RegFi Episode 47: The Future of Financial Services: AI, Bots and the Metaverse
34 min listen
David Birch, an internationally recognized thought leader in digital identity and digital money, joins RegFi co-hosts Jerry Buckley and Caroline Stapleton to discuss the evolution of financial services in the metaverse, the role AI and bots will play in managing consumer finances, and what the future holds for digital currencies.
Links:
- DGW Birch Website (dgwbirch.com)
- Brian Armstrong, Bots and Bank Accounts. Non-Human Customers Are Here (Forbes)
- Orrick Financial & Fintech Advisory
- RegFiPodcast.com
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Jerry Buckley:
Hello, this is Jerry Buckley, and I am here with RegFi co-host Caroline Stapleton. We are honored to have as our guest today, David Birch, an internationally recognized thought leader in digital identity and digital money.
David was ranked one of the “Top 100 Global Fintech Influencers” in 2021. Previously, he was named one of the “Top 15 Favorite Sources for Business Information” by Wired magazine and identified as one of the “Top 10 Most Influential Voices in Banking” by Financial Brand. He created one of the “Top 25 Must-Read Financial IT Blogs” and was found by PR Daily to be one of the “Top 10 Twitter Accounts Followed by Innovators.”
Pretty impressive, David, really.David Birch: You’re very kind. Thank you very much for reading all that out.
Jerry: We are truly honored to have you join us on this podcast. As you know, our premise in this RegFi podcast series is that driven by technology, financial regulation will change more in the next 10 years than in the last 50. It seems clear that technology advances will provide regulators with enhanced tools to monitor risk and to assure safety and soundness and consumer protection. But an even more powerful driver for regulatory change will be the changes in technology that affect the way financial services are delivered in the marketplace.
There’s a principle in architecture that form follows function. And similarly, the changes in the way financial services firms are regulated will follow the way technology is driving change in the financial services marketplace.
So let me begin by asking an open-ended question, David. How do you see AI changing the way in which consumers shop for and obtain mortgages, credit cards, auto loans, and similar products? You wrote an interesting Forbes article that speculated on the role that bots might play in this regard.David: Yeah. So, my thinking really was — and this, actually, is not new. It does go back a little while. I’m not the only person that began to think of this sort of thing. When I began to look at what financial service strategies there were around AI, I thought they were sort of boring. So, I was reading things about how some bank was going to invest in AI in order to slightly improve credit scoring or fire some people in the call center or send some people some more targeted marketing. You know what I mean? I mean, you must have sat through endless presentations like this. And I thought, “This just can’t be right.” I mean, this is the most revolutionary technology we’re dealing with. I don’t think it’s hyperbolic to say this is the next industrial revolution coming along. So, therefore, there’s got to be something more disruptive going on in financial services than firing a few people in the call center.
And I think what it is is a lot of those strategies look at the bank use of AI, but they haven’t taken on board yet the consumer use of AI. And I think consumers having access to AI, which is being given to them by Google and Meta and Apple and everybody else — whatever the banks think about it — the consumer use of AI is much more revolutionary, and it’s much more disruptive. And in fact, I’ll be on stage at Money20/20 in Las Vegas later in October making exactly this point, which is that the threat to bank revenue models and profit pools is customer.
And you can see exactly why this would be, because I’m a normal person, you know. Broadly speaking, there are two kinds of financial transactions I get involved with, which is things like I’m just about to go and pay for car parking at the train station. This is too boring for human beings to do. It should be something in the Constitution that we don’t have to do that sort of thing. That’s exactly the sort of thing that phones should do for you. So, a lot of transactions are simply too boring to waste human brainpower on.
And then there are other transactions, like when I talk to my financial advisor next week about some stuff to do with pensions, where I have literally no idea what he’s talking about. And he’s a nice guy, and I’m smart. But when the pension advisor starts telling me that we’ve got to do an inverse flip because the swap rate doodle has changed under the latest tax, I have no idea what he’s talking about — might as well be Mandarin Chinese. I’m not smart enough to do those transactions. I need a bot to do that kind of thing.
