The National Wealth Service
The next generation of financial services is about robots providing services to other robots (and making better decisions than people do)
In the UK, Faith Reynolds and Mark Chidley’s excellent report on “Consumer Priorities for Open Banking” set out just why it is that open banking by itself delivers quite limited benefits for consumers. They point towards a future of open finance (and, indeed, open everything else as well) and talk about an industry that uses the new technologies of artificial intelligence (AI), application programming interfaces (APIs), digital identity and so on to take a more complete view of a customer’s situation and provide services that increase the overall financial health of that customer. I think this is a very useful place to begin formulating a narrative for the next-generation fintech and regtech services.
Pointing in a similar direction, the US Center for Financial Services Innovation (now the Financial Health Network) published a report back in April 2019 on “How Industry Executives View Financial Health”. This was an interesting snapshot of the changing nature of the financial industry in developed economies, starting from the perspective that more than a decade on from the global financial crisis, financial institutions are still trying to regain the trust they lost with customers. The fintech non-revolution does not seem to have helped very much: the vast majority of Americans still struggle with their financial health.
Rik Coeckelbergs, founder of “The Banking Scene” in Belgium wrote that a bank must support its customers in having "a financially balanced life, helping them to reduce financial stress by improving their financial wellbeing". The more I think about it, the more I agree with Rik that this should be one of the societal responsibilities of banks as heavily-regulated players crucial to the nation’s well-being. Just as electricity companies are regulated to not only produce electricity but not to pollute their environment or kill consumers because of poor safety, so perhaps it is time to apply some similar thinking.
Where should we start? As the CFSI reported, while more than two-thirds of executives surveyed said financial health was a “strategic priority”, less than a fifth were actually reporting on customer financial health, which would seem to be a good trigger for practical initiatives and a way to encourage regulators, partners and customers themselves to ask questions about improvements in financial wellbeing. That’s not to say that nothing is happening, of course! For example, JPMorgan Chase have committed to give $125 million over the next five years to non-profits working around the world to improve the financial health of underserved communities and efforts such as this deserve applause.
We are beginning to see initiatives focused on financial health and wellness and some financial institutions are shifting from a product-focused orientation to one that places the customer and their financial health at the heart of the proposition.
National Wealth Service
Writing in the Harvard Business Review, Todd Baker and Corey Stone explored some interesting ideas around what these new financial health propositions might look like. They say that the prevailing paradigm (of markets and choice) has created a regulatory system that “largely places responsibility — absent the most egregious abuse — on the individual consumer”. They argue for a radically different regulatory structure to more directly connect the success of financial services providers to their customers’ financial health, a where-are-the-customers’-yachts approach where banks prosper when their account holders prosper. They draw an interesting analogy by comparing this approach with experiments in the American health marketplace that pay providers for improving patients’ health, “rather than paying them simply for treating patients regardless of the outcome of the medical intervention”.
Ron Shevlin has argued that financial health platforms will emerge to provide this next generation of financial services and pointing out that it will provide some terrific opportunities for fintechs. He suggests that aggregators such as MX, Plaid, Yodlee or Finicity could be a real catalyst in making something happen. I agree: if we can connect the potential for open banking to provide the data to the potential for new players to use that data, we can expect to see real innovation. This kind of thinking delivers a useful narrative for stakeholders to communicate around the post-pandemic financial services they must necessarily develop to support communities in their recovery from the COVID chaos and beyond.
I think this is really important. As I wrote in Forbes (2nd November 2020), refocusing the sector on delivering financial health, rather than financial services has implications that go way beyond choosing better credit cards or spending less on coffee and more on pensions. The American Psychological Association considers financial stress to be one of the top stressors in America and research shows clearly that financial stress and economic hardships link to a variety of very negative physical and mental health outcomes, ranging from abuse and neglect to household dysfunction and heart disease. There is no doubt about it: improving financial health improves health in general.
In order to do this, financial health providers will need a better picture of individuals and their circumstances. They need the raw data to work with. Just as the doctor needs X-rays, bloods and histories, so the artificial intelligence (AI) that powers an effective financial health provider needs your transaction records from your checking account, your mortgage, your pension, your insurers and everywhere else. Only effective machine learning (ML) and AI can take on board all of this data and use it make sound decisions for individual customers at scale. As an aside, my good friend Clara Durodie (author of the excellent book “Decoding AI in Financial Services”) publishes an excellent newsletter “Decoding AI” which you really should subscribe to if you are interested in learning more about this crucial new technology.
Onstage with “Decoding AI” author Clara Durodie at the Paris Fintech Forum (2020).
