Next Banking Revolution

One of the largest technology shakeups in banking in recent years has been the use of advanced data analytics techniques to catch rogue trading activities within banks. The stand-out story has been the collaboration between Credit Suisse and Palantir, which led to the creation of a sophisticated analytics system for identifying the early warning signs of rogue trading. While many might assume this is a fintech startup success story, they would be wrong. Palantir already had a distinguished history of working with government agencies – most notably the CIA.

Fintech, defined by IOSCO’s 2017 research report into the sector as typically offering one or more specific financial products or services in an automated fashion, has attracted considerable interest for a while now. A number of innovation hubs have been created in financial centres around the world with the aim of encouraging the development of, and providing funding for, fintech startup companies. But the question is: will the next banking revolution actually come from the fintech sector?

Recent newspaper articles have typically focussed on the difficulties fintech startups have had in creating a banking revolution through the innovative application of technology. The fintech startup Moven recently admitted to the New York Times that they had toned down their rhetoric of replacing the banks, focussing instead on selling their technology to banks.

“The general trend in talking about emerging technologies seems to split opinion between passionate advocates and wary cynics.”

Banks’ business models are protected by years of history, established practice and regulation. However, this isn’t the same in all industries – and so-called technology disruption is occurring in other sectors. The best-known modern example is the breaking of taxi cab monopolies by the likes of Uber, Gett and Lyft. Through a combination of aggressive policies and highly-usable technology, these companies have replaced the existing intermediaries, who offered little economic value to the businesses they were managing.

Banks, however, are not classic intermediaries. The promise of fintech “peer-to-peer lending” has failed in all but name. The idea that some people want to lend and others to borrow is a classic one that seems simple to solve via technology. However, the real value that banks provide is that they take deposits and issue loans, creating economic value in the process. The security provided by the banks’ balance sheets is hard to replicate with a website and in many cases peer-to-peer lending is now provided by banks, such as the example of Citi teaming up with Lending Club in 2015.

On the other hand, IOSCO’s paper also talks of another area of finance technology – namely emerging technologies that can be used to “supplement both fintech new entrants and traditional incumbents”. This provides a much more promising avenue for exploration.

The general trend in talking about emerging technologies seems to split opinion between passionate advocates and wary cynics. Sales pieces tend to overstate the case with a sense of pride and awe, giving the impression that robotics and artificial intelligence (AI) are already combined into an integrated set of products, which is not currently the case. This then inspires a backlash of cynical commentary discussing how far sales pitches have deviated from technological reality.

Another source of disillusionment has been the banks’ interest in blockchain technology. For many, the magic of bitcoin was that it provided a distributed ledger for all, with the only barrier to entry being technical know-how. By contrast, some banks are proposing allowing only trusted institutions to hold the ledgers, thus dampening some of the enthusiasm.

Both the supporters and the doubters, however, miss the point. Whilst Libratus (the poker playing AI system built by two computer science researchers at Carnegie Mellon) may win Texas Hold ’Em tournaments and grab headlines, of equal interest is JP Morgan’s COIN software. This learning machine has been taught to parse contracts for legal clauses that were previously only readable to humans. The implications for solving business problems from netting to client account segregation are huge.

And here is where the real revolution in banking is likely to come. Not from fintech alone or banks alone, but from banks and fintech companies collaborating on emerging technologies.  Financial institutions are investing heavily in big data, artificial intelligence, blockchain and distributed ledger technology, in some cases with only an outline of a business use case. Instead of determining how technology can service their business model, they are looking to see what new business models the new technology might suggest. This is the future.