Bank disruptors: tread carefully and bend things

In Silicon Valley, disruptors “move fast and break things”, to quote Facebook’s early motto.

Banks could only envy that kind of creative freedom when they started trying to disrupt themselves – they were hemmed in by legacy technology, internal fiefdoms and potentially wrathful regulators. The industry’s own motto might instead have been “tread carefully and bend things”.

That’s less swashbuckling, of course, but it may also be the right approach to change in financial services, as Facebook discovered when it tried to launch a tradition-trashing digital currency last year. Libra met with suspicion and resistance from regulators and policy-makers. In Switzerland, where Facebook is seeking regulatory approval for Libra, finance minister Ueli Maurer declared in December that the project had “failed” in its current form.

Similar projects led by old-line commercial banks look better by comparison. JPM Coin, a digital currency backed by US dollar deposits in JP Morgan accounts, is currently being used for corporate payments. More than 350 banks have joined JP Morgan’s Interbank Information Network, a blockchain-based platform for exchanging payment information.

Meanwhile, a consortium led by UBS is putting the final touches to the utility settlement coin (USC), the first digital currency backed by deposits at central banks. The USC has lots of potential uses, but its main purpose is to settle the cash leg of trades involving smart contracts and tokenised assets. The first transaction using USC is set to take place in 2020.

This may all be happening at a pace the tech giants would deride as glacial, but glaciers transform the landscapes through which they travel. The advent of tokenised assets and digital currencies means financial markets are entering “a new age of efficiency”, says Chris Purves, head of the strategic development lab at UBS. Among the benefits are lower issuance costs, improved liquidity and near-instant settlement times.

As they race to innovate, banks must also learn from the missteps of big-tech

These advances are the early fruits of a technology revolution in banking that has been playing out over the past three years, with senior figures leading the charge. When JP Morgan appointed David Hudson and Guy Halamish as co-heads of digital and platform services, a new unit with around 36,000 employees, it changed its entire organisational structure to promote innovation.

Most banks have set up internal innovation labs and incubators for aspiring partnerships. The innovation drive has resulted in a flurry of partnerships with established fintechs. At many firms, the language of innovation is taking root. Senior managers talk of breaking down silos and fostering agile collaboration. Cultural change may follow: experimentation is encouraged and failure is accepted – at least, in theory.

All this investment is starting to pay dividends. Two years ago, UBS did not have any machine learning algorithms for trading. Now, machine learning is used in most of its pricing algorithms for liquid products. JP Morgan wants to incorporate AI into every stage of the trade lifecycle. Nomura is diversifying its revenue streams with software services, while Societe Generale is working with scores of startups and fintechs. 

As they race to innovate, banks must also learn from the missteps of big-tech. After Facebook announced Libra, policymakers began showing greater interest in USC. “Regulators are now working even more closely with banks, and that’s a great place to be,” says John Stecher, chief technology and innovation officer at Barclays.

When people’s savings and investments are at risk, it is best not to break anything.

Recently, Risk.net interviewed senior bankers tasked with leading the digital transformation of seven major global banks. These interviews will be published over the next seven days, starting today with Barclays.

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JP Morgan smashes silos

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