Change – Page 2 – FINthinkers

Originality

The price of originality is criticism.

The value of originality is priceless.

Vala Afshar

Digital to replace the human touch?

Can technology/ intelligent machine replace the human touch? While a machine can perform a given task, often more efficiently than we can, what it lacks is the creativity in the activity, a uniquely human ability to cater to the needs of the individual. What is creativity? What are the needs of the individual? Even if a machine could determine an appropriate plan humans will still want to interact with another who has the creative expertise/ experiences to talk us through, one who understands that creativity in that context.

How much of this effect is real, how much of it is specific to our generation? Will the next generation or future generations after have the same distrust and longing for such “human” touch? Especially digital natives who grew up with the internet and social media as part of their everyday world.

Technologies of the industrial revolution (steam power and machinery) – largely complemented human capabilities. The great question of our current time is whether digital technology will complement or instead replace human capabilities…can digital technology replace human capabilities especially the understanding and judgement – let alone the empathy – requires to successfuly deliver services such as social care; or that lead us to enjoy and value interacting with each other rather than with machines.

Faster isn’t wiser: Intelligence is defined in terms of the ability to acquire and apply knowledge and skills, but what is often missing is the act of taking decisions base on the ability to choose objectives or hold values that shape it.

Values are experience, not data: As we use increasingly powerful computers to create more and more sophisticated logical systems, we may succeed in making systems resemble human thinking, but there will always be situations that can only be resolved by humans employing judgement based on values that we can empathise with, based in turn on experiences that we can relate to.

Artificial life, experience, values:

Intelligent machines can make choices based on data available to them but this is very different than a judgement based on values that emerge from our experience of life.

Need for ethical data sharing standards ….

Currently there is an intense discussion about personal data and ownership. Although the assumption of exposing data is inherently dangerous, the opposite may be true as well. The key question focusses more on access control to manage data exposure in order to avoid risks while still getting the benefits. Or maybe it is more about establishing broad ethical standards as data availability is neither good or bad on its own – the way it is used makes the difference.

Let’s look at some use cases which illustrate the challenge. Let’s assume you feel an unusual pressure in your chest and decide to visit a doctor. He does an electrocardiogram (ECG) which looks normal. What does this mean – although it maybe normal in relation to a statistical sample but may be very unusual for you. The doctor does not have the necessary data to determine this.

Let’s assume now that you have a wearable which collects data of key body functions on an ongoing base. Many others do this as well and the gathered data can be analysed leading to algorithms which can detect anomalies like an indication of an increased risk of a heart attack on a personal level. Your data is now used in two ways – to build up the algorithm and to detect health issues for you. Please note that just doing some data gathering when you feel bad has not the same effect. The power comes from the availability of longer term data.

Let’s now assume that the new way to identify potential heart attacks reduces the perspective costs substantially. Especially in the long-term, trends and indicators can be used to influence the behavior e.g. towards more physical activity.

The data gathered could also be used to derive further information which could be used for unethical purposes.

You might say that it is always possible to switch data gathering on and off – depending on the type of data such ‘white spots’ may finally be problematic and will not help to better protect privacy. If gathering data is the norm, then switching it off could easily seen as an indicator that somebody tries to hide something may actually attract attention.

Such data could be pseudonomized – but needs to have some sort of tag to allow correlations to power the analytics or it may even by identifying itself like the ECG which is also being used for authentication.

There are many such examples – if you share your GPS position, somebody may take advantage that you are far away from home or use the data to rescue you after an accident.

I think that collecting data will be the norm. Protecting data will be key – but even more important is the need to establish ethical standards on how to deal with such data and information derived from it.

The Swiss National Bank and the Cypto Franc

Financial newspaper “Finanz and Witschaft” published an article titled “SNB will keinen Krypto-Franken” reflecting on the speech “The financial markets in changing times – Changes today and tomorrow: the digital future” by Andréa M. Maechler, Member of the Governing Board of the Swiss National Bank (SNB) held at Money Market Event in Zurich on 05th of April 2018.

