ST. LOUIS—Credit unions were told to prepare for change by a competitor that is driving much of that change–PayPal.
One of those changes to prepare for: “Everyone will have the power of a bank branch in their hands” within the next 10 years.
PayPal CEO Daniel Schulman, speaking at PSCU’s 2018 Member Forum, delivered a message about change to attendees by citing three factors—Moore’s Law, computing power, and artificial intelligence—that are speeding evolution within retail in ways many have never predicted.
“As leaders of companies we have to define reality and inspire hope for our employees,” said Schulman, acknowledging that requires foresight. “Look at history–most companies don’t get this right.”
Schulman looked back 100 years on all the companies that failed to adjust to change, such as Blockbuster and Kodak, and are no longer around.
“Only 2% of those Fortune 500 companies in place 100 years ago are still around,” said Schulman, adding that only 12% for Fortune 100 companies in business 50 years ago are still here.
But he acknowledged that looking back does not correctly paint the picture of what’s coming for retail organizations as the pace of change and the need to adapt quickens dramatically.
“In 1937 the average lifespan of an S&P 500 company was 75 years,” said Schulman. “Now the average life of an S&P company is under 11 years. That’s how fast things are changing.”
‘Learn from History’
And that is the existing reality for companies, he emphasized, saying that Moore’s Law, computing data and artificial intelligence will make companies that don’t adapt obsolete much sooner in the next ten to 15 years.
“It is wise for all of us to examine the reality around us and learn from history as well,” Schulman said. “History tells us that companies that don’t get it right go away. There is going to be more change in the next 10 to 15 years than you can imagine. So why is it that companies fail? They can’t see what’s coming, what could be, and they an inflexible.”
As many speakers on the topic of change have done, Schulman gave the example of Blockbuster, and the company’s inability to see what was ahead. He noted that Blockbuster had the chance to buy then upstart Netflix for a small amount of money, but instead invested $500 million in Enron’s broadband program.
‘Measured by Qubits’
Pointing to Moore’s Law, which posits that processing power will double every 18 months while the costs associated with that data will drop by one-half, Schulman said, ““What’s interesting is that 30 years ago, when Moore’s Law was introduced, many people said they did not believe in it. Here we are 30 years later and it still applies.”
What will certainly keep Moore’s Law relevant–unless it must be modified in response to even shorter time periods–is the sharp rise in data power with quantum computing, he said.
“It throws away everything we know about processing,” Schulman said. “This is processing power measured by qubits. With a one qubit today, there are one quadrillion transistors on a chip.”
Schulman noted how that will wipe out today’s cyber security measures.
“Once we hit five qubits of processing power, crooks can crack any cyber defense in under one second,” he said.
‘Exciting and Scary’
Finally, artificial intelligence (AI), is one of the most “exciting and scary things coming our way,” Schulman emphasized.
“Today AI is specific,” Schulman observed. “Machines are taught to learn a specific task, like playing chess. In 20 years we will move from specific to general AI, when you won’t be able to tell the difference between a machine and a person. The interface will be seamless except the AI brain will operate much faster than ours and much more powerfully. And these machines will be just as sophisticated as us, if even more so.”
Schulman said the thought of those types of machines is scary, calling them “godlike.” He noted that the machines will likely be so smart that they won’t allow themselves to be turned off.
“So how would you kill one?” he said.
He said that the machines will have to be taught morals and ethics, which has been a long-time focus of much science fiction writing. He said that will lead to some interesting decisions for autonomous vehicles.
“Three people are in the car and to save them from death by hitting the car in front the car has to swerve to the left and kill one person,” said Schulman. “So, does it choose to save one life or three? But what if the three people in the car all have criminal records and with facial recognition the car knows the person on the street is a Nobel prize winner? This will lead to some interesting things.”
Certainly, the automobile industry will be impacted by driverless cars, said Schulman. He said home design will even change, not needing garages.
What It Means to Financial Services
But how will financial services be impacted?
“Everyone will have the power of a bank branch in their hands,” said Schulman about what is ahead in the next 10 years. “The financial services industry will see more change in the next 10 years that it has seen in the last 70. Basic consumer transactions will all be done over the phone using sophisticated data algorithms.
Schulman noted that PayPal is already changing the world of finance, saying that the modeling the company uses to assess borrowers credit is 30% better than using a FICO score. And, its faster. He said PayPal has granted millions in small business loans quickly without using FICOs.
He emphasized that credit unions need to begin using more than the FICO to judge borrowers’ ability to pay. He said that thinking will be much more mainstream in the coming years as financial institutions, through the use of technology, get even closer to consumers and learn much more about their daily lives.
‘Jump on This’
Schulman said that will allows CUs to better understand that a person really is a good risk, and may, for example, have encountered a life event that has placed them behind on some bills.
“As an industry you need to jump on this,” he said. “You have a chance to make a real difference by extending credit to people who live outside the mainstream financial system.”
Schulman said that credit unions must think about the value proposition they have today.
“You think that is the personal touch, you know your members who are coming in,” he said. “That value is quickly going away as machines and interfaces learn more about your members than any one person can. Remember, the next generation was borne on the screen and they won’t be coming by the branch. Examine your value proposition.”