Four Technologies That Will Revolutionize Financial Services


(first published on bankinnovation.net)

A new wave of technological change is right beyond the next hill, really in the next couple of years. Its most visible symptom is the hyper-connectivity to the Internet, which fuels the evolution of:

  • bitcoin-inspired distributed systems,
  • open APIs (application programming interface) as a new way to consume business services on the internet,
  • crowd-sourced identity schemes, and
  • open source hardware and applications.

How can the traditional industry players prepare for such changes? How can we leverage these changes to make low cost, secure and reliable financial services available for everyone on the planet?

Imagine yourself being an electro-mechanical engineer back in the late 1940s. This was a period of vacuum tube electronics, and the appliances using this technology were widely used from the household to the heavy industry. it was a time where the technology was mastered. This vacuum tube “castle”, a safe and predictable technology, had gone through many cycles of improvement since its inception at the turn of the century. On the other hand, it was clear that the technology was reaching its limits in many applications that required different characteristics of portability and power consumption. The ”sandbox” experiment that would revolutionize the whole field of electronics had been carried out in Bell Laboratories and was unveiled in 1948 – the transistor. We know what happened next. Of course, with the benefit of hindsight, it is clear that the transistor would wipe away the old technology. But I’m sure that it was not so obvious to electro- mechanical engineers a few short years before 1948.

Is the traditional consumer financial system, based on bank accounts, in the same situation today? Are we in the age of “vacuum tube financial services”, with the transistor right beyond the next hill? I can see solid, substantiated indicators that make me think we are indeed facing such change. I’ve observed these indicators over the last year, and they appeared even more clearly to me in the new job I took in the Financial Services for the Poor and the Bill & Melinda Gates Foundation.

Let’s first consider a number of changes that can be observed on the way people perceive and use financial services. Technology has so far made it possible to accelerate the pace and volume of transactions, but it has not transformed the relationship between the industry and its customers in the same way as it has in, say, publishing (from books to e-books), movies (from DVD to mp4), or popular music (from CD to mp3 to streaming).

Changes in the use of financial services

The first change comes from the next generation of consumers. The Internet is now more than 20 years old, which means that anyone under 40 has never known a social or working life without it. As a result, younger consumers come to the market with different expectations from service providers. Instead of technology being used to hold them captive, they expect service providers to use technology to empower them to determine not only how services will be provided, but what services will be provided. Just consider how today people prefer to use their Facebook name to identify themselves to new sites on the Internet, showing how the power gradually moves into their hands.

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The next billion connected people. They will have a voice they don’t have now.

The second change comes from the estimated 2+ billion people who today have no access to any financial service, and resort to cash for all transactions. The traditional banking system has all but ignored them, as they don’t fit the established business model of the
banks. The problem the banks have in serving these people is not so much in terms of lack of revenues, but it is mostly of having access to them, as many of the poor people are far away in rural areas without traditional banking coverage (branches and ATMs). The other problem is getting to know them, as the traditional ways of identifying people (social security, street addresses, etc.) are mostly not available to these people. On the other hand, a large majority of them have a mobile phone, a very powerful instrument of communication but also inclusion. This explains why the telecommunication companies are increasingly seen as instrumental in making financial services available to the unbanked.

The last change comes in the way we access and consume financial services. Perhaps this change is most perceptible with the advent of the tablets. As an European consumer until recently, I was used in dealing with my few banks through heavily secured web sites – all different, all using specific and incompatible hardware security tokens. The smart phones and especially tablets have simplified this considerably, but most of us are still facing a different app for each service provider, while what we really want is to have a seamless and integrated view of our financial assets. One identity, one user interface for all service providers.

The above changes – really new, fundamental requirements – are driving the pace of technological innovation. I’ve observed four of these innovations, and I will illustrate them mentioning companies that have products available today or in a matter of months (I’m mentioning these particular companies because I had the opportunity to study them firsthand. I’m not related in any way with any of the mentioned companies).

Four financial innovations

The first innovation is bitcoin. I think of “bitcoin” (lower case) as a technology, as opposed to “Bitcoin” (upper case) the crypto-currency. Bitcoin, the currency, has been through several boom and bust cycles, served (or not so well served) by the Bitcoin exchanges, some of which have recently succumbed to concerted hacking attacks. It is possible that the new wave of exchanges, should they be better equipped for operational excellence and “five-nines” availability, will propel Bitcoin as a widely used currency.