There are various views on the nature and definition of money, currency and cash which has substantially changed over time. The post How to explain ‘new’ things like bitcoin … provides some thoughts on this topic. It is very difficult to talk about all these terms as the definitions incorporate specific perspectives.

The challenge all countries, including Switzerland, face is to sustain global competitiveness. How does one move from the current economic system, of the industrial age, to one which is digital in its core. The post “Crypto Franc” – key ingredient for a Swiss national blockchain” provides a proposal published by the Fintech Rockers.

This essay proposes to create a Swiss national blockchain. A blockchain allows to track and change ownership of digital assets without the need of a central authority or intermediate. The exchange is peer to peer and cryptographically secured. Money is a key ingredient when values are exchanged and hence a blockchain infrastructure should contain some form of it to unleash the full potential.

“Such blockchain infrastructure, carried jointly by all Swiss cantons, will have an equivalent catalyst effect as the initial introduction of the railway system or the creation of the Gotthard tunnel during the age of industrialization. The Swiss national blockchain will enable local as well as foreign entities and all people with an interest and/or business relation with Switzerland to hold genuine Swiss cryptocurrency and/or execute transactions via legal compliant smart contracts.”

On this blockchain environment a cryptocurrency bound to the Swiss franc controlled by the SNB is envisioned:

“The introduction of Swiss cryptocurrency “Crypto Franc”, bound to the issued fiat Swiss Franc by the Swiss National Bank (SNB), revolutionizing digital payment capabilities. The national blockchain will enable and bring the Swiss industry(s) to the international forefront of the digital age.”

In her speech, Andréa M. Maechler commented on aspects of the proposal:

“A more prominent role for central banks in this end-customer business area is currently a subject of debate, amid calls for ‘digital central bank money for the general public’. The SNB opposes this idea. Digital central bank money for the general public is not necessary to ensure an efficient system for cashless payments. It would deliver few advantages, but would give rise to incalculable risks with regard to financial stability.”

“Which technologies and solutions ultimately prevail on this solid foundation should in principle be left to the market to decide, however. This division of roles between central banks and commercial banks epitomises our current two-tier financial system. It contributes to the stability of the system, while allowing sufficient leeway for innovation.”

Both are for sure valid points – but again perspective matters. If a “Crypto Franc” is seen as a modern form of cash then not a lot would really change. The SNB controls the amount of cash in circulation and it would continue to control the amount of cryptographic cash which could be safely kept and exchanged using a blockchain infrastructure.

Introducing cryptographic cash could have an impact on the financial system as it would allow people to keep their cash safe – within your e-wallet on a blockchain instead of your existing cash account in the bank. With a cash account the client gets a repayment promise by the bank in turn the bank can use the amount from this account for other business (e.g. mainly lending). The value of the repayment promise depends on the trust in the bank while the trust in the Crypto Franc depends on the trust into the currency.

Thus issuing cryptographic cash is not of the interest of the bank when ownership and value is no longer with the bank but with the individuals. Regardless if a cryptographic currency is introduced, the prevalent systemic risk will continue as long as there is still book money or money created though credit. As the adoption of cryptographic currency increases, it will eventually reduce the systemic risks as commercial banks need to compete for such currency of clients. Clients will need to make an explicit decision when putting Crypto Francs onto an account which means transferring ownership to the bank against a repayment promise. They need to assess the risk(s) whether a bank is able to meet its repayment promise. On the other side the bank can provide return on investment where such transparency would rather de-risk the system invalidating some of the arguments stated by the SNB.

There is an increasing interest by companies and other organizations to create their own form of money. Dr. Edward De Bono suggested years back that companies should consider to issue their own currency using IBM as the example (Towards a digital barter economy?). It was futuristic at the time where he made this proposal – but today in a digital world it becomes feasible (David Birch – Before Babylon, Beyond Bitcon – from Money that We understand to Money that understand Us ). There seems to be a trend going into this direction which could accelerate with potential huge implications on the existent monetary system.