As is often said then, we plan for the battles of the next war using the weapons of the last one. This is true in finance just as it is in defence. A couple of years ago, John Cryan (then CEO of Deutsche Bank) said that that the bank was going to shift from employing people to act like robots to employing robots to act like people. They put this plan in motion and earlier this year announced big staff reductions as part of a radical overhaul of operations. At the same time, the bank announced that it will spend €13bn on new technology over the next four years. These investments in infrastructure "are already making some humans at Deutsche unnecessary".
It is not surprising to see this change happening so quickly, because there are many jobs in banks that are far simpler to automate than flying a helicopter around on Mars (for example). In India, YES Bank has a WhatsApp banking service that uses a chatbot (a conversational AI with extensive financial knowledge) to help customers to check balances, order cheque books, report unauthorised transactions, redeem rewards points, connect with help desks and to apply for more than 60 banking products. And this is only the beginning. The Financial Brand has just reported on research from MIT Sloan Management Review and the Boston Consulting Group showing that only one in ten companies that deploy AI actually obtain much of a return on ROI. This is, as I understand it, because while bots are good at learning from people, people are not yet good at learning from bots. A robot bank clerk is like a robot fighter pilot, an artificial intelligence placed in the same environment as a human: when organisations are redesigned around the bots, then the ROI will accelerate.
The robots will take over, in banking just as in manufacturing. So will you be served by a machine when you go to the bank five years from now? Of course not. That would be ridiculous. For one thing, you won't be going to a bank five years from now under any circumstances. You'll be explaining "going to" a bank to your baffled offspring just as you were explaining "dialling" a phone to them five years ago. But you won't be going to your bank in cyberspace either. Your bot will. As I pointed out in Wired a couple of years ago, the big change in financial services will come not when banks are using AI, but when customers are.
In The Loop (Not)
Think about it. Under current regulations, I am required to make decisions about my financial health while I am the least qualified entity in the loop! I am an intelligent person, but in any conversation with my financial advisor I very quickly sink into the quicksand of changing government rules about pensions, complex taxation arrangements and risk-related investment decisions and I am sure I am not the only person in this situation.
The bank knows more than I do, my financial advisor knows more than I do, the pension fund knows more than I do, the tax authorities know more than I do. Asking me to make a decision in these circumstances seems, frankly. perverse. Much better for me to choose an approved and regulated super-clever cloud-accessible AI/ML-powered silicon brain (i.e., a bot) to take care of this kind of thing. And if you are concerned that there may be legal issues around delegating these kinds of decisions to a bot, take a look at Ryan Abbott's argument in MIT Technology Review that there should be a principle of AI legal neutrality asserting that the law should tend not to discriminate between AI and human behaviour. Sooner or later we will come to regard allowing people to make decisions about their financial health as dumb as letting people drive themselves around when bots are much safer drivers.
I predicted in Forbes (24th November 2020) that the battle for future customers will take place in a landscape across which their bots will roam to negotiate with their counterparts - i.e., other bots at regulated financial institutions - to obtain the best possible product for their "owners". In this battle, the key question for customers will become a question of which brain they want to work with, not which bank. Consumers will choose bots whose moral and ethical frameworks are congruent with theirs. I might choose the AARP Automaton, you might choose the Buffett Bot or the Megatron Musk. Once customers have chosen their bots, then why would they risk making suboptimal choices around their financial health by interfering in the artificial brain's decisions?
Clever and Cleverer
This has the rather interesting implication that financial products will be vastly more complicated than they are now. If the vision of the decentralised finance (“DeFi”) pioneers is realised then it seems to me self-evident that individuals will have no realistic possibility of understanding the products that they are using. As DeFi products are built on smart contracts, multiple DeFi products can be composed by letting smart contracts interact with each other (see “DeFi-ning DeFi: Challenges & Pathway” PDF for an interesting introduction to the subject). This allows developers to build even more flexible and powerful tools. This connectivity of DeFi is often also called “money Lego” (although personally I prefer money Meccano as a metaphor) and is viewed as an especially promising feature.
Now, I can understand what a current account is, but there is no possibility of me understanding the financial instruments of the future built from these money bricks. I can easily imagine a situation where my bot recommends I put my money somewhere (e.g., some yield farming enterprise) that I simply cannot understand, yet it will deliver a better financial outcome for me.
Therefore, it seems entirely predictable to me that these money bricks will be assembled by bots in order to provide services to other bots. It’s probably time to start thinking about what the regulatory structure around this might be! If the individual bricks are regulated in some way (perhaps they must be certified for use within a jurisdiction) and them assembled into a product, does it logically follow that an AI regulator can inspect the product and judge it fit for the general public or not?
Imagining the world of the future as super-intelligent robo-employees serving mass-customised credit cards and bank accounts to human customers is missing the point because in the future the customers will be super-intelligent robo-agents too. This is an exciting prospect and it makes the transition from financial services to more holistic financial health realistic.
Financial health may seem to be just another buzzword for embedded finance strategists, but I think it is more than that. It’s a way of thinking about the next generation financial sector.