Banking On You
The Personal Bank (PB) & The Dawn of Micro-Tailored Financial Services
Of course, the greater one’s need, the greater one’s propensity to be mesmerized - Vikram Seth, A Suitable Boy
When Mohammed Yunus founded the Grameen Bank in October of 1983, modern Artificial Intelligence and Blockchain were virtually non-existent. After Satoshi’s whitepaper, it seems that AI and the Blockchain can herald a world of micro targeted financial services.
Just like the Personal Computer, the capitalistic PB (Personal Bank) will herald a new revolution ironically based on the socialist ideal of inclusion. The Personal Bank may not be a physical entity. Rather, it may be a seamless integration with digital assistants, AR/VR interfaces or social media applications.
Beyond the mainframe, the PC expanded the use of computing to individuals. The PB will open the floodgates of finance (including access to hedge funds, cryptocurrencies, alternative investments and crowdfunding through ICO’s or fiat currencies) to the common man. Blockchain will enable inexpensive, real time global remittances and flow of money.
This article takes a futuristic look at how financial services could be tailored to the specifications of the common man creating a Personal Bank (PB) which opens up the Saṃsāra (Sanskrit word for the world) of financial services to the common man. In doing so, finances become bespoke. The only difference is that bespoke finance will no longer be exclusive. Rather, it will be based on the socialist ideal of inclusion. A meeting of two contrarian ideologies ie capitalism and socialism through the bridge of technology. A neoliberalistic idea. This is because of one simple fact:
Most modern business models (Facebook, Google, Amazon etc.) are predicated on personalization which means taking the business closer and closer to the end consumer.
TechFin is Not FinTech
The view that finance is utilizing technology to evolve will soon be inverted. Technology will drive how finance is delivered. The two views are not the same. Let me explain.
On May 23, 2018, Bloomberg ran a story on how Alipay and WeChat in China are the front end user interfaces for virtually all types of payments. To be fair,China has a few differences compared to markets like Europe, USA or for that matter rest of Asia including India. The most populous country in the world is relatively closed to internet tech giants which gives is it an unmatched, captive market.
In Europe and the US, there are a few prominent models. First, neo-banks utilize Unique Artificial Intelligence (AI) algorithms to identify and price under served consumer segments to lend to. Loans are made out of capital infusions by Venture Capitalists and modern Initial Coin Offerings. Once the business model stabilizes, activities move beyond lending to accepting deposits as a source of funds. For services such as wealth management, insurance and other services, neo-banks form partnerships with other providers by creating a marketplace for consumers to choose from. Open API’s allow the software platforms of various financial services providers to talk with each other and sharing of consumer data means reduced switching costs for the end consumer. This is how tech startups use their tech DNA and apply it to financial services. Thus, financial services is just an application under the vast umbrella of AI and the Blockchain.
Second, non-banks such as financial planning, broking and even tech giants such as Apple, Amazon or Facebook have a potential to enter the lucrative financial services market. That’s because these are the products and places consumers use to shop and to socialize. Now, imagine if these very same products such as mobile devices or social media apps integrate payments by allowing users to link their bank accounts through API’s. You get the drift.
Third, incumbent banks branch out with their own mobile first digital banking platforms. Case in point, Goldman’s Marcus
The App That Wants To Become A Bank
The number of user accounts on the Robinhood trading app has blown past E*Trade, hitting 4 million. That’s double where it was a year ago — Fortune Magazine
Think about it, E*Trade was founded in Palo Alto in the 80’s. Robinhood, on the other hand, was founded in 2013.
At a valuation of $5.6 billion, the stock and crypto currency trading app — Robinhood is one of latest entrant into the prestigious “unicorn” club. On May 10, 2018 Robinhood announced that it had closed a funding round of $363 million in series D financing. Robinhood has doubled its user base from 2 million last year to 4 million this year. It has also added trading of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH). The startup founded by Baiju Bhatt and Vlad Tenev. Baiju does not deny the startups ambitions of becoming a financial supermarket.
What is amazing about startups such as Robinhood is the possibility of expanding such “free to use” platforms to the unbanked thereby marrying the welfare objective with capitalist businesses.
Then, there is Circle Internet Financial which runs a crypto platform where users can invest and trade cryptocurrencies, convert fiat currency to and from cryptocurrencies, allows Over the Counter (OTC) exchange of cryptocurrencies and allows users to trade on multiple crypto exchanges.