“The SNB will keep a close watch on developments to ensure that it always remains able to assess their potential impact on the financial system in good time.”

This sounds given the context to passive. The SNB needs to active in the developments to gain the required experience. Observers will typically be late. Being late means becoming defensive and reactive. The SNB in my view should be active and engaged in building the best possible future for Switzerland and its financial system.

The ‘No’ by the SNB feels premature influenced by past paradigm rather than by the current developments and the needs of the future. One aspect became prevalent from all the statements across the various parties engaged in the thought exchange is the complexity of the topic. It is a complex network problem and requires much more thoughts and discussions. It is key to have these exchanges in a frequent but immediate manner in order to come to conclusions before other organizations/entity(s) may take over and suddenly provide “the” new form of money pushing organizations like the SNB into a reactive rather than proactive position.

Towards Canary Banking

Services offered by banks are mainly commodities sold with rather opaque pricing strategy. Client experience has become the main differentiator as underlying services are largely the same. The challenge has become creating outcomes which integrate into the life of the customer via respective touchpoints of the client’s eco system. This becomes difficult as the number of potential touchpoints increases significantly (ubiquitous computing).

The focus within banks has moved from operations and backend infrastructure to the touchpoints. Such focus leads to the shift in investments – which leave the backends under-invested hidden from the user by layers of newer systems. This trend started years back when the financial services industry realized that the internet is not a transient effect and changed the way business is fundamentally done. The adoption accelerated with the rise of mobile and the next catalyst with the increase usage of conversational technologies like chat or voice.

Adding more layers does not improve the overall system – instead only to delay and cover up the increasing issues and complexities of the fragile legacy backend which can no longer be sustainable (Measuring complexity in networks). From an opertional perspective the whole architecture becomes more and more unmanagable and risky highlighting the need for a substantial refactoring or more likely a total re-architecting.
Let’s for the moment assume that you own such a “backend” which becomes increasingly hard to change and difficult to operate. What could be a way out of this situation?

Be bold and start greenfield. This allows to get rid of the layers of legacy and build a system which matches current needs.
Try to be clever and refactor the system in an incremental approach. You have to be faster then the changes in the environment as you have to catch up and eliminate debts while adding the functions required to stay competitive. Implementation risk and sunk cost avoidance are the typical arguments backing this option.

Most organizations will go for the second option and try hard. They neither have strong leadership and capability(s) to aim for the first option nor the skills to actually build something new based on current state practices. The organization and the management are only trained to do small changes and the “internal immune system” reacts immediatly against any major change which could endanger the status quo.

Maybe it is better to start with a canary banking approach – where the next version of the bank is built up while the first is operational.

It is similar to driving a car – you choose one, drive it, maintain it and at some point you switch to another model. The new model may contain some parts already used before – that’s fine as long as they fit into the new model. The approach is rather different than continuously adding/ changing external cosmetics elements to an outdated Ford-T backend.

Information dissemination ethics

Digital technology encourages the dissemination of knowledge and know-how. Its ability to influence socio-economic structures also means it confers power and a competitive edge on those who design its applications over those who merely use them. Ethics, a form of critical thinking on social structures and traditions shaping the lives of societies. Aim at questioning moral biases and opening new choices. Digital libraries belong to an emerging digital culture. New questions concerning production, collection, classification, and dissemination of knowledge arise. How is the integrity, validity, and sustainability of these digital collections guaranteed?

Information technology is now ubiquitous (Ubiquitous Computing) in the lives of people across the globe. These technologies take many forms such as personal computers, smart phones, the internet, web and mobile phone applications, digital assistants, and cloud computing. In fact the list is growing constantly and new forms of these technologies are working their way into every aspect of daily life. Have we allowed the digital medium to grow chaotically and carelessly, lowering our guard against the deterioration and pollution of our infosphere. Is it due to the desire and reflection of only what we wanted – entertainment, cheaper goods, free news and gossip – and not the deeper understanding, dialogue or education that would have served us better.