So, when you roll up that impact, then what you see is retail financial services will have to sell to bots and not to people. I’m right in the middle of the process right now. In the UK, we have a thing called an ISA investment savings account, kind of like a 401k. It’s a tax-efficient savings plan. And every year, all people like me go through this thing of having to try and choose the best one, and is it the one with the best interest rate, or can I make early withdrawals, or can I roll up from other accounts into it, and blah, blah, blah. This is the stuff that a machine could do in a nanosecond, and I’m wasting two days doing it. So, I think people getting this stuff is really revolutionary.
But the question is, how do you respond to that from the financial services point of view? Because, you know, you go into a big bank and you want to launch some particular kind of mortgage product, you have like a room full of people who have 50 years’ experience of this, and they can tell you, “Okay, but if you want X percent of this market, you need to spend that much above the line and this much below the line, and you need these incentives and you need this cross,” and blah, blah, blah. You know, there’s people that know this as a science. I don’t think my bot is going to care about the TV adverts. I don’t think it cares that you sponsor the Super Bowl or a NASCAR. I don’t think my bot cares about your brand or whether the branches are welcoming or if the colors that you’re using — and they spend millions on the branding stuff, but they spend all this money on the colors of things. My bot doesn’t care about any of that. So, what does the bot care about? That’s the first question.
The second is — there’s three questions, by the way, so if you were just wondering where this was wandering, just stay with it, and I’ll come around to make a point. So, the second question is if the bot is going to make selections on the basis of anything other than price — like, if it’s just going to be about price, banks are in for a very rough ride because that is just a race to the bottom. You’re just going to have to cut margin after margin after margin. Because if the bot sees that your savings account is 1.99% and somebody else’s is 2.01%, and we have open banking in place so the bot can move the money between the accounts on my behalf, my bot is going to be checking those rates 1,000 times a day.
I was just talking to somebody earlier on about — you know how people joke sometimes how frequent flyer miles are a bit like money. One of the things that drives me crazy — I’m in a airline — I’m a million mile whatever in one of these programs — and it drives me crazy because I can never get flights to anywhere I want to go. There’s never any reward flights available. You want to go to Dusseldorf, fantastic, especially on a Wednesday — lots of free flights. I want to go to San Francisco; there’s no seats available at all. So, I can’t be bothered to log in every five minutes and check the reward seat availability because I’m a normal person. But for a bot, that’s no problem. The bot can log in 50 times a day. The bot can look at my calendar, and it sees that I’m going to Toronto in May — which I am, by the way, for Payments Canada — and my bot can wait till the seats come up and pull the seats that I need. Now, that changes the airline’s revenue model completely. And it’s the same kind of thing in banks. No human being is going to waste all day logging — well, most people, I’m guessing, are not going to spend all day logging in and out of different things and moving money to try and get point one. But actually, bots can do that all day long. That means an immediate collapse in retail bank profit pools.
And then there’s the problem of quite how you find things other than price to compete on. Because, I mean, maybe my bot would respond to — maybe if your API has a better response time, it will sacrifice a bit of margin in return for that; maybe you provide richer data that my bot can use to do other things with. And I’m not smart enough to know what these answers are. I can just see that if it’s only going to be about price, that’s a problem.
And then the third question to ask is what happens when the regulators come into this loop? We live in a regulated business. We want it to be well regulated. We want consumers to be protected. The only way that you’re going to be able to regulate consumer bots talking to bank bots is with regulated bots. There’s no possibility of people being in that loop. And I wonder if there’s a version of — you’ll see that thing — did you see the thing on Netflix, The Three-Body Problem?Jerry: I didn't. No. David: Did you watch that show? Caroline Stapleton: No. David: Oh, well, don’t. The book is way better. The book is way, way better. But you know what the three-body problem is, right? This was — you know, Isaac Newton came across this — which is if you have two things, like the Earth and the Moon, and you’re trying to calculate the orbits, you can do it perfectly. The calculations work out. When you bring a third body into it, like an asteroid or the Sun or something like that, you can’t do the calculations anymore. The three-body problem is that you can’t solve the equations when you bring that third body in. And I’m starting to wonder if we’re not looking at kind of a three-body problem around the corner, which is, “Maybe we can stretch our minds to imagine how a bank bot and a customer bot are going to interact, or a bank bot and a regulated bot, or maybe a regulated bot and a customer bot.” But when you’ve got the three interacting with each other, it’s very unclear to me what’s going to happen. You know, for one