Traditional finance institutions often question and criticize the new finance models enabled by FinTech, using the excuse that banks are heavily regulated and must manage risks and protect their reputations. Yet the banking sector has more than its fair share of scandals – Danske Bank and Wells Fargo being two very recent examples – where regulations are bent or broken, putting their reputation and bottom line at risk (not to mention the careers of the people involved).
Perhaps now is a good time for them to wake up to reality?
Around 15 months ago I talked with a person at Danske Bank who works with digitization. I tried to get him to talk with some of our companies to implement truly digital processes. His comment was that he doesn’t talk with companies that use clouds because they are too risky. Another Danske person from wealth management gave me a lecture about how it’s easy for startups to use new technology – e.g. for KYC and AML and digital processes – but banks must really focus on regulation, reputation and risk management. Now we are reading that dozens of billions dollars (estimates of total exposure range from $30 billion to $240 billion) has been laundered through Danske.
Meanwhile, we’ve seen the news that Wells Fargo employees created millions of fake customer accounts to fulfill their targets. It was not very clear who initiated this practice, but it was basically motivated by pressure to hit targets and earn bonuses. Wells Fargo has also had other issues with things like modified mortgages, delayed payment fees (although the delays were their fault) and overcharging of credit card payments. Several management and lower-ranking staff were forced to leave the bank, and the firm has announced 26,000 job cuts.
When I recently spoke to a finance sector consultant in London about FinTech and wealth management, he commented to me: “It is clear the Swiss wealth management business struggles when it has been based on money laundering and tax avoidance, and now many governments have put pressure on it.” People also question more and more what these well-paid guys who offer coffee and lunches are really doing to offer value for their high management fees. Data analytics and AI can replace a significant part of portfolio management with lower fees, although it’s questionable if even AI can get those expensive lunches and dinners under control.
I was recently speaking at a FinTech panel in Silicon Valley and one fellow panelist – a venture capitalist – made a comment that “KYC is a funny thing – if you take a billion dollars in a suitcase to a bank in Switzerland or London, and you have traces of cocaine and blood in your suitcases, they find a way to pass the KYC, but if you are a foreign worker with a few hundred dollar salary, you are in trouble with KYC.”
Big risk hubs
Regulation seems to be a recurring argument traditional finance institutions use to protect their own positions. At least, people in the organizations seem to believe that. But in reality it is not so clear – many regulators have also seen that traditional finance institutions are big risk hubs and that’s why we have things like PSD2 and FinTech sandboxes. The cases above are only some examples – there are many others, so it’s fair to question how much talking about regulation and reputation is hypocrisy.
It is easy to list all kinds of risks and uncertainty with new technologies, crypto and blockchain models, and how machines could handle KYC, AML and portfolio management. They also like to argue that customers are keen to have a human touch in the services. But do you really feel you have a human touch when you call a bank call center, end up in a call queue for half an hour, and when you’re finally connected to the human, you realize he/she is reading standard answers from a screen?
It is said that if someone invented bank notes today, they would be illegal because they would be too risky to use. People are always skeptical with new things. At the same time, concern, skepticism and risks never stop development, especially when new solutions are just so much more effective and offer new opportunities. It is the same with finance services. When distributed models, FinTech and AI come to finance, old institutions either adapt or lose a significant part of their business.
We can already see, for example, cloud back offices and IT that cut the IT costs to 1/100th of traditional banking IT. When these come to the mainstream, this will be quite disruptive, and we will see thousands of new finance services that are not only more cost-effective, but also can offer better tools to manage money, find optimal loans and provide a better customer experience. Expensive IT is no longer a barrier to entry.
Probably AI is also more resistant to all the hypocritical talk about regulation while the other eye is closed to suspicious transactions and customers. Data analytics, AI and RegTech will be the new tools of regulators. No system is perfect, but when machines manage the process and there are audit logs and document history of yellow and red flags, it is harder to bypass processes.
We are headed for a new finance services reality, and traditional finance institutions can no longer hide behind the window dressing of regulation, reputation and risk management. They need to face reality and decide their next move. They can either fight and defend the old castle till the very last man, or start a journey to a new land.
The article first appeared on Disruptive.Asia.
