The new paper from the European banking industry, produced by the European Banking Federation (EBF), European Association of Co-operative Banks (EACB) and the European Savings and Retail Banking Group (ESBG) sets out the industry’s vision for the EU payments market in detail. There’s lots of interesting stuff in there, but I was particularly interested in their views on the regulatory environment.
I couldn’t help but notice this paragraph on page six…
“From a data privacy perspective, global BigTech’s existing data superiority combined with access to payments data should be concerning and could lead to unintended negative outcomes for EU citizens.”
This is not a new position. It’s been obvious to any serious surveyor of the European payments landscape that it has been tilted. This is what I wrote for Wired magazine back in 2017:
“Non-banks are about to get a huge boost from European and UK regulators, thanks to the European Commission’s Second Payment Services Directive (PSD2)”.
I’m hardly the only person to have realised that PSD2 would mean that the playing field is tilted against banks and in favour of Big Tech. In fact I gave a keynote address on this topic at PaymentsNZ a couple of year ago, so if you are interested in a more detailed explanation of why the current regulatory environment is unsatisfactory, put your feet up and watch this:
The question is what to do about it now. Fortunately, I wrote about this in some detail more than a year ago, so if the European banking industry needs some help in formulating specific policies to lobby the legislators for, I stand ready to point the way. Last year, following the Paris Fintech Forum where this topic was discussed, I commented on the suggestion from Ana Botin of Santander that organisations holding personal data ought to be subject to some regulation to give API access to the consumer data. Not only banks, but everyone else should provide open APIs for access to customer data with the customer’s permission. This is what the European banks are asking for in their vision document. They want “concrete support” from policy makers to help achieve their objectives, including this levelling of the playing field between banks and Big Tech competitors, brining in a mutually-beneficial approach to data sharing address the inherent asymmetry in the post-PSD2 environment.
So, yes, Open Banking. But open everything else as well. Particularly Open Bigtech. This sharing approach creates more of a level playing field by making it possible for banks to access the customer social graph but it would also encourage alternatives to services such as Instagram and Facebook to emerge. If I decide I like another chat service better than WhatApp but all of my friends are on WhatsApp, it will never get off the ground. On the other hand, if I can give it access to my WhatsApp contacts and messages then WhatsApp will have real competition.This is approach would not stop Facebook and Google and the other from storing my data but it would stop them from hoarding it to the exclusion of competitors.
Forcing organisations to make this data accessible via API would be an excellent way to obtain the level playing field that the European banks are calling for. This would kill two birds with one stone, as we say in English: it would make it easier for competitors to the internet giants to emerge and might lead to a creative rebalancing of the relationship between the financial sector and the internet sector. So, if the European Union wants to begin thinking about PSD3, in my opinion it writes itself.
Now, of course, when techno-determinist mirrorshaded hypester commentators (eg, me) say that the future of money might be somewhat different to the Bretton Woods II structure and that perhaps the decentralising nature of computer, communications and cryptographic (CCC) together mean that there might be currency issuers other than central banks (as, for example, I did in Wired magazine two decades ago), this might be dismissed by scenario planners and strategists as cypherpunk-addled babble.
It seems to me, however, that the reflections of sensible, knowledgable and powerful players is tending int the same direction. Mark Carney, governor of the Bank of England, recently gave a speech at Jackson Hole, Wyoming, in which he said that [Central Banking] a form of global digital currency could be “the answer to the destabilising dominance of the US dollar in today’s global monetary system”.
Mr. Carney went on to talk about the idea of “synthetic hegemonic currency” (abbreviated to SHC by everyone else but abbreviated to SyHC by me so that I can pronounce it “sick”). An obvious example of such a currency would be an electronic version of the IMF’s Special Drawing Right (SDR). In fact the former boss of SDRs has already put forward such a proposal, asking for the IMF to “develop a procedure for issuing and using market SDRs following currency board rules and backed 100% by official SDRs or by an appropriate mix of sovereign debt of the five basket currencies”. This, of course, sounds a little like Facebucks (or “Libra” as they are more properly designated) and, indeed, it is.
So what would be the difference between holding Facebucks and holding eSDRs? Well, for one thing, Facebuck currency board basket will not include Yuan. In responses to questions from a German legislator, Facebook have said (Reuters, September 20th) that their basket will be:
One half US dollar,
Sterling 11% (although why anyone would be this in “stable” basket right now is beyond me), and
Singapore Dollar, 7%.