thing, there’s not going to be a gap. There’s not going to be a — I mean, unless we put it in somehow. So yeah, so anyway, those are my three questions that I think this raises. Jerry: David, I don’t want to overextend this discussion, but it seems like there might be a chance that financial institutions would be able to offer bots themselves, which would enhance the consumer’s understanding of how to manage their behavior to enhance the products they can receive. I don’t know if that’s going to be possible, but I think of Steve Jobs just driving toward, “Where can I offer a better product all the time?” And it may be — I say may be — that financial services firms can offer more than just price, but how to enhance your situation. David: I think anything that — personally, I’m very skeptical about any business model that involves educating consumers. Jerry: Jerry Buckley Well, you don’t — I wouldn’t educate — it would be educating the bot ... David: Yeah. Jerry: ... but it would be offering solutions to the bot. David: Yeah, that’s right. And you can certainly — like in the UK, we have the Financial Conduct Authority, the FCA Duty of Care, and you could imagine the duty of care being rewritten in such a way that bots could understand it. It’s like — you know, I’m really not a reg tech person, but one of the — I remember years ago — one of the very first projects I ever got involved in with this sort of thing was to do with machine readable handbooks. And that was like a — and we still don’t have them. That was like a generation ago. And the lawyers, in my opinion, have contributed negligence in this respect because they keep writing rules, like the FCA Duty of Care, which says you have to make “best efforts” to contact the customer about something, or you have to take “practical steps.” Basically, things that only lawyers can interpret.
You can’t write a piece of code for best — if those rules were changed to be machine-readable: you have to email the customer three times, you have to send the customer a letter — that kind of thing — then I could see you could have an interesting competitive landscape where bots that complied with the regulations might find interesting other things to compete on. And one of the examples that’s quite often quoted to me is the idea of sort of green sustain — you might opt to have a sort of Greta Thunberg bot that’s doing your savings and things for you and makes certain decisions about particular sectors or companies. Or you might have, like, an ethical bot that’s taking an ethical feed, so when companies behave in unethical ways, it marks them down; when they do kind of ethical things, it marks them up. You might have portfolios that are to do with — I don’t know — perhaps you have a particular thing about health and improving health and this kind of stuff.
So, I could sort of imagine — I don’t know what they would be — but I could sort of imagine you could have bots which had certain kinds of values attached with them that people would choose not purely on the basis of — I mean, I want the most unethical, rampant selfish — you know I want a bot that’s modeled on an investment banker basically. I don’t care about the planet, I just want the best possible return for me. But you know other people might make different choices around this kind of thing.Jerry: Well, Caroline. Go, come on. Caroline: Yeah. I mean, I’m just thinking about how much I need my laundry and dishwashing bot, really. If I could just start there, I think my life would be vastly improved. David: There’s a lot of unemployed call center workers, so that’s — Caroline: In this universe that we’re hearing about, for sure. But seriously, thank you so much for joining us. It’s great to have you on. You’re such an insightful commentator and writer. And on that note, I want to ask about your recent book, “Money in the Metaverse.”
So, you and your co-author explore the potential for financial services in metaverses and look at the key technologies needed to make these metaverses useful for business. It’s a lot to unpack there, obviously, including: what do you mean by metaverse; what are the technologies involved? I’m hoping you can share your thoughts at a high level on these topics with our listeners and with Jerry and me.David: Yeah, no, what happened there was I got invited to a book launch — not one of my books, I’m sad to say, but somebody else’s book — in a virtual world. And it was fun. I mean, you know, I was chatting to people I hadn’t seen for a long time, and we were all, you know, virtually walking around. And, you know, in the metaverse, we were all a lot slimmer for one thing, and the hair was a little darker. It was infinitely preferable in every respect to do it.
Until I wanted to buy the book. And then I had to come out of the metaverse and use credit cards and other such antiquated mechanisms to buy. And I just thought, “This can’t be right. I think we have to look at other ideas there.”
And that led me to talk to a few people about developments that are going in that direction. That took me towards digital assets and Web3, essentially transactions that can be resolved inside the metaverse that you don’t have to drop out and access banking networks for that kind of thing. And then that made me realize that the sort of, the digital wallets were a core to this. I know a little bit about them, but Victoria Richardson knows a lot more. So I asked, it’s one of those typical things where you think you know roughly about something, and then when you ask someone who actually knows about it, you realize, oh, my God, I know next to nothing about this, which is how come I was able to convince her to write the book with me.
