hen mobile telephony broke the curse of fixed-line infrastructure, it unlocked an era of more open telecommunications and laid the foundation for a near ubiquitous mobile internet to take root—provided of course you won the national birth or postal code lottery. Yet, despite the miracle of mobile connectivity, it was not until 2003 that users could break free of the second curse of vendor locks where low barriers to entry were met with high barriers to exit on phone number portability.
Banking and payments labor under similar twin-challenges. The first, is the curse of brick and mortar, coupled with bank holidays, which seems perilously antiquated in an always-on global economy where people’s financial needs do not take breaks. The second, like mobile phone portability, is the inability of end users to carry their banking and cumulative financial behavior with them without becoming a product of one of three major credit bureaus. A financial services trusted traveler program, coupled with universal account portability can rectify these challenges creating a more inclusive world of user-directed, device-centric financial services.
As the adage goes, if the product is free, you are the product. Nowhere is this truer or more insidious than in traditional financial services, where for the cost of basic banking and payments, ostensibly public goods, people are imperiled with identity theft risks, the lack of banking portability, financial redlining based on their personal traits, postal codes or country of birth, among other deleterious challenges. Add to this, a yawning financial inclusion gap, with more than 1.7 billion people outside of the formal economy and a billion with no form of acceptable identity to clear even basic know your customer (KYC) checks, and the world is facing some stark choices. Namely, can open banking and financial services, including fast growing emerging blockchain-based finance, conform with prevailing financial integrity norms? Or is banking (like mobile telephony before it breaking the chains of vendor locks) consigned to living under the twin challenges of brick and mortar and the lack of portability?
Breaking the Curse of Brick and Mortar
One of the reasons these locks may be more of a necessary evil in banking is the argument that phone calls or the mobile internet are not the same thing nor pose the same risk as the movement of money—although there have been powerful innovations for how money moves and to whom it is sent. The movement of money comes with a wide range of domestic and global risks as old as humanity’s propensity for greed and misdeeds. Yet, for something that should be construed as a human right at the highest order or a public good at the lowest (especially because banks enjoy an implied public backstop as we were reminded by the privatization of gain and socialization of trillions in losses during the Great Deleveraging of 2008), portability should be both guaranteed and encouraged. But what should a financial services trusted traveler program look like if it were to promote banking and payment interoperability, user choice, discretion and control, but did not imperil the financial system to a range of insidious threats? These ever-present threats include money laundering, terrorist finance, fraud and other forms of illicit activity that act like a drag coefficient on global economic output and necessitate costly forms of intermediation where the burden of trust is on the end-user of the system, rather than hardwired into the system itself.
Indeed, one of the reasons the banking system is so entrenched, siloed, and anti-competitive is because traditional banks and financial services firms are the proverbial trust brokers that monetize their gatekeeper status. This is done by collecting huge, vulnerable honeypot databases of personally identifiable information (PII) on entire working populations. This data set, cumulative banking activity, personal information, among others, are deterministic of people’s financial freedom and wherewithal. Yet people cannot carry the sum of this economic activity with them and switching costs (mirroring the barriers to exit in the pre-2000s mobile telephony era) can be insurmountable. Indeed, the financial inclusion fig leaf that is an oft cited goal of traditional and challenger financial services firms alike, is held in place by the twine of unevolved compliance and delivery models that make it expensive to be poor.
The Flight of Trust
Looking at the post-9/11 response to getting planes back in the skies and resuming the trusted trade, travel, and commerce that is the lifeblood of the global economy while removing friction, took some inventiveness and some system upgrades. Thus, trusted traveler programs were born, which allow travelers through faster lanes based on pre-screening of passport information, biometrics and other demonstrable information that suggests a traveler poses a low security risk. Like air travel, a risk or failure in any one bank, erodes confidence in banking and could pose systemic risks based on interconnections and correlations. Blending these frameworks with the type of user control and portability that enabled mobile telephony and connectivity to blossom into world changing breakthroughs, could augur a new world of responsible and more inclusive financial services innovation. There are three ways to overcome these challenges.