The composition of the SDR varies from time to time, but the current basket (last reviewed in 2015) is:
41.75% US dollar,
Sterling 8.09%, and…
So Libra vs. eSDR (or Libra vs. A Chinese digital currency) comes down to the Yuan. I think the Wall Street Journal (September 23rd) is right to characterise the fascinating future of digital currency as a “coming currency war” between digital money and the Dollar, saying that “The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable alternatives to the U.S. dollar could emerge, embraced by nations and monetary officials concerned about the dollar’s outsize influence on the global economy”.
This is about so much more than permissioned vs. permissionless or proof of work vs. proof of state.
The Paris FinTech Forum this year was a superb event. I take my hat off to Laurent Nizri for pulling it all together and especially for his terrific first day panel with Christine Lagarde (who is Managing Director of the IMF and is therefore the woman in charge of money), Stefan Ingves (the governor of the Bank of Sweden), Carlos Torres Vila (Group Executive Chairman BBVA) and Kathryn Petralia (President of Kabbage) [video].
At one point, the conversation shifts to data. Carlos said that we should treat ownership of data as a human right, which I have to say I am not entirely sure about, and that “we should have regulation that forces data to flow” rather than the limited prescriptions of the 2nd Payment Services Directive (PSD2) “so that all sectors have to share their data, with consent, as banks have to do”.
(The reason that I’m not sure about the data ownership thing is that, as discussed in the MIT Technology Review recently, it may be a counterproductive way of thinking that “not only does not fix existing problems; it creates new ones”. Instead, was that article says, we need a framework that gives people the ability to stipulate how their data is used without requiring them to take ownership of it.)
That is a very interesting perspective on a very important issue.
What Carlos was talking about is the asymmetry at the heart of PSD2, an asymmetry that the regulators created and which if left to its own devices means an uncomfortable future for banks. I wrote about this back in 2017 for Wired, pointing out that the winner in this new environment will not be innovative startups across Europe but the people who already have all the data in world and can use data from the financial system to obtain even greater leverage from it. In other words, the GAFA-BAT data-industrial complex.
In Prospect (August 2018) there was a debate between Vince Cable, the former chief economist at Shell, and the economist John Kay. The issue was whether the internet giants should be broken up. Mr. Cable felt that the new data-industrial complexes (the DICs, as I call them, of course) need regulatory taming and that competition authorities should take a wider view of social welfare rather than focus solely on price, while Mr. Kay felt that regulators should focus elsewhere on higher priorities and let internet competition sort itself out. He has a point, because regulators have so far failed in this respect. As The Economist (Antitrust theatre, 21st July 2018) noted, despite headline grabbing fines and other antitrust actions, the European Commission has done little to strengthen competition.
So what to do? Do we sit back and allow the DICs to form unassailable oligarchies or should there be, as Carlos clearly thinks, a regulatory response? And if so, what response?
Mr. Cable’s call for some form of regulatory response is hardly unique. Last year I had the honour of chairing Professor Scott Galloway at a conference in Washington, DC. Scott is the author of “The Four”, a book about the power of internet giants (specifically Google, Apple, Facebook and Amazon). In his speech, and his book, he sets out a convincing case for regulatory intervention to manage the power of these platform businesses. Just as the US government had to step in with the anti-trust act in the late 19th century and deal with AT&T in the late 20th century, so Scott argues that they will have to step in again to save capitalism. His argument centres on the breaking up of the internet giants, as Mr. Cable called for, but I cannot help but wonder if this is an already outdated response to changing economic dynamics in a world where data is the new oil (and personal data is the new toxic waste). Perhaps there is a post-industrial alternative to replace that industrial age regulatory recipe for healthy competition in a future capitalist framework. As Viktor Mayer-Schönberger and Thomas Range note in Foreign Affairs (A Big Choice for Big Tech, Sep. 2018), a better solution is a “progressive data sharing mandate”. They suggest sharing anonymised subsets of data to boost competition, but I think there might be an alternative.
The Banking Example
To see what this might look like, consider the example of the UK’s banking sector where regulation at both the UK and European levels has turned it into a laboratory for what is called “open banking”. Here, a “perfect storm” of the combination of the Competition and Markets Authority (CMA) “remedies”, the European Commission’s Second Payment Services Directive (PSD2) “XS2A” (weird euro-shorthand for access to accounts) provisions and the Treasury’s push for competition in retail banking mean that new business models, never mind new product and services, will be developed and explored here first.
(The rest of Europe will move to open banking in September 2019, when PSD2 comes into force, and other jurisdictions such as Australia are bringing in similar regimes — more on this later.)
Under the open banking regime, the banks are required by the regulator to install sockets in customer accounts so that anyone can plug in and access those accounts (with the customers’ permission, of course). Who knows what new businesses will be created by companies using these standard plugs to access your bank account? Who knows what new services will be delivered through the wires? It is an earthquake in the finance world and no-one can be completely sure as to what the competitive landscape will look like when the shocks have settled.