The reason for the timing is this. I was doing some — actually for an insurance company, which I regard as the most conservative of institutions. But if you’re trying to think strategically, you’re thinking in five years’ time, there’s a cohort of people who are going to be buying their first car insurance, their first renter’s insurance, their first travel insurance, their first health, you know, how do I get those people? Where are those people now? Well, we think of young people as being, oh, they’re all messing around on YouTube or, you know, they’re doing the TikTok throw yourself off a building challenge or whatever it is this week.
But actually, if you look at the figures for attention span, where the attention is going is Fortnite, Minecraft, Roblox. It’s those proto metaverses. I’ll come back to say why I say proto in a moment. It’s those proto metaverses where they go with their threat. We think of them as games, but they’re not really games. They’re social spaces that have, you know, which have control and rules. And that’s where they go to interact with their friends. That’s where they go to learn about things, you know.
So, you can sort of see the next phase of commerce. I saw Mark Zuckerberg was talking this week saying that he was looking to get rid of smartphones. He was going to use the sort of smart glasses as the first step. You know, and eventually it will be smart contact lenses. And then I assume it will be Elon Musk style chips in our head and this sort of thing. But there’s something to that. The idea that the next generation are already comfortable in these more immersive places.
So now to get back and actually answer the question, what’s a metaverse? Well, a metaverse is like a virtual world, but the property rights in it are real. So, in other words, when I’m messing around in some game and I buy a giant magic sword or I buy a hat in Fortnite or something whatever, it feels like it’s mine, but it isn’t really. It belongs to the platform. They could delete it at a moment’s notice or they could make 10,000. They could do what they like with it.
The Financial Times’ original definition of the metaverse, which I think holds up very well, says, ok, it’s like virtual worlds, except the identities and the assets are real. They’re yours. They’re not the platform’s. You can take them from one place to another. And I think that holds up pretty well.
If you look at what Apple are doing with their glasses, for example, it’s very clear that you’re not talking about a metaverse. You’re talking about lots of metaverses that you’ll go into to do different things. And the ability to move things between them becomes really rather interesting. And I don’t know what kids are going to do with that and what people are building in their basements right now. But, you know, I can see that’s where things were going.
So anyway, that’s why the book seemed like a good idea and people have been very kind about it.Caroline: Do you think financial institutions are even thinking about the metaverse? Because it seems like in some ways — when you’re talking about commerce in the metaverse and financial transactions to acquire tangible property, maybe even whatever the equivalent of real property is in a metaverse. I mean, financial institutions would typically be at the core of those. Is this even part of the conversation? David: I think it’s very illustrative to compare something like American Banker to something like Vogue. So, when I was looking for a couple of stories about companies that were building interesting things in the metaverse and looking forward, you don’t find those in banks. You know, insofar as banks have a vision of the future of financial services, it’s basically like virtual people queuing up in a virtual bank branch to talk to a virtual bank teller, which is literally the most unbelievable use of the term. I don’t want to go to a bank branch now. I’m pretty sure I don’t want to go to one in the metaverse either. And I remember, I mean, JP Morgan had a tiger in it, didn’t they? Which, I mean, I’m not sure what the tiger really did. But that can’t be the vision of where we’re going.
If you look at what people are doing with brands, the way that they’re brand building in these metaverses to bring in that next generation of consumers, looking forward to other technologies like 3D printing and this kind of thing, it’s really very interesting. And you can see business models evolving there, which seem unbelievable. Like the — if you go to that point, like kids go into these proto-metaverses to engage with their friends, and that’s where they spend their time. So actually, spending money on a virtual hat that they want, that looks good and they’re friends-like and whatever, kind of makes sense, because that’s what we would have done when we were kids, but in the physical world.
So, when you put those things together, you can see that models are evolving. And if there’s going to be business, then there’s going to be financial services. So, you would think, I mean, there must be skunkworks inside the big financial services providers looking at this stuff now. Maybe they just haven’t shown it to us.Jerry: Interesting. You know, David, among our listeners, there are still some who are scratching their heads, I guess I might say we're among them, when they think about cryptocurrency. Of course, as we all know, the Fed and other central banks issue fiat currencies, and fiat currencies have not been backed by tangible assets since the United States abandoned the gold standard in the 1970s. But standing behind the dollar is the strength of the U.S. economy and the taxing power of the federal government. It's hard to understand what drives the nominal dollar value of cryptocurrencies that are not tied to government-backed currency like the dollar. Bitcoin and other crypto valuations have been volatile, but they have demonstrated persistency and have strong political support in some quarters. But there are still those who are scratching their head and saying, is there a “there” there?
