World Economic Forum Debates the Changing Digital Landscape for Banks
Cyber security, the threat of non-financial players and blockchain were the three standout topics for banks at the WEF’s annual New Champions meeting in China this month, writes Martin Frick
What does leadership mean in an era of digital disruption?
The sheer range of cutting-edge technology under review at the World Economic Forum’s Annual Meeting of the New Champions – this year in Dalian, China – was truly astonishing. From how we might live to be 150 to degradable bioplastics, social robots and DNA data storage, 1,800 delegates debated innovations that are already making an impact on our lives, and those still to come.
The digital economy was rightly seen as the linchpin of future growth. Data will be its driving force if it is allowed to flow freely across borders under the right regulation. As one delegate said: “We used to talk about data and digital as the new oil. Now we call it the new air. The question is how we make that air free of pollution and accessible [legitimately] to all.”
The Chinese are undoubtedly leaders in this field. Chinese companies, many not actually banks, have about 90 per cent of the global market share of electronic payments and the companies involved use the data they collect from these transactions to push into financial areas such as lending, divisional accounts and wealth. The crucial point now is to make that data safe.
As my colleague Jun Zhu, president of greater China, said, we are moving towards the Bank 4.0 era: banking is everywhere, but not at a bank. Such networked business models connect more and more actors, increasing the vector for attack and bringing down the level of security of the network to that of its weakest node. The best approach to cyber security is to align different parties i.e. your cyber security consortium, security solutions provider, insurance company and government to define a comprehensive security framework and enable the fintechs to be secure while providing innovative services to society.
Such an approach would benefit banks, which are at the heart of the ecosystem and see cyber security is a key area of investment. In our most recent banking survey with the Economist Intelligence Unit 39 per cent of banks said cybersecurity was top of their digital investment priorities and 68 per cent said they believed regulators would demand tighter cyber security authentication protocols by 2025. This translates to banks such as Standard Chartered having 1,300 people working IT security.
Given the high cost of such investment, it is not surprising that banks are interested in automating and digitising as much as possible, with a keen focus on artificial intelligence. But at the conference, AI was far from being seen as a panacea. One of the most interesting discussions concerned whether AI was a possible solution to mitigating cybercrime – or a dangerous rabbit hole.
AI is already being used to help banks identify patterns and analyse huge amounts of data to self-learn, meaning they can apply their resources to high-risk groups or activities and predict fraud faster, more accurately and at a lower cost. But some were concerned that AI itself can be hacked without raising alarms in a way that fraudulent human behaviour cannot be hidden.
They pointed out that a gut feeling for something fishy will never be reproduced by an AI algorithm and that rules based/human intervention fraud-mitigation processes will include measures to stop problems going further should one person be fooled into opening a dodgy link. In contrast, should an AI machine open a bad link and not identify it as such it will have “learnt” something that is harmful and will act on that lesson – without anyone knowing. But in fact, this “black box” fear is overcome by explainable AI.
Vital to an AI platform is transparency in its decision-making process so that it instils trust among those that use it or are subject to its calculations and decisions. This is delivered by explainable AI, which helps banks understand AI decisions so that users can know how to gauge if the AI is right or wrong, capabilities delivered by Temenos XAI platform.
Competition from non-financial players
Also discussed was the growing trend for non-financial services providers to enter the financial services sector. Facebook, Amazon, Netflix and Google, along with China’s tech titans Baidu, Alibaba, Tencent (the BAT) have all pushed beyond their original sector into financial services – Facebook most recently with the announcement of its blockchain-stored currency Libra. And other non-financial players, including telecommunications companies, are building market share or planning to.
Much of this activity has been spurred by governments trying to open up competition to stimulate innovation and improve customer service. In Europe the revised European Payment Services Directive (PSD2) is opening up customer data held by banks to third parties. In Asia, governments in Hong Kong, Singapore, Malaysia and Taiwan are all offering banking licences to non-traditional players to liberalise the sector. In China, too, non-banking groups are being awarded banking licences.
Some see this as yet another onslaught on traditional banking players, but we believe that it only increases the opportunities for banks to grow and thrive. Banks will not be outrun by new entrants if they are equipped for easy access to their customers’ data, with the ability to store it correctly, analyse it as required and with the facility to add new services via APIs.
In terms of implications for the banking industry, the future is bright for banks that embrace change and adapt their business models and use technology to take advantage of open API digital ecosystems. We should not forget that banks retain very important advantages: they have large customer numbers, they are regulated (and a lot of the network effects will accrue to regulated entities even in an open banking world) and most importantly of all, banks still have trust (more than Google or Facebook). In the future, consumers will turn to businesses that will safeguard their data, help them to get a higher return on their attention and help them to make smarter decisions.
Blockchain finds a use as a token tech
But perhaps the most interesting new phenomenon concerned blockchain, which appears to have found a truly useful purpose at last. While Libra got a lot of attention at the meeting, it remains to be seen just what holders of that currency will be able to spend it on once it is launched next year. This stumbling block may see the nascent currency flounder, but with Facebook’s two billion registered users as potential customers it is certainly an experiment worth following. So while the jury is still out on Libra, the really interesting conversations regarding blockchain were about the tokenisation of assets – when an asset’s value is represented by tokens stored on a blockchain.
Over the past 18 months or so, trading desks for tokens have started to emerge within the banking sector. Frick Bank and LCX, both in Liechtenstein, offer blockchain token trading and they are not alone. The belief is that as tokenisation becomes more widespread, individuals and even institutional investors will increasingly include tokenised assets in their portfolios.
It’s important to remember that this is very early days for the technology. It certainly isn’t without detractors. The amount of storage required is considerable, for example. But as an application for blockchain technology, it looks promising.
As always with WEF summits, there was plenty of food for thought. And as ever, we came away convinced that those who continue to invest in the digital economy will not only survive but thrive in a world of artificial intelligence and other new technologies.
Martin Frick is managing director of APAC, Temenos