Snippings

I was quoted in The Economist (“Plug and pay”, 21st November 2019) talking about the impending reshaping of the retail financial services sector. Although the quote isn’t quite accurate — I was responding to the statement that a a bank is a balance-sheet, a factory that turns capital into financial products (such as loans and mortgages) and a sales force, I didn’t make it — the paraphrase is correct. Those first two activities are heavily regulated, as they should be, which is why Big Tech is uninterested are in them. They are more than happy to have banks, for example, do this boring, expensive and risky work with all of the compliance headaches that come with it. As noted in article, the Apple credit card is actually issued by Goldman Sachs (although it was Apple that caught the flack in the row about gender discrimination around credit limits) and the Amazon cards are issued by Chase, Synchrony and American Express. Similarly, the Google “checking” account (this is the American word for a current account, because they still use cheques, which must be something to do with the Continental Congress or something) is actually provided by Citi.

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What big tech wants is the distribution side of the business, as shown in this old diagram of mine. They have no legacy infrastructure (eg, branches) so their costs are lower but to my mind more importantly the provision of financial services will keep customers within their ecosystems. If you use the Google account and Google pay then Google will have a very accurate picture of your finance. As the article says “Amazon wants payments in-house so users never leave its app”. Indeed. What Big Tech wants isn’t your money (the margins on payments are going down) but your data.

This is where there are some pretty serious implications. If Big Tech takes over consumer relationships, banks will end up having to give away margin but, far more seriously, data. Andrei Brasoveanu of Accel, a venture-capital firm, is quoted as saying that they could turn into “utilities, providing low-margin financial plumbing”. Well, that’s the lucky ones. The unlucky ones will be wiped out in a wave of consolidation and closures.

This isn’t a technology prediction, by the way. In Europe at least it is a regulatory prediction. Back in 2016, I wrote about regulators demanding that banks open up their APIs that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If  regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t it true for other organisations in general and the “internet giants” in particular? This same point was just made by Ana Botin, Chairperson of Santander. My good friend Chris Skinner notes her comments to Bloomberg: “I need to know you and that’s based on data. Why should data be regulated in a different way if you’re called a bank and if you’re called something else”.

There are big changes coming, and banks and payment companies in particular are going to need effective strategies to survive. It’s not only a problem for those legacy incumbent dinosaurs that the happening new digital kids like to poke fun at. The fintech “challengers” also have a problem. Just as Big Tech has made ecosystems impervious to competition, so it could cross-subsidise (with data as well as with money) its financial services products to raise such a barrier to competition that no newcomer will be able to spend enough to gain traction.

There are some really big changes coming in retail financial services. And that’s not a prediction, that’s a fact.

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The dollar’s falling share of reserves represents an “official sector vote against US ‘exceptionalism’”, said Mr Ruskin. In his view, the data should give pause to US policymakers contemplating laws to tax foreign purchases of US assets, further sanctions based on the international use of the dollar and plans to restrict access to US capital markets. All are actions that could weaken the dollar’s influence.

Why central banks are edging away from the dollar | Financial Times:

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​​​ITU Workshop on Standardizing Digital Fiat Currency (DFC) and its Applications
New York City, USA, 18-19 July 2018

Case: The State of DFC Implementation in China People’s Bank of China (PBOC) has been a leader in thinking strategically about DFC deployments at a large scale with a mixture of heavy cash use and robust and growing use of mobile payments. This will highlight PBOC’s efforts in meting these challenges. Yao Qian,Vice Director-General of Technology Department, People’s Bank of China [ Presentation ]

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Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.

The High Stakes of the Coming Digital Currency War by Kenneth Rogoff – Project Syndicate:

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Sean McFate, a former US paratrooper and now adviser to the Pentagon, but not quite as Hollywood might want us to believe.

“When people think about cyber they think about sabotage, but the true power of cyber is information; to shape people’s perception of reality and to craft a narrative,” he says.

“That’s the future of war, not tanks.

Is Britain already in a cyber war?:

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Powell said… a digital national currency may not offer advantages to the U.S. that it may do to other nations

Fed Reserve Evaluating Digital Dollar But Benefits Still Unclear, Says Chairman – CoinDesk:

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The Microsoft-owned company’s first moderation report, published on Thursday, revealed that 19.5m fake accounts had been automatically tackled at the moment of registration by its AI systems, with a further 2m “restricted” after being created.

Are LinkedIn’s 21m fake accounts the work of spies?:

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A live simulation of a White House National Security Council meeting during a major national security crisis with former senior administration officials and thought leaders Nicholas Burns, Ash Carter, Jennifer Fowler, Gary Gensler, Aditi Kumar, Neha Narula, Meghan L. O’Sullivan , Eric Rosenbach, Lawrence H. Summers, and Richard Verma.

Digital Currency Wars: A National Security Crisis Simulation | The Institute of Politics at Harvard University:

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So the upshot is that China’s CBDC will be providing a certain sort of privacy to users. Which reminds me about what Rodney Garratt and Morten Bech, two economists that specialize in payments systems, have written about payments anonymity. According to Garratt and Bech, there are two grades of payments anonymity. With third-party anonymity, a person’s true identity is hidden from everyone who participates in a transaction, including the system operator. Banknotes are the best example of third-party anonymity, since the issuer—the central bank—has no idea who is using them.

Counterparty anonymity is less strong. This sort of anonymity prevails when personal information about the two counterparties to an exchange remain hidden from each other but the system operator is still privy to each user’s identity. Yao’s controlled anonymity presumably means that DCEP will provide Garratt and Bech’s second sort of anonymity, counterparty anonymity.

Moneyness: “Controllable anonymity”:

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“Sixty two percent of U.S. respondents in Bain’s annual retail banking report published Monday said they would buy a financial product from an established technology company. Among people ages 18 to 34 it was even higher — roughly 75% said they would be open to banking with a tech giant.”

From “Majority of Americans would try banking with big tech: Bain report”.

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