Barclays Africa Group has a market penetration problem.

Though its parent company, the $1.8 trillion-asset Barclays PLC, has had operations in Africa for more than 100 years, today Barclays Africa has only 12 million customers, about 1% of the continent's total population. Clearly, said Stephen van Coller, Barclays Africa's chief executive for corporate and investment banking, "you've got an opportunity to bank significantly more people than you currently are banking."

But to reach the other 99% — to bank the next billion customers — will require more than marketing efforts, more than simply better outreach, van Coller said. It will require building an entirely new bank, a "virtual bank" that will strip out legacy costs and offer new products and services, such as faster, cheaper payments, tailored to the needs of people at "the bottom of the pyramid."

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For more than a year now, Barclays Africa has been engaged in building this bank, partnering with Deloitte and various fintech startups to get it done. At a time when bank profits often seem to depend more on reducing costs than on growing revenue, Barclays is taking a long-term view: that a dramatic improvement in its bottom line depends on plugging the unbanked en masse into the global economy.

"If you can create financial inclusion for the 80% of the [African] population that doesn't have financial inclusion today, imagine what that does to the GDP," van Coller said. "And if I can grow the GDP, even if my business does nothing better, I'll grow my business."

Barclays' effort to bank the unbanked has implications far beyond Africa. Some 2 billion people worldwide have little or no access to banking services, and many live in countries where Barclays already has a presence.

The bank's attempt to rethink its business from the ground up, though still in utero, could have even larger implications. The virtual bank, when fully developed, is intended to replace the existing core banking system and its attendant cost structures. It will serve not only the formerly unbanked but existing customers as well, starting at Barclays Africa.

"A lot of banks have innovation labs, and a lot of banks are spending money on [fintech] experiments, and a lot of those experiments are focusing on digitization and efficiency," said Thomas Jankovich, the financial services innovation leader at Deloitte, who has worked closely with Barclays on the initiative. "Barclays is doing something unique with the virtual bank, where it is entirely reimagining and re-platforming the concept of what a bank is."

A New Approach

With all banks struggling to find new revenue streams while trying to adapt to customers' ever-changing preferences, Barclays attempt to build a virtual bank alongside a traditional one is likely to be watched closely by other institutions. But building a new approach to banking is not like coding an app. It doesn't happen overnight.

Barclays' initiative emerged out of a months-long program that Deloitte was running on its behalf. Its aim was to forecast the future of the financial services industry and create a growth strategy to capitalize on it.

After priming the pump by immersing Barclays executives in the techno-futurism of Singularity University, a Silicon Valley think tank, Deloitte's team came up with a list of more than 100 new business opportunities. It narrowed the list down to eight and began to develop four of them into real ventures.

The first to be executed, in March 2014, involved Barclays taking a 49% ownership stake in RainFin, South Africa's largest peer-to-peer lender. After working with the bank to refine its credit model and marketplace and expanding loans to small businesses, RainFin has increased its daily lending from about 400,000 rand, or $26,000, to well over one million rand, according to the company's CEO, Sean Emery.

Two of the other business concepts are still in stealth mode. The final idea, said Jankovich, was for Barclays to create a streamlined virtual bank. It would have "extremely simplified processes, simplified architecture and simplified products" that could scale massively and cheaply. It had to be able to handle 1 billion customers — and do it for less than 10% of the current cost per person.

Traditional banking processes, it became clear, were irrevocably mired in legacy costs. So Deloitte began looking for fintech startups that could help the bank achieve its goals.

The move made sense: The virtual bank initiative itself is being run like a startup within the larger bank. An initial team of 14 soon grew to more than 70 people between the U.S. and South Africa.

And like any startup, it has faced resistance or incomprehension from more hidebound executives.

"There's a lot that has to be done just to keep the bank alive," van Coller told an audience at a conference in New York earlier this month. "So people are reluctant to spend too much money on innovating. There's always the naysayers trying to stop you."

His perseverance is due to his belief that pretty soon banks will have to start changing how they charge their customers. Take foreign exchange, he said. Currencies are swapped electronically now, yet banks are still charging the same fees to exchange them as they did in the old days of paper bills. This won't last.

"There are going to be components of the virtual bank that will just not earn income in the way that the old bank did," Jankovich agreed. "That requires some very difficult conversations, where you're basically making a conscious decision to say, 'We used to charge for this, and it used to make us a lot of money, but in the future it has to be free. So let's just go and make it free now.' These are not small decisions."

Moreover, the unbanked are unlikely to be interested in the same products and services as existing, relatively affluent customers. "If you're trying to solve for your current architecture and your current clients and your current products," you're on the wrong track, said van Coller. The opportunity lies elsewhere.

Email for Payments

Van Coller is betting that one of the areas in which old fee structures will no longer be tenable is payments.

