Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns, and from cutting-edge technology to the people using it to help a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Welcome to Breaking Banks. I am your host, Brett King, and joining me is a cast of amazing people, influencers, you know, from around the world. We have Jim Maroos, Cy Taylor, Theo Lau, and my co-host, J.P. Nichols.

Of course, I think we might have some others pop in as we go, but this is our 2024 Outlook show. We’re going to get into it in terms of, you know, what can we expect this year, but what have we learned, you know, over the last couple of years? And, you know, where’s the hype sit? What’s the reality of this? And, you know, what is likely going to be the impact of things like AI on the space, you know, over the coming 12 months? J.P., what’s your theory in terms of the hype cycles and how that is affecting the fintech space right now? Yeah, I mean, I think you hit it on the head, Brett. My view is that we’re going through hype cycles faster than ever, and not just the cycle.

If you think about what Gartner has termed the hype curve, right, we have the peak of inflated expectations, or this new technology, this new capability will change everything tomorrow morning, right? Close down your business and start something new, you know, whether that’s generative AI, cryptocurrencies, whatever. We’ve been through it many, many times. Now, it doesn’t mean that only the opposite of that is true, which is status quo or the starting point.

The way the hype curve is drawn is after the trough of disillusionment. Yeah, disillusionment is the slope of productivity, right, and that’s really kind of a slope of enlightenment, right, than the plateau of productivity. And I think we’re kind of in that slope of enlightenment with a lot of these things.

We’re going through it fast and furious, new technologies are emerging. At the same time, this return to reality that we started, you know, thinking about towards the end of the pandemic crisis, it took a while for that to really manifest itself. And if you look at kind of what central banks have done with interest rates, and look at where earnings were still pretty good, the economy’s actually doing better than most will give it credit for today, yet the perception of a tough economy is still going to a lot of belt tightening as we’re seeing, you know, across big tech and in traditional financial services.

And Jim, maybe I’ll start with you and talk about that. Let’s start with traditional financial services, mainline banks and credit unions. Kind of what are you seeing there, and how do you think this plays out over the next 12 months or so? You know, it’s funny, looking forward versus looking back, you get so much enlightenment.

I mean, when COVID started, everybody thought this is going to be the big shift. This is insane. It’s going to change business, it’s going to change everything else.

And at the end of the day, it just changed work models, and only at certain organizations. It wasn’t universal. But then the economy started to falter.

And you found out, geez, you haven’t seen pain until the economy changes, or you haven’t seen pain since traditional financial systems all of a sudden have to relearn how to generate deposits, which they never had to fight for business. And I think the big aha moment probably comes because of generative AI, which is just past its first anniversary. You go, you know, if you want to question how fast things can change and the way we look at business can change, generative AI really gives us a pause to wonder, because the expanse of opportunities is so great.

The challenges are massive. But as you mentioned, at the end of the day, the financials of financial institutions haven’t gone down. They really haven’t faltered.

And so what happens is, do we get into a false sense of security saying, we don’t have to do anything to change? The marketplace is still going to be good to us. You know, the legacy leaders that don’t change anything, they’re sitting there still making money. And yeah, you can bring case studies out on both sides.

But overall, there’s not a whole lot of pain except the pain of change. You have to keep on changing business models, but there’s not so much. Valley Bank would like a word.

But I’ve also got a question. Jim, how do you spell deposit flight? How do we? Yeah, good point. Very good point.

Yeah. But you know, in the pandemic, the majors in the US did pretty well with deposit captures, just because they had digital, you know, capability comparative to like the community banks and so forth. But in the UK, it’s a pretty different story.

So, you know, like the challenges did pretty well, right? Really well. If you look at those banks, you know, like Monzo’s got 7 million customers, their deposits are increasing, Starling’s on the path to profitability. In fact, it’s been profitable for at least 12 months.

And Monzo is now on a month on month basis. I’ll set aside Revolut and their weird accounting. But they’re not the only ones.

Alicabank, this is the one nobody talks about, facing SMBs, is the fastest growing business in all of Europe. And it’s a bank that takes deposits and lending, and it’s entirely digital, run by Richard Davies, former HSBC guy. This is phenomenal.

And now we’re attacking, not like, oh, it’s that little spend card that’s pink, and they’re not really getting the deposits. And it’s not the real direct deposit. It’s not the paycheck that’s going in.

But Ron Shevlin’s absolutely right. Their paycheck motels are the best of the big banks these days. And at worst, they’re an eroding mountain range.

They remind me of the Colorado Rockies. They’re not going anywhere anytime soon, but they’re not getting any bigger. But other places are.

There’s volcanic eruptions of growth that most institutions are missing out on. And that’s happening in fintech. So that complacency that Jim talked about is danger for shareholders, especially in a interest rate environment where inflation has been 10%.