Finally, Coinbase, the cryptocurrency exchange approached the Office of the Comptroller of Currency (OCC) in the US for a banking license.
Coupled With AI & Blockchain
As AI becomes more sophisticated and gets access to more consumer data, financial services can be endlessly tailored to suit the client. In other words, clients don’t step into a branch. Instead, the bank is available to the client using unobtrusive interfaces operating in the background through the front end of personal digital assistants and Augmented Reality (AR). Think of pulling up your bank account out of thin air. If you need help, the hologram of an AI algorithm or a human that lives on an entirely different continent appears to help you. All transactions are recorded on a Blockchain supported by digital wallets. You can access your account using your private key. Think about it: your apple account is already linked to your credit card. When you ask Siri to buy a song from iTunes store, it automatically debits your card. It’s that seamless. Now, extend it to all forms of payments and you realize how a glue called API’s can link completely different systems into one seamless interface. Suddenly, you realize your bank is available wherever the internet is albeit in the background. All you need to do is to say the command. In the future, with cybernetic organisms, a thought would suffice.
To Share Or Not To Share? That Is The Question
Regulations such as PSD2, open API’s and digital sandboxes are enabling TechFin startups to access client data. There’s always a price to pay. With extreme personalization comes loss of privacy.
AI algorithms could facilitate what was once thought of as Steve Jobs’ greatest ability — knowing consumers’ inner desires even before they are aware of them. You could say this is nothing new. Data mining has been used by scores of marketeers to predict consumer choices. However, multiply the data points 10x and soon there is no privacy. Dystopian movies show holographic advertisements projected on a surface that only you can see. Imagine scanners that tell the AI engine that you are wearing a red shirt and the advertisement starts flashing red color sunglasses which can be purchased by a hand gesture or just a thought.
If I were to bet one way or another, I feel consumers are increasingly willing to share their personal information for making their lives easier. Think about it: Facebook lost about 37 million users in the US after the Cambridge Analytica debacle which is only 10% of its user base. The overwhelming majority still stuck to their accounts.
Therefore, the question is not whether to share or not share data rather it is to find how your data is actually being used. That’s where regulations such as the General Data Privacy Regulations (GDPR) come in. In fact, GDPR becomes enforceable today. In a nutshell, “the GDPR aims primarily to give control to citizens and residents over their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU” (source: wikipedia). However, GDPR’s reach extends to EU citizens outside the EU as well.
Then, there is the concept of ‘Differential Privacy’ which entails introducing some noise into personal data such that the statistical characteristics are preserved while allowing the user to be anonymous.
Dawn of A New Beginning
Hedge funds, private equity and other non-banks have already started lending to borrowers who would otherwise not qualify or would not fit the customer profile of large banks. FinTech and Technology enabled financial service providers are gaining market share. For instance, Quicken loans which built an end to end mortgage processing software now ranks #1 in market share ahead of big banks. Quicken is a classic example of technology enabled financial services (TechFin). The banking industry is also witnessing what the cable industry already had ie the digitization of the last mile. When the last mile connecting clients homes were analog, it had limited bandwidth and could carry only about 100 cable channels. With digitization, there was no such choke point and thousands of channels could be made available.
The last mile in banking used to be a branch or an ATM. Today, the last mile has been digitized and is capable of endless customization through a super computer called the cell phone. Let the platform wars begin.
However, what the Blockchain and AI promise is the overhaul of the backend infrastructure of banking. From onboarding clients to analyzing their transactions, AI is being applied to every facet of the backend. The Blockchain, on the other hand, has the potential to streamline payments, facilitate efficient cross border transactions and create an Internet of Value. With both front end and backend digitization, it is no surprise that financial services can be tailored at a micro level to the requirements of the end consumer.
There has been an explosion of business models i.e. apps that want to become banks, social media backed payment apps, crypto apps that allow payments, neobanks etc. The unifying thread could be the last mile i.e. what interface will dominate in the future? There is a good chance it will be an unobtrusive digital assistant capable of voice, gesture and ultimately thought recognition. The company or companies that dominate the last mile of digital assistants will control the gateway to financial services. As Arthur C. Clarke says: Any sufficiently advanced technology is indistinguishable from magic.
For now, there are many magicians and I am completely mesmerized by their magic.