Horizon scanning in good company

My favourite think tank, the Centre for the Study of Financial Innovation (CSFI) in London, where I am honoured to be the Technology Fellow, was asked by the law firm Dentons to put together a series of “horizon scanning” events, each looking at the major factors that will determine the shape of the financial services sector over the next 10-15 years. As part of this series they held a fintech breakfast to look at the world of tech-based challenger banks, P2P lenders, crowd-funding, new payments methodologies, AI, crypto-currencies, blockchain and so forth. I was flattered to be invited to take part, along with Clara Durodié (founder and managing partner of AI outfit Cognitive Finance Group) and Nick Ogden (the founder of ClearBank and, some years ago, the founder of WorldPay).

(In my opinion, Nick is at the heart of the current fintech revolution, the UK-centric whirlwind around open banking and the “platformisation” of financial services, whereas Clara is at the heart of the current regtech revolution, using AI to change the markets themselves. We may be a long way from Terminators and HAL 9000, but the massive AI investments pouring into financial services around the world mean that the technology is going to change the sector soon.)

For what it’s worth, my three main horizon-scanning observations were that:

  1. Open Banking starts in January and I remain convinced it will be far more disruptive than many people think. It is not far-fetched, as Wired magazine observed, that banks might go under because of this. At the risk of sounding like a broken record, this about identity, trust and reputation not money. Obviously, I left it to Nick to talk turkey on this one. He set up Clear Bank to provide building societies, credit unions, other banks and fintech companies with access to all the major payment and card schemes, including Faster Payments and is obviously pretty convinced that open banking is going to provide space for innovation.

  2. AI is an event horizon. In that 10-15 year timescale it is clearly the most important technological trend of the generation and it is impossible to see what is the other side of it. Obviously, I left it to Clara to run a few things up the flagpole here. What I will note is that analysts at Forrester have predicted that quarter of financial sector jobs will be “impacted” by AI before 2020 and John Cryan, the Deutsche Bank CEO, was quoted in the Financial Times in September saying that the bank is going to shift from employing people to act like robots to employing robots to act like people. The impact on employment is obvious, but we cannot hold back the tide so we must take advantage of the changes and begin to explore for new opportunities that can be built around a more productive financial services sector

  3. I wanted to bring something from left field to the discussion, so in addition to these two obvious key trends I spoke about the token and Initial Coin Offering (ICO) marketplace. I think that a regulated and organised token marketplace will be one of the big financial services business moves in 2018 and I’m pretty sure that it will be successful (for a variety of reasons to do with liquidity and the elimination of clearing and settlement).

Nick, Clara and I put forward our thoughts about the longer term. During the discussion that followed, there were a number of questions and comments about the impact of AI on the financial services sector. I think this is in many ways quite unpredictable not only because of the “event horizon” but because of the impending interaction. People tend to think in terms of robo-advisers and chat interfaces, focusing on the use of AI by financial institutions to either cut costs or deliver new services (some of which, of course, we can’t imagine). But, to paraphrase Fred Schwed’s 1940s financial services classic… where are the customers’ bots?

If you think about it, however, the customers will have access to AI as well. The customers smartphones will connect them, permanently, to an intelligence far greater than their own. Thus, if a bank is trying to sell me a mortgage or a credit card or whatever, it’s wasting its time showing me incomprehensible advertisements involving astronauts riding horses through fields of purple daffodils and people singing.

My AI is going to negotiate with the AI of the regulated financial institutions in order to obtain the best product for me. Since I’m not smart enough to choose the right credit card, pension or car loan then clearly I’m going to want my own giant killer robot to take care of things. But which robot? Should I choose the Saga robots or the Virgin Money robots or the best performing robot over the past 12 months or the Google self-taught super intelligent robot that is also the world Go champion?

How the banks’ robots will interact with the customers’ robots is at the same time fascinating and frightening. I’m not sure I really want to be in the loop when the discussion of a pension plan or insurance project is taking place, but I do want some sort of confidence that there’s a regulator in the loop and that should push come to shove, my robot will be out to explain why it made the decisions it did. All in all, what I can see on the horizon is giving my AI access to my account through open banking and then letting it decide which ICO is to invest in.