At the heart of the new regime, which began in January of this year, is the requirement for banks to implement these sockets, technically known as Application Programming Interfaces (APIs), for third-parties to obtain direct access to bank accounts. Just as apps on your smartphone can use map data through the Google Maps API or post to your Twitter stream using the Twitter API, open banking means that apps will be able to pull your statement out through an HSBC API and tell my bank to send money through a Barclays API.
Thus there is a genuinely new financial services environment coming into existence. But who will take maximum advantage of it? The incumbent banks or fintech startups? Financial services innovators or entrepreneurs who want to harness the banking infrastructure for social good? Customers taking control or challenger banks able to deliver better services to them?
I don’t think it’s any of these. Deutsche Bank Research published a note PSD 2, open banking and the value of personal data (June 2018) noting that while the new, free interfaces open up opportunities with respect to payment services, retail financing and other tailored products for fintechs who can “seamlessly attach their innovative services to the existing (banking) infrastructure”, there are others who can similarly take advantage. Retailers with a large customer bases, for example. And of course the internet giants and, somewhat surprisingly perhaps, the existing retail banks. As Deutsche Bank point out, the incumbents could also benefit and act as third-party providers “vis-à-vis other account servicing banks” and offer an array of new or extended services to their customers, which will intensify competition among all providers.
We already see these responses out in the market. Deutsche Bank themselves have announced a project with IATA and there is great work being done by other incumbents (see for example, my Barclays mobile app) as well as challengers. Of particular interest I think is Starling Bank’s strategy to create a platform for new players. But… as I have said before, I think the regulators have made a miscalculation in their entirely laudable effort to increase competition in the banking sector. In brief, forcing the banks to open up their treasure trove of customer transaction data to third parties is not going to mean a thousand fintech flowers blooming, precisely because of the advantages it affords the incumbents vs. incomers. And while some big retailers will take advantage, the overall impact will be to tip the balance of power to a new, different and potentially more problematic oligarchy (to use Vince’s label).
What is going wrong?
Back in 2016, I said about the regulators demanding that banks open up their APIs that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t it true for other organisations in general and the “internet giants” in particular? As the Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge, pointed out in the Financial Times a year ago (Digital platforms force a rethink in competition policy, 17th Aug. 2017), economies of scale and insurmountable network effects mean that it will be very difficult for fintech startups to obtain significant market traction when they are competing with these giants.
Now, of course, when I wrote about this last year for the Wired magazine Wired World in 2018, no-one paid any attention because I’m just some tech guy. But when someone like Ana Botin (Executive Chairman of Santander) started talking about it, the regulators, law makers and policy wonks began to sit up and pay notice. In the Financial Times earlier this year (Santander chair calls EU rules on payments unfair, 16th April 2018) she remarked on precisely that asymmetry in the new regulatory landscape. In short, the banks are required to open up their customer data to the internet giants but there is no reciprocal requirement for those giants to open up their customer data to the banks. Amazon gets Santander’s data, but Santander doesn’t get Amazon data. Therefore, as Ana (and many others) suspect, the banks will be pushed into being heavily regulated, low-margin pipes while the power and control of the giants will become entrenched (broadly speaking, the distribution of financial services has a better return on equity than the manufacturing of them).
It boils down to this: If Facebook can persuade me that it’s in my interest to give them access to my bank account, I can press the button to give it to them and that’s that. They can use the PSD2 APIs to get to my data. On the other hand, if a financial services provider can persuade me to give them access to my Facebook data… well, hard luck. Carlos said, rather elegantly, that one of the nice things about data as a resource is that it doesn’t get used up.
What is to be done?
Ms. Botin suggested that organisations holding the accounts of more than (for example) 50,000 people ought to be subject to some regulation to give API access to the consumer data. Not only banks, but everyone else should provide open APIs for access to customer data with the customer’s permission. This is what is being planned in Australia, where open banking is part of a wider approach to consumer data rights and there will indeed be a form of symmetry imposed by rules that prevent organisations from taking banking data without sharing their own data. If a social media company (for example) wants access to Australian’s banking data it must make its data available in a format determined by a Consumer Data Standards Body. (Note that these standards do not yet exist, and as I understand things the hope is that the industry will come forward with candidates.)
This sharing approach creates more of a level playing field by making it possible for banks to access the customer social graph but it would also encourage alternatives to services such as Instagram and Facebook to emerge. If I decide I like another chat service better than WhatApp but all of my friends are on WhatsApp, it will never get off the ground. On the other hand, if I can give it access to my WhatsApp contacts and messages then WhatsApp will have real competition.
