Financial technology is proving less of a battleground than feared
The relationship between banks and technology companies is becoming increasingly collaborative
May 6th 2017
IN JUNE 2007 a banker, or anyone else with $499 to spare, could try a novel distraction from work: Apple’s first iPhone had just gone on sale. In October 2008, after Lehman’s fall, another technological innovation was more quietly unveiled. A paper published online under the name of Satoshi Nakamoto described and advocated a form of electronic cash which people could send to one another without going through discredited banks. It was called bitcoin.
As banks have adapted to the crisis and its aftermath with varying degrees of success, the rest of the world has not stood still. Smartphones and, less visibly, cloud computing have transformed people’s daily lives—and hence their use of money. Consumers expect to be able to use the powerful computers in their palms to pay for goods or move cash around as easily as they can tweet, stream videos or share photos with friends. Corporate customers are equally demanding. Yet banks’ information-technology systems are a curious mixture of the old and rickety and the sleek and modern. Malevolent hackers continually probe for weaknesses as banks are striving to stay ahead.
And if they don’t? Bitcoin embodied an anti-establishment, libertarian threat to banks: that upstart technologists might disrupt them as Amazon has disrupted bricks-and-mortar retailers and Uber cabbies. So far that has not happened, to the chagrin of ambitious financial-technology (fintech) startups and the relief of many bankers. New competitors have made some inroads, but—in Western countries, at least—they are finding that collaboration is a likelier path to success than a full-on fight. Moreover, far from being usurped by bitcoin, banks are eager to turn blockchain, the technology on which it is based, to their own ends. Again, co-operation with technology companies, and sometimes with other banks, is the order of the day.
To be sure, a gang of newcomers have muscled their way into their domains. Peer-to-peer or marketplace lenders, such as Lending Club and SoFi in America, or Funding Circle and RateSetter in Britain, connect people and companies that want to borrow with those that have money to lend, promising both sides keener rates. Britain’s MarketInvoice allows small companies to borrow against receivables immediately, rather than turn to a bank or wait for bills to be paid. Digital banks such as N26 in Germany, Tinkoff Bank in Russia and an array of British hopefuls are challenging incumbents.
But banks are not easily displaced. Peer-to-peer lending, for instance, has grown rapidly, but still amounted to just $19bn on America’s biggest platforms and £3.8bn in Britain last year, according to AltFi Data, an analytics company. And some marketplaces now involve banks. Lex Sokolin, director of fintech strategy at Autonomous, a research firm, argues that music—one of the first industries to be attacked by digital revolutionaries—was fairly easily disrupted. Retailing was a little harder, but customers got used to not handling books, cameras and clothes before buying. Finance and health care, he says, are much more difficult. People are rarely inspired by financial products, says Mr Sokolin, which makes it costly to build a brand. It is easier to team up with those who already have the customers.
Banks command resources that small startups can only dream of: last year JPMorgan Chase spent over $9.5bn on technology, including $3bn on new initiatives. As well as economies of scale, they enjoy the advantage of incumbency in a heavily regulated industry. Entrants have to apply for banking licences, hire compliance staff and so forth, the costs of which weigh more heavily on smaller firms. Even tech giants, which are moving into finance and may enjoy more trust from younger customers than banks do, could be deterred. Apple, Google and Samsung all have apps allowing people to pay shopkeepers from smartphones, and Amazon offers loans to businesses selling on its platform, but may not want to be supervised as closely as banks are now.
In the West, regulation is opening up more of the field to fintechs, both large and small. A revised European Union directive on payment services, known as PSD2, allows third parties to offer more convenient ways of paying online or to consolidate information from different accounts (with the holder’s permission) so that people can keep track of their finances. America has no equivalent, but the Office of the Comptroller of the Currency, which oversees national banks, has proposed giving special licences to fintechs.
How China does it
China’s digital behemoths worry less about such things. Companies like Ant Financial, the financial arm of Alibaba, an e-commerce giant, and JD.com, another online marketplace, have masses of data about those who buy and sell on their platforms. They know their spending habits and how much cash they can spare, so an easy next step is to offer them small loans. Big Chinese banks in any case neglect consumers and small businesses, so customers feel no loyalty towards incumbent lenders. Regulators have also been willing to let online companies shift into finance. No wonder that Asia accounts for the bulk of investment in fintech (see chart).