Voter ID is back, and this time it’s in Woking

Well, Woking is in the news. It is going to be part of a pilot scheme at the forefront of the UK’s non-existent identity non-strategy to not introduce a working digital identity infrastructure to our great nation at any time in the foreseeable future The government has decided that voters in five areas in England will be asked to take identification to polling stations at local elections next year, and Woking is one of those areas. The report doesn’t mention just how the entitlement to vote is to be established but we already know what array of high technology machine learning AI super intelligent giant killer robot world brain quantum neuro-computing systems are to be deployed, because local authorities will be invited to apply to trial different types of identification, including forms of photo ID such as driving licences and passports, or formal correspondence such as a utilities bill.

Wait, what? It’s pointless enough showing a trivially counterfeitable physical identity document to someone who can’t verify it anyway, but come on… a utilities bill? That’s where we are in 2017 in the fifth richest country in the world? In Scott Corfe’s recent Social Market Foundation report A Verifiable Success—The future of identity in the UK he highlighted what he calls the “democratic opportunity” for electronic identity verification to facilitate internet voting thereby increasing civic engagement. Well, I agree. But that’s a long way from showing a gas bill to a polling station volunteer.

(And what does ‘local authorities will be invited to apply’ really mean anyway?  They’ve already been ‘invited’ to adopt the national Gov.UK Verify identity service. Very few did, and fewer still continue, so five might be ambitious. And where they do, are we disenfranchising voters who don’t feel like forging documents if they don’t come from the mainstream demographic — a point also made in the SMF report — thus distorting the outcomes).  

Now, I’ve written before that I am in favour of electronic voting of some kind but I’m very much against internet voting, because I think that in a functioning democracy voting must remain a public act and if it is allowed in certain remote conditions then we cannot be sure that a voter’s ballot is either secret or uncoerced. I think it is possible to imagine services where trusted third parties or electoral observers of some kind use mobile phones to go out and allow the infirm or otherwise housebound to vote, but that’s not the same thing as just allowing people to vote using mobile phones. I think internet voting is a really bad idea, but I take Scott’s point about the need for digital identity. However, since we don’t have one and I don’t see any prospect of Government producing a robust one in the foreseeable future, we’re stuck with gas bills until someone gets to grip with issue.

(I should explain here for any baffled overseas readers of this blog that the United Kingdom has no national identification scheme or identity card or any other such symbol of continental tyranny, so our gold standard identity document is the gas bill. The gas bill is a uniquely trusted document, and the obvious choice for a government concerned about fraud. By the way, if for some reason you do not have a gas bill to attest to your suitability for some purpose or other, you can buy one here for theatrical or novelty use only.)

Woking Polling Station

Why is it that the government never ask me about this sort of thing? Since they don’t have an identity infrastructure, why don’t they use other people’s? I would have thought that for a great majority of the population, especially the more transient and younger portion of the electorate (e.g., my sons) social media would provide a far better means to manage this entitlement. I’ve written before that I judge it to be far harder to forge a plausible Facebook profile than a plausible gas bill, so if I turn up at the polling station and log in to the Facebook profile for David Birch (if there is a Facebook profile for a David Birch, incidentally, I can assure you that it isn’t me) then they may as well let me vote.

None of this will make the slightest difference to the central problem, of course, because the main source of electoral fraud in the UK is not personation at the polling station but fraudulently-completed postal ballots, a situation that led one British judge to call it “a system that would disgrace a banana republic”. Indeed, this is precisely what has been going on in my own dear Woking, where four people were jailed recently for electoral fraud. As far as I can understand it from reading the various reports, including the source reports on electoral fraud in the UK, the main problem is that postal votes are being completed by third parties, sometimes in bulk. No proof of identity is going to make any difference to this and so long as we allow people to continue voting by post I can’t see how the situation will improve. So: it is not beyond the wit of man to come up with alternatives to the postal vote. But that’s not what is being proposed. The UK government is not currently proposing an app or any other kind of electronic voting here, it is merely proposing to add a basic test of entitlement at the ballot box.

