Breaking up Big Tech is so last century

What should regulators do about the power of the big technology companies? In America, the Justice Department has just filed massive anti-trust suit against Google, which many think marks the beginning of a new era of regulation for “Big Tech” and the the House Judiciary Committee’s antitrust panel have just completed a 16 month investigation into Amazon, Apple, Google and Facebook. That panel found that Big Tech has what is calls “monopoly power” in key business segments and has “abused” its dominance in the marketplace. It was a thorough condemnation of the internet giants. The panel complains that there is “significant evidence” to show that BigTech’s anticompetitive conduct has hindered innovation, reduced consumer choice and even weakened democracy.

So, what is to be done? I had the honour of chairing Professor Scott Galloway who is the author of “The Four”, an excellent book about the power of internet giants (specifically Google, Apple, Facebook and Amazon – hence the title), at a conference in Washington a while back. He set 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 Professor Galloway argues that they will have to step in again, and for the same reason: to save capitalism.Galloway

With Professor Galloway in Washington, DC.

Professor Galloway argues that the way to do this is to break up the internet giants. Should Congress go down this route? Well, one of the panel’s own members, Ken Buck (Republican), while agreeing with the diagnosis, said that the Democratic-led panel’s proposal to force platform companies to separate their lines of business (ie, break them up) is not the right way forward. I agree. Forcing Amazon to spin out Amazon Web Services (to use an obvious and much-discussed example) won’t make any difference to Amazon’s role in the online commerce world.

Breaking up big companies seems to me an already outdated industrial-age response in the post-industrial economy. Click To Tweet

Google is not U.S. Steel, data is not the new West Texas Intermediate and Facebook is not the new Standard Oil. However, the idea of focusing regulation on the refining and distribution of one of the modern economy’s crucial resources has logic to it. We need this regulation to protect competition in the always-on world of today and there are plenty of alternatives to breaking up technology companies, as Angela Chen explained very well in MIT Technology Review last year. Perhaps the most fruitful way forward is an approach based on a future capitalist framework along the lines of what Viktor Mayer-Schönberger and Thomas Range called in Foreign Affairs a “progressive data sharing mandate”.

There are many informed observers who say that America should to look see what is going on in Europe in order to formulate this kind of approach: Here in Forbes last year, Robert Seamans and “Washington Bytes” highlighted data portability as a potentially valuable approach and pointed to the UK’s open banking regulation as a source of ideas. I think this makes a lot of sense and that a good way to explore what some form of data-centric remedy might look like is indeed to take a look at Europe’s open banking regime. More specifically, start with what it got wrong: because in that mistake are the seeds of a solution.

Cake

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

Back in 2016, I wrote about the regulators demanding that banks open up their APIs to give access to customer data 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 that true for Big Tech?

When I said that the regulators were giving Big Tech a boost in “Wired World in 2018”, no-one paid any attention because I’m just some tech guy. But when Ana Botin (Executive Chairman of Santander) began talking about the lack of any reciprocal requirement for those giants to open up their customer data to the banks, regulators, law makers and policy wonks began to sit up and pay notice. She 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 along the lines of what is being implemented 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. The Australian Competition and Consumer Commission (ACCC) has already had enquiries from international technology companies wanting to participate in open banking. The banks and many others want this method of opening up to be extended beyond what are known as the “designated” sectors, currently banking and utilities, so that if a social media company (for example) wants access to Australian’s banking data it must become an “accredited data recipient” which means it turn that it must make its data available (in a format determined by a Consumer Data Standards Body).

A symmetrical approach along these lines would not stop Facebook and Google and the others from storing personal data but it would stop them from hoarding it to the exclusion of competitors. As Jeni Tennison set out for the UK’s Open Data Institute, such a framework would allow “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.

SIBOS 2020

This year, the SIBOS event was totally online.

At this year’s SIBOS (it’s a sort of Burning Man for bankers), the CEO of ING Steven Van Rijswijk re-iterated the need for reciprocity, saying that he wanted the regulators come up with an equivalent for banks so “the data flow can go two ways”. Well, this may be on the horizon. As the Financial Times observed, an early draft of the EU’s new Digital Services Act shows it wants to force Big Tech companies to share their “huge troves” of customer data with competitors. The EU says that Amazon, Google, Facebook and others “shall not use data collected on the platform . . . for their own commercial activities . . . unless they make it accessible to business users active in the same commercial activities”.

It seems to me that U.S. regulators might use this approach to kill two birds with one stone: requiring both Big Banking and Big Tech to provide API access to customer’s data. Why shouldn’t my bank be able to use my LinkedIn graph as input to a credit decision? Why shouldn’t my Novi wallet be able access my bank account? Why shouldn’t my IMDB app be able to access my Netflix, Prime and Apple TV services (it would be great to have a single app to view all of my streaming services together).