The Era of Device-Centric Banking
The first, is to overcome the false confidence that brick and mortar banking is the only safe and sound method for banking a population, country, or let alone the planet. Indeed, the number of unbanked people cited above are stark reminders that brick and mortar like Wall Street, has reached a point of diminishing returns without fundamental digital transformation. Extending the perimeter of payments and basic banking, the bottom rungs of economic mobility, requires the acknowledgement that “fringe finance” challengers, fintech, neo-banks, mobile money and the emerging crypto economy, all conspire for more inclusive, always-on financial services. This is largely powered with little more than an internet connected mobile device. In short, uncoupling connectivity from fixed-lines added to uncoupling banking from fixed infrastructure, can create an updraft of financial inclusion.
The critics—compliance conservatives and the banking lobby—may argue that moving fast and breaking things does not work well with people’s money and the only form of conformity in the rules-based economy is with a host of rules that were written before the internet, let alone emerging exponential technologies. The somewhat checkered fintech and crypto-assets journey with some teachable risk management and compliance failures such as WireCard in Germany or QuadrigaCX in Canada (which now enjoys a Netflix shockumentary) are emblematic of the challenge of a creative destructive cycle with money. But they are not emblematic of a steady state.
A Blue Checkmark Moment
The second area for unlocking a financial services trusted traveler program is to break or evolve the reliance on vulnerable, unchanging alphanumeric identifiers such as social security numbers, as preconditions for access to the formal economy. Storing this personal information in antiquated, single-point of failure databases can and has imperiled entire economies to a lifelong identity theft risk, as was evident in the 2017 Equifax breach. Digital identity and decentralized trust present critical opportunities to turn the financial services trust pyramid on its head. Moving from a model where trust (for a public good no less) is conferred on people by opaque and occasionally nefarious institutions, to a model where people guard their data and permission in counterparties can trigger a Cambrian explosion in financial access. People should be empowered to choose who they trust, bank with and how they send, spend, save, and secure their money.
As the world now travels with makeshift and fraud-prone COVID-19 vaccine passports recording vaccine dates on alterable index cards while evidencing them with makeshift photos, such user-controlled and privacy-preserving identity models have powerful implications beyond financial services. The third way a financial services trusted traveler program can be unlocked is that it has to break the broad anti-competitive curse of proprietary technology. One of the main reasons traditional financial services seem so unfit for the future is how the core technology that underpins it has not had a major system upgrade in decades. The reliance on proprietary technology or only a small number of vendors, many of which could be construed as systemic financial or technological institutions hiding in plain sight, to advance a single firm’s competitive advantage, often comes at the expense of people, markets and entire industries.
Rebooting Financial Systems with Open Technology
If, for example, small to mid-sized banks have to keep pace with large bank digital transformation and cybersecurity spending, let alone the technological convergence that has forever blurred the lines between banking and the internet, localized finance may become extinct. This is especially true as a new generation of users born with smart phones in their hands demand always-on instant gratification, including in historically complex and exclusive financial services, which were the remit of the well-heeled and well-banked. Today, these services are becoming the remit of the well-connected. Armed with little more than an internet-connected device, emerging digital finance is powering new always-on financial services models, while empowering a new round of market participants by lowering historical barriers to entry. To combat the reliance on anti-competitive proprietary technology, the emerging world of open financial technology, digital assets and open-source standards offer powerful paths to “financial markets shareware” on certain activities and heavily competitive siloes in others. For example, should robust standards of identity verification and authentication become openly available and ubiquitous, or should they remain the domain of individual company technologies that are not conversant or conforming with the wider market?
Both hinge on access to low-cost internet connected devices to work their magic. However, when it comes to moving money, governments and financial integrity bodies are none too pleased by the prospects of global, peer-to-peer mobile native payment networks. In the same way we no longer send a cross border email because borders and friction have been removed from information sharing, will we no longer send cross border payments, but rather instantaneous ones to trusted counterparties? The operative word is trust and if trust and its preservation can scale to the internet, each and every internet-connected device on the planet can become a compliant payment end point. This begs the perhaps rhetorical question, is it really your money, if you have to ask someone for permission to spend it and pay someone to hold it?