When this scheme was originally announced, the minister in charge of voting (Chris Skidmore) was quoted by the BBC as saying that “in many transactions you need a proof of ID” which is not, strictly speaking, true. In almost all transactions that we  take part in on a daily basis we are not proving our identity, we are proving that we are authorised to do something whether it is to charge money to a line of credit in a shop, ride a bus or open the door to an office. In these cases we are using ID as a proxy because we don’t have a proper infrastructure in place for allowing us to keep our identities safely under lock and key while we go about our business.

If we are to implement the kind of electronic identity verification envisaged by the Social Market Foundation, then what you should really be presenting at the polling station is an anonymised entitlement to vote that you can authenticate your right to use. It is nobody at the polling station’s business who you are and, in common with many other circumstances, if you are required to present your identity to enable a transaction then we have created another place where identity can be stolen from. The real solution is, of course, not about using gas bills or indeed special-purpose election ID cards, but about introducing a general-purpose National Entitlement Scheme (NES). If memory serves, I think this is what my colleagues at Consult Hyperion and I first proposed in response to a government consultation paper on a national identity scheme a couple of decades ago. Oh well.

Really breaking banks

I can’t stress enough just how big a deal the UK’s transition to Open Banking is. The writer Wendy Grossman posted an excellent piece about this in her “net.wars” series recently. She said, without exaggeration in my opinion, that the “financial revolution” coming here in mid-January has had surprisingly little publicity perhaps because “it’s not a new technology, not even a cryptocurrency. Instead, this revolution is regulatory: banks will be required to open up access to their accounts to third parties”. As Wendy notes in her piece, Wired had a great article about this (written by Rowland Manthorpe) in October. Having talked to some of the key players and examined some of the key concepts, he draws an important conclusion, which is that open banking is not “just a technical fix, or even a solution specific to banking, but a new way of dealing with the twenty-first century’s most sought-after resource, personal data“.

He is spot on. Identity is, as some people maintain, the new money. Banks are about to be transformed from places that store digital monies (which they really don’t anyway, since the proportion of household wealth held in the form of demand deposits has already fallen to minuscule levels) into places that store digital identities. Now, this is hardly a new idea and it isn’t only techno-crackpots like me who keep going on about it. Back in 2014, the Financial Times was reporting that “Britain’s high street banks believe their future role will be as repositories of more than just money: they want to be the safe place where customers store their digital identities”. This makes complete sense as a strategy and as a European Banking Association (EBA) white paper of the time put it, “banks are well positioned” to be a crucial, supporting, positive part of their customers online lives. Banks know this to be the case, they just haven’t done much about it. I still can’t use my Barclays identity to open an account at RBS, much less to log in to Direct Line or Bet365.

Since that FT piece, some people (uncharitable persons, of whom I am not one) have suggested that banks will pratt about and muck it all up and hand digital identity on a plate to Apple, Facebook, Google, Amazon and Microsoft (the GAFAMs). Well, we’re going to start finding out in January, because I can’t help but feel that the major beneficiaries of the regulators pressure to open up the banks will not be nimble fintech startups but the internet giants who already have the customer relationships. Rowland speculates that open banking may expose some institutions to change and to competition that they simply cannot respond to. He even goes as far as to suggest that banks may well fail because of it. This is the sort of thing that they must have been mulling over down at Open Banking Limited, the entity set up to implement open banking in the UK, where the Implementation Trustee, Imran Gulamhuseinwala, “doesn’t seem to have much sympathy for failing banks”.

Now, having met Imran at dinner (with the Russian Ambassador, as it happens) I can confirm that he is one smart cookie (and a very nice guy too). He’s got a point about the competition that open banking should unleash, but when RBS goes under because all of its customers have shifted to Facebook and the bank becomes a low-margin heavily-regulated pipe that is not operationally-efficient enough to compete only on price and service levels, I suspect others may have a different perspective. Either way, I agree with Erik Tak, Head of the ING Payment Centre, who said at Trustech in Cannes this year (below) that the people who will benefit most from this opening up of retail banking will not be fintechs but those GAFAMs mentioned earlier.

Tak at Trustech

Wendy’s words are well chosen. Open Banking is a revolution, and all we can say for sure is that there is going to be change. But as to who the winners and losers are… well, the UK is about to become an interesting, exciting and unpredictable laboratory experiment in banking regulation. In a year or two, we may at least have a signpost to the future of retail banking in place.