During prior mediums of disseminating information (e.g. newspaper, physical mediums) there was concerned with maintaining standards, adherence to accuracy and an informed public debate. We now have the same problem with online misinformation. These kinds of digital, ethical problems represent a defining challenge of the 21st century. They include breaches of privacy, of security and safety, of ownership and intellectual property rights, of trust, of fundamental human rights, as well as the possibility of exploitation, discrimination, inequality, manipulation, propaganda, populism, racism, violence and hate speech. A lack of proactive ethics foresight thwarts decision-making, undermines management practices and damages strategies for digital innovation. The near instantaneous spread of digital information means that some of the costs of misinformation may be hard to reverse, especially when confidence and trust are undermined (Emotional Trust in an Hyperconnected world).

How do we establishtrust through credibility, transparency and accountability – and a high degree of patience, coordination and determination. Will this be fulfilled with an ethical infosphere to save the world and ourselves from ourselves?

The PSD2 and GDPR gym

There is an intense ongoing debate about the pros and cons of PSD2 in media. On one side some feel that the financial sector is already heavily regulated and with any additional regulation,like PSD2, it will hinder the free evolution of markets. Others on the other hand think that PSD2 is good, as it allows fintechs and bigtech to access client account and transaction data as the catalyst ti add-on services and provide superior user experience. The client owns the decison power and the incumbents are mandated to collaborate. The incumbents may actually get the biggest value from PSD2. Sounds counterintuitive so lets explore a few thoughts.

There is a general set of ongoing trends – the age of industrialization has been superseeded by the age of information. Thus the pipeline businesses which domintated during industralization are being superseded by the platform business models. The platform models are superior as they take advantage of the benefits of network effects. They leverage ideally through similar advantages of the internet. Platform business models are typically composed of many smaller organizations grouped together via the platform into a structure much more powerful than the sum of their parts. Successful platforms create a pull effect as each participant increases the value of the platform for all.

Banking is not yet a platform business – many talk about the uberization of banking and I am convinced it will happen. Typically a very small number of big players will dominate a specific sector in a platform economy These are companies that successfully establish the pull effect described above. When banking moves into such a model, the only players are ones which can integrate seamlessly, offer highly competive services or the one which owns the platform and masters the integration and collaboration. All successfull entities must be well connected and are experts in the interaction and integration through API’s.

Todays incumbents today are often the opposite – they operate in a closed and private environment and try to create captive businesses individually. They interact with very selective partner(s) and does not empower their clients to make their own choices l. They also typically create specific standards and make it very difficult for others to interact with the large number of incumbents.

This is where PSD2 changes the game – it forces the incumbents to think about interfaces and forces them to open up. This is a threat as business(s) may be lost but it brings to the attention of incumbents wanting to change, a survival training in the world of VUCA (Dance on the VUCAno). This forces companies to participate in the mesh economy and its dynamics. It increases the chance to become robust enough to delay the time when the tech giants might take over (Next stop fintech giants). It may well be that a fair amount of revenues of incumbents get eroded during this process and that more client touch points are lost to competitors who just create better client outcomes and experience. But it also strengthens the companies in the upcoming big tech challenge.

This leads to a key question: Should other regulators follow the EU and mandate a regulation like PSD2 and GDPR in order to strengthen the financial system by exposing the incumbents to a shock to increase anti-fragility (In a world of VUCA seek anti fragility) or should it leave the choice to the incumbents which may prefer to protect what they once had and then experience at one point their Kodak moment with potential disastrous impact on the sector and economy?

Rightsizing organizational governance

Lars Vollmer made me think with his latest book about self organization. There is some sort of a chicken and egg problem – as soon as there is a rule or policy there needs to be some governance to verify its adherence.

“Governance is the way the rules, norms and actions are structured, sustained, regulated and held accountable.”

Many organizations have developed tons of rules and policies. I don’t think that this was planned upfront – it happened over time. Let’s rock an idea and think about what would happen if those rules and policies would be deleted? Would this lead to chaos?