Wherever they are, even small fintechs have at least two advantages over bigger rivals. First, they are nimble, writing and rewriting code, testing and retesting products, discarding what doesn’t work and improving what does. Better, an online mortgage-broker in New York, updates its products “20 or 30 times a day”, says Erik Bernhardsson, the company’s chief technology officer. Banks might do so “every six months”. Second, fintechs attract bright, mainly young people whom banks might have hoped to get to work for them (see article). Plenty of them used to. Joseph Lubin, the founder of ConsenSys, a blockchain company in Brooklyn, came from Goldman Sachs; Andrew Keys, the head of business development, was previously an analyst at UBS; and other colleagues used to work at Bank of America, Deutsche Bank and HSBC.
A profitable symbiosis
All this fosters co-operation between banks and fintech companies. Fintechs gain access to banks’ scale and customers. Banks can exploit fintechs’ expertise in programming and in analysing mountains of data. Co-operation may also lessen (but not eliminate) the danger that banks are reduced to dumb utilities, maintaining basic systems on which others make money from fancy new products. Application programming interfaces, or APIs—routines that connect two lots of software—are taking symbiosis a stage further. Small businesses, say, might use accounting software, created by a fintech, through a bank’s online platform.
Banks (and central banks) have invited startups to develop products in controlled environments such as in-house labs and accelerator programmes. That can lead to more formal arrangements. Bipin Sahni, head of research and development in Wells Fargo’s innovation group, says 11 young firms have gone through his bank’s six-month programme since 2014. Being based in San Francisco, Mr Sahni adds, “we see more interesting companies than a bank sitting in other parts of the United States.”
For fintechs, symbiosis need not mean minnowhood. Stripe, a San Francisco firm, processes mobile and online payments on companies’ behalf, linking them to card networks (and through them, banks) in much the same way as bricks-and-mortar retailers and offering them additional software tools. It was valued at $9.2bn in November, when it last raised money. Patrick Collison, who founded Stripe with his brother John in 2010, explains that from the beginning the plan had been to work with credit- and debit-card networks. “It was always clear there was no viable independent strategy,” he says.
Some fintechs allow lenders to reach customers they might otherwise miss—for instance, by improving underwriting. Better funds mortgage applicants with capital from more than 20 investors, including Fannie Mae and most of America’s big banks, letting its software decide which of the investors’ underwriting criteria suit the borrower best.
Chinese internet giants, too, are using smaller fintechs. Douglas Merrill of ZestFinance in Los Angeles says that Baidu, a search-engine titan that has a stake in his firm, increased approval rates for its small-loans programme by 150% without a rise in losses; ZestFinance’s software crunches reams of messy data, allowing less obviously creditworthy people to borrow. A big American credit-card issuer, Mr Merrill adds, has cut annual losses by “a nine-figure number”; a carmaker has reduced credit losses by more than 20%.
Adam Ludwin of Chain, another blockchain company, calls examples like these, in which new and better products are connected to banks’ own infrastructure, “top-down fintech”. “They do what financial institutions should have done, but do it more quickly.” Blockchain, by contrast, he calls “bottom-up”: new infrastructure, either within banks or shared among them.
Blockchain enthusiasts stress that its potential stretches far beyond finance. In essence, a blockchain is an immutable shared record known as a distributed ledger. It might list transactions, payments or simply owners of money, land, shares or other assets. All parties have their own copies, which are updated instantly once changes are agreed on. That makes it lightning-fast by comparison with traditional transactions. Transfers between American banks, for example, can take three days. International transfers, which may involve several banks, can take even longer, and senders do not always know how much recipients will get after banks have taken their cut. Settlement of securities trades can be held up because one bank’s record of who sold what to whom, when and for how much may differ from another’s. A blockchain permits just one version of the truth, holding out the promise of huge savings in back offices. “Blockchain reduces the cost of trust,” says Mr Lubin of ConsenSys.