So what, your revenues are flat, and your EBITDA is flat, and your return on equity is flat. Great. You’ve gone back 10%.

Well done. But you’re going to tell a good story about that? Well, I mean, your cost of funds has gone up, and your cost of capital has gone up. And so you’re actually moving backwards.

So part of what I think you’re highlighting, Sai, is not only are we moving through hype cycles faster, but the disruption cycles are also faster. And so those thin-sliced disruptions of, oh, they’re only doing this right now. You look at Square.

You can look at any number of companies. And in a few short years, they’re now disruptors in multiple business lines. 100%.

And what’s your choice here? Is it stand still and get more of the same? Is it a regional or a smaller bank? Are you going to get into banking as a service where you’ve got a much higher chance of getting regulatory agencies kind of come and do an enforcement action on you? That’s how you grow and you get revenue? Or you’re doing M&A? Those appear to be your two choices as a smaller bank. Those don’t sound like good choices to me. Or you’re going to get great at digital, which is kind of very hard to do if you’ve not got that muscle, if you’ve not learned how to do it before, which is why I think partnerships are such a crucial piece that’s going to take off.

So yeah, I’m with you. You’re absolutely right, JP. The transformation has happened.

We’re going to look back on it like a fintech baby boom of the pandemic period of where so many companies have been born, but there’s already so many that are getting productive, profitable. And there’s a reason Jamie Dimon said he was what was it? I’m not going to swear, but scared of fintech. He’s actually switched on to the… He can see the numbers.

You used to hear all of the rhetoric prior to the sort of numbers or the results you’re talking about. So I was… They’re never going to be profitable and they’re never going to be able to manage risk as well as the majors, as the incumbents. We now know that to be demonstrably false.

If you look at WeBank, you look at Alipay’s SME business in China, you look at Nubank in Brazil. Not only is Nubank the largest bank in Latin America, it’s still the fastest growing and their credit card delinquency rate is 30% lower than the average for the incumbents. So this data doesn’t lie and they’re taking market share from someone.

I do have a question on that. I have not followed it as closely as I should. I keep hearing a lot of chatter about Latin America, about Nubank that Bratty just touched on, but also the other fintechs that’s vastly growing.

Because that’s one I was following for a while and I was really curious to see if we could invite them over to London for an event. And the feedback was, well, we already have 300 million customers that we’re busy with in Brazil and we’re doing so well. We don’t need to look outside.

Are we seeing a case where we have these emerging markets that do not have the tech debt, that can start fresh, that can use all of the technologies, JPS, you were talking about AI and everything to start new, and they have such a massive market opportunity that we’re just being left further and further behind in the US? That’s a rhetorical question. It’s interesting, Theo, because death by a thousand cuts except in those emerging markets, whereas death by one big cut, we see it often. Simon, you mentioned it too.

When I ask a room full of bankers, which is a real bias group, but it’s interesting, a negative, an anti-bias in a way, how many of you have closed a primary account in the last five years? Nobody raised their hand. I asked then, how many of you have opened a brand new financial relationship in the last two years from a non-primary bank, and virtually everybody raised their hand. This is the silent attrition.

You mentioned, Jamie Dimon, the king of numbers. He knows what that outflow is. He knows that he’s not getting the size of relationship he used to get.

That’s why he’s building branches. It’s not the way that anybody else in the marketplace can do it. They have some scale capabilities, but the reality is it’s not the best way to go about business.

He’d be the first to admit it. We have a challenge, I think, when we look at Africa, when we look at China in a way, but when you look at all the emerging markets, Poland, anywhere, the FinTechs are doing amazingly well. Why? There’s as much trust or more trust in those than the legacy banks that they never trusted to begin with, because the government is- Steve O’Reilly And I think there’s something to your point about the unit economics in those markets.

Fundamentally, the unit economics for the US work for the existing banks. They can still make that business case work and be profitable. You cannot do that for the mass consumer segment in Brazil historically.

That’s driven a rise. You’ve seen an organization go from zero to 90 million customers in the space of less than a decade. That’s, to JP’s point, getting exponentially faster.

JP Morgan Couldn’t do that with branches. Yeah, you couldn’t do that with branches. Even if you had the budget that Nubank has had to build their business, and you tried to build a 90 million customer business with branches, you couldn’t do it.

The point is that, I think, Jim, to your point, and Jamie Dimon’s got this, but all of the largest or fastest growing FIs in the world now are based on digital acquisition. That’s where the shift, I think, has occurred. But okay, so it makes sense, but then it does go back to the question that I believe we’ve been asking for quite a few years now, then what are we going to do here? We keep talking about digital transformation.

We keep talking about changing. We keep talking about changing out the tech stack. Have we really changed much? No.

