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

 

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Trust On The Internet – The Solution Is Ahead


There is a need for a user-centric identity, privacy and trust on the internet, to power the digital economy. It’s a major issue, and a solution that relies on crowd-sourcing is being proposed by Respect Network.

Let’s first look at how trust works in the real world “brick & mortar” economy, then understand the issues with trust on the internet, and finally the Respect Network solution.

Trust and the “brick & mortar” economy

How do you ascertain of the identity of somebody? For example, when signing a contract? Or making sure somebody has the legal age to transact?

You will probably rely on some form of government or bank issued credentials – an identity card, a passport, a driver’s licence, a debit card, or something that an institution you trust (the local public library for example) has issued.  And, for sure,  you will attach varying degrees of trust to each of these tokens of identity. A debit card, with its pin, is a good proxy  in many day-to-day financial transactions. A passport is probably the token you will trust most in travel or real estate transactions.

Furthermore, once someone’s identity is clear, how do you establish whether you can trust him to perform the agreed action – such as paying the bill, delivering the goods, etc? In the real world, this is one’s reputation – is she paying regularly her bills? Is the company you’re dealing with healthy and reputable?  There are many possible ways to establish trust, going from personal opinions to rating agencies.

Trust and the open internet

Let’s now look at the online world. One immediate and major difference is that the online world is, by design, global. The person you are dealing with may be in your neighbourhood or may be on the other side of the planet. Establishing the identity, and the associated trust, is made very difficult because there are no central and inter-operable agencies or bodies, as we have in the real world.

A good example of this is the eBay reputation.  As a regular user of eBay, I’m very conscious of my reputation there. On eBay, one’s reputation is gradually built by the people one transacts with. Buyers will hopefully recognise a good seller (goods corresponding to description, fast shipping) or sellers will recognise  a good buyer (fast payment). In my case, the reputation of a seller of something I’m interested in is a key factor on whether I will bid for the item or not.

In other words, the eBay reputation is an asset with a lot of value, even if is not expressed in monetary terms. This is fine if you only deal with eBay. However, looking at this more broadly brings the following issues –

– there is no inter-operability. The eBay reputations is not something that can be easily used on, say, Amazon.com. So, people have to build these relationships all over again in many contexts. It’s the same with Twitter and Google+. When Google+ launched, many people went through the pain of re-building their Twitter relationships on Google+. Many people didn’t bother, as it can be a lot of work and time to do that.

– there is a potential lack of privacy. Indeed your assets end up residing in many places, and the more places, the more risk there is for these assets to be compromised.

– there is a lack of control and there is a missed opportunity. What do the companies that store you assets do with them?  Some of them are actively selling your assets for various commercial purposes, and, as far as I know, you as the owner never see any of that money.

The digital economy and the Respect Network

So, how can we establish trust on the internet? This is where Respect Network comes in.  It is a little bit of a complex construction of organisations and companies. Below is an overview, and why this is interesting for Innotribe and me.

Trust on the internet is the focus of OIX  (Open Identity Exchange),  a non-profit company organization founded by Google, Paypal, AT&T and others. Their business is to establish, standardise and manage “trust frameworks” – legal, business and social rules that enables parties unknown to each other to trust their respective digital identities. The trust frameworks are designed to be public, standardised and inter-operable, so that people and companies can play various roles in the framework and still manage trusted relationships.

Among the three trust frameworks currently available, an intriguing one is the “Respect Trust Framework”. The idea of this framework is to not only establish a digital identity, but also to provide individuals control over ownership and sharing of their data on the internet. The key to the framework is the use of a crowd-sourced, peer-to-peer reputation system. It’s really very simple – people can vouch for you (for example, say “I vouch for John Smith’s innovativeness”), or complain about you (“I complain about John Smith’s stubbornness”). Similarly to eBay’s reputation system, the peer-to-peer reputation system grows over time, and the more vouches and complaints about a particular person, the more precise the information is and therefore the trust level in this person increases or decreases.

Respect Network  is a project run by Respect Network Corporation and which uses OIX’s Respect Trust Framework to implement the first trusted personal data network. Notable partners include Neustar and Swisscom, and Innotribe is involved.