Symmetric data exchange enforcing consumer-centric data rights can lead to a creative rebalancing of the relationship between the technology and banking sectors and make it easier for new competitors in both to emerge. 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. The way to deal with the power of BigTech is not to break them up, but to open them up.

[This is an edited version of an article that was first published on Forbes, 12th October 2020.]

What fintech revolution?

You may have missed World Fintech Day this year. It was 1st August, a date chosen by (amongst others) my good friend Brett King. It was a day to take some time to congratulate an industry that has achieved… well, what exactly? What is there to celebrate when the truth is that we haven’t yet had a fintech revolution or anything like one. The “challenger banks” are just banks, they haven’t brought new business models or changed market dynamics.

If you think I’m being harsh, take at look at this survey of almost 800 companies that has just ranked financial services as one of the least innovative sectors of the economy! We all expect the pharmaceutical companies, to pick an obvious example, to be more innovative than banks. And according to this survey, they are. But even the textile industry is more innovative than banking, where business models and the cost of intermediation (which I would see as being a key measure of productivity) haven’t changed for generations. Yes, fintech has brought financial services to hundreds of millions of people in developing markets, but it has yet to transform developed markets.

Even the textile industry is more innovative than banking, where business models and the cost of intermediation haven’t changed for generations Click To Tweet

Why has nothing happened?

Well, there’s a story that I tell at seminars now and then about a guy who was retiring from a bank after spending almost his entire working life there (I heard the story a couple of times from a couple of different people but as far as I know its earliest written form is in Martin Mayer’s excellent book “The Bankers“).

The guy in question had risen to a fairly senior position, so he got a fancy retirement party as I believe is the custom in such institutions. When he stepped up on stage to accept his retirement gift, the chairman of the bank conducted a short interview with him to review his lifetime of service.

He asked the retiree “you’ve been here for such a long time and you’ve seen so many changes, so much new technology in your time here, tell us which new technology made the biggest difference to your job?”

The guy thought for a few seconds and then said  “air conditioning”.

It’s a funny story, but it’s an important story because it includes a profound truth. Robert Gordon’s magisterial investigation of productivity in the US economy “The Rise and Fall of American Growth”, shows very clearly that the introduction of air conditioning did indeed lead to a measurable jump in productivity, clearly visible in the productivity statistics. Of course, other technologies led to improvements in the productivity of banks and the wider financial services sector. Computers, for example. But it took a while for them to transform anything (we all remember Robert Solow’s 1987 “productivity paradox” that computers were everywhere except for the productivity statistics) and the figures seem to show that those improvements slowed to a standstill a couple of decades ago.

Pinkcard

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

In the last decade, the smart phone revolution does not seem to have been accompanied by any increase in productivity at all and it’s not just because half the workforce are playing Candy Crush and the other half are messing around on Instagram instead of doing any useful work. It is, as Gordon notes, because the technologies are being used to support existing products, processes, regulation and institutional structures rather than to create new and better ways of delivering financial services functionality into the economy. So while there are individual fintechs that have been incredibly successful (look at Paypal, the granddaddy of fin techs that is going gangbusters and just has its first five billion dollar quarter), fintech has yet to fulfil its promise of making the financial sector radically more efficient, more innovative and more useful to more people.

I can illustrate this point quite simply. While I was writing the piece, I happened to be out shopping and I went to get a coffee. I wanted a latte, my wife wanted a flat white. While I was walking toward the coffee shop, I used their app to order the drink. The app asked which shop I wanted to pick up the drinks from, defaulting using location services to the one that was about 50 yards away from me. Everything went smoothly until it came to payment. The app asked me for the CVV of my selected payment card, which I did not know so I had to open my password manager to find it. After I entered the CVV, I then saw a message about authentication. What a member of the general public would have made of this I’m not sure, but I knew that they message related to the Second Payment Services Directive (PSD2) requirement for Strong Customer Authentication (SCA) that was demanding a One Time Password (OTP) which was going to sent via the wholly insecure Short Message Service (SMS). Shortly afterwards, a text arrived with a number in it and I had to type the number in to the app. The internet, the mobile phone and the app had completely reinvented the retail experience whereas the payment experience was authentication chromewash on top of a three digit band-aid on top of a card-not-present hack on top of a 16-digit identifier on a card product that was launched in a time before the IBM 360 was even thought of.

Thomas Phillipon of the Stern School at NYU carried out a very detailed analysis of the US financial sector back in 2014 and found that the unit cost of financial intermediation was around 1.87% on average (which is a lot of money). This adds up to a significant chunk of GDP. Indeed, calculations seem to indicate that the finance sector consumes about 2% excess GDP. What’s more, these costs do not seem to have decreased significantly in recent years, despite advances in information technology and despite changes in the organization of the finance industry.  Earlier World Bank work looking at the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data from 1,400 banks across 72 countries tells us why: tighter regulations on bank entry and bank activities increase the cost of intermediation.