Banks, central banks, regulators, exchanges and technology companies both large and small are working on a host of projects using blockchain. Collaborative efforts abound, including Hyperledger, run by the Linux Foundation, a non-profit group that promotes open-source software, and backed by IBM; R3, a consortium involving several banks; and the Enterprise Ethereum Alliance (EEA), the newest such group, which includes Microsoft and ConsenSys, as well as an array of banks. Among Chain’s projects is a payment-settlement system for VISA, a credit-card network, which is due to go live this year. Another hopeful, Ripple, has payments partnerships with several banks, including Santander. Digital Asset is developing a clearing-and-settlement system for the Australian stock exchange.
This mix reflects different ideas about which version of blockchain will work best. The EEA is building private, secure blockchains with technology repurposed from an open, public network, based on ethereum, another blockchain platform, which its creators believe will be the next generation of the internet. Others think blockchains will be more specialised. Ryan Zagone, Ripple’s head of regulatory relations, likens bitcoin to the Model T Ford: since that first appeared, carmakers have produced vehicles in many shapes and sizes for specific uses. Blockchain, he thinks, will follow the same pattern.
This technology is still in its infancy, but with plenty of applications in the pipeline, banks should soon start to learn whether, and in what form, it lives up to its promise. Until then they have little choice but to pursue it. They are under pressure from supervisors and shareholders to reduce costs, and from clients to work better and faster. The eventual gains will probably flow to customers rather than producers, because that is usually the way with leaps in technology. But the banks know that it is better to be first than to bring up the rear.
This article appeared in the Special report section of the print edition under the headline “Friends or foes?”
What are “virtual” telecoms networks?
Unbundled on the cloud, existing networks can be re-bundled for novel purposes
Apr 27th 2017
BUILDING or extending telecoms networks is hard work: operators have to buy specialised gear, pull cables and install antennas. But in recent years some have started to “virtualise” their networks, in effect making them easily programmable, just like computing clouds. At its core, this means replacing all the specialised equipment with off-the-shelf machines, with software dictacting its functions. What does this mean for mobile networks?
Although the technology is moving in the direction of virtualisation, some barriers are unlikely to go away: telecoms networks are connected with the physical world. Radio towers cannot be turned into software. Whereas computing capacity is theoretically unlimited, radio spectrum is scarce and hard to use efficiently. And creating physical infrastructure across hundreds of miles is much harder than building big data centres, as Alphabet, Google’s parent company, learned when it tried to quickly wire up millions of American homes.
But “cloudification”, in the lingo, will make it easier to unbundle telecoms networks and then re-bundle them in new ways. Once that happens, a clever entrepreneur could find ways to combine different bits—fibre networks, computing power, unlicensed spectrum—to provide cheap mobile connectivity, at least in urban areas. Start-ups such as FreedomPop and Republic Wireless already offer “Wi-Fi-first” mobile services, which send most calls, texts and data via Wi-Fi hotspots, relegating the conventional cellular network to the status of a back-up. At the very least, the number of “mobile virtual network operators” will grow rapidly: these rent and combine services from other operators to target certain groups of consumers, such as immigrants.
In the longer term, it is conceivable that the industry may be shaken up by the equivalent of Amazon Web Services (AWS), a bank of computers owned by an e-commerce giant that can provide processing power on demand. Call it a “telecoms service”. Such a provider would be able to offer the tricky bits of running mobile networks on demand, allowing start-ups and individuals to run their own mini-networks, scaling them up as needed. A plethora of small or specialised operators would be able to offer competition to the established networks. It would be yet another revolution in communications.
Cloudification will mean upheaval in telecoms
It will allow startups to challenge incumbent operators
Apr 12th 2017
IN THE computing clouds, startups can set up new servers or acquire data storage with only a credit card and a few clicks of a mouse. Now imagine a world in which they could as quickly weave their own wireless network, perhaps to give users of a fleet of self-driving cars more bandwidth or to connect wireless sensors.