The Three Entanglements of the Web
Herein, the crypto economy offers an important challenge to the status quo, as well as an important opportunity. The ultimate promise of blockchain-based financial services is the democratization of financial assets, in the same way the internet democratized access to information sharing and knowledge. For this reason and its ability to immutability record digitally scarce assets and solve the accounting world’s most vexing double spend problem, blockchain is not only heralded as a foundational technology second only to the internet, but as the backbone of the third generation of the web or Web3. If in the first generation of the web, users were able to read content produced by others on the “world wide wait,” the second generation enabled read and write features turning erstwhile content consumers into producers. The second generation of the web fueled the embarrassment of riches of e-commerce, social media and other category creating and gravity defying firms. Web3 therefore completes the internet usability triumvirate by adding the power (and empowerment) of ownership of digitally scarce content and assets. Without blockchain and the internet beneath it, the ability to read, write and own digital assets would not be possible.
As with all technological and economic revolutions, the three entanglements of the web are not free of risk, complexity or externalities. If the robber barons of the Industrial Age unlocked man-made climate change with their carbon-hungry economic model, the tech titans’ tinkering on the edges of societal trust, information and misinformation, unlocked a Pandora’s box of complex cyber risk and dependency. What will the societal externalities be from Web3? Will the checkered climate change scorecard of voracious energy consuming first generation blockchains be neutralized by more efficient alternatives or greener upgrades? Can societal trust and new business models exist outside of the four walls of corporate and institutional form or will Web3 become co-opted as a tool and medium for further entrenchment of established players? These and other important questions may very well be the technological contests of our times. What is clear, however, with more than 200 million users in the Web3 economy and counting, the genie is out of the bottle and a world of flat, participatory, instant and increasingly trusted financial services is afoot.
The best choice policymakers, regulators and politicians can make now, is to give Web3 a home, and use its powers of trust, transparency and accountability to reverse the trend of institutional and societal mistrust. Perhaps the Biden Administration’s Executive Order and the recent volte-face in the UK on harnessing the potential of Web3 mark a turning point or, at a minimum, an acknowledgement that stopping the democratization of the web would not only be anti-Western, but perhaps impossible.
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A Financial Services Trusted Traveler Program
Photo via Pixabay.
June 14, 2022
Basic financial services are a public good, yet the industry is fraught with identity theft risk, lack of portability, inequitable financial redlining, and a yawning inclusion gap. We can use open technology to reboot and improve these systems, writes Circle's Dante Disparte.
W
hen mobile telephony broke the curse of fixed-line infrastructure, it unlocked an era of more open telecommunications and laid the foundation for a near ubiquitous mobile internet to take root—provided of course you won the national birth or postal code lottery. Yet, despite the miracle of mobile connectivity, it was not until 2003 that users could break free of the second curse of vendor locks where low barriers to entry were met with high barriers to exit on phone number portability.
Banking and payments labor under similar twin-challenges. The first, is the curse of brick and mortar, coupled with bank holidays, which seems perilously antiquated in an always-on global economy where people’s financial needs do not take breaks. The second, like mobile phone portability, is the inability of end users to carry their banking and cumulative financial behavior with them without becoming a product of one of three major credit bureaus. A financial services trusted traveler program, coupled with universal account portability can rectify these challenges creating a more inclusive world of user-directed, device-centric financial services.
As the adage goes, if the product is free, you are the product. Nowhere is this truer or more insidious than in traditional financial services, where for the cost of basic banking and payments, ostensibly public goods, people are imperiled with identity theft risks, the lack of banking portability, financial redlining based on their personal traits, postal codes or country of birth, among other deleterious challenges. Add to this, a yawning financial inclusion gap, with more than 1.7 billion people outside of the formal economy and a billion with no form of acceptable identity to clear even basic know your customer (KYC) checks, and the world is facing some stark choices. Namely, can open banking and financial services, including fast growing emerging blockchain-based finance, conform with prevailing financial integrity norms? Or is banking (like mobile telephony before it breaking the chains of vendor locks) consigned to living under the twin challenges of brick and mortar and the lack of portability?
