"Algo Banking" the next big thing in retail banking?
From the archive: written before or outside the Architect Tomorrow newsletter, so it may be out of date.
Since I last worked in the financial sector the regulatory and technology landscape has changed significantly. Open Banking APIs (programming/data exchange technology - see here for a good overview) offer massive potential to transform the market. #FinTech (Short for Financial Technology) is on the rise due to the opportunities for innovation through technology and new business models enabled by opening up access to banking IT back end systems.
Before I go on I should add the usual disclaimer that these are my views only and not those of my current or previous employer(s).
It’s interesting to think about the potential of something you could call “AlgoBanking” or “AlgoRetail”. So what do I mean by Algorithmic Banking?
In a nutshell you can think of AlgoBanking as a mashup between Algorithmic Trading*, and online price comparison services on steroids.
There are already developments to create “Robo-Advisors” - which essentially help you manage your investments via clever algorithms for a lower fee than a human fund manager. But I see this potentially going much further than just managing wealth and investments. You could extend this and think of it as a mash up between price comparison services, algo-trading, robo-advice and banking mobile apps…
Why? Well imagine being able to optimise your personal finances on an ongoing [semi]automated basis rather than once every few years. Currently we take out a current account or a Mortgage or a Credit card perhaps once every few years (or in many cases once in a lifetime for current accounts). But with Current account 7 day switching, different rates available on different Credit Cards, balance transfers etc why not have an online system crunch all your financial data (available through OpenBanking APIs and other data you provide it) and it then suggests the right financial service products for you? Saving you the headache of comparing services and creating massive spreadsheets with your personal finances on. As you go through the year it might suggest a new strategy might be a different Credit Card as it offers discounts at the store you tend to shop in most - which brings down your overall monthly spend. Later in the year it might suggest other products as you’ve told it you intend to take a family holiday; it has found a deal that will give you a significant amount of Air miles. Potentially this could tie into AlgoRetail the new “channel” for customers to buy products and services - where you set a buy price for larger items you want to buy - when they reach the buy price AlgoRetail buys the product for you and works alongside AlgoBanking which suggests some of the best ways of paying for it (using discounts, savings, loan, credit card or a combination) and you can select the option that works best for you given your current financial goals.
Possibly crazy, far fetched? 10 years out? This may be here quicker than you think given the enabling pieces like Open APIs and developments in Artificial Intelligence and Algorithms (which Robo-advice is just one example of). Look at where Algo trading is today and how quickly it has taken over large parts of the trading world. Although this will require the Open Banking APIs to go beyond just data access; it will need account transaction capabilities such as account opening, balance transfers etc.
However once the regulator realises that full Open Banking is letting a massive genie out of the bottle that could massively disrupt the existing large banking players they may have a rethink on the scope of it…? Or at the very least experience some serious lobbying to rethink it to prevent disintermediation.
* Automated trading systems that manage portfolios for large investment banks - often by splitting up one big desired stock market trade into lots of smaller ones; or spotting arbitrage opportunities that only exist in timeframes that only computers can respond to fast enough. See here for more details. I also came across this fascinating TED talk on the topic this week which is well worth a watch.
Originally published on LinkedIn. Comments and discussion live there.