Could you take a few minutes to give us your thoughts about the role cryptocurrencies are likely to play in the economy on a going forward basis, as well as the prospects for the emergence of central bank digital currencies in the United States and in other countries?David: So personally, I’m quite skeptical about cryptocurrency and remain so. I remember a few years ago, if you go to these kind of Bitcoin events, sometimes they strike me as being sort of quasi-religious. They’re more like a cult than anything else and if you express any kind of skepticism, you’re essentially a heretic as opposed to just being wrong about something.
So, I in my head there’s two completely different things here. There’s digital currencies and digital assets, there are things which are going to use those technologies to create liquid markets in assets and make for a more efficient financial market infrastructure. And that’s essentially the — you know, I mean, I wrote a book about that as well a long time ago.
And I personally am a very strong believer in digital assets. The reason why people like Larry Fink are going on about tokenization isn’t ideological in any way. It’s not some sort of libertarian thing about decentralization and smash the state and all this sort of thing. It’s just because it’s a more efficient way to do business. When the asset moves — so because there’s no clearing — if I send my square inch of the Mona Lisa to you in return for a million dollars or something, that’s the entire transaction. There’s no clearing. There’s no settlement. There’s no front and back office. The money is the message, so to speak. So, I completely buy that. I’m absolutely committed to that.
The cryptocurrency stuff I think is better understood as a kind of protest movement, more than as a kind of economic thing. Because as you’ve said, they’re not backed by anything. I think there’s a substantial case to be made, and I’ve seen it made by people who understand more about the law than I do, that cryptocurrency should be regulated under gambling regulations rather than under financial services regulations. In fact, attempting to regulate it under financial services regulations gives it almost a sort of spurious credibility that it doesn’t really deserve.
I was arguing with somebody just the other day — well, I argue with someone every single day, actually. But I picked somebody up because they said, “Well, what do you think about the state of the market?” So, you’re using the wrong word. It’s not a market. The Bitcoin market is not a market in the sense of the stock market or the oil market or the gold market. It’s a thin, opaque, manipulated, you know, it’s not real.
And so, I’m going to Las Vegas, I told you, for Money20/20. I’m very excited about it. I’m going to go play blackjack, right? And I’m probably going to lose money. But it’s OK, because I know what the rules are. I know what the probabilities are. I’m going to go and have fun doing it. If I log into a crypto exchange and buy some, I don’t know what the rules are. I don’t know who’s fixing the odds. I’m going to lose, and it won’t even be fun. And I think I’m just in the process of writing something. I don’t really want to annoy anybody or get death threats from any of your listeners by poking my nose into American politics. But I’m extremely skeptical of this idea that there’s a crypto block of voters who are going to have any impact on the election whatsoever. There are certainly crypto donors that will have an impact on the election. I don’t doubt that. But there are so few people that hold — maybe 10% of the population have actual — as opposed to a Dogecoin somewhere they’ve forgotten the password to. And the average holding, if you look at the wallets, the average holding is so small.Jerry: You are confirming that suspicion that many have. And I will admit to being among the heretics that there isn’t really a “there” there. But, it is a game, but it’s an exciting game for many. And I just hope I’m very glad that heretics are not burned at the stake these days because ... David: They’re driving the technology forward. And I respect and admire that. But I just think the economic model is wrong.