Breaking the Curse of Brick and Mortar
One of the reasons these locks may be more of a necessary evil in banking is the argument that phone calls or the mobile internet are not the same thing nor pose the same risk as the movement of money—although there have been powerful innovations for how money moves and to whom it is sent. The movement of money comes with a wide range of domestic and global risks as old as humanity’s propensity for greed and misdeeds. Yet, for something that should be construed as a human right at the highest order or a public good at the lowest (especially because banks enjoy an implied public backstop as we were reminded by the privatization of gain and socialization of trillions in losses during the Great Deleveraging of 2008), portability should be both guaranteed and encouraged. But what should a financial services trusted traveler program look like if it were to promote banking and payment interoperability, user choice, discretion and control, but did not imperil the financial system to a range of insidious threats? These ever-present threats include money laundering, terrorist finance, fraud and other forms of illicit activity that act like a drag coefficient on global economic output and necessitate costly forms of intermediation where the burden of trust is on the end-user of the system, rather than hardwired into the system itself.
Indeed, one of the reasons the banking system is so entrenched, siloed, and anti-competitive is because traditional banks and financial services firms are the proverbial trust brokers that monetize their gatekeeper status. This is done by collecting huge, vulnerable honeypot databases of personally identifiable information (PII) on entire working populations. This data set, cumulative banking activity, personal information, among others, are deterministic of people’s financial freedom and wherewithal. Yet people cannot carry the sum of this economic activity with them and switching costs (mirroring the barriers to exit in the pre-2000s mobile telephony era) can be insurmountable. Indeed, the financial inclusion fig leaf that is an oft cited goal of traditional and challenger financial services firms alike, is held in place by the twine of unevolved compliance and delivery models that make it expensive to be poor.
The Flight of Trust
Looking at the post-9/11 response to getting planes back in the skies and resuming the trusted trade, travel, and commerce that is the lifeblood of the global economy while removing friction, took some inventiveness and some system upgrades. Thus, trusted traveler programs were born, which allow travelers through faster lanes based on pre-screening of passport information, biometrics and other demonstrable information that suggests a traveler poses a low security risk. Like air travel, a risk or failure in any one bank, erodes confidence in banking and could pose systemic risks based on interconnections and correlations. Blending these frameworks with the type of user control and portability that enabled mobile telephony and connectivity to blossom into world changing breakthroughs, could augur a new world of responsible and more inclusive financial services innovation. There are three ways to overcome these challenges.
The Era of Device-Centric Banking
The first, is to overcome the false confidence that brick and mortar banking is the only safe and sound method for banking a population, country, or let alone the planet. Indeed, the number of unbanked people cited above are stark reminders that brick and mortar like Wall Street, has reached a point of diminishing returns without fundamental digital transformation. Extending the perimeter of payments and basic banking, the bottom rungs of economic mobility, requires the acknowledgement that “fringe finance” challengers, fintech, neo-banks, mobile money and the emerging crypto economy, all conspire for more inclusive, always-on financial services. This is largely powered with little more than an internet connected mobile device. In short, uncoupling connectivity from fixed-lines added to uncoupling banking from fixed infrastructure, can create an updraft of financial inclusion.
The critics—compliance conservatives and the banking lobby—may argue that moving fast and breaking things does not work well with people’s money and the only form of conformity in the rules-based economy is with a host of rules that were written before the internet, let alone emerging exponential technologies. The somewhat checkered fintech and crypto-assets journey with some teachable risk management and compliance failures such as WireCard in Germany or QuadrigaCX in Canada (which now enjoys a Netflix shockumentary) are emblematic of the challenge of a creative destructive cycle with money. But they are not emblematic of a steady state.
A Blue Checkmark Moment
The second area for unlocking a financial services trusted traveler program is to break or evolve the reliance on vulnerable, unchanging alphanumeric identifiers such as social security numbers, as preconditions for access to the formal economy. Storing this personal information in antiquated, single-point of failure databases can and has imperiled entire economies to a lifelong identity theft risk, as was evident in the 2017 Equifax breach. Digital identity and decentralized trust present critical opportunities to turn the financial services trust pyramid on its head. Moving from a model where trust (for a public good no less) is conferred on people by opaque and occasionally nefarious institutions, to a model where people guard their data and permission in counterparties can trigger a Cambrian explosion in financial access. People should be empowered to choose who they trust, bank with and how they send, spend, save, and secure their money.