In my mind though, the true innovation is not about the currency but is about the bitcoin blockchain, a single database massively distributed and replicated, without any central coordinating point. Ripple, a company based in San Francisco, uses this idea to propose what they describe as a low cost, worldwide, multi-currency payment mechanism they say is faster, more secure and simpler to use than any banking based alternative. The system is based on secure wallets managed by the users themselves, and a distributed ledger inspired by the bitcoin blockchain. From the customer perspective, the operative word is low cost – the system is open, and as there is no central authority necessary, there are therefore no fees associated to intermediaries.

The second innovation is the business API (application programming interface). The API has been used since many years by software developers to assemble program components within an application. The new use of APIs is to make business functions available as components on the Internet (think how Google Maps can be integrated into other applications and web sites).

The promise of APIs is to grow volumes from existing customers, and attract new customers without friction. Adopting APIs does require though a leap of faith in the traditional marketing doctrine – indeed, rather than trying to “capture” customers into a bespoke system, the API actually fosters opening the systems to be freely assembled by the consumers in the way they desire. As such, making the move to business APIs is a tricky decision to make for many businesses, especially the banks.

Stripe, a company based in San Francisco, proposes to enable a business to process electronic payments simply by integrating Stripe’s APIs (and supporting processes). Apigee, another company in the Silicon Valley, propose to “API-ise” a business and make their services available in new ways on the Internet. So does the Open Bank Project, a German startup, who focuses specifically on banks.

The third innovation is a crowd-sourced, social media based, identity system.
In the current financial system, regulation impose that banks and other players conduct “Know Your Customer” (KYC) activities, with the goal of confirming the identity of people that open accounts and conduct transactions. In many occasions though, KYC proves to be very cumbersome because it implies manual checks of various documents. I can vouch, as a newcomer in the USA, that opening an account can be very tricky if you don’t have a document proving that you live at a particular address (but living at a particular address does require usually to have a bank account, as you need to pay rent or mortgage – you can see how tricky this can be). Viewed from the perspective of onboarding billions of people, it is clear that a different solution is needed. OIX (the open identity exchange) and the Respect Network have come up with a crowd-sourced reputation system on the internet, where people on the internet can trust each other based on their digital reputation. I’ve written previously about how this works in some detail. I’ll use another example to illustrate – think about your persona on Facebook. Your timeline, friends, likes describe a digital identity that can be trusted over time, as more and more interactions accumulate. In other words, another way to look at Facebook (or LinkedIn and other major social networks) is as a trusted identity system. Now, Facebook connects in excess of one billion people, many of them unbanked, which could be a great opportunity to hook these people to financial services without friction. For example, Fidor, a financial service provider in Germany, allows you to open an account with only your Facebook profile. Of course, they will only let you start with a reduced service, and will provide additional financial services as they know more about you. This “tiered KYC” system reduces friction and is a powerful instrument of inclusion.

The fourth innovation is about using the open source movement in the context of financial services. Mozilla is a good example of how it is possible to create a community of millions of developers working on the same project, based on meritocracy. Outside of the well known Android and Firefox projects, Mozilla has recently shown that open source can be applied to hardware and not only software – the $25 Mozilla smart phone promises to be another instrument of inclusion to the internet, and also of course financial services in the long run. I’ve written about how the open source concept is being applying to core financial systems. Allevo, a Romanian software company, has recently put in the open source domain a core banking transaction-processing software. OpenGamma is a UK startup that uses open source to provide a risk analytics platform, one of the “crown jewels” of banking, to financial institutions.

How can we then envision a financial system that rides the wave of change, and leverages the technological innovations we have reviewed above?