We had this slogan ‘live your data’ for our data analytics company in 2007. The company was growing, attracted investors and many new people, and especially the new management and marketing people thought the slogan is too abstract and unclear. I think I had quite a lot of responsibility with that slogan. Probably it was too early, but we now are coming to an era that we can say people truly live their data.
Maybe it is still abstract, but let me try to explain the background. We already made very advanced analytics, combining traditional segmentation, machine learning behavior and social network analytics. We also had the very first concepts for ‘distributed’ data and analytics models, for example, how a mobile phone could learn from the user’s behavior and propose and choose things based on their profile, and a user could even have an anonymous avatar to do things online. Some of those things were too early for that market and technology.
The point of the slogan was that data is becoming a fundamental part of each person’s life. Your data influences your life, your data helps you to live your life and your data can even do things on your behalf. Data is really taking a fundamental role in your life. But, you need tools to control, utilize and manage it, or other people will manage and use it to drive your life.
Now we see this clearer than in 2007. Your finance data very much controls your financial opportunities. Your social media profiles and data create your public image. Your purchase history data determines what kinds of offers and pricing you get. Your health care, and now even real time well being and exercising data, defines your insurance policy and pricing. You live your data.
We have also seen the negative side of this. If someone steals your data, he or she can literally live your life after the identity theft. If someone is able to modify your data, it can change your life drastically, e.g., result in a bad credit score or cause troubles at immigration, or you can even become a terrorist based on your data. You live your data.
We see countries and governments that start to collect all kinds of data not only for credit scoring people, but scoring their reliability and ‘citizenship’. If your data tells that you are not a good citizen, your life can suddenly become much more difficult. You live your data.
Now we are really at a point that we must get control on our own data. There have been enough scandals about data misuse, theft and trading. We are also in a point where legislators, regulators and technology are driving new models to own, manage and use data.
We already see new solutions where people can start to manage their own health care (e.g. MedRec and Patientory) and finance (e.g. Prifina) data. They are still early phase companies and models, but the change has started. Telcos are near consumers and their data, they should also think about how to help their customers embrace a new way to manage data. There are also many more plans about distributed data models, e.g. a social network that doesn’t own data, but just enables people to show their posts (data) to their friends, or a personal AI that helps to find relevant things.
In 2007 we finally started to use ‘data is the black gold of 21st century’ slogan and dumped the ‘live your data’ slogan. The black gold slogan became very popular and many parties have used different versions of that since then. Now this old slogan came to mind at a time when I feel we really are moving from the data as oil era, to the data drives your life era.
Personal coaches and psychologist give advice, how to get your personal life under control. Now we need coaches and tools to take our data into our own control. Live your data, or someone else lives it. And, by the way, your data lives much longer than you.
The article was first published on Telecom Asia.
Grow VC Group has been invited to the Transatlantic Economic Council meeting in Vienna, Austria, and Horasis Asia meeting near Ho Chi Minh City, Vietnam, in this month.
The Transatlantic Economic Council (TEC) is a body set up between the United States and European Union to direct economic cooperation between the two economies. It was established by an agreement signed on 30 April 2007 at the White House by U.S. President George W. Bush, President of the European Council Angela Merkel and EU Commission President José Manuel Barroso. The Council is co-chaired by an EU and a U.S. official.
Grow VC Group Chairman Jouko Ahvenainen participates in the meeting in Vienna. He is working in a group that focuses to develop SME access to finance in the EU and the USA. The focus of the discussion is especially to find new models and instruments for the SME finance, including utilization of new technologies like fintech and blockchain.
Horasis is a visions community that with its members explores, defines, and implements trajectories of sustainable growth. Horasis provides strategic foresight to public and private entities who envisage growing into global organizations. Horasis will convene the 2018 Horasis Asia Meeting in Binh Duong New City – a high-tech development zone close to Ho Chi Minh City. The Horasis Asia Meeting will bring together over 400 of the foremost leaders from across Asia.
Grow VC Group Jouko Ahvenainen is a co-chair of the event. He participates in the discussions about Asian's dynamism, how business, trade, diversity and cultures can develop together across Asia. Mr Ahvenainen also focuses on the opportunities of new finance and fintech services, and how they can offer opportunities to unbankable people and businesses. He has also earlier participated in the Horasis Global meeting.
Grow VC Group focuses especially on global finance, digitization and data businesses. Its target is to participate in work to create future opportunities and more equal access to finance globally and give people better tools to manage their finance and data. A part of the work is to participate in workgroups to shape the visions, policies and strategies for the future, and at the same time the Group companies offer practical solutions and technologies to enable these things.
Record labels and movie production companies work hard to protect their copyrights, especially when it comes to digital distribution solutions, which has resulted in all kinds of restrictions in how content can be copied, distributed and shared. They have also been very aggressive with legal action to enforce those restrictions.
Which gets me to wondering: could the same happen for personal data? Imagine that every time someone uses someone else’s personal data, they must pay for using it and must adhere to agreed-upon policies on how it can be used, otherwise they will face harsh legal action.
There are several factors changing the personal data business: GDPR and other new regulations in many countries; increasing concerns about privacy; blockchain-type solutions to distribute data and make smart contracts; and more advanced models to monetize data. It is basically a combination of changes in the legal environment, people’s behavior and Internet services, as well as emerging FinTech models.
In the content business, authorities have been very active to shut down sites that enable file sharing of music or video (see: Pirate Bay or Kim Dotcom). And currently in many countries, ordinary consumers can be sued if they download an illegal copy of a song or movie, or knowingly used a pirate streaming device. In some countries, even using a friend’s Netflix login credentials is illegal.
But what are the consequences for companies that have sold, bought or utilized data from ordinary people without proper and clear consent? Up to now there really haven’t been any. Indeed, it’s a core business model for OTT services – attract people to somehow use something for free, and then take their data and monetize it by selling it to advertisers and partners. The people whose data is being used are the product, not the customer.
One extreme and confusing consequence of this is that consumers’ personal data can be potentially mishandled by companies they don’t have accounts with. For example, I just received an email from British Airways informing me that someone had stolen payment data from their servers, including names, credit card details, and customer addresses. The email was essentially a notification and apology, with no offer of compensation or redress.
But the strange thing is that I have never created an account with BA, so I was surprised that they were storing my payment data in the first place, and confused as to why they would. A payment transaction should be just a transaction, and when they get the money, they should not keep all the details.
It has been easy for companies to collect all this data and develop fancy ideas to use it or sell it. And to be sure, many individual consumers haven’t been too keen to protect their data, and have been willing to let companies use it in exchange for some meaningless discount points. Meanwhile, the ones who do want to protect and control their data have very limited options to hold companies who collect and misuse that data to account.
However, this year marks a probable turning point. Many point to GDPR as the linchpin, but honestly, it is just one component in this shift. It might actually be more significant that public opinion is shifting and technology is being developing to enable these changes to happen. It is also about having solutions that make it cost-effective to implement new data models.
Many companies see customer data as a business opportunity, but they might also see it as a potential liability if they (or a partner) lose it, abuse it or do anything unethical. The risks to play with data are becoming increasingly higher, even if what’s at stake is your reputation. Companies also need more and more advanced tools to utilize data all the time – simply analyzing purchase behavior to for some “best next offer” campaign isn’t a competitive advantage anymore.
Blockchain, distributed models and smart contracts are among the solutions that are changing services and data models. The same is true for local AI solutions that work for an individual consumer to find the best deals. All this together fundamentally changes services and concepts. Of course, none of this will happen overnight, but this is increasingly becoming the mission statement of a new wave of startups rather than the usual “free service in exchange for your data” model.
I have written in the past about data being the oil of the 21st century – that is to say, just as oil was an enabler for people do new things (especially drive a car), data should also enable people to do new things. Maybe we can also say personal data should be the copyright battle of the 21st century, where the individual is seen as the ‘copyright holder’ of their data (intellectual property).
We’re seeing the first indicators that this change is starting to happen. When companies understand they must respect the individual’s ownership of data as much as content companies expect us to respect the copyright of songs and movies, we will enter a totally new phase of consumer data. Only then can we say consumer data really gets the value it deserves.
The article first appeared on Disruptive.Asia.
Read more about Prifina's models to manage personal finance data.
Est. 2009 Grow VC Group is the global leader of fintech innovations, digital and distributed finance services. Our mission is to make the finance services more effective, transparent and democratic. The Group includes leading fintech companies in their own areas.
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