As the world now travels with makeshift and fraud-prone COVID-19 vaccine passports recording vaccine dates on alterable index cards while evidencing them with makeshift photos, such user-controlled and privacy-preserving identity models have powerful implications beyond financial services. The third way a financial services trusted traveler program can be unlocked is that it has to break the broad anti-competitive curse of proprietary technology. One of the main reasons traditional financial services seem so unfit for the future is how the core technology that underpins it has not had a major system upgrade in decades. The reliance on proprietary technology or only a small number of vendors, many of which could be construed as systemic financial or technological institutions hiding in plain sight, to advance a single firm’s competitive advantage, often comes at the expense of people, markets and entire industries.
Rebooting Financial Systems with Open Technology
If, for example, small to mid-sized banks have to keep pace with large bank digital transformation and cybersecurity spending, let alone the technological convergence that has forever blurred the lines between banking and the internet, localized finance may become extinct. This is especially true as a new generation of users born with smart phones in their hands demand always-on instant gratification, including in historically complex and exclusive financial services, which were the remit of the well-heeled and well-banked. Today, these services are becoming the remit of the well-connected. Armed with little more than an internet-connected device, emerging digital finance is powering new always-on financial services models, while empowering a new round of market participants by lowering historical barriers to entry. To combat the reliance on anti-competitive proprietary technology, the emerging world of open financial technology, digital assets and open-source standards offer powerful paths to “financial markets shareware” on certain activities and heavily competitive siloes in others. For example, should robust standards of identity verification and authentication become openly available and ubiquitous, or should they remain the domain of individual company technologies that are not conversant or conforming with the wider market?
Both hinge on access to low-cost internet connected devices to work their magic. However, when it comes to moving money, governments and financial integrity bodies are none too pleased by the prospects of global, peer-to-peer mobile native payment networks. In the same way we no longer send a cross border email because borders and friction have been removed from information sharing, will we no longer send cross border payments, but rather instantaneous ones to trusted counterparties? The operative word is trust and if trust and its preservation can scale to the internet, each and every internet-connected device on the planet can become a compliant payment end point. This begs the perhaps rhetorical question, is it really your money, if you have to ask someone for permission to spend it and pay someone to hold it?
The Three Entanglements of the Web
Herein, the crypto economy offers an important challenge to the status quo, as well as an important opportunity. The ultimate promise of blockchain-based financial services is the democratization of financial assets, in the same way the internet democratized access to information sharing and knowledge. For this reason and its ability to immutability record digitally scarce assets and solve the accounting world’s most vexing double spend problem, blockchain is not only heralded as a foundational technology second only to the internet, but as the backbone of the third generation of the web or Web3. If in the first generation of the web, users were able to read content produced by others on the “world wide wait,” the second generation enabled read and write features turning erstwhile content consumers into producers. The second generation of the web fueled the embarrassment of riches of e-commerce, social media and other category creating and gravity defying firms. Web3 therefore completes the internet usability triumvirate by adding the power (and empowerment) of ownership of digitally scarce content and assets. Without blockchain and the internet beneath it, the ability to read, write and own digital assets would not be possible.
As with all technological and economic revolutions, the three entanglements of the web are not free of risk, complexity or externalities. If the robber barons of the Industrial Age unlocked man-made climate change with their carbon-hungry economic model, the tech titans’ tinkering on the edges of societal trust, information and misinformation, unlocked a Pandora’s box of complex cyber risk and dependency. What will the societal externalities be from Web3? Will the checkered climate change scorecard of voracious energy consuming first generation blockchains be neutralized by more efficient alternatives or greener upgrades? Can societal trust and new business models exist outside of the four walls of corporate and institutional form or will Web3 become co-opted as a tool and medium for further entrenchment of established players? These and other important questions may very well be the technological contests of our times. What is clear, however, with more than 200 million users in the Web3 economy and counting, the genie is out of the bottle and a world of flat, participatory, instant and increasingly trusted financial services is afoot.
The best choice policymakers, regulators and politicians can make now, is to give Web3 a home, and use its powers of trust, transparency and accountability to reverse the trend of institutional and societal mistrust. Perhaps the Biden Administration’s Executive Order and the recent volte-face in the UK on harnessing the potential of Web3 mark a turning point or, at a minimum, an acknowledgement that stopping the democratization of the web would not only be anti-Western, but perhaps impossible.