And also, you know, you referred again to one of their implicit concerns. You said about the U.S. taking the dollar off the gold standard, which happened on the 15th of August 1971. It was under Nixon, remember?Jerry: Right. I was there. David: So the Bitcoin people will say, “Well, therefore, it’s not backed by anything, the same as, but we’re backed by enormous wastes of electricity and all this sort of thing.” But that’s not true. If you look at the demand for dollars around the world, and if you look at the premium people will pay right now for digital dollars, the premium that people will pay for dollar stablecoins over physical dollars, it’s very clear that the demand for dollars is huge and significant. And attempting to displace that demand, you’re trying not just to displace the dollar as a means of exchange. You’re trying to displace the American legal system, the American financial infrastructure. The reason why people want dollars is because they’re valuable in a much wider context than just as money. If I’m 90% of the people in the world, I want dollars and dollar assets. And the idea that it’s not backed by anything, you say it’s raised by the tax raising power of the US. It’s raised by the ability of the U.S. to borrow money from foreigners to a large extent. But to say it’s not backed by anything, it’s backed by a legal system and courts and accounting rules and all sorts of other things which go to maintain its value. That could be proved totally wrong, but I think they’re really exaggerating the extent to which the dollar’s under threat.
This is why the U.S. exceptionalism around this is interesting to me, you know, because, you know, and I completely understand it’s rooted in deep-seated suspicion about the federal government and states’ rights and all sorts of things I don’t really understand. But on sheer economics, you would think a digital dollar would be a number one priority at the Treasury, because the demand for those dollars will be astronomical. And if you think that something like 2/3 of all the U.S. dollars now are not in the U.S. and will never be repatriated, that’s a massive interest-free loan to Uncle Sam. Digital dollars could double that, triple it. Who knows?Jerry: Right. There are concerns about Central Bank digital dollars around privacy and so forth, but it's an ongoing issue that really does bear watching. In the meantime, those non-government digital currencies that are backed by the dollar are being used as a way of accessing dollars around the world. If you’re in a high inflation economy, you'd much rather do business with digital currencies backed by the dollar than your local currency.
You know, David, we like to talk a little bit more about this, but we have limited time, and we’d like to talk about some of your other books. Caroline, maybe you could just ask your question on that.Caroline: Yeah, absolutely. I mean, this has been such an incredible conversation. It’s really been imaginative, but also that almost feels like the wrong word to use because the concepts that you’re talking about are happening and they’re real and they feel like the future. But in many ways, the future is here. And whether we acknowledge that or not in the financial services industry has major implications.
So anyway, I think it’s just been such a creative conversation. We see that in some of your other works that you’ve published, I love “Before Babylon, Beyond Bitcoin,” “Identity is the New Money.” These are such great titles. I think we’d all love to know if you can close us out by just telling us what inspires your creative thinking. How do you kind of get outside the box and then find the, you know, not only the energy and creativity to think about these things, but to actually write down your thoughts and kind of bring these to the world?David: You know, I would try and tell you it was amazing strategic visionary planning, and it wasn’t. Caroline: You can tell us, we'll believe you. David: I mean, I’ve ended up in a fortunate position because I get to go and see, you know, I’m in Chicago Monday and Tuesday. I’m in Uganda Wednesday, Thursday, Friday. You know, I was in Amsterdam earlier this week. I was in Paris the week before that. I’m fortunate. I get to see lots of people, and I get to see lots of different perspectives. I had an investor — you know, this morning I was talking to a startup that’s building a new payment system for AIs to pay other AIs. You know, it’s like I have the time to look at these. It’s not, you know, I’d like to think I’m a unique and special genius. I’m not. I have the time to talk to all of these people, and I’m curious. So, I write that down.
I’m, I think, slightly better at writing than the average fintech person, and that translates into a useful, you know, competitive advantage. You don’t have to be JK Rowling to write this stuff. You’ve just got to write better than fintech guys, which is, I’m telling not such a high bar. But and also, I read — I think, you know, in one of my standard lectures for my women in payments stuff is that idea, “If you want to write a lot, you need to read a lot.” There’s no there’s no way around that. And I read a lot, and I think you need to take a lot in so that you can weigh things up and and have opinions about stuff. And so, yeah, there’s no magic solution to it.Jerry: You know, it strikes me that you have the advantage of not trying to run something. The danger for any academic or anybody else who likes to think is that they get promoted to administrative responsibilities. And you are able to avoid that, and therefore have the time to actually think and enjoy that creative process. David: I put my hands up. I wasn’t good at it. Jerry: Well, you know, each of us has our strengths. We’re all a balance sheet. So, you know, David, I wish we could go on. Our time is up, but this has been so much fun to talk to you. David: Oh, you made it so easy for me, guys. That was fun. Thank you. Caroline: Thank you so much again. I really enjoyed it also. I can’t wait to read more. David: Thank you.