Legacy Systems Threaten Banks More than Startups: RBC Head McKay

Dave McKay, chief executive of Royal Bank of Canada, likes the blockchain, loves his bank's mobile wallet and thinks banks should focus more on fixing their legacy systems than trying to pull fintech startups under regulators' purview.

Those were among the key takeaways McKay offered up during an hourlong roundtable discussion in New York on Tuesday at the RBC Capital Markets conference on technology, Internet, telecommunications and media.

At the root of most of his comments was a fundamental challenge in banking: how does the industry take a system that was built on human interaction and tailor it to fit customers who want to do everything themselves on their phones?

"We used to know our customers because they use to visit us physically. We used to put that picture together from interactions on a weekly basis," he said. "We have to rethink how you rebuild a profile to understand them in a digital world and be relevant."

Here are takeaways from the conversation.

Dipping a Toe into Blockchain
Like most large banks, the company is experimenting with the blockchain, a technology that McKay described as a "quantum innovation."

The company could roll out a loyalty program that relies on the technology known for its fast settlement and distributed system of recordkeeping by next year.

"It would be a nice hybrid step" into integrating the blockchain into banking, McKay said. "A loyalty account is a good, safe currency to start with."

When asked why RBC would use rewards — rather than tangible money — as a test case, McKay said an unproven technology "begs caution."

"It is a brand-new technology, and what do we really know about it? How cyber-secure is it? We are going to learn a lot more about it," he said. "Given what is at stake, it is not something you can rush to market with and fix as you go. You want it to work."

Although several recent announcements indicate that financial institutions are still curious about bitcoin and cryptocurrencies — not just the underlying blockchain architecture — McKay seemed uninterested in bitcoin, saying that the industry wouldn't be "solving any problems with a new currency."

Besides using the distributed ledger technology for its loyalty system, RBC is also one of the 13 banks that have formed an alliance with R3CEV, a blockchain startup, to develop commercial applications of distributed ledger technology in the financial industry.

"Some of these issues are best broached as an industry," McKay said.

Staying Top-of-Mind via Mobile
McKay boasted about the company's mobile wallet, which is currently offered on Android and BlackBerry devices.

Banks need to make sure their mobile wallet offerings are strong because innovations like Apple Pay have the ability to relegate banks to utilities, he said.

"Right now, no one gets between us and our customers when they pay with a card. There is no one else in that ecosystem," McKay said. In a nonbank mobile wallet "someone can come in and interact with you. 'You should go with this card or this device.' They are getting between me and my customer."

Additionally, if a customer pays with Apple Pay or a similar wallet, all the joy associated with that purchase is associated with the wallet provider.

"We are the negative part. We send the bill," he said. "We become plumbing in the billing system — that's what I'm worried about. I want our brand in front of the customer."

The key to adoption, McKay said, is the integration of loyalty programs into the mobile wallet, as JPMorgan Chase has done with its Chase Pay offering.

"It is not the technology that is interesting, it is the partnerships," McKay said of Chase Pay, which is pairing with Merchant Customer Exchange (a consortium of several major retailers including Walmart, Target and Best Buy) to integrate loyalty programs into its wallet when it launches next year. "The merchant partnerships are incredibly important."

The Risk of Legacy Systems
One of the most debated topics at the intersection of banking and fintech right now is regulation. McKay's opinion falls somewhere between ambivalent and concerned. He said he thinks banks ought to be more concerned with their back office than the startup from Silicon Valley.

As he sees it, regulation is designed to give banks and their customers confidence in the economy. As a result, "any business model that has traction with consumers and is meaningful" should be regulated so it doesn't undermine the strength and confidence of the system, he said.

At this point, the marketplace lenders and other fintech companies that are nibbling at pieces of core banking are "not fundamental to the economy."

But he said regulators will need to remain diligent in watching the growing sector to determine when the "fence will need to expanded to encompass them."

Specific to compliance issues like anti-money-laundering laws and know-your-customer expectations, he does think the fintech companies should be held more accountable.

"There is a huge cost barrier put on banks related to AML and KYC, and it is very much unfair to ride on that rail for free," he said. "If you want to be in the money-moving business, you have to play an equivalent role in the AML world. So as they grow in prominence, I'd expect regulators to say, 'You need to have good processes like other guardians.' "

Still, he said banks ought to be more concerned with upgrading their back offices to have a digital platform than rallying for the disruptors to be regulated.

"Does [the lack of regulation for fintechs] hurt us? No, regulation is not the problem. The biggest barrier to adapting is the incredible legacy systems," McKay said, noting that many banks have systems that are essentially 50 years old.

"To make everything digital end to end takes a lot of investment," he said. "We've spent an enormous amount of money just in accounts and mortgage, for instance."