one e-wallet to another using mobile phones. And these were not smartphones, mind you. They were using SMS protocols and old Nokia phones to do that. You would not have seen such athing in Europe or in the USA at that point. Right then and there I understood the impact that this rapidly-changing technology would have.

Because people in the emerging markets did not have the legacy infrastructure (that keeps old habits unchanged in the other parts of the world) they were forced to find new solutions to basic problems.

If you visit parts of West Africa, where I was for example, there is no infrastructure whatsoever – no fiber optics, no copper cable laid country-wide. There you will see just how innovative change takes place there. It’s absolutely fascinating to witness how people can still find solutions to their daily problems, living under such circumstances.

That changed my mentality and approach to daily business operations. It altered how we operated and the amount of thought we had to put into this area at that particular time. I instantaneously began thinking about how we could approach certain things differently, while also being more cost-efficient.

West Africa changed my mentality and approach to daily business operations. People there don’t have infrastructure – no fiber optics, no copper cable laid country-wide. Yet, there is an innovative change that takes place.

I should mention that ideas can sometimes outpace the technologies that are in place in a given moment. However, in this instance we observed that technology was evolving very fast, to the point where we would be able to address numerous aspects of the financial sector, such as post-trade transaction settlement, in a completely different way.

But the main point I wish to make here is that such experiences had a strong impact on me. I subsequently left the company and decided to devote myself to FinTech ventures.

My background was not in technology per se. Rather it was in financial markets, treasury operations, post-trade settlement and the like. Because of that, I tend to look at these sectors more deeply than, let’s say, security. I do take care of that as well, but I’m closer to what we now call direct banking or neo-banking.

What is the success factor for digitalisation?

Adam Pogorzelski: That’s a really impressive background! Let’s move to FinTech and Switzerland. I know it is difficult to generalize, but in your opinion, are financial services in Switzerland already sufficiently digitalised, or are there still some obvious areas of financial services that require digitalisation? If there are, what is the nature of these areas?

Christian Kranicke: I don’t have a total overview of all financial services here but, that said, if I look at the banking and asset management sectors or anything else that involves trading operations, I do believe that there is still room for further digitalisation.

We have to be careful of course and be specific. For example, my inbox is often full of business propositions, some of which are quite interesting. But some may also suggest getting involved in yet another FOREX trading platform, which I don’t recommend because this market segment is already over-crowded and very well-serviced.

If you look at other aspects of operations in financial services, my feeling is that they are frequently dominated by legacy systems. Back in the day, let’s say, Bloomberg and Reuters were quite innovative and offered a lot of value. I remember seeing Reuters’ terminals for the first time in banks in remote foreign countries. For these places, that represented a great leap forward. They went from nothing – that is, no information – to a real-time source of information with a transactional capability.

My current observation though today is that these systems, both Bloomberg and Reuters, create something that I call “a strictly binary relationship”. In it, one entity can only communicate with another single entity in a given moment. But there is no overview of the larger community as a whole and that community is not being comprehensively serviced.

I mention this ‘service gap’ as an over-arching theme because it affects many areas. So, in my view, yes, there’s still room for improvement here in Switzerland and for digitisation. There are obstacles but there is room for tech players to enter this space.

Traditional banking systems operate with legacy systems and legacy mentality. They offer strictly binary relationship with customers.

Adam Pogorzelski: You already touched on my next question quite a bit. What is the key factor for success in the digitalisation of traditional financial services? What’s the main challenge? For example, may legal regulations differ between various countries?

Christian Kranicke: I can identify a few factors but I don’t believe regulations are among them. I have worked across multiple European jurisdictions – in Switzerland, Luxemburg, United Kingdom, Poland, Hungary, Romania, Bulgaria, and Moscow. Legal regulations are not at the top of the list of obstacles to overcome in my view. With respect to that, the key is to approach the regulators and establish a good relationship with them. You have to talk to them, understand them, and explain your proposals and what you wish to do so they won’t be taken by surprise at a later date.

With regard to the other factors, let me tell you about my experience instead. Back around 2007 or 2008, I was working with a partner company to sell software to a bank. This exercise speaks more to the obstacles and experiences that FinTech ventures face.

In such an exercise, you have to confront many things: you have to deal with legacy systems, unwillingness to change (because what banks have is “good enough”), matters of price (which can be mitigated by flexible pricing models). On top of that, you have the biggest challenge, which often is the entrenched interest of the in-house IT department.

You may have a CEO that loves the product and wants to implement it but who does not have the technical knowledge to challenge other views on the product. That’s why the CEO trusts his Chief Technical Officer (CTO). But the CTO can also block change – either for months or until you simply run out of money or the patience to pursue this particular client.

The remedy here, of course, is the underlying business argument: Do you actually have something that fulfills a real need? Afterwards, it’s about the money: Do you have a pricing model that is attractive for the client? And finally: Can you convince them to implement this product?

The remedy for binary relationship in financial services sector is simple – you need a product that fulfills a real need.

Then, it’s about the money – do you have a pricing model that is attractive for the client?

And even if all of that is said and done, there remain questions of how to negotiate other issues – those that are softer, harder or even difficult to identify. Those include factors such as the entrenched behaviors in the company; the people in charge; whether or not they have a progressive IT department. It seems that part of the unspoken job description for many IT departments is maintaining the status quo and supporting existing systems. If you’re coming in with a new proposition, they may not be happy about it and they can block it. Perhaps that’s understandable – everyone has bills to pay and wants to eat.

There may be other factors as well that go into the acceptance of a new proposition and I have seen this even here, at the European level. For example, the CEO likes the product and the IT department is on board. But there may be other interests in the company, at board level or elsewhere, that you are completely unaware of. Those things can make the implementation of your product very, very hard.

So, to summarize, I would say that in order to be successful, you need to address a real problem in the target sector, not imaginary problems. In addition to just solving one problem the product should ideally offer real opportunities to grow the business. You also must have a reasonable pricing model. And by all means, you need to be able to get every in-house stakeholder on board with the venture.

Traditional banking and FinTech – mutual relations

Adam Pogorzelski: Can you say that traditional banking is now more open to some FinTech solutions? Do bank executives see more value in FinTech that can provide complementary solutions to their own?

Christian Kranicke: Yes, I would say that there is more openness with every passing year. I would agree with the statement that there is more openness now towards FinTech solutions than in the past. This comes from the maturing ways in which both parties interact with each other.

Years ago, I found it phenomenally compelling that in certain African markets people were already able to send money to their families simply by using SMS services. Even small transactions of, say, two dollars at the time, were manageable.

When I returned to Switzerland and discussed this subject with others here, do you know who else found it compelling? No one! (laughing)

Back then, for me that was already an example of the type of transaction that was to become common, the type that would take place in the future – in a changed financial landscape; a landscape that fewer people than today were able to see and appreciate.

So looking back now over the past six or seven years, I can see that there has been a steady progression here in Switzerland in perception and understanding. On a much larger scale people have begun to understand the concept of FinTech, its utility and its impact. That may seem wildly obvious to you and me, but it is not always easy for others because the phrase ‘FinTech’ is a vast term. It’s like a big umbrella, full of FinTech segments, sectors and sub-sectors. That is why it is important to always be clear about the particular segment in question and what the value proposal is.

To sum up: I can definitely say that people here are now more open than ever. That is due to the reasons I mentioned earlier and perhaps also because of fear. People are intrigued by new technical possibilities but they may also be more afraid – afraid that someone else will develop a competitive advantage against them and their business. That fear will get them moving, make them more motivated and more receptive to FinTech solutions.