This is approach would not stop Facebook and Google and the other from storing my data but it would stop them from hoarding it to the exclusion of competitors. As Jeni Tennison wrote for the ODI in June, a good outcome would be for “data portability to encourage and facilitate competition at a layer above these data stewards, amongst the applications that provide direct value to people”, just as the regulators hope customer-focused fintechs will do using the resource of data from the banks (who are, I think, a good example of data stewards). Making this data accessible via API would be an excellent way to obtain such an outcome.
It seems to me that this might kill two birds with one stone: it would make it easier for competitors to the internet giants to emerge and might lead to a creative rebalancing of the relationship between the financial sector and the internet sector. Instead of turning back to the 19th and 20th century anti-trust remedies against monopolies in railroads and steel and telecoms, perhaps open banking adumbrates a model for the 21st century anti-trust remedy against all oligopolies in data, relationships and reputation.
A while back, the Wall Street Journal ran a story about Amazon being in talks with major banks, including JP Morgan, about building what the Journal referred to as a “checking-account-like” product. This set off a storm of speculation about Amazon moving into the banking business, despite the obvious fact that you don’t need to be a bank to offer such a product.
One of the main reasons for the speculation growing was that consumers seem warm to the idea. Almost half of US consumers surveyed said that were “open” to the idea of Amazon as the provider of their primary bank account (according to LendEDU) which may seem surprising but I think is a reflection on consumer experiences of Amazon in practice. Yesterday I ordered some bottles of sparkling water and some bottles of Coke from Amazon, this morning they showed up. From the time I hit the “buy” button on Amazon I never gave the transactions a moment’s thought. It just works. Some commentators therefore began talking about Amazon becoming a bank. Any why not? They’ve become a book shop! I went into the Amazon store in Austin, Texas, just to buy a physical book from them because I could!
I don’t think they will, though. Why don’t I think Amazon will be a bank? Because, as was said in The Street, “I don’t think Amazon wants to be a bank in the way that JPMorgan is a bank”. Amazon just does not make money the way that banks make money. Look at their existing partnership with Bank of America to lend money to merchants. Amazon don’t care about making some small margin from interest payments, they care about helping merchants to increase Amazon’s overall sales.
If Amazon is going to distribute financial services but not be a bank, then what will it be? I think it’s time for another review of terminology and I’ve got a couple of suggestions. Let’s standardise this way: a “neo-bank” is something that looks like bank, but isn’t (eg, my Simple account when I first got it and before they were taken over by BBVA, which is an actual bank), whereas a “near-bank” is something that performs a function traditionally associated with banks but isn’t a bank and doesn’t look like a bank (eg, Transferwise). In this framework, Amazon would probably become a Neo-bank.
The neo-bank is not a new idea, by the way. In 1997, I wrote, with Consult Hyperion colleague Mike Young, an article for Internet Research (Volume 7, Number 2, p.120-128) called “Financial Services and the Internet”. In that article we wrote about the potential for the new technology to assemble a banking service depending on the customers’ needs explaining how the new infrastructure would allow customers to build their own financial services “with the underlying best-of-breed products originating from a wide range of suppliers” which the manufacturers of financial services (eg, banks) would “retreat to a small range of products that build on core competencies, but supplied to a global market”. Amazon is precisely the kind of organisation that can take these products (eg, unsecured personal credit) to that market.
In Europe, there is nothing that the banks can do to stop Amazon from becoming a neo-bank. PSD2 means that bank customers will give Amazon permission to access their bank accounts, at which point Amazon will become the interface between the customer and financial services. I’ve no reason to doubt Amazon’s potential for success if they go down this route. Time for some thought experiment scenario planning…
If Amazon were to provide something that looks like a checking account but is actually a prepaid account of some kind (as my Simple account was), would people use it? I think the answer to this is a resounding yes, especially if Amazon offer the usual array of discounts or cashback to go with it. They have plenty of margin to trade for data. Look at their credit card that gives you 5% back at Whole Foods, for example. If Starbucks can sit on a a billion (plus) in float just from people buying coffee, imagine the float that Amazon could sit on from people buying… well, everything.
If people begin holding $$$ in Amazon float that gives them a 2% discount on stuff instead of holding $$$ in a bank account that gives them a 0.2% interest rate, funds will begin to drain away from demand deposits pretty damn quickly. Now imagine how quickly that might happen in Europe, where Amazon can use PSD2 to get direct access to customer bank accounts in order to instruct credit transfers to load to Amazon accounts automatically, something like their US Amazon Cash service but using modern electronic instant payments transistors and laser beams instead of Federal Reserve bills. It could be seriously big business.