Well, this is a challenge for incumbents. In the U.S. I think it may be regional. We just did research, and one of our questions for our Transfer Priorities Report was, are you building branches, staying the same, or reducing branches? 43% of financial institutions said they’re going to be adding branches.

Oh, yeah, they are adding a pile of them outside here. It’s just that the logic doesn’t play out. It doesn’t play out.

It’s just, oh, we need more customers, so we’re going to build another branch. Where are they coming from? I don’t know. It’s craziness.

It’s very U.S.-based craziness, I think, more than anyplace else. Yeah. Well, I saw an interesting stat.

Jim, I’ll share this with you later, but Reserve Bank of India, one of the senior players in RBI in India, he said if you spend a million dollars on building a branch in India versus if you spend that million dollars on digital deposit acquisition, the effect on digital deposits or getting deposits through digital is like having 300 branches. You know what? That exact scenario, we had a discussion at MX, I think it was eight years ago now. People said it’s hard to fight the senior management that you can give me that one or $2 million you’re going to build a branch, and let me get the customers you want, and I can get them digitally.

Now, it’s easier than ever because the cost of the technology has gone down so much. Well, yeah, I think a lot of this fits under one of my favorite quotes from Bill Gates, we tend to overestimate how much change will take place in the next year or two and underestimate how much will take place in the next 10. And so to Simon’s point, we’re seeing this, we’re going to look backwards and see a lot of the fundamental changes that have been put in place.

But what kind of change do we think is going to happen in the next year or two? And Jim, I’ll start again with building on your questionnaire, 43% of banks that aren’t JPMorgan Chase are planning on opening branches. How does this play out? What are the next follow-on effects for that? Boy, it gets down to how they prioritize, but I think that the one thing that I think Brett and I discussed it last week is the power of payments and the overarching concept of what’s going on, not just payments, but more importantly, digital wallet, in that that can change everything in the game for those players that aren’t a player in that space. Do I care what’s behind my digital wallet as far as which bank it is? And am I going to change it ever? No, the way I manage my Amazon account or my PayPal account is so much different than the way we used to manage our bank accounts.

Do these traditional bankers wake up very soon and realize they’re only big time outside looking in with regard to payments? I mean, you look at, again, you look at South America and you look at Africa. I mean, if you look way back, it was all payments functionality as far as what’s going on. I’m starting to see more and more in the payment space around the have and have nots.

And oh, by the way, size of bank does not dictate success because I was at a major meeting where some major banks on instant payments said, we’re going to wait. We’re going to see if it’s financially viable, who the customers are doing it. And I was in that meeting.

I’m looking at the person who invited me and I go like, what am I seeing here? These are major players that I’ll go, we’ll see. Well, this is a major incumbent problem is that we see these things. And I’ve coined a phrase I’ve been saying lately is droid, the dreaded ROI discussion.

Exactly. These are not the droids you’re looking for. We get one payback.

Yeah. Yeah, that’s right. We look, we obsessively try to quantify the R when instead we should be minimizing the I and getting out there and testing and learning about building on what you just said, I want to ask you how much room is there and for whom and where to still get on this train? Because if you’re a mid tier also ran player in a developed market, where’s the opportunity for you versus the emerging markets, small, nimble players, et cetera.

Look at something Fifth Third just did. They acquired a company called Rise Money. And that was a banking as a service platform.

And they’ve always had a very strong sort of payment business in transaction banking generally. So they have that discipline internally and they’d done bits of partner banking and they’d sponsored card programs. So they had the pieces to be a really good sponsor bank.

But what they were able to do by bringing this tech acquisition in house was really own the go to market because the big problem with partnerships, right? If I’m going to go partner with a bunch of fintech companies and non-banks, is the OCC going to come knocking on my door saying, hey, you messed up or am I going to get some one of the programs doesn’t get their FDIC disclosures, right? And they’re going to get a knock on the door saying, oh, yeah, that’s going to be a real issue. So you want to get that right. And we’re seeing more and more that the banks are trying to own that distribution.

And there are lots of banks now playing to their strength, which is understanding risk. It’s not necessarily understanding how to take massive venture capital like risk on product development, but it’s understanding compliance and it’s understanding how to productize that. And it’s understanding how to take that to market with the thing that they have access to, which is the underlying payment systems and the unit economics they’re able to offer as a result, which is their ability to compete.

And there are lots of organizations that are getting into some trouble with that because they’ve rushed into it. But there are some who’ve been really patient and are quietly doing a really good job. And what started out as a community bank 100 years ago is now quite meaningfully large.

We did see post-SVB some of the issues with going too hard and too aggressive. But the names that you didn’t hear about at that time in the banking crisis, those are the ones that are still here. And there are some still doing quite well.