I think about this from the perspective of the billions of unbanked, and the next billion of hyper-connected individuals that will be the customers of tomorrow. The financial system will need to be a platform that federates existing players (such as banks) and new players (such as telecommunication companies and other information technology companies) that will -

  • Be accessible safely and reliably from connected devices, from feature phones to smart phones to other specialized (wearable?) devices.
  • Enable new customers to be connected seamlessly, using a crowd- sourced and flexible “know your customer” system
  • Enable customers to own their accounts, and operate them themselves or choose freely who to contract to operate it for them
  • Be based on open APIs so new service providers (payments, insurances, loans, etc.) can be connected and discovered easily.
  • Be based on open APIs so customers can freely choose how to combine the services on the platform in new ways that suit them

In addition, the platform should be available in open source – so that it can be permanently refined and built upon, as a common asset of the humanity.

Deploying such a platform and fostering its deployment in countries and – why not – globally: that is the ambition of the Financial Services for the Poor initiative of the Bill & Melinda Gates Foundation. In this endeavor, the technology I describe will be necessary, but not sufficient. As I have written previously, another important aspect of the work will be to put all the key stakeholders around the table – banks, central banks, telcos, startups. All hands will be needed on deck to deploy the technology to work openly, safely and reliably.

The Digital Disruption Of Financial Services


I’m lucky to have a job where I have the opportunity to meet a lot of innovators in financial services and fin-tech. As a consequence I build up a sense of the state of the industry and the key trends ahead, and I love to share these insights on this blog.

Of course, I had the finger on the pulse of the fin-tech startup community in my Innotribe job in the last 4 years. Now, working for the Bill & Melinda Gates Foundation, I focus on building financial payment platforms for the poor people and thus meet a wide range of stakeholders – governments, banks and central banks, telcos, mobile money operators, technology giants and startups. I can tell it makes for a very wide perspective and I do spend considerable time thinking and integrating this rich input.

I love doodling as well, so when inspiration comes I take my iPad and my faithful Jot pen and I try to capture this in a drawing. Here’s the latest one – a cartoon depicting in a funny way what I think is the state of the consumer financial services industry.

Image

I’ve posted it on Twitter and it generated an incredible amount of interest, so I thought I’d share some more about the underlying thinking, and also some additional insights coming from the numerous comments on Twitter.

philip1 Well, optimist that I am, I really thought of my drawing as a cartoon, exaggerating a situation to make a point. Philip rightly points out that sometimes real life is itself an exaggeration!

jorge

Indeed, I don’t think someone will acquire a global bank with 2 trillion US dollars in its balance sheet. But the point is not about acquisition, it is about who will eat these bank’s lunch if they don’t pay attention. Telcos are tempted to provide financial accounts, even though it makes them getting into the murky (for them) waters of financial regulation. In fact, in my focus countries (Nigeria, Indonesia, India, Pakistan and Bangladesh), telcos are probably best placed to reach out to poor people in remote, rural areas.

By delivering financial accounts and person-to-person payments, telcos and other mobile money operators are developing the next generation of low cost payments platforms. My belief is that these new platform will simply prevail in the traditional financial system (often referred to as “the rails”) – why in the world would we continue to use more complex and costly variants? In other words, if banks don’t embrace these new recipes for lower cost rails, they will be in dire straits. The readers of my book (“The Castle And The Sandbox”) will recognise this argument – banks will need to step out of their established “castles” and innovate and experiment in “sandboxes” to understand and adopt these new platforms.

The bounty, the vision, is the volume that will be brought in the system by the 2,5 Billion people who are currently out of any financial system.

alexey

nacho

Agreed, the predators are everywhere. Just to prove the point that banks can indeed step out of the castle, Simple was recently acquired by BBVA. I knew this when I drew the cartoon, and voluntarily included Simple in the “startups” cloud, just to show that nothing is really simple in the fin-tech eco-system :-)

benjamin

daniel

There is a show on French TV (“On n’est pas couché”) that used to start by introducing who is NOT invited to the show. Similarly, I’ve had a number of comments about who is not shown in the cartoon, and notably Paypal, Visa and MasterCard.

For me, the core business of these companies is really part of the current “rails”, so in my mind they are included in the “banks” cake in the cartoon. I know this is a big shortcut, and I can hear all the objections coming. But hey, as the author of the cartoon, I can choose who to invite in, right? ;-)

More seriously, I do think Paypal, the card companies, and indeed many banks do have innovative products and services “on the rails”. If you are following my blog you know that I’m a big fan of Paypal for international payments.

