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OBSERVATIONS FROM THE FINTECH SNARK TANK

It’s that time of the year when banking industry pundits turn their thoughts to the top trends of the upcoming year. I’d like to take a different tact and posit the top debates the industry will wrestle with in the coming decade.


1) Branches: Dead or alive?

The branch debate is certainly not new. But it’s far from resolved, and will accelerate in the next few years. To date, the debate has centered on arguments from:

  1. Branchophiles who point to statistics that show that some high percentage of consumers still go to branches. For example, a CNN article reported that “banks should think twice before they shut down their next bank branch: Many customers, especially younger ones, still regularly rely on physical banks to make deposits, get paper money and even pay bills.”
  2. Branchophobes (like myself) who argue that while consumers might still want the “human touch,” that touch doesn’t necessarily have to come from someone sitting in a building called a bank branch. Why can’t banks use Facetime to facilitate interactions between people? Or why can’t they improve digital processes so consumers don’t need human intervention?

Over the next few years, this debate will focus less on consumer behaviors and preferences and more on the potentially disparate economic impact of branch closings.

That argument isn’t new either, as witnessed by recent studies from the Federal Reserve (Bank Branch Closings Weigh on Rural Communities, Fed Finds) and the National Community Reinvestment Coalition (Bank Branch Closures from 2008-2016: Unequal Impact in America’s Heartland).

Make no mistake: This debate will continue to be politically-infused with anti-bankers accusing banks of intentionally taking harmful actions against segments of the population.

The NCRC report, for example, points out that “the loss of branch banking access impedes small business lending, hampering capital availability to the primary engine of US economic growth.”

This ignores two facts: 1) The capital gap was created by banks’ increased aversion to risk, not branch closings, and 2) The gap has been closed by fintech startups—who don’t have branches.

Potential implication: Digital banks (and other types of fintech providers) will be required to have a physical presence in economically disadvantaged areas, which will impede their cost advantages.

Bottom line: This decade-old debate will continue into the 2020s, but will be the first of the big debates to be decided as technology-driven approaches to banking become even more dominant—and operationally better.


2) AI: Biased and in need of regulation?

Advancements in artificial intelligence (AI) promise to change banking in many ways. But accusations of bias threaten the use of AI for certain applications and raise calls for regulation of the technology.

Like the first debate, this is already happening, but in some ways, it’s a misguided debate.

The data used in AI models is no different than the data used in non-AI quantitative models and other decision-making processes. Should the use of data in management decision-making processes be disallowed, then, until all data sources are proven to be free of bias?

That’s not realistic, and neither are calls for increased regulation of AI.

Over the next decade, AI will be assimilated into existing bank (and other industry) applications and systems. In effect, it will be difficult—if not impossible—to determine what part of an application is AI and what part is isn’t.

The concerns regarding AI bias go beyond business-specific management decisions. In When Algorithms Decide Whose Voices Will Be Heard, Theo Lau worries that:

“While we may have the perceived power to express ourselves digitally, our ability to be seen is increasingly governed by algorithms—with lines of codes and logic—programmed by fallible humans.”

Bottom line: Special-interest groups will continue to cry foul over results that might not even be caused by bias in AI. The debate over how to minimize, avoid, and/or regulate it will continue through the 2020s.


3) Data: Will privacy and security concerns curtail the use of data?

Picking up where the AI debate leaves off, the debate over the use of consumer data will rage on throughout the 2020s with no easy answers.

On one side of the debate are Dataphiles who argue that data can be used to personalize products, services, and advice that deliver benefits to consumers.

On the other side are Dataphobes like Karen Yeung, a University of Birmingham professor who writes, in Five Fears About Mass Predictive Personalization in an Age of Surveillance Capitalism, that:

“Personalization fosters the asymmetry of power between profilers and individuals. Because preferences and interests are not explicitly stated, personalization may not be in the interests of the customer. Predictive profiling systems intentionally seek to exploit the systematic tendency of individuals to rely on cognitive heuristics or mental short-cuts in making decisions.”

Giving consumers choices over who gets to use their data and how its used will prove to be fruitless. As a Brookings Institution research study reported:

“Maybe informed consent was practical two decades ago, but it is a fantasy today. In a constant stream of online interactions, it is unrealistic to read through privacy policies. And people simply don’t.”

It’s not just privacy policies that fall short—proposed “dashboards” to give consumers control over their data can’t come anywhere close to the level of complexity involved with the use of consumer data.