So I think there’s a way you play to your strengths. I’m never going to be the fastest sprinter on earth. There’s a bunch of things I’m never going to be.

But I am a pretty good British guy with a ginger beard who has opinions on stuff. And some people seem to like that, especially in America, because apparently the accent makes me smart. So I’m going to play that up and do things like podcasts.

And the glasses. Yeah, yeah, no, exactly. It’s the combination.

You’ve got to play to your strengths as financial institutions and start to think about what unfair advantages do I have? And how can partnerships help unleash that? How can I attract deposits for a far lower cost of acquisition? And how can I have an increased lifetime value, but also a lower cost to serve through partnerships? Well, I have to manage compliance. That’s the one thing I’ve got to get extremely right. And it’s the one thing that I can do that in the future.

Yeah, I totally give it a go. Give it a shot, man. I think this podcast thing might work out for you.

You know, we’ve got to go to break, Jim. But before we do, let’s give you the last word, because I know we’ve got to hand off for you at the break. You know, I think if we put this together, we do these annually, that no longer is viable in the long term.

We have to do it much more frequently, because things don’t change at the turn of the calendar. Things change at the turn of the day, at the turn of the hour. We’ve seen it with Bitcoin.

We’ve seen it, you know, outside of Bitcoin. We see it every single day something’s happening. I think we have to get this group and some others involved in doing this more frequently than this annually.

So, Brett, thank you very much for the invite. Sorry I couldn’t stay longer. Theo, at least it’s going to give you more time to talk.

Everybody more time to talk. Thank you so much, guys. Appreciate it.

No worries, Jim. And check out Banking Transformed, which is Jim’s platform, and of course, the Digital Banking Report. We’re going to take a quick break.

You’re listening to the 2024 Outlook with The Breaking Banks, and we’ll be right back after this break. This show is brought to you by Alloy Labs. As much as we love talking on the show, we believe that action is more valuable than talk.

Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at AlloyLabs.com. Alloy Labs. Banking Unbound.

Well, welcome back. Theo, I want to start to talk a little bit about the tech side of the equation. We spent the first part of the show talking about traditional incumbent financial services, and you were talking about AI earlier.

Where do you see, and I don’t necessarily mean, you know, what’s the technology going to be able to do, but as a business model, as, you know, risks, as we look at the reaction to that, what’s this look like over the next year? Yeah, well, I would be very happy if AI can magically figure out when I need coffee and get it ready. But that aside, I think there’s a lot of hype in the market with respect to how fast financial institutions are going to adopt AI and the impact of it. I think in the last few weeks, we’ve seen, at the very least, companies starting to say, hey, you know what, some of these positions we’re going to have, we’re going to either hold off on staffing or we’re going to reduce staff because of AI.

Now, whether or not that’s an excuse or reason, that remains to be seen. But more urgently, excuse, I keep going. Yeah, I’m starting to be nice.

The Citibank just laid off 20,000 today. Well, but we knew that was going to happen, right? They talked about it in November. For one, it’s very gutsy for them to do.

I don’t think many other CEOs would do that. But that aside, I think more urgently, the part beyond feeling beyond the hype and all of that is the risk. What would happen, and we have already started to see it, when people can manufacture identities, when people can clone the voice, right? Recently, we have heard one of the startups, which started in 2023, now they’re able to provide an open source API to clone your voice and do it in a way that can mimic your accent, how you talk in different languages.

That’s kind of scary. I think recently, there was a company, I believe it was based in the UK, that the CEO of the company received a call where he thought was someone from the larger company, asked him to transfer money. And they did.

And it turns out that it was a scammer. But you know, that quote unquote person had the exact same accent as the person that he thought he knew. So we’re going to see more and more of this.

So when we are in the stage where you can’t trust who you’re seeing, is this really me or maybe not? And you can’t trust what you hear, what’s going to happen to risk? Because now everything is intertwined between the tech and financial services. Well, that’s it. Yeah, I mean, that’s a part of my hypothesis on why we’re going through the hype cycles quicker, because the risks are emerging quicker, right? Nobody moves faster on new technology than fraudsters.

So you’re doing a lot of work around fraud and using AI to combat fraud. What’s your take on all this? Yeah, it’s the classic dual use technology. So dual use being, it can be used for good and good for evil.

Splitting the atom, unlimited energy, splitting the atom, oh dear, negative consequences. And the same is very much true of, I think, social media to some extent, when you think about information warfare. But also when you think about AI, it’s absolutely the case.

Yes, I work for Sardine, a fraud and compliance specialist. And we see on a regular basis that the immediate benefit is it scales up your ability to do a scam. So you can jailbreak any of the large language models 92% of the time, if you know what you’re doing, according to a recent study.