Now, on to the “hot” topic!

philippe

tomasz

I hope Philippe will comment on this post and explain more. I love the way Tomasz has captured my meaning – “Bitcoin slowly but surely heats up the pan”. I’ve written here why I think Bitcoin is important for the fin-tech industry – in a nutshell it’s not about the Bitcoin currency (which may or may not become one of the trading currencies on par with the RMB or the USD) but about the bitcoin (lowercase) inspired technology: the bitcoin blockchain and its massively distributed architecture. I believe this architecture will influence how the financial transactions are performed in the future. I used the opportunity of this post to add Ripple to the cartoon – I’ve also written about how this company uses the bitcoin blockchain architecture to perform very low cost international money transfers.

gigi

Gigi has the last word on bitcoin – financial technology, all electrons that it is, needs to contribute, as all other industries, to the massive ecological problem we are facing as a civilisation.

daniele

sam

Danièle, Sam, and all the numerous others who have retweeted and favorited my tweets – many thanks for your kind words!

And I give the final word – pardon, picture – to Jorge. And Jorge please comment below and tell us more on your thinking!

jorge1

 

The Startups That Will Change Our Lives


I was asked recently - what technologies are most prone to change the world in the next 3 years?

It’s the type of question where you’d naturally start thinking about artificial intelligence, 3D printing, robotics and other advanced science topics.

But, after giving it some thought,  I think what will impact us most is not new technology, but a very clever use of the technology we already have.

Namely: smartphones and the pervasive permanent connectivity that they bring.

Mark Pesce, a futurist who was with me at an Innotribe event last year , calls it “hyper-connectivity”.  Erik Kruse, networked society evangelist at Ericsson and another Innotriber, calls it “the internet of things”.

Because smartphones make each one of us a geo-located, connected, data beaming and data absorbing walking entity, they enable a complex person to person or person-to-business mesh or grid. This was not possible before, simply because we were not connected in the way we are now.

I’ve been privileged to be on the jury of the Innotribe Startup Challenge and the Accenture Financial Services Innovation Award, and I’ve seen three innovative uses of smartphones by startup companies (or startup units within larger companies) that illustrate what this hyper-connectivity means.

1. The truly remarkable effect of the hyper-connectivity is removing “friction”, to use another of Mark Pesce’s term, in the day-to-day transactions.  Peer-to-peer is replacing hub-and-spoke models for more efficiency, volume and convenience.

Uber is an excellent illustration. It’s an app produced by a start-up company that connects people in need of transportation with participating drivers of luxury vehicles. No intermediary needed. It started in San Francisco streets, and is expanding rapidly in other cities in the US and Europe. You can imagine what Uber does to traditional dispatch (hub and spoke) cab companies. And you can understand why the cab companies are desperately trying to stop Uber.

I’m watching closely Uber in its quest to make friction disappear.

2. Another additional clever use of smartphones is in the person to person (peer to peer or P2P) payment space . There was a lot of talk in the last couple of years about NFC and related technologies to enable P2P payments with a hardware proximity based sensors. But right now NFC proves to be more of a friction than an enabler, as it requires a massive upgrade of all the smartphones to support the technology. A feat that requires Apple and Samsung to agree to roll it out…

A Belgian payments company called Bancontact/MisterCash has not waited and is rolling out a P2P payment solution using a very simple thing – the QR code.

Rather than relying on the hardware, they realised they can solve the problem with onboard technology already available on smartphones:

  • a high definition screen, on the vendor’s smartphone, to display a QR code with all the selling information (amount, nature, location etc)
  • a camera, on the buyer’s smartphone, to scan the QR code from the vendor’s smartphone screen, and initiate the payment using Bancontact’s existing debit card payment scheme

This solution requires both the buyer and the seller to be part of the Bancontact scheme, and to have the Bancontact app installed on the buyer’s and seller’s smartphones.

In Belgium, these are very low, frictionless, requirements and I predict a big success to this scheme.

3. The last illustration of hyper-connectivity is in the couponing space – enabling consumers to manage and benefit the coupons provided by merchants.  When you think of it, coupons are nice – as they give you price reductions and other benefits at your local stores – but they don’t really empower the consumers that we are. We are supposed to collect coupons, store them, understand how and when to use them, understand how they can be combined etc. Rather than a benefit, coupons prove to be a headache in many situations.