Enabling consumers to sell their data isn’t a panacea. Proponents argue that “if consumers could sell their data, they would have the ability to share the data from any transaction with multiple organizations—to their own benefit and that of society as a whole.”

Unfortunately, this perspective ignores the fact that most consumers can’t foresee the way the data they sell could be used. According to the Brookings Institution, “Consumers are unlikely to strike a good deal for their data since they lack information about its value, and the data collectors will be the market makers.”

Bottom line: The debate over the use of data will become highly complex in the 2020s. Big Tech firms are already in the spotlight for their use of data—that light will spread to the companies who partner with them.


4) Currency: Will cryptocurrencies fail or succeed?

In the past few years, the arc of change regarding cryptocurrencies has swung from: 1) the anarchistic fervor of new currencies replacing existing currencies to 2) corporate-sponsored cryptocurrencies from players like Facebook, JPMorgan Chase, and Walmart to 3) talk of government-issued cryptocurrencies in the US and China.

The cryptocurrency debate starts with whether or not they can even be considered currency. According to S&P Global:

“Cryptocurrencies don’t meet the basic two requisites of a currency: An effective mean of exchange and an effective store of value. First, cryptocurrencies are still not widely accepted as payment instruments. Second, the volatility over the past 12 months in the valuation of some cryptocurrencies and their market cap is the most meaningful evidence that they fail the test of value storage.”

But that could change—and that’s just the tip of the debate iceberg.

A predominant component of the cryptocurrency debate in the 2020s will be corporation’s motivations and rights to issue cryptocurrencies.

Facebook’s Libra is at the forefront of this debate, with Senate hearings enabling lawmakers (on both sides of the aisle) to demonstrate their cluelessness.

Walmart’s filing for a cryptocurrency stated that it may be “pegged to the US dollar and available for use only at selected retailers or partners. The digital currency can provide a fee-free, or fee-minimal place to store wealth that can be spent, for example, at retailers and, if needed, easily converted to cash.”

Translation: Walmart is looking to skirt the interchange fees levied by the major networks.

JPMorgan Chase’s JPM Coin, announced in February 2019, might not be very different. According to Charles Potts, Fintech Catalyst at ATDC:

“For years, Chase has invested in reducing its reliance on legacy payments networks. JPM Coin appears to be another example of that strategy to directly control the manner and method by which payments activities flow.”

Bottom line: While the debate regarding the possibility of cryptocurrencies replacing fiat currencies continues into the 2020s, the debate will splinter into the payment and international remittances space.


5) China or the West: Which fintech model will prevail?

SWIFT reports:

“China and the West are at different stages of fintech maturity. China’s fintech success derives not just from a technological advantage and unprecedented innovation, but also from integrating finance and real-life needs.”

The integration of “finance and real-life needs” has produced “super apps” like WeChat, which have yet to catch on in the US. The big question is: Will they?

The answer will likely be determined by how the other debates outlined in this article play out. Unknowns in this debate include:

  • Will the US continue to move towards socialistic economic approaches that help favor a super app environment?
  • Will the US develop and adopt a national AI policy to become more competitive (and, in fact, does it even need to)?
  • Will the US regulatory environment (e.g., antitrust laws) change to favor a super app approach?
  • Could a Chinese-like Social Credit System take hold in the US?

The virtue of a social credit system is a debate unto itself that could dictate the fintech implications. A study titled A Dystopian Future? The Rise of Social Credit Systems presents two sides of the argument:

  • One side argues that “a Social Credit System can’t be rightfully designated as civic virtues because: (1) a score constitutes an aim external to any ‘virtuous action’, and (2) the resulting activity tends to conformity rather than to distinction in the public sphere.”
  • The other side sees it as a “promising way to enhance distributive justice and an alternative for price mechanisms in market economies.”

The stakes of this debate transcends the success or failure of individual companies. As Richard Turrin writes:

“For the first time, fintech is being used by countries to compete with one another on a global stage. Fintech is being deployed as a tool for governments to project their power abroad, and potentially disrupt established systems.”

Bottom line: This is the mother of all debates among the five listed here. This debate goes to the heart of the American economic system and the zeitgeist of the American psyche.


The Final Word

The common unknown across these debates is how societal norms will change. The result: The future of fintech is beyond the control of the industry, and will be shaped by external factors.

There are certainly other debates and unanswered questions about fintech that remain to be answered. But I’m putting a stake in the ground that the five spelled out here will be the ones that shape the 2020s and dictate how the other debates will be resolved.

