First Principles Thinking in the Banking Industry

First Principles thinking is an idea popularized by entrepreneur Elon Musk, although it has roots with other minds like philosopher Aristotle, inventor Johannes Gutenberg, and military strategist John Boyd.³ First principles thinking is like taking a scientific approach to your thought processes. A first principle was defined by Aristotle as, “the first basis from which a thing is known.”³ As Musk describes, “you kind of boil things down to the most fundamental truths […] and then reason up from there.”² 

According to Musk, the normal way humans conduct their lives is to reason by analogy, “we’re doing this because it’s like something else that was done, or other people are doing.” This “normal” way of thinking drives most innovation and development, but banking author, radio show host, and provocateur Brett King believes this first principles line of thinking is what sets companies over the edge. 

King relates that this analogous design is what mainly drives changes in the banking industry— “where a new technology comes along, like mobile—smartphones—and you adapt your business to that technology.” He says that most banks just see these new innovations like mobile and internet as a new channel for existing products. But a first principles thinker would say, “Let’s start from scratch. If we were going to design the banking system from scratch today, what would it look like?”¹ 

Bankers are often worried about businesses like Facebook or Amazon taking over the banking industry, but King thinks the bigger concerns lie with technologies like WeChat Pay and Alipay in China, who he believes model this first principles line of thinking. In America, the mobile payment solution is, “we’ve shoved a plastic debit card inside the phone, and we’ve said, ‘Here you go. You’ve got ApplePay and SamsungPay, you can even see your card inside the phone.’ So we’ve basically just iterated on the card model.” However, China, who had 55.4 trillion yuan (7.99 trillion USD) in mobile payments in Q1 of 2019⁴ took a different approach. To use their platforms, you don’t necessarily need a bank account at all. “They didn’t require point-of-sale infrastructure, they didn’t require all of those things that we currently have to enable mobile payments.”¹ So, as King says, “you’ve got two very different approaches to mobile payments. In the US it’s iterative, it’s designed by analogy. In China, it’s clearly first principles thinking—'how do we use a phone to make payments, not based on anything that we’ve done in the past, how do we just use this vehicle?’” 

One thing is for certain, though, “if you’re going to make this transition, whether or not you’re going to try some first principles approach to some specific product design, or whether you just want to go down the digital transformation route, the first thing you’ve got to do is stop hiring people with baking experience, right, because you need to start thinking differently about innovation.” The problem with having banking experience, King says, is that they will tend to iterate on the bank model and decision-making will naturally be framed by their experience with building banking products. 

King urges bankers to consider the core utility of the bank: the ability to store value, the ability to move money, and the ability to access credit.¹ With that, you might ask questions like “when do people need to use this?” or “in what scenarios is this product most used?” 

King uses the example of a card being declined at the grocery store. In this situation, that person needs access to a credit line in real time. “It’s not good to send them a credit card offer, because they’re not going to sit there at the checkout filling out a credit card form and then waiting for you to approve it seven days later. You’ve got to deal with it in real time. So instead of taking a product [you already have] in the branch, you strip away that thinking and say, ‘How do we solve this problem while they’re standing in the grocery store?’, you might come up with a very different experiential design.” To answer these questions, you will need people on your team with different skill-sets than you might currently have: data scientists, behavioral psychologists, experienced designers. Change is for certain, but the way we choose to think, innovate, and implement those changes can greatly affect the results.  

Sources: 

1. Penny Crossman, host. Brett King, guest. “’Stop hiring people with banking experience’” American Banker. 6 Jun. 2018. Retrieved from Apple Podcasts.  

1. https://www.youtube.com/watch?v=NV3sBlRgzTI 

1. https://jamesclear.com/first-principles 

1. https://www.chinainternetwatch.com/29517/mobile-payment-2019/