Apple has released last year an app called Passbook that allows to store some of these coupons and other items such as boarding passes. But this is only scratching the surface. There are startups out there that use hyper-connectivity to enable much more powerful scenarios. The idea is that your smartphone realises through geo-location that you are approaching a participating merchant and, suggests, in real-time, how to best use the coupons you have on your smartphone. Truaxis, recently acquired by MasterCard, is one such startup. Fidelsys, in Belgium, is another startup providing innovative solutions in this space.

It’s amazing to see how the hyper-connectivity brought by smartphones enables innovation. The smartphones are a platform on which infinite and clever new business models can thrive.

It’s truly the Far West of the internet.

Four Questions (And Answers) About Open Source Software In Finance


The subject of open source software came about in several recent discussions and I thought the key points would be relevant for this blog. Here’s a summary in the form of a Q&A.

1. Open source software has been identified as a tool that can be used for highly commoditised IT tasks, including compliance, measuring performance, etc. Is this generally where financial services organisations use open source or is it transferring into other areas too? 

Open source has been used primarily in IT shops and especially on Unix platforms, where a number of necessary components are by tradition open source (things like file systems or graphical user interfaces).

Over time, cost pressure has led the IT organizations to consider open source for mission critical components such as database management systems (mySQL) or the operating system itself (Linux).

What I’m seeing now is the open source approach being used in the application space, driven by commoditisation and also the search for new profitable business models. Let me point out two interesting examples-

  • OpenGamma is a UK based startup. They were the winner of last year’s Innotribe Startup Challenge regional showcase in Belfast. OpenGamma used the open source approach to provide a risk analytics platform to financial institutions. Quoting  Kirk Wylie, CEO of OpenGamma:
    “The idea of OpenGamma came from a need I noticed while working in the risk and front office technology for financial services firms.
    My job was building generic infrastructures,  but infrastructure for which there wasn’t a viable commercial offering. With financial services firms looking for cost reductions in every part of their operations, it seemed absurd that most of their IT budget was spent on building and maintaining expensive in-house systems that didn’t hold any proprietary value to the company. Trading and risk analytics systems are plumbing; as long as it works you shouldn’t notice it.
    So why should every firm build their own from scratch? Why shouldn’t there be an open source solution out there available to all?
    This thought triggedred an email to the other two co-founders, and the idea for OpenGamma was born”
    See more about OpenGamma here.
  • Allevo is a Romanian based software company. They took a big bold bet, and decided to put their core product – FinTP, a financial transation processing platform – in open source. They want to attract new customers for their platform, and want to transform their business model from software seller to support provider. Quoting Sorin Guiman, the CEO of Allevo: “Why shouldn’t every bank out there, doing the exact same thing in the back-office systems, use the same payment application? Customers don’t care what these systems look like, they care about what customized cool products and services their bank is able to deliver to them and the way these are delivered. We see no dangers for financial institutions to adopt open source software in their back-office systems, but rather an opportunity to become more relevant, in pace with technology”
    See more about Allevo here.

2. Are there any serious security issues in mixing open source and proprietary software? 

I’ll quote Sorin Guiman again: “Security by obscurity is widely denigrated – it does not mean that if one doesn’t have access to the source code, that code cannot be cracked.”

One of the main advantages of open source software is that any security issue is transparently known and can be collectively & rapidly solved by the community developers, making the application at least as secure as the proprietary one. Thus the mix of the two cannot hurt more than mixing any types of software.

3. Is there not an argument that open source security problems are easier to pick up – and solve– than ‘commercial’ software?

Having more eyes to see the code, getting issues solved, patches released and installed is definitely a faster process in open source software. I like to quote Bill Vass , the COO of late Sun Microsystems:

“If the Trojan Horse was made of glass, would the Trojans have rolled it into their city?”

4. How do you see open source take-up developing in 2013? Are there any clear trends that could emerge?

Financial institutions are starting to take open source software more seriously.

Allevo, OpenGamma are examples of firms pioneering the way in 2013 for financial services. I also think this is not only a financial industry trend; governments have started for a few years now to create policies designed specifically to encourage the use & adoption of open source software.