This depends I guess on the organization. If the organization is driven by an external purpose and a mission, then the members of the organizations would continue to do the best to move the organization towards the vision. In a healthy organizations mistakes made by individuals would be corrected by the others on the base of common sense and shared principles. The organization learns by example how to act. It walks the talk.

In some organizations the members must sign that they have read and understood all rules and policies. In a healthy organization this is no issue – there are a few rules only and it is not a problem to keep them consistent and contradiction free. In large bureaucratic organizations such behavior can only have the purpose of ‘backside covering’. Somebody needs arguments he can use in case something goes wrong – look, it was clearly stated in the policy.

An organization which has many rules needs a lot of governance. Somebody needs to train the people on the rules, and track that all the rules have been followed. For the members of the organizations this reduces the amount of personal responsibility – it’s not intended to do what’s outside of policy even if it would make a lot of sense and it is fine to do things which don’t make sense as long as they comply to the rules.

Complexity is one of the key aspects in a world of VUCA (see Dance on the VUCAno) – it is not so difficult for a common sense based organization with a clear purpose and healthy structures to adapt to the increasingly fast changes. But it is impossible for a governance dominated organizations to do so for at least the following reasons.

Policies cannot be changed and adapted fast enough and keeping them free of conflict is impossible.
Members as a consequence have to react according to policy and will miss important developments and client needs.
The ones who define the policies will try to embed all eventualities to be on the safe side – the amount of rules grows.
Every mistake tends to result in new or changed rules.

It would be much better to have a small set of principles. Please note that a principle is not a rule – it is a meta rule which helps to identify the right decision. Many organizations have such principles in addition to the rules and policies. Just be careful to really stick to principles and avoid to state the obvious.

So what would be a good approach.

Clear vision and external purpose everybody in the organization shares (see Giving Direction)
A few guiding principles which help to channel the activities
The minimal set of rules and policies required to allow the organization to operate safely

Then let the people create the social structures and norms based on this.

Emotional trust in an hyperconnected world

Trust is an often used term in financial services. What is trust, how is it built, gained or lost? Has trust building changed in the last few years of emerging digital hyper connectivity and will this have an impact on banking? (see “Banking evolution: Service Innovation,” “No Off Switch“) Let’s together explore this a little bit …

There are at least four dimensions of trust:

predictability – ability to predict actions of others and situations which might occur
vulnerability – giving others the chance to take advantage of vulnerabilities
value exchange – exchange of values even though there is no full knowledge about the peer
delayed reciprocity – giving something now with the expectations to be compensated at some future point

The trustor has logical and emotional expectations against the trustee. The logical expectations are often contract related. In case of a loan a payback including interests is a logical expectation. The emotional expectations include the level of comfort and the experiences made during the time where the loan is granted and beyond.

The following little example explores these dimensions. Let’s assume you want to make a ride home and you call a cab.

An ordinary cab arrives with a smiling driver. Before you enter the cab you need to trust the driver that he knows the place, has serviced the car properly and will not crash the car while you are in. This quick assessment is nothing simple but humans have developed senses during the evolution which support this interpersonal check.
The cab arrives – but nobody is in. There is a screen showing a friendly face in an office telling you that he is your driver. The cab is remote controlled in a way that it feels for the driver like being in the car. You can again perform the quick assessment described above based on the reduced amount of information and available senses.
A self driving car arrives with a smiling man in it. He has been mandated by law to sit in the car to intervene in critical situations. You may be tempted to make the quick assessment as in the first scenario but then you notice that this person has limited chance to intervene and influence the sequence of events in an emergency situation as the available time to react would be to short. In essence you notice that you need to trust the system, its sensors and the algorithms.
A self driving car arrives – completly empty. That’s a different story – the interpersonal element and the usual base for quick asseementis is completly missing. Maybe you should do a short ride first to see if this is safe and then, once you gain confidence into the car, its sensors and algorithms go for longer trip. With good experience, trust is built.

There are futher factors influencing your final emotional assessment – the taxi could be dirty, the driver may have an unpleasant driving style or the climate control may be broken. Even when the target is reached on time, the experience may not great and you may decide not to rely on the services of this company again.