As improbable as it sounds, this is the logical endpoint of a development that is picking up speed in the telecoms world. Networks are becoming as flexible as computing clouds: they are being turned into software and can be dialled up and down as needed. Such “cloudification”, as it is known, will probably create as much upheaval in the telecoms industry as it has done in information technology (IT).
IT and telecoms differ in important respects. One is largely unregulated, the other overseen closely by government. Computing capacity is theoretically unlimited, unlike radio spectrum, which is hard to use efficiently. And telecoms networks are more deeply linked to the physical world. “You cannot turn radio towers into software,” says Bengt Nordstrom of Northstream, a consultancy.
The data centres of big cloud-computing providers are packed with thousands of cheap servers, powered by standard processors. Telecoms networks, by contrast, are a collection of hundreds of different types of computers with specialised chips, each in charge of a different function, from text messaging to controlling antennae. It takes months, if not years, to set up a new service, let alone a new network.
But powerful forces are pushing for change. On the technical side, the current way of building networks will hit a wall as traffic continues to grow rapidly. The next generation of wireless technologies, called 5G, requires more flexible networks. Yet the most important factor behind cloudification is economic, says Stéphane Téral of IHS Markit, a market-research firm. Mobile operators badly need to cut costs, as the smartphone boom ends in many places and prices of mobile-service plans fall. The shift was evident at the Mobile World Congress in Barcelona in February. Equipment-makers’ booths were plastered with diagrams depicting new technologies called NFV and SDN, which stand for “network-functions virtualisation” and “software-defined networks”. They turn specialised telecoms gear into software in a process called “virtualisation”.
Many networks have already been virtualised at their “core”, the central high-capacity gear. But this is also starting to happen at the edges of networks—the antennae of a mobile network. These usually plug directly into nearby computers that control the radio signal. But some operators, such as SK Telecom in South Korea, have begun consolidating these “baseband units” in a central data centre. Alex Choi, SK Telecom’s chief technology officer, wants “radio” to become the fourth component of cloud computing, after computing, storage and networking.
Spin me up, AT&T
The carrier that has pushed cloudification furthest is AT&T, America’s largest operator. By the end of 2017 it wants to have more than half of its network virtualised. In areas where it has already upgraded its systems, it can now add to the network simply by downloading a piece of software. “Instead of sending a technician, we can just spin up a virtual machine,” says Andre Fuetsch, AT&T’s chief technology officer.
Even more surprising for a firm with a reputation for caution, AT&T has released the program that manages the newly virtualised parts of its network as open-source software: the underlying recipe is now available free. If widely adopted, it will allow network operators to use cheaper off-the-shelf gear—much as the rise of Linux, an open-source operating system, led to the commoditisation of hardware in data centres a decade ago.
If equipment-makers are worried about all this, they are not letting it show. Many parts of a network will not get virtualised, argues Marcus Weldon, chief technology officer of Nokia. And there will always be a need for specialised hardware, such as processors able to handle data packets at ever faster speeds. Still, Nokia and other telecoms-gear-makers will have to adapt. They will make less money from hardware and related maintenance services, which currently form a big chunk of their revenues. At the same time, they will have to beef up their software business.
Cloudification may also create an opening for newcomers. Both Affirmed Networks and Mavenir, two American firms, for instance, are developing software to run networks on off-the-shelf servers. Affirmed already claims 50 customers. Mavenir wants to work with underdog operators “to bring the incumbents down”, says Pardeep Kohli, its chief executive. If the history of cloud computing is any guide, the telecoms world may also see the rise of new players in the mould of Amazon Web Services (AWS), the e-commerce giant’s fast-growing cloud-computing arm.
According to John Delaney of IDC, a research firm, the big barrier to cloudification is likely to be spectrum, which newcomers will still have to buy. But a clever entrepreneur may find ways to combine assets—unlicensed spectrum, fibre networks, computing power—to provide cheap mobile connectivity. Startups such as FreedomPop and Republic Wireless already offer “Wi-Fi first” mobile services, which send calls and data via Wi-Fi hotspots, using the mobile network as backup.
