By David Gardner, partner at law firm TLT
18 months on from the introduction of PSD2 and Open Banking in the UK, we can begin to assess how large tech firms have responded to these developments at the crossroads of banking and technology. By increasing competition, innovation and market access, Open Banking is already driving significant market change by giving consumers control over their financial data, and the power to share that data with third-party providers offering innovative customer services. With digitisation of banking services now well underway, it is not surprising to see that large tech firms are also making inroads into financial services.
With their substantial resources and unrivalled expertise in Big Data, Google, Amazon, Facebook and Apple (GAFA) and China’s Baidu, Alibaba and Tencent (BAT) have an established track record of disrupting various industries worldwide. For several years their entry into financial services has loomed large on the horizon. In the past few months, that horizon has moved closer: in May, Chinese firms Tencent, Alibaba and Xiaomi were granted virtual (online-only) banking licences by the Hong Kong Monetary Authority to launch digital banks, and are expected to launch their services in late 2019/early 2020. Once launched, they will operate as new challenger banks, competing with established global banks such as HSBC and Standard Chartered in one of the world’s leading financial centres. It would be surprising if this development was limited to Hong Kong.
Although we are yet to see such radical developments closer to home, in many respects the UK has taken the lead in the digitisation of financial services, driven by the Open Banking Implementation Entity production and promotion of world-leading, PSD2-compliant Open Banking standards. From a product perspective, the UK has a mature credit and debit card market and has started to embrace the digital wallet, with ‘Apple Pay’ and ‘Google Pay’ becoming established methods of payment alongside PayPal. More recently, Apple has teamed up with Goldman Sachs and MasterCard to launch the “Apple Card” – a credit card, complete with repayment options and cashback facilities on various Apple-related purchase, built into and managed by the Apple Wallet mobile app.
Apple’s entry into the world of financial services through Apple Pay and Apple Card is a logical step when viewing Apple as a tech and lifestyle brand, with a range of integrated services orbiting around the use of core Apple products, like the iPhone and the iPad. Other large tech firms may also recognise the benefits of building Open Banking channels into their existing business models. For Google or Amazon, adding customer financial information to their existing customer data sets will enable them to offer more tailored, competitive services to users. PSD2 compels EU banks and payment service providers to make account information available and allows customers to give consent for use by third parties they trust. Furthermore, by registering as Account Information Service Providers (AISPs) or Payment Initiation Service Providers (PISPs) under PSD2, large tech firms can access this information in the EU without the requirement to obtain a full banking licence. Banking regulation has historically been a major barrier to entry for non-bank service providers, so the existence of these alternative routes is likely to be attractive to large tech firms who do not wish to establish and operate banking subsidiaries.
All this sets the stage for a near-future where users of personal digital assistants and smart speakers may be able to ask “OK Google, which is the best current account deal for me?” and, if they like the answer, “Alexa, switch me!” If that future state becomes reality, this presents a considerable challenge to more traditional, established banks and financial services institutions.
As with other would-be providers of Open Banking services, large tech firms have their own challenges when it comes to engaging with the public and earning their trust: in the wake of the Facebook/Cambridge Analytica scandal and other high-profile data breaches, consumers are more alive than ever to the risks of sharing data and consequently are more sceptical about the practices of large tech firms; whether consumers will choose to share financial data with them (or anyone else) is by no means a forgone conclusion.
Whilst GAFA and BAT executives ponder these issues, banks and fintechs are already responding to the risk of Big Tech’s entry into digital banking. TLT’s Opportunity Knocks report found that large tech firms were perceived as the biggest competitive threat in the Open Banking market – something that was agreed by senior decision-makers from banks and non-banks alike. Given the relatively low level of activity by large tech firms in financial services when our survey was conducted, it is interesting to note how seriously banks and fintechs have been monitoring this potential threat.
Banks are now allocating significant resources to stay ahead of the curve with their digital offerings. As well as developing their own digital service offerings in-house, the pressure to innovate and keep competitors at bay has resulted in a flurry of bank-fintech partnerships, joint ventures and acquisitions. Through strategic partnerships, banks are able to benefit from specialist tech expertise and tap into disruptive culture necessary to deliver innovative client services.
The dynamics of challenger banks working to take market share, established banks adapting to maintain their pre-eminence, and fintechs collaborating and competing with them all, means that the financial services sector will continue to experience disruption. The entry of large tech firms into the market, via Open Banking or by taking the bigger step of establishing new banks, will introduce a significant, further disruptive element.
The market itself is developing rapidly and customer engagement is increasing as more Open Banking products and services become available. Additional security requirements relating to Strong Customer Authentication for transactions under PSD2 will come into force in September this year, facilitating the provision of more new Open Banking services, particularly for providers offering payment initiation services. More broadly, regulators such as the FCA are already looking beyond the confines of Open Banking to “Open Finance”, which will encompass all elements of customers’ financial lives.
For all participants, the race is on to find the killer product or the perfect partnership to win market share and establish a leading position in this exciting and unpredictable market.
RISK VS REWARD: IS AI TAKING OVER?
Xavier Fernandes, Analytics Director at Metapraxis
A study by Oxford University academics into “The Future of Employment” in 2013 prompted apocalyptic headlines which stated that in the future 40% of jobs will be automated thanks to advancing technology.
The researchers subsequently claimed that the truth was in fact a little more prosaic; rather than facing complete automation, the research found that 40% of jobs faced some aspect of automation in their activity. So with new ‘AI processes a likely reality for almost half us, what does that mean for our current roles and should we be worried?
The fourth revolution?
The first industrial revolution saw machines replacing muscle, both human and animal. The second and third saw electrical power, mass production and computerisation revolutionise the job market. Now, with daily headlines of AI as an employment superpower, there is some concern that AI is bringing a fourth revolution, and with it, unknown circumstances.