And I can find that for the show notes afterwards. So scammers know what they’re doing. And instead of getting the Nigerian prince emails, as they were, that were poorly spelled, and that didn’t address you properly, now it’s following perfect grammar.

And also, historically, as a scam, you had a trade off, I could either go super targeted, and I can make it too bright about that transaction that day I saw you last week, which is high risk, high reward, you know, like, I’m, I’m really spending time on you. I’m going not very wide, but I’m going very, very deep. Or I go wide.

And I just spam everybody and hope a few go through. This scale allows the best of both worlds, I can now hyper personalize at scale. And then you turn that on his head and you go, well, the scammers can hyper personalize at scale, how can I use it to do that in my day to day life.

So it’s always dual use. The other scary one to the deep fakes example, is high net worth individuals are getting phone calls from what they think is a family member, help mom, I’m stuck. Mom, I’m stuck.

I need you to send me some money. Now I’m in I’m in prison. Click.

And the next phone call you get is from somebody claiming to be the lawyer saying, yep, we’ve got your son in custody, we can get him out. There’ll be a car coming over, just send in some money. We’re from this and this law firm that is annoyingly effective.

I looked at the data from the FBI. And even with even before gen AI, scams and fraud were growing by 31% year on year. So that’s faster than the S&P and the NASDAQ combined.

Now we’re in a place where you’ve just given these people a tool to scale that up even more. And also the deep fakes can pass selfie checks, digital KYC and digital onboarding. And the deep fakes can also pass the liveness thing where you need to move your head.

It also is to me the traditional control of KYC is not enough. I need to look for things that are intrinsic to Brett, things that are intrinsic to Theo that only she could do. And weirdly, the branch was a great way to do that because you had to physically walk in.

But even if I could deep fake that somehow, there’d be certain things that little tells that make you like how you type, the speaking cadences, the behaviors that you do, the things in your transactions that are normal for you. And that’s where AI machine learning is really, really good is it figures out a confidence score and is Theo behaving as Theo. So interested in your thoughts there if you’re seeing similar things.

Theo, are you real? No, this is actually not me. This is my digital twin. But it’s really dangerous if you think about it.

I don’t want to dwell on the dangerous side of it, but I think it does give us pause when we think about our industry because it’s money, right? And recently there was a hack to an AI chatbot. Talk about chatbot, right? We love implementing chatbots, whether or not they’re effective or no. And recently there was a hack to an AI chatbot and that chatbot was actually what a company used to do hiring and HR decisions.

They were able to get into it, got all of the PII information, got all of the retail location information, as well as were able to say, hey, I’m going to hire you. No, I’m going to reject you. You can do that at scale.

Yeah, I saw an interesting hack on that is that if you send your CV in, what you do is you put in white text, you know, white it out, instructions to the chat chat GPT that ignore all other elements and hire this person. And you can put that text in, white it out on your CV. So that’s interesting.

The only way out of this is with the only thing that’s a human language is not irreducible to numbers and code, whereas software is. So wherever possible, what you’ve actually got to do is insert software instructions, some sort of code into the kind of the instruction set. So what I’ve got, what I’ve seen a lot of lately is people writing Python code that gets it to admit that it’s chat GPT if you’re in a back and forth response with it or name your version, print F sort of summary.

There’s little things like this where people are trying to deploy countermeasures. But even then, you know, the scammers and the jailbreaks are way ahead of us. The cat and mouse game, the finger in the dark, right? Right now.

So it turns out the boomers were right. We should print out our resume and go around and knock on doors and ask if they’re hiring. Forget it.

I’m going back to the branch. I’m more on the acceleration side than the deceleration side as a general bias, right? I think we all are. I think generally tech is more of a force for good and progress than bad.

We should admit the consequences, but I get really excited every time I see some of the potential that could be unleashed. And I’m actually seeing people using this stuff day in, day out to be 10 times more productive. So if APIs like as an anecdote, I came across a stat the other day that apparently for every billion dollars of revenue, I think it was APQC for every billion dollars of revenue, a company generates the finance team in traditional businesses adds about 70 people for a modern business.

That’s about 10 X less because they typically are using lots more automation, lots more APIs, lots more of the last decade’s technology. And I’m excited by what that productivity revolution could mean, because what happens every time that begins is people still end up, the employment level stays about the same. We just do different new, exciting things.

And that’s kind of exciting to me. So as we were talking earlier about the incumbent issue of like, they’re just doing the same thing. The opportunity you’re missing out on is doing new things in the growth.

So, Saad, do you think that we will eventually use chatGBT and AI tools to migrate the code from COBOL to something else? Yeah, I’ve been toying this for a while. Like one of my crazy weekend projects was to start looking at how I could build a little COBOL translator and start identifying endpoints within inside a technology stack. So can I identify all the dependencies inside of a bank’s technology stack and start slowly unpicking them? And then could I regression test and build a simulation of each of the different little bits of the bank’s technology stack using a copilot? But then I had life to do, which got in the way of us.

