Banks manage information, not money

In a recent thread on the Personal Clouds list discussing to Barclay Bank’s new secure document storage service, a correspondent wrote “I believe many banks will offer similar services as they move from managing money to “managing information.”  That many people still believe that the business of banks is primarily money and not information speaks to the effectiveness of the industry’s PR.  Banks have primarily managed information for decades.  They just didn’t want to tell retail customers until doing so was likely to yield a competitive advantage or a profit.  That time has come.

When I was at Bank of America we cleared about $3B a day in settlements electronically, and that’s not counting retail ACH transactions.  The actual amount of cash moved around was miniscule by comparison.  The function of the data processing has more to do with reconciliation and maintaining transactional state across a multi-participant mesh network than it does with monetary value.  Furthermore, other than retail banking, most of the transactions don’t actually represent money.  If they did we’d have a lot more volatility than we actually do.  Most of the transactions flowing back and forth actually support the informational and regulatory framework within which the banks operate.

For example, banks are limited as to the proportion of risk that they are allowed to extend to a single customer as well as in aggregate.  So the largest loans are syndicated such that the lead bank offers a loan on the market and various banks bid to participate.  The lead bank sorts the offers (primarily by ascending rate but other factors apply) and then accepts them until fulfilling the loan.  The lead bank may or may not be a participant.  As the loan is repaid, the lead bank makes distributions according to the ratio of participation.  Over the life of the loan, the disbursements, repayments, distribution and fees are the minority of transactions flowing over the wire.  Much more important and plentiful  are the flows that determine the customer’s risk profile, the aggregate and individual proportion of risk of each bank, the regulatory reporting, the SOX and GLB internal compliance, the audit logs, the messages that enforce access control policies against the information, the approval and review processes, and the recon that makes sure all participants record one and only one copy of each transaction and that none are missed.

The syndicated loan is essentially a protocol implemented in code and human processes for the conversion of information into value.  So are derivatives, International Letters of Credit, etc. etc.  Money is nothing more or less than a medium of exchange for that value.  Money is the public-facing API behind which is a mountain of information and to the extent that we can avoid the friction in converting value to and from money, dealing instead in pure information, the exchange becomes more efficient.

I had this discussion many times with my managers at the bank over the years, right up to and including my exit interview in 2003.  At the time I was told that they were taking pains to avoid any public perception of banks as managing anything but money, even though internally the executives (if not the rank and file) understood well that information was the life blood of banking and that digital networks were the circulatory system.  Interstate banking was relatively new, the industry was fighting to loosen up the regulatory regime further, the regulatory landscape was in flux and nobody wanted to shine a light on this aspect of the business.  My assertion at the time, and one I stand by today, is that eventually this swings the other way and banks will compete on direct information services as much or more than money services, advertising these to customers.

Barclay’s is perhaps the first direct example  of this but it’s been with us quite a while.  In the early days of online banking it was common to keep e-statements around for only 6 months.  Download them or lose them.  Or pay a hefty fee to have them restored from archives and sent to you.  Today almost no bank keeps less than 18 months of history on statements and e-bills because they eventually realized you need to do your taxes and disk storage costs less than customer turnover and acquisition.  For many customers today it’s more important that a bank have a good online banking site or a good phone app than that the bank have offices nearby.  This has allowed virtual banks to spring up that have no physical banking branches anywhere.  Banks are offering information processing as their core function, they just haven’t acknowledged that publicly or begun to compete openly on that basis.

That banks will go this route is inevitable.  Everything about the Bank of America building in Charlotte is designed to give visitors the impression of solidity and stability.  From the massively heavy doors you enter into a soaring glass and quarried stone lobby adorned with sweeping murals and expensive art.  You couldn’t help but imagine an impenetrable vault buried somewhere in the basement.  That was intentional and appropriate for the time since the primary perception of banking was stacks of physical money in a vault.  Now that retail banking customers are increasingly digitally literate, we know that the heart of the bank isn’t the vault in the basement but rather the data processing center higher up in the tower.  We know that information is value.  Because we increasingly do know that, then ask yourself what value does the bank bring to the table if they allow other services to spring up that store and manage your information?  The ability to convert information to money is their primary business so if Amazon, Box, Evernote and others store the information, the banks are reduced to nothing more than a currency exchange portal, especially if the banks are perceived as no more reliable an information processor than these services.

The banks urgently need to stake a claim in personal information management or risk losing their relevance.  With services like Mt. Gox converting