With that in mind, Deloitte turned to a nonprofit blockchain startup, Stellar, to build the payments component of its virtual bank. Much like bitcoin, Stellar is a decentralized, peer-to-peer payments network. But whereas only bitcoin can be sent through the bitcoin network, Stellar's payment rails work for ordinary currencies.

In an era of new payments technologies, banks will have to compete by growing their customer networks and slashing their fees, van Coller said. "If you assume that payments are tending to zero, you need massive scale."

In other words, Barclays hopes to make up for the drop in fees by enormously increasing its volume of transactions.

"The goal with Stellar is to make payments work the way that the internet works — to be an email-type analogue for payments," said Jed McCaleb, Stellar's co-founder and chief technology officer.

Just as it's no trouble to send an email from a Google account to a Yahoo account, McCaleb built Stellar to allow the instant conversion of one currency into another. So money being sent from a Londoner's bank account, denominated in pounds, would arrive in the form of rand in a South African's bank account — in a few seconds and for practically no cost.

"If I want to send money to London using my bank account, that will cost me $25 and take five to seven days," Jankovich said. With the Stellar-powered prototype, by contrast, "we can do it in less than six seconds and for less than one U.S. cent."

When British banks, including Barclays, set out in the early 2000s to build a real-time payments system, it took years of consensus-building and development before the system, Faster Payments, finally launched in 2008. The initial prototype that Stellar built with Deloitte took just four weeks.

The "no-brainer use case" for the new technology, said Jankovich, is cross-border payments, because those transactions carry the highest surcharges and are the most painful for customers.

"The stuff we're working on makes payments better everywhere," McCaleb said, "but it makes it way, way better" in the developing world."

There is a mobile app for the prototype, and the technology will also work on feature phones, which are still common in many parts of the world. Deloitte revealed its partnership with Stellar last month, though at the time it didn't identify which bank had commissioned the project.

Van Coller said that Barclays does plan to charge for payments made through its virtual bank, and that at scale it will make it a lucrative service. Its fee model for the prototype was based on 10% of what the bank currently charges.

A test of the prototype found that it could process 36 million transactions an hour using Google cloud servers, van Coller said.

"We've got massive confidence in the underlying Stellar protocol and its ability to handle volume," Jankovich affirmed.

Barclays is now in the early weeks of a pilot program for the technology, making it available to students at select Johannesburg schools. The pilot began after one of the schools approached Barclays looking for an electronic wallet to use in its digital-learning program. "It was just by chance that we stumbled into it," van Coller said.

Barclays has no intention of stopping there, of course, nor does McCaleb want to stop at Barclays; he hopes to plug plenty of other financial institutions into the Stellar network. That's fine with van Coller, who said it was never Barclays' intent to be "100% owner of the platform."

Barclays is also in talks with one African government that wants to run its own pilot of the payments platform.

"My personal view is that every government should be building this," van Coller said, comparing the payments network to transmission lines for electricity. "It's almost like a public asset. Theoretically, every government should have low-cost payment rails within the country."

'From a Telegraph to an iPhone'

Along with the payments platform, several other components of the virtual bank are also complete, at least in prototype form, including a digital "vault" for customer identities. But most of the components won't be debuted in isolation.

"We should start making it real, as the next step, with up-and-running applications that actually work," Joe Guastella, Deloitte's U.S. managing director of financial services, said at the Consensus 2016 blockchain conference in May. "We are now anywhere in between tomorrow and 18 months from now for something to actually happen."

When the virtual bank does launch, said Jankovich, it will be "like going from a telegraph to an iPhone." Customers with accounts on the old system will be transitioned to the new platform. Exactly when this will happen is unclear, however, as is the expected date, if there is one, for applying Barclays Africa's innovations to the parent bank and its other subsidiaries.

"There will be a structural shift when the virtual bank is launched. But how and when that manifests, that's Barclays' decision," Jankovich said. "Whether they run two different versions for some time, or whether they create an entirely new brand that targets an entirely different customer segment, that's their prerogative."

But he suggests, somewhat ominously, that the changeover may be enormously disruptive for Barclays' workforce. "A virtual bank does not have scores of people doing a whole bunch of redundant things," he said.

Deloitte, for its part, isn't standing still. Having "cracked the code on how you match a very large, established brand and highly regulated bank with a bunch of very fast, very powerful but very small fintech players," as Deloitte believes it has, the firm is now offering its expertise to U.S. banks, Jankovich said.

In addition to Stellar, Deloitte has partnerships with a handful of other blockchain startups, including BlockCypher, Bloq, ConsenSys Enterprise and Loyyal.

The challenge is figuring out how to integrate blockchain and other digital applications into each bank's back-end system. But the pace of development is rapid nonetheless.

"We now have a global blockchain development capability," Jankovich said. "We've moved beyond prototypes. These are actually now 'accelerators' that we offer for clients."