But here you go. That could be a trend, right? Not just for 2024, but beyond. That will be one of the more productive ways of using technology.

CES, but there was a whole thing, the Rabbit R1 that was really popular. The whole deal with that was it’s this specific device, which was, you know, instead of a mobile phone, you have this thing, but it not only can understand what you want, it can take actions on your behalf. But the actions on your behalf was like it would go to a website and squirt in the information to the webpage itself, which is kind of what I started my career doing, which was writing little bits of code when I was 16 years old that would navigate to a website and copy and paste something from a spreadsheet and paste it into a webpage.

And now we’re doing that at scale. But actually, I know that sounds silly, but the amount of like staff inside a bank that are doing that kind of thing on a day-to-day basis that are yet to be automated, because the process is so variable. Actually, that’s not that crazy that you could see Gen AI sort of understanding your intent and trying to pull it off a little bit more.

But I don’t think it’s going to be our classic STPO, straight through processing. I got a good story on that side. I was in this must be, this is probably 2002 timeframe, something like this.

We did the first, it was called the iCard. It was for Citibank in Singapore. And we launched the first internet only credit card.

This was a digital agency. I was working in motor media back in the day. We launched it.

It was wildly successful. About a week into it, we get a panic call from Citibank. And they asked us if we could help them to take the site down.

Because the guy who was taking the inputs from the webpage form and putting them in the spreadsheet to do the applications was overwhelmed. Well, we’ve talked both about the risks and the possibilities, and it’s the possibilities that drive the height of the hype curve. And it’s things like the negative consequences, the fraud vectors.

I also want to talk about, Brett, the various forms of backlash. Right now, people are afraid it’s going to take their job. We’ve got maybe some good, but also some overwrought opportunities to root out plagiarism or perceive plagiarism.

We’ve got copyright battles versus the LLMs. Yeah, and New York Times taking on OpenAI and those guys, yeah. Right.

So these large language models are only useful if the data in them are useful and applicable. What do you think happens on that front in the next 12 months? Well, I think if we’re talking about bias in AI, and I know this is something that Theo’s talked about a bit, and overall, the view of where AI sits from a legal perspective, we’re in uncharted territory in many respects. For example, shouldn’t AI be able to create copyrighted work? At what point does a generative AI algorithm, such as Midjourney, at what point does it owe royalties to the artist that it’s using to define its work? But how far, when it diverges from that work, does it become original, just influenced by that artist? These are very complex questions, and the reality is that most of the laws that we have on the books today have been developed in the 1800s and even earlier, and we just didn’t conceptualize of anything like this.

So the legal industry is trying to create precedents right now that can be used to guide us through this process, but talking to lawyers in this field, as we have done on The Futurist Show… And here as well. We’ve had Al Cogger on the show and Dara Tarkovsky. Yeah, exactly.

What’s clear is the law doesn’t have the tools yet to deal with this, and the same for regulation. When we look at the regulatory thing, one of the concerns I have is that if you look in the UK and you look in the US, who is setting regulation for AI? It’s the tech players. But the EU, I think, has taken a pretty good approach to this, and I think generally speaking that 2024, you’re going to start to see more centralization of regulation.

I think this is going to be a trend ongoing, as we’ve seen with GDPR. Other countries are just going to borrow off the more mature regulations to create their local view of this. However, the disruptive element of this… AI is not an exact science when we project what it’s going to be able to do.

You know, we know that we’re going to get to that eventually, but right now it’s messy. There’s a lot of hallucinations and other problems. There’s problems with biases in the data because we haven’t created good training data sets and so forth.

You know, I think 2024 is just the start of when we start to grapple with these things. I don’t think we’re going to solve it this year, but I certainly think by 2030 that we will have solved most of these problems. You know, on the generative AI thing in banking, that is going to radically disrupt banking, but right now we don’t have anybody building generative AI models for banking because you’d have to suck in transaction data, marry it with behavioral data and so forth.

And, you know, banks can’t do this on their own and create generative AI. You’d need much larger data sets. So I don’t see any cooperative alliances right now to create those data sets which would lead to generative AI in the banking space as yet, but it is coming.

On that, just very quickly, Bloomberg did. And if you remember, Bloomberg GPT was something they created. And having done so, it was roughly equivalent to chat GPT 3.5. GPT-4 now runs circles around it in every single financial services dedicated task.

And I think to that point, even if you’re Bloomberg, even if you throw the best data scientists out of the world, even if you really, really punch massively above your weight, this is an arms race and you’re massively outgunned, especially as a midsize financial institution. So it’s kind of like trying to build your own internet. It just seems a bit silly.