This ‘fourth industrial revolution’ is defined by replacing brain power with machines. Our thinking capacity is what inherently sets us apart from other species, so it’s not surprising that any encroachment on it triggers some existential angst.
Evolve to reap the rewards
While many businesses still don’t fully understand the capabilities of AI, those who fear its development are, instead of embracing it, missing all the benefits that it can bring to the workplace. Businesses that utilise AI appropriately are seeing vast improvements across their entire value chain; better customer experience, reduced costs, and more insightful analysis to support management decisions.
AI is particularly useful for supporting tasks with repetitive activity, for example, performing financial checks and assessing large sets of data within financial services firms. AI performs particularly well within this context, spotting outliers before a human expert would notice them, allowing impending problems to be flagged and avoiding costly mistakes.
There is also an increasing focus on maximising customer lifetime value through the use of AI. Being able to predict existing customers’ needs as well as track trends in their financial circumstances is supercharging the old cross-selling approach with testable, predictable outcomes.
With potential benefits like these on offer, management teams of innovative financial services are increasingly relying on AI to help them with some of the heavy-lifting of analysis. Using advanced data capabilities and learned behaviours, AI analyses market trends to provide predictions of future performance. This insight is invaluable and allows management teams to change direction and correct any problems accordingly. This offers a huge advantage over those that have not adopted such tools.
Supporting the workplace
Algorithms and AI are typically ‘smart’ at doing one, tightly-constrained task, but they can be less helpful with many of the activities that humans find straightforward. In most white-collar jobs, automation tends to replace certain tasks in the job, rather than the role in its entirety, as the need for human intelligence is still highly necessary. In particular, we still need human input to first challenge, and then synthesise, this information before taking action. Employees should therefore work with the business to proactively identify what areas of their role could be automated, so that they can focus on the areas that add real value to the business’ commercial goals.
Challenging AI is certainly still important. We know that algorithms can be much better than humans on certain, bounded tasks. However, many algorithms rely on existing data sets to build their understanding. As a result, when a business unit has ‘symptoms’ that fall outside of that body of knowledge, the algorithm may suggest the wrong course of action with costly results.
Indeed, even with plenty of data, algorithms will reflect any biases the data set contains. We’re seeing this with some legal sentencing algorithms where there is evidence that they are treating disadvantaged people more harshly. Getting the answers to why and how far we should trust our algorithms should therefore become an everyday part of any job affected by AI.
Rather than depending entirely on AI for all decisions, workers should be taking all these new, AI-generated insights and using them to complement the human decision-making process. No manager of a complex business ever has enough time to sieve through all the analysis available, but with AI driven algorithms able to flag up any issues and indicate where action needs to be taken, we may find that we have some AI ’colleagues’ who will cover our backs and suggest innovative options. Yes, there will be times when the algorithms get it wrong, but as long as we’re watching out for those, the future is bright.
HOW TECHNOLOGY IS FUTUREPROOFING STOCK MARKET TRADING
Tony Shaw, Executive Director, London Office and Head Sales UK & Ireland at the Swiss Stock Exchange
Markets are shifting, there’s no doubt. Amid all the disruption and volatility from the past year, the Swiss Stock Exchange asked traders about what they expected in 2020 and beyond in our industry survey. The findings point to a rise in digital to help traders content with external forces.
First and foremost, traders are enthusiastic about what digital assets can offer.
Two thirds of traders polled said they’d had a marked rise in interest from their clients for digital assets and crypto-products. Given the interest, traders are increasingly bullish about the potential of these products – so much so that 80% have predicted an increase in overall demand in the long term. Market users believe these assets will help generate cost synergies and streamlining trading and settlement processes by creating efficiencies and ultimately reducing costs.
Our 2019 results reflect what traders have told us when it comes to digital assets and products. Last year, we saw significantly higher trading volumes from products with crypto currencies as underlyings. Overall volumes grew by +8.5% over 2018, but the increase in crypto products alone was +17%, reaching CHF 518.2 million ($534.54 m). There was a year-on-year increase in the number of transactions, as well (+21%): 19,636 trades in total.
The potential digital assets hold is clear – evidenced by the building of the SIX Digital Exchange (SDX), a fully integrated issuance, trading, settlement and custody infrastructure for digital assets.
According to traders, artificial intelligence (AI) is expected to bring further benefits to market operations.
Two thirds of our survey respondents anticipate AI will create more opportunities for the traditional equities business, while a similar number expect it to reduce the cost of trading. Innovation in AI is already – and will continue to be – a key driver in making our industry more effective at withstanding future risks and challenges both within and beyond the market itself.
In Europe, there is growing momentum behind calls for shorter trading hours – this trend was reflected in our survey as well.
Industry groups such as the Investment Association are advocating for stock market trading hours to be cut from 8.5 to 6.5 hours to open the industry to working parents and women who cannot commit to such long workdays. We found traders were largely supportive of this, with many saying that it could even facilitate operational benefits. The roll of AI is clear here in improving efficiency while minimising time wastage: 36% of traders said the introduction of shorter trading hours would prompt greater market liquidity.
Beyond the market itself, geopolitics continue to shape wider market sentiment.
It comes as no surprise that four fifths of traders said their strategies have been – to some extent – influenced by Donald Trump’s tweets. Interestingly, only 39% of those polled viewed Brexit as an influencing factor in trading activity, while three quarters believe the US election will drive trading activity in 2020 and 65% acknowledged trade wars would also have an impact.
More broadly, traders are split on the state of the global economy – 58% are bracing for a global recession while 42% predict stable macro-economic conditions over the next three years. What seems clear is that whatever happens in the wider economy, traders are making headway with new technologies that can improve their strategy, efficiency, and overall market health.
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