I guess it is rather clear what follows now. All these situations also occur in financial services today. The chance that you meet a banker which is an entrepreneur and personally engages in the trust relationship with you are rare. Such a banker would stand up with his name for the agreement made and would do the best to meet the logical and emotional expectations.

So let’s explore the other three scenarios in a little bit more detail.

The secenarios have all one thing in common – the ‘driver’ has limited skin in the game.
Remote meetings with specialists who can come up with creative solutions for complex problems are quite the norm in business and personal live today. Finding the right specialist may already be a challenge and arranging a physical meeting may be close to impossible.
You may have an assigned employee representing the bank as a sales clerk or relationship manager. The relationship manager will talk with you and then key in the data into some engine which finally processes the agreed business. You may build up a personal relationship to your relationship manager. If this is strong, then you will be tempted to follow him if he moves to another bank. If you trust more the brand, its system and processes, then you will stay and engage with a new relationship manager.

You may also be routed to a customer services desk which is used to deal with requests like the one you have. With each call you get to know another person – building an interpersonal relation is not intended.
You may also interact through an electronic channel with the system. A hopefully cool user interface guides you through the necessary steps to get things done.

The objective of most companies is to operate with standard processes leaving the relationship manager very limited flexibility. Hyper connectivity leads to more transparency, the logical element of the trust relationship is performed by an engine and the emotional one is more and more an outcome of the digital experience.

Trust is still a key element in many things. In banking the logical element of trust is more defined by processes, algorithms and infrastructure while the emotional aspect becomes more and more a result of a great digital engagement.

Trust is shifting from personal relationships to systems and experience.

The challenge of (financial) mobility of the future

I had the great pleasure to join the “Impulse Apero” on Feb 6th organized by Kellerhals Carrard and Implement Consulting Group featuring the head of the SBB’s board of directors Monika Ribar. Monika walked the audience in her inspiring presentation through the challenges and opportunities of mobility of the future.

Transparency is the new currency – people estimate transparency. Its about enabling people to reach their goals independent of the provider and about being informed in good and in bad times.
Openness is the new norm – we are living in a network economy. Openness is the key to unleash the combined potential of all services in the network. Closed and monolithic systems are relicts of the past.
Holistic services – users want to have an end to end service and an broad overview. There is just the choice of providing it or let somebody else do it.
Simplicity – the different pricing schemes used by the various service providers are hard to understand for the consumer. But all this complexity can be hidden using smart technology – either by offering a flat rate scheme which enables general usage or by simply billing the actual consumption with the optimal price for the consumer.

These points are very true for a mobility provider and also for financial services and other industries as the relate to big shifts in society. There is one huge difference – the SBB has a huge logistic challenge with a lot of infrastructure which is required to realize the desired degree of mobility. Financial services companies in essence just deal with information and have a simpler problem to solve.

I also would like to highlight a few other aspects which I found very interesting:

Empowerment – the people who are in contact with the users must be empowered to solve problems in creative ways. They see the problem and they can directly engage and solve them with their creativity. The SBB has allocated a budget at discretion for the ‘railway companions’ – this are the people in the train who make sure that the travelers have a smooth journey. This empowerment of employees at the point where the company engages with the clients is just cool.
Team – the rail clean organization is now a part of SBB again and wears he SBB logo. In more an more automated railway stations they are often the only people. Now the wear an SBB logo again and can help support travelers in case of problems. This is a win-win situation as the job has become more interesting and as clients have a further human touchpoint with the brannd.
Development – all roles are changing due to the evolution of the environment and the technology. It is of strategic importance to think about the roles and their evolution paths. SBB grows and moves together with its employees into the future of mobility.
Data – SBB as a provider collects a lot of data about its users. Monika stressed that the data belongs to the client and not SBB. So the client decides when and how this information is used.

Again four aspects which can be translated very well into financial services. The empowerment of the staff is key, every employee is a part of the brand management and client data belongs to the client and not the service providers.