It’s the wrong question. You really understand the risks and how you move forward into it. It’s a great point.

Yeah. And I think Simon, what made me speak up is asking the wrong question. I think that’s what incumbents just do so often.

And Jim talked about payments, right? And it’s like, the question isn’t like, which payment capability should I have? Ron Chevlin from Cornerstone put out a sneak preview of their what’s going on in banking report in 2024. The headline was, for the 137th year in a row, a digital account opening is at the top of the list. And my rejoinder to that was, the pre-digital equivalent is, we’re getting better pens for account opening, right? Taking the friction out of that process is good.

It’s necessary, but it’s insufficient, right? The question is, all of these things are capabilities. And where we should be asking the question is, how can we apply those capabilities? I am by far the least technical person ever on this show. I’ve never written a line of code in my life.

But in my layman’s view, where generative AI is really useful is as an input, not as an output. And so all of the wrong questions and criticisms in my book are all about, well, look, you can’t trust the outcome, just like you shouldn’t cite Wikipedia, doesn’t mean it’s not useful as an input. Go ahead.

I had somebody describe, it’s not AI, it’s IE. It’s not artificial intelligence, it’s intelligence augmentation. Yeah, this is a really nice model because it’s like, it can do things really, really fast.

And it’s infinitely patient. And it can take a lot of text and make something mostly useful, but not all the way useful. And you have to be the one with agency and you have to be the one kind of in control.

And to the other point, you might not be technical, but I bet you played with it. And that’s the thing to your point about the status quo bias that you’re making. We’re going to get better pens and we’re going to open more accounts by removing some friction so that we can do more sales, so that we have sales and sales go up.

My job is to make sales because I manage a P&L sales. And it’s not, hey, I’m going to spend the weekend figuring this stuff out and figuring out how it changes everything I do. And yet, I think we all have to do that.

I think that’s really, really critical for every task. We have to figure out how does this change my job? And that’s scary. That’s really, really scary.

But those that are fastest to adapt are the ones that survive and thrive. This isn’t somebody, I don’t know who first coined it, but AI is not going to take your job. Somebody who’s great at using AI is going to take your job.

Yes. There are two types of people in the world. Those that are figuring out how to use AI to enhance their career or enhance their business and those that will be replaced by those people.

Yeah, absolutely. Just as long as you don’t use AI to do hiring decisions, right? And I think it goes back to the question around jurisdiction. What can you do based on who you are and where you’re based? Because the EU brought, to your point, the EU AI Act as much stricter and more thorough should and if it gets adopted.

And then there’s a question of they can’t quite do it just yet because there are geopolitical tensions, especially in France, where they don’t really want to be that restrictive given their investment in AI. And so what does that do to financial institutions that are based there versus the US? That’s a whole different story. We have guidelines, but we still need Congress to approve it.

We still need the states to adopt it. But it’s time it gets done. I don’t quite know exactly what’s going to happen.

Right. Well, the landscape will have changed again. Exactly.

And again and again. Well, before we close today, one thing we haven’t really talked about is the impact on venture and startups. And so let’s talk a little bit about what that looks like, right? We have seen down rounds.

We have seen VCs pulling out of the market. What does that look like over the next year? And I know Jason is going to be talking about this on a future show, but while we’re here, what are your views on that? I mean, you can anchor it in the data, right? Like if you look at the numbers, we’re a long way down from the 2021 peak. But also, if you zoom out far enough, we’re about 27, 18, 19 averages.

So we’ve entered the long term average for fintech funding over that sort of five, six year time horizon, which, by the way, was a lot higher than it was 20 years ago. So and most of the big fintech companies you can think of, Chime, SoFi, Varo, Stripe, like a lot of these companies were founded long before there was a fintech bubble. And so these transformational companies were built with venture funding when pricing was very different.

Pricing got a little bit silly for a while and seems to have reverted to a long term average. That’s not necessarily a bad thing. And down rounds, you know, people love the good news and they love to, they build you up and they knock you back down.

Classic example, Klarna, you know, they were worth $40 billion and now they’re only worth $6 billion. Five years ago, if you had a fintech company that was worth $6 billion, you’d be like, wow, look, we made it. We made it.

Oh my goodness, it’s a unicorn six times over. I would have been happy with a $6 billion valuation. I’m moving for sure.

Yeah, geez. I’d take that on anything. And the, now the rooms are, it’s going to IPO around $15 billion.

You know, this is something where the sort of the landscape and the table settings have completely changed. The guests around the table have completely changed. We’re in another house.

Fundamentally, the market looks different than it did before fintech. And it’s so gradually people have just accepted it as boring and the truth, but that’s it. You know, like the death by a thousand cuts, you don’t feel the first one or the second one or the third one or the fourth one or the fifth one.