The Three Best Job Titles Of 2012 (And A Wish For 2013)


For me, 2012 was an intense year of encounters and meeting of the minds. As I was replaying it in my mind, I remembered three unusual job titles, and three special persons behind those job titles.

These persons and their titles also represent what I wish to be hot topics for 2013 - possibilities, innovation and the “internet of things”.

The first best job title of 2012 is “Princess of Possibility”, and it is proudly worn by Min Xuan Lee (twitter: @minxuan, LinkedIn), co-founder of PlayMoolah.

PlayMoolah was the winner of the Innotribe Startup Challenge 2012, and I had the pleasure of giving Min and Audrey  Tan (the other co-founder of PlayMoolah) the $50,000 prize at Innotribe@Sibos Osaka in November 2012. More about PlayMoolah in my earlier post on this blog.

Audrey (left) and Min (right) with PlayMoolah kids

Min has chosen the “Princess of Possibility” job title, and I find it goes perfectly with her – she is all smiles, outgoing and very kind. At the same time, she (and Audrey) relentlessly pursue a very ambitious and noble goal related to kids (educating them to master money and finance). And she manages to pull some magic (which really is all about perseverance and passion) to make this small startup grow.

The second best  job title of 2012  is “Chief Happiness Officer”, and is a title that has been acquired after considerable effort by Laurence Vanhée (twitter:@happy_laurence, LinkedIn). Surely by now you must be thinking Laurence works in some startup in the Silicon Valley to claim a title like that. Well, not really. Laurence works as the head of human resources at the Belgian Ministry of Social Security. One of her basic beliefs (to which I subscribe 100%) is that people should be happy at work. Here is her TEDx talk explaining some of the ways she uses to make this happen in a governmental organisation.  Don’t do the mistake of considering this as wishful thinking. Laurence is a woman on a mission, and she has many success to demonstrate that, yes, being happy at work is possible and necessary.

The Innotribe team has recently run an “Ignite” event at SWIFT – a kind of a TED event for the SWIFT employees, where we have brought some of the best 2012 Innotribe speakers (in fact we call them “Igniters”) to inspire our people. Laurence was with us and here is my sketch of her talk.

Happy Laurence’s Happy@Work talk

I really love the way Laurence says it – “Don’t Complain, Innovate!”. It’s a mantra that helps me at many occasions.

The third best job title of 2012 goes to Erik Kruse, “Networked Society Evangelist” at Ericsson. I got in touch with Erik (LinkedIn) when organising a SWIFT Business Forum is Oslo earlier in October 2012, and he simply … evangelised … me. I’m a technologist at heart, and he talks about pervasive technology, hyper-connectivity, and the “internet of things” (the internet where billions of humans but also hundreds of billions of things – computers, cars, fridges, micro-drones – will be connected and interacting). I’ve heard similar speeches before, and they tend to be threatening (at least to me). The big difference with Erik is that he explains this simply, in a non agressive manner. He is very humble and he talks in a kind of  “around an open fire” manner. I also like the way he uses the life of his son to illustrate many of his concepts. Here is his TEDx talk for you to enjoy.

I also invited Erik at the Ignite event at SWIFT, and here is my sketch of his talk.

Erik Kruse’s The Internet Of Things

Erik Kruse uses the expression “Digital Transfomation” which I vibrate in sync with, see here for my thoughts about the digital transformation of finance.

2012 is drawing to a close, and as I said I had the privilege of meeting and interacting with incredibly creative and innovative people. I’ve highlighted three of them in this post, as they have what I thought to be inspiring job titles, but if you read this blog you will find out about many others.

On to 2013 - I think the above three job titles are the perfect representation of my wishes -

- Possibilities. We need to be open, to scan and understand the tremendous change we’re going through, driven by technology.

- Don’t complain, innovate. For the financial industry, this means: yes, we have more regulation, more rules, more costs. And yes, we have to do all of that with flat or reduced budgets. The only way ahead is innovation.

- The “internet of things” or hyper-connectivity. This drives tremendous changes in the social fabric, especially with the younger generation, soon to become our new employees and/or consumers. Focusing and understanding this new generation will be of paramount importance.

I want to use the opportunity to wish you an innovative, sparkling, exciting 2013.

A HAPPY 2013.

Kosta