As the case of AWS shows, a potential Amazon Telecoms Services does not have to spring from the telecoms world. Amazon itself is a candidate. But carmakers, operators of power grids and internet giants such as Facebook could have a go: they are huge consumers of connectivity and have built networks. Facebook, for instance, is behind the Telecom Infra Project, another effort to open the network infrastructure. However things shake out, expect the telecoms world to become much more fluid in the coming years, just like IT before it.
Google is accused of underpaying women
The allegation inflames a debate about sexism in Silicon Valley
GOOGLE has made a fortune by helping people dig up whatever information they seek. But in a court hearing on April 7th, America’s Department of Labour (DoL) accused the company behind the profitable search engine of burying the fact that it pays its female employees less than their male counterparts. The accusation of lower compensation for women forms part of a lawsuit by the DoL, which has asked Google to turn over detailed information on pay. The department has not released data to back its assertion, and Google denies the allegation.
Whatever the outcome in court, the government’s recriminations risk marring Google’s image. Just three days earlier it had taken to Twitter to boast that it had “closed the gender pay gap globally”. That claim is now under suspicion. It is true that at Google’s parent company, Alphabet, several women hold high positions, including Ruth Porat, the chief financial officer, and Susan Wojcicki, who runs YouTube, an online-video business. But the important question is not only whether a few women get promoted but also how those in the middle and lower ranks fare.
What figures there are paint a depressing picture about the status of women in technology. According to a one-off survey in 2015 called “Elephant in the Valley”, two-thirds of women in Silicon Valley feel excluded from key networking events, and three-fifths have experienced unwanted sexual advances. More than a quarter of American women in engineering, technology and science feel “stalled” in their careers, and a third say they are likely to quit their jobs within a year, according to the Centre for Talent Innovation, a think-tank.
The marginalisation of women in tech became a prominent subject in 2015 during a sex-discrimination lawsuit brought by Ellen Pao, who had worked at a venture-capital firm, Kleiner Perkins (she lost the case). It has been back in the headlines since Susan Fowler, a former engineer at Uber, a ride-hailing firm, wrote a blog post in February saying that male supervisors had failed to promote women and that human resources had not taken complaints of sexism and harassment seriously. Uber has hired Eric Holder, America’s former attorney-general, to lead an investigation into the company’s handling of sexual harassment and workplace culture. The results are expected in the coming weeks.
Some firms, including Uber, are now publishing annual reports describing the composition of their workforce, after they were criticised for not hiring more women and ethnic minorities. Well under half of tech companies’ employees are female (see chart). Despite attempts to hire more women, they have not shifted their female-staff shares by more than a few percentage points.
Educational choices are part of the problem. In 2013, the most recent year for which data are available, only around 18% of computer-science graduates were women, half the proportion in 1985. Some suspect there is a “negative” network effect, and that the small share of women in the field discourages others from choosing it as a course of study.
Retention is also difficult. A study in 2014 that tracked women in jobs related to science, technology, engineering and mathematics (STEM) found that half of women had left their professions after 12 years. By comparison, only a fifth of women who work in non-STEM fields leave within 30 years. Female entrepreneurs find it more difficult to secure funding from venture capitalists than their male counterparts do. Elizabeth Holmes, the founder of Theranos, a blood-testing firm which has run into trouble, attracted a lot of hype largely because she was so unusual. And female venture capitalists, who are more likely to fund startups run by women, are the rarest unicorns of all in Silicon Valley.
Transparency about the composition of firms’ staff may help with hiring more women. But another place where transparency can make a big difference is pay. The secretive nature of compensation at tech firms, with employees being discouraged from telling their peers anything about their equity grants or cash bonuses, means that women do not know when they are being underpaid, says Pamela Sayad, a San Francisco-based lawyer who specialises in workplace discrimination.
Some companies that have unearthed disparities, including Salesforce, a software firm, and Cisco, a networking company, have pledged millions of dollars to fill wage gaps. But absent disclosure, it can still be hard to see the pay differences in the first place. For years tech executives have talked up the importance of transparency and the power of data for decision-making. They should do a better job of practising what they preach.