To put it crudely, Moore’s Law and Metcalfe’s Law are overcome by the actual law and the costs of KYC, AML, CTF, PEP, Basle II, MiFID, Durbin and so and forth climb far faster than costs of transistors fall. This observation in fact shows us the way forward. As technology has driven down the costs of computing and communications, the costs of shifting bits around has collapsed. But financial services is — as it should be — heavily regulated and the costs of that regulation have rocketed. The net result is that fintech has not brought about a revolution. If there is going to be such a revolution, if new technology is allowed to create new business models and new market structures, and if those new structures are to reduce the costs of intermediation, then we need the regulators to create the space for innovation. And perhaps, just perhaps, they have: open banking is the first step on an open data road that may ultimately not only revolutionise payments, banking and credit but… everything.

Banking Bubbles no attribution

@dgwbirch The Glass Bank (2020).

We all understand that the future competitive landscape is about data, so the regulators can make an more innovative platform for enterprise by opening up access to it and then providing new kinds of institutions to curate it (such as the Payment Institution in the European Union and the Payment Bank in India). This kind of regulatory innovation may allow fintech to deliver what it promised and lay the groundwork for some actual challengers. So, this World Fintech Day, let’s celebrate fintech for what it is going to bring as we move forward into the open banking era, not for what it has achieved so far.

[An edited version of this piece first appeared in Forbes, 1st August 2020.]

PSD3 call me

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.

Not neutral

Emily Nagel, the CEO of Yankee Group, has a book called “Anywhere“. I happened to be reading this last week, and I came across the section on “I’m from the government and I’m here to help” in Chapter 11, “Anywhere Unknowns”. In it, she makes a good point about net neutrality and she says

…at Yankee Group our perspective is that legislating the ways in which the network capacity can or cannot be monetised by the networks’ owners is likely to stifle their efforts to find ways to monetise the constantly increasing traffic loading their networks.

This is absolutely spot on. It is perfectly reasonable for Virgin Media to charge me for QoS and GoS (Quality of Service and Grade of Service, as us old telecommunications hands still think of them). But it is not reasonable for them to charge me depending on what, or who, I am connected to. What’s more, it will never work. If Virgin (my ISP) wanted to charge me extra for looking at the BBC website or accessing BBC iPlayer rather than Virgin’s web site, then I would simply log on through an SSL VPN all the time, instead of only when I am overseas and want to telly, as I do now. I also use a US VPN when I want to watch “The Daily Show” sometimes. Once everyone has switched to encrypted VPNs, then none of the ISPs will know what anyone is connected to. Anyway, who would be against net neutrality?

In a speech entitled “The Open Internet” Communications Minister Ed Vaizey was said to have opened the floodgates for, say, Sky to provide a broadband service that prioritised its TV catch-up services and made those of the BBC practically unwatchable.

[From Ed Vaizey: ‘My overriding priority is an open internet’ – Telegraph]

I went along to the Houses of Parliament a few days ago at the invitation of Stephen McPartland MP and Alun Michael MP to hear Britain’s Communications supremo, Ed Vaizey, talk about this. The Hon. Edward Vaizey went to one of the most expensive private schools in the country (the same one as Nick Clegg) and is a barrister, and is therefore ideally suited to job of Parliamentary Under Secretary of State for Culture, Communications and Creative Industries. Hansard says that one of his specialist subjects is “light bulbs”. That was why I was looking forward to his speech. He said that:

  • The Government’s communications policy is going to attract high-tech industries to the UK. He never said how, and I was left puzzled as to how his views on net neutrality might support this contention.
  • There will be a digital single market… Broadband… inclusion… Consumer confidence…
  • We should develop “rights management system fit for a digital age” but he didn’t even allude to what this might be or what its requirements might be. I strongly suspect that he is not thinking of maximising the net welfare, but that’s a personal opinion.
  • Competition in telecoms is a good thing and national regulators should stand up to incumbents, something that I’m sure we’d all agree with, especially when those incumbents campaign against net neutrality (this is what BT mean by traffic management based on “types of expected usage“).

He mentioned something about IPv6 in passing, but I didn’t quite catch it. I may be wrong, but I shouldn’t think he knows what IPv6 actually is, so it probably doesn’t matter. He didn’t take questions and left immediately after his talk, but I’m sure we was able to ascertain many of the opinions of the assembled experts by some sort of osmosis as he brushed through the crowd to the exit. Incidentally, he also said “Britain is no longer an island”, which made me laugh out loud because it reminded of the old Not the Nine O’Clock News sketch where “Lord Carrington” says “Britain is not an island” and “Robin Day” cut him off with “Well I’m afraid it still is Peter”.

 

In the future, everyone will be famous for fifteen megabytes… [posted with ecto]