Technology disruption – coming to a bank near you

30^th March 2015

Before entering Parliament I worked as an electrical engineer, mainly in telecoms.  I spent a lot of time in network software development, getting networks to talk to each other and exchange voice and data. When people talk disparagingly about public sector IT I remember some of the decades-old code I worked on in the private sector. In some cases, that same code is still driving basic telecoms transactions, with new software layered on top to facilitate new services – proof that you can put lipstick on a digital pig: it’s called middleware.

But I was told by those who had worked in both sectors that banking had even older and creakier software at its centre, harder to change, harder to modernise, harder to upgrade. That was one reason why, until recently, while data travelled at the speed of light, it still took three days for banks to figure out if we had the money in our accounts to clear cheques. We may have had online banking and (relatively) user-friendly front ends, but the systems behind it are in dire need of investment. That raises serious concerns for me, not least in my capacity as Shadow Minister for Cyber Security, and techUK and others have called for greater investment into ‘back end systems’ to ensure greater protection.

The Basel Accords consider capital adequacy, stress testing and market liquidity risk in the banking sector to address the poor resilience and risk assessment which contributed to the financial crisis, but externally the banking sector has changed little since the crash: we have a small number of very big banks. The proportion of UK nationals who are unbanked is estimated at 12%, often those in most need of financial support. Payday loan companies and pawnbrokers are at the more acceptable end of the financial services offered to many of our most vulnerable – when compared to loan sharks at any rate. The poorest in our society pay the most for bad financial services.

The same is true of remittances – worth more to Africa than trade or aid and yet associated with high charges even by first-world standards.

There is much that good regulation can do to address some of these issues, and developing ‘challenger banks’ is important – but will new banks created in the image of old banks provide really disruptive competition?

I have high hopes in that most inventive of market disrupters – technology.

The banking sector has largely absorbed technology rather than been disrupted by it. We have seen the rise and acquisition of internet banks such as First Direct, now a subsidiary of HSBC, but there has been nothing comparable to the disruption seen in the media or retail sectors. Indeed, the banks are often the one constant on the high street.  In the public sector, the Government Digital Service (GDS) and innovative local authorities like Camden and Leeds are leading the way in digitising services and promoting open data., which can change the relationship between government and the governed, flattening the hierarchical relationships between residents, stakeholders, service providers and policy makers, and putting citizens in control of their own services.  The next government will need to be the most digital ever and it should help technology help the banking sector to transform itself.

The blockchain technology that underpins digital currencies such as bitcoin has the potential to change the role of banks.  We look to banks to provide us with trusted services, enabling us to transfer money reliably, keep our funds safe and provide trust in many of our daily transactions.  The blockchain embeds transparency, security, accountability and replicability into bitcoin – and potentially other services.  While the financial sector is working to regain our trust, blockchain technology is already capable of providing a direct trust relationship between its users and people they have never met.  Retailers can have confidence that a customer’s funds will arrive in their accounts as soon as the goods have been delivered.  Government could be sure that taxes are paid on time and traders that funds swiftly reach their intended destination.

The technology is available to offer near-free, immediate global payments.  By making new services available which bypass or exert pressure on existing service providers, competition in banking and financial services will increase between players that are not all clones of our existing incumbents.

Of course there needs to be proper regulation. Interestingly, that is what many in the new digital currencies want too – they want to be part of a properly regulated financial sector. That regulation has to reflect the realities of the new technology too. In many ways we are managing 21^st-century finance with 20^th-century institutions. A Labour government would look to help digital currencies enable change that prizes transparency and resilience, bolsters consumer access and protection, empowers communities to manage their own money more closely, and allows wealth to circulate locally and globally.