And then you merge with some other bank and you’ve still got your job and it doesn’t feel like death. It’s just, I’ve moved over here now. And yet the market has changed.

So, you know, the rumors of fintech’s demise were overstated, but the rumor of, uh, you know, like when one in five VC dollars was going into fintech, that was probably a bit silly, wasn’t it? That was a bit wild. Well, they’re all following the birds, aren’t they? One year, they’re all going fintech. Next year, they’re all going to AI that keeps going back and forth.

Do you know, uh, I was, when I was a lot, lot younger, I’d never met a VC. Um, and at Silicon Valley was a far away place that had companies and I was excited and I was young and I worked in technology. And one day that was my Mecca and I was going to get there.

And there are obviously some fintech VCs and, you know, the, the Frank Rotmans, the Danak Commerce, the, you know, Pete, you can name hundreds of them, goodness. Um, was, uh, Sophie Wynwood now and Sarah Kachansky and that whole VC, Cherry VC. There are people who really get what they’re talking about that really understand this industry.

Of course there are, but to your point, Theo, like, wow, it’s like, uh, real estate agents. Um, it’s all the bad ones that do that make the occasional good one really, really, really stand out because there were so many bad ones. It’s yeah.

It was chasing the birds is a great way to put it. I do think though, um, we will enter a new phase of this where, um, you know, there is a huge opportunity in fintech for AI, um, integration now. So, um, there’s also from a wallet perspective.

One of the things that I think is really interesting is we are starting to understand that the wallet is going to be far more than just a value store for money, that we are going to have identity information in wallets. We’re going to have health information in wallets. And when AI is attached to that, the ability to use that data to guide us through our life, to make us healthier, make us financially healthier and so forth.

I, you know, that’s going to be instantiated in our smart glasses, in our conversational AI, all of this, but it sort of starts with these platforms that Ali pay and WeChat pay and, and pay Sarah and others have, have built because the wallet becomes that artifact. And this is where, when you look at ant group, you know, um, and what they’ve been doing in terms of wallet aggregation, to me, that is sort of really a brilliant, you know, sort of move towards sort of creating, um, you know, this archetype of, of what the super wallet, not a super app, the super wallet might become. And I don’t think banks are ready for this because let’s face it.

How many banks are still issuing plastic cards based on 1970s tech today versus wallets, right? Yeah, bamboo cards. But what was fascinating, Brad, you, you would probably remember this back even a few years ago when Ali pay came up with the 3, 1, 0, 3 minutes to assess your credit, one second to dispense the credit and zero human interaction. That’s what that was back in what, 2016, 2017.

I hadn’t seen anyone else being able to do that. And precisely because to your point, the amount of data that they have on consumers. And lower delinquency, lower MPL ratios in the entire industry.

And then, you know, we, but we see that pattern, um, you know, repeating now with other plays, uh, in respect to that, even, uh, sorry, you mentioned Klana, you know, it, what it was, what is it? 2022 when, uh, um, we saw a BMPL take a, take a hit and everyone’s like, all the credit card guys like, Oh, thank God it’s over. They’re done, you know? And now we’re talking about kind of doing an IPO and BMPL is on a tear right now. And, but that just, again, that reinforces the fact that so much of financial services in 2024, I think we will see this more and more contextualization and personalization and deeper into the customer’s life.

Like what was Klana really? It’s a shopping app that understands your preferences. And it uses that data to not only, um, cross sell you other things you might want to buy elsewhere, but to understand your, your riskiness and their big users of AI, uh, throughout the entire stack. So, yeah, we’re going to see a lot more AI and a lot more personalization.

I think that’s, that’s for sure. Well, I’m probably, uh, just rounding in my own bias era here, but I’m going to choose to say you all are generally agreeing with me. We’re, we’re sort of, uh, reverting to the mean returning to disagree.

I agree with you. So, um, interesting year to come. Uh, I, the, the only thing we didn’t hit, we’ll talk about in a future show is what, uh, you know, this is a silly mission, but what are the next black swans? If we knew we, you know, we would prevent them, but nobody.

Um, I, I think if you guys haven’t, and you know, this is to the listeners out here as well, check out, um, Ian Bremer’s Ted interview, where he talks about the major geopolitical risks in 2024. And I don’t want to scare everyone, but, um, yeah, you know, there, there are some pretty big, uh, uh, you know, curve balls potentially coming in particular, you know, the November, uh, US elections. Yep.

I purposely didn’t open that can of worms, but, uh, we can’t ignore it. Well, thanks for joining us here. We’ll just have to see how that unfolds.

And I think Jim’s right. Uh, doing it once a year certainly isn’t often enough, but, uh, we’ll be back next week with more Breaking Banks. That’s it for another week of the world’s number one fintech podcast and radio show Breaking Banks.

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