Users of this network own their data (unlike centralised social networks such as Facebook and eBay). Users then establish secure channels between their personal data clouds, under very strong privacy and security rules. All the software and protocols uses are open to encourage inter-operability and to prevent any single company taking control.

Respect Network also establishes a crowd-sourced peer-to-peer reputation system, implemented through a service called Connect.me (Connect.me is in private beta now and will be launched soon. You can request access on theconnect.me website).

The architects of the Respect Network include an impressive number of people, among which Drummond Reed (who is also a co-founder of connect.me), Doc Searls, Craig Burton, Phil Windley who I have all met at Innotribe events and respect enormously.

The peer-to-peer reputation network establishes naturally a chain of trust. The chains begin with a number of known people, called Founding Trust Anchors, who provide credibility. These are people whose identity is publicly verifiable – members of the Internet identity, security, and privacy communities who believe in the power of a peer-to-peer, socially-verified reputation network. Others are early users of the Connect.Me private beta. Others still (you?) will emerge over time.

Peter Vander Auwera of the Inntoribe team and I have been extensively involved over the last couple years with many of the above companies, organisations and people. Peter and I have the honour to have been elected Distinguished Trust Anchors – nominated by other people and trust anchors as individuals that “exemplify the spirit and principles of the Respect Trust Network”.  Proud to be in such company!

Peter’s and my readers will also probably recognise that many of the above concepts and components are part of Innotribe’s Digital Asset Grid project. The information on this project is now in the public domain.

What Does 2013 Hold For Financial Services IT?


Several people asked me recently about how 2013 would look like for IT professionals in the financial industry. Here are my thoughts, inspired by the 2012 Innotribe events and network.

If you’re a CIO/CTO in financial services, you probably have something like the following in your objectives –

  • flat budget
  • long list of regulation related “must do’s”
  • drive innovation to deliver tangible new value to internal and external customers
  • continue delivering operational excellence

In other words, 2013 budgets reflect on one hand a continuing focus on fiscal caution, and on the other hand the necessity to invest for the future.

I’ve gathered from my talks with CIOs in various financial companies – and indeed my own (SWIFT) – the ratio of maintenance vs investment has changed. What used to be a 90/10 budget (90% for maintenance and operations, 10% for new projects) has now shifted towards 80/20 or even 70/30. That means serious money for innovation.

The first area of innovation will be related to regulation. How to cope with the inevitable and increasing requirements, while keeping the budget equation balanced? I think cloud computing will probably emerge as a best adapted tool. Regulation lends itself to be, by nature, a shared effort – everyone must comply to the same rule. Therefore, why implement this over and over in every financial institution – why not use a shared resource? A good example of this is the recently launched Sanctions Screening service from SWIFT (http://www.swift.com/products/sanctions_screening). This service checks payments against public sanctions lists for the banks who subscribe to it. I think there is a major opportunity for more services such as this one, and a large number of potential suppliers out there.

The other areas of innovation will be driven by technology change in mobile computing, social media and “big data” analytics.

Most financial institutions are playing catchup right now with respect to mobile computing – I expect frantic investment in 2013 to go into easy to use, mobile based front end to replace the more traditional web based home banking systems. It’s a “no-brainer”, and this gameplan will essentially be about choosing the right partner (outsourcing or ad-hoc) to deliver – delivering this in-house is seldom an option.

The challenge for 2013 will be about formulating the gameplan for a truly innovative customer experience. This is not only about technology, it is really about a mindset change. Going from “captured consumers” into “empowered consumers”. The clever use of social media and “big data” analytics (analyzing massive amounts of customer related data to gather new insights) will be key in differentiating the offerings and gaining traction with the “digitally native” generation (people under 30 today).  I’ve seen some pioneering examples of this at Fidor bank (www.fidor.de), who rely heavily on social media for new customer acquisition, and Movenbank (www.movenbank.com) who use big data analytics to compute financial health scores.

Finally, it is going to be important in 2013 to map the future. Where does the “empowered consumer” road ultimately lead? One interesting idea I saw in the context of Innotribe is the “Digital Asset Grid” (http://innotribe.com/digital-assets/) – a new internet where consumers own their digital assets (valuable data such as a person’s eBay reputation), and where digital assets can be shared safely and securely. The banks may have a major role to play. It will be important to incubate this – and other – ideas related to the digital banking of the future.

(also posted on ComputerWeekly.com)