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OBSERVATIONS FROM THE FINTECH SNARK TANK

It’s that time of the year when banking industry pundits turn their thoughts to the top trends of the upcoming year. I’d like to take a different tact and posit the top debates the industry will wrestle with in the coming decade.


1) Branches: Dead or alive?

The branch debate is certainly not new. But it’s far from resolved, and will accelerate in the next few years. To date, the debate has centered on arguments from:

  1. Branchophiles who point to statistics that show that some high percentage of consumers still go to branches. For example, a CNN article reported that “banks should think twice before they shut down their next bank branch: Many customers, especially younger ones, still regularly rely on physical banks to make deposits, get paper money and even pay bills.”
  2. Branchophobes (like myself) who argue that while consumers might still want the “human touch,” that touch doesn’t necessarily have to come from someone sitting in a building called a bank branch. Why can’t banks use Facetime to facilitate interactions between people? Or why can’t they improve digital processes so consumers don’t need human intervention?

Over the next few years, this debate will focus less on consumer behaviors and preferences and more on the potentially disparate economic impact of branch closings.

That argument isn’t new either, as witnessed by recent studies from the Federal Reserve (Bank Branch Closings Weigh on Rural Communities, Fed Finds) and the National Community Reinvestment Coalition (Bank Branch Closures from 2008-2016: Unequal Impact in America’s Heartland).

Make no mistake: This debate will continue to be politically-infused with anti-bankers accusing banks of intentionally taking harmful actions against segments of the population.

The NCRC report, for example, points out that “the loss of branch banking access impedes small business lending, hampering capital availability to the primary engine of US economic growth.”

This ignores two facts: 1) The capital gap was created by banks’ increased aversion to risk, not branch closings, and 2) The gap has been closed by fintech startups—who don’t have branches.

Potential implication: Digital banks (and other types of fintech providers) will be required to have a physical presence in economically disadvantaged areas, which will impede their cost advantages.

Bottom line: This decade-old debate will continue into the 2020s, but will be the first of the big debates to be decided as technology-driven approaches to banking become even more dominant—and operationally better.


2) AI: Biased and in need of regulation?

Advancements in artificial intelligence (AI) promise to change banking in many ways. But accusations of bias threaten the use of AI for certain applications and raise calls for regulation of the technology.

Like the first debate, this is already happening, but in some ways, it’s a misguided debate.

The data used in AI models is no different than the data used in non-AI quantitative models and other decision-making processes. Should the use of data in management decision-making processes be disallowed, then, until all data sources are proven to be free of bias?

That’s not realistic, and neither are calls for increased regulation of AI.

Over the next decade, AI will be assimilated into existing bank (and other industry) applications and systems. In effect, it will be difficult—if not impossible—to determine what part of an application is AI and what part is isn’t.

The concerns regarding AI bias go beyond business-specific management decisions. In When Algorithms Decide Whose Voices Will Be Heard, Theo Lau worries that:

“While we may have the perceived power to express ourselves digitally, our ability to be seen is increasingly governed by algorithms—with lines of codes and logic—programmed by fallible humans.”

Bottom line: Special-interest groups will continue to cry foul over results that might not even be caused by bias in AI. The debate over how to minimize, avoid, and/or regulate it will continue through the 2020s.


3) Data: Will privacy and security concerns curtail the use of data?

Picking up where the AI debate leaves off, the debate over the use of consumer data will rage on throughout the 2020s with no easy answers.

On one side of the debate are Dataphiles who argue that data can be used to personalize products, services, and advice that deliver benefits to consumers.

On the other side are Dataphobes like Karen Yeung, a University of Birmingham professor who writes, in Five Fears About Mass Predictive Personalization in an Age of Surveillance Capitalism, that:

“Personalization fosters the asymmetry of power between profilers and individuals. Because preferences and interests are not explicitly stated, personalization may not be in the interests of the customer. Predictive profiling systems intentionally seek to exploit the systematic tendency of individuals to rely on cognitive heuristics or mental short-cuts in making decisions.”

Giving consumers choices over who gets to use their data and how its used will prove to be fruitless. As a Brookings Institution research study reported:

“Maybe informed consent was practical two decades ago, but it is a fantasy today. In a constant stream of online interactions, it is unrealistic to read through privacy policies. And people simply don’t.”

It’s not just privacy policies that fall short—proposed “dashboards” to give consumers control over their data can’t come anywhere close to the level of complexity involved with the use of consumer data.

Enabling consumers to sell their data isn’t a panacea. Proponents argue that “if consumers could sell their data, they would have the ability to share the data from any transaction with multiple organizations—to their own benefit and that of society as a whole.”

Unfortunately, this perspective ignores the fact that most consumers can’t foresee the way the data they sell could be used. According to the Brookings Institution, “Consumers are unlikely to strike a good deal for their data since they lack information about its value, and the data collectors will be the market makers.”

Bottom line: The debate over the use of data will become highly complex in the 2020s. Big Tech firms are already in the spotlight for their use of data—that light will spread to the companies who partner with them.


4) Currency: Will cryptocurrencies fail or succeed?

In the past few years, the arc of change regarding cryptocurrencies has swung from: 1) the anarchistic fervor of new currencies replacing existing currencies to 2) corporate-sponsored cryptocurrencies from players like Facebook, JPMorgan Chase, and Walmart to 3) talk of government-issued cryptocurrencies in the US and China.

The cryptocurrency debate starts with whether or not they can even be considered currency. According to S&P Global:

“Cryptocurrencies don’t meet the basic two requisites of a currency: An effective mean of exchange and an effective store of value. First, cryptocurrencies are still not widely accepted as payment instruments. Second, the volatility over the past 12 months in the valuation of some cryptocurrencies and their market cap is the most meaningful evidence that they fail the test of value storage.”

But that could change—and that’s just the tip of the debate iceberg.

A predominant component of the cryptocurrency debate in the 2020s will be corporation’s motivations and rights to issue cryptocurrencies.

Facebook’s Libra is at the forefront of this debate, with Senate hearings enabling lawmakers (on both sides of the aisle) to demonstrate their cluelessness.

Walmart’s filing for a cryptocurrency stated that it may be “pegged to the US dollar and available for use only at selected retailers or partners. The digital currency can provide a fee-free, or fee-minimal place to store wealth that can be spent, for example, at retailers and, if needed, easily converted to cash.”

Translation: Walmart is looking to skirt the interchange fees levied by the major networks.

JPMorgan Chase’s JPM Coin, announced in February 2019, might not be very different. According to Charles Potts, Fintech Catalyst at ATDC:

“For years, Chase has invested in reducing its reliance on legacy payments networks. JPM Coin appears to be another example of that strategy to directly control the manner and method by which payments activities flow.”

Bottom line: While the debate regarding the possibility of cryptocurrencies replacing fiat currencies continues into the 2020s, the debate will splinter into the payment and international remittances space.


5) China or the West: Which fintech model will prevail?

SWIFT reports:

“China and the West are at different stages of fintech maturity. China’s fintech success derives not just from a technological advantage and unprecedented innovation, but also from integrating finance and real-life needs.”

The integration of “finance and real-life needs” has produced “super apps” like WeChat, which have yet to catch on in the US. The big question is: Will they?

The answer will likely be determined by how the other debates outlined in this article play out. Unknowns in this debate include:

  • Will the US continue to move towards socialistic economic approaches that help favor a super app environment?
  • Will the US develop and adopt a national AI policy to become more competitive (and, in fact, does it even need to)?
  • Will the US regulatory environment (e.g., antitrust laws) change to favor a super app approach?
  • Could a Chinese-like Social Credit System take hold in the US?

The virtue of a social credit system is a debate unto itself that could dictate the fintech implications. A study titled A Dystopian Future? The Rise of Social Credit Systems presents two sides of the argument:

  • One side argues that “a Social Credit System can’t be rightfully designated as civic virtues because: (1) a score constitutes an aim external to any ‘virtuous action’, and (2) the resulting activity tends to conformity rather than to distinction in the public sphere.”
  • The other side sees it as a “promising way to enhance distributive justice and an alternative for price mechanisms in market economies.”

The stakes of this debate transcends the success or failure of individual companies. As Richard Turrin writes:

“For the first time, fintech is being used by countries to compete with one another on a global stage. Fintech is being deployed as a tool for governments to project their power abroad, and potentially disrupt established systems.”

Bottom line: This is the mother of all debates among the five listed here. This debate goes to the heart of the American economic system and the zeitgeist of the American psyche.


The Final Word

The common unknown across these debates is how societal norms will change. The result: The future of fintech is beyond the control of the industry, and will be shaped by external factors.

There are certainly other debates and unanswered questions about fintech that remain to be answered. But I’m putting a stake in the ground that the five spelled out here will be the ones that shape the 2020s and dictate how the other debates will be resolved.

(Excerpt) Read more Here | 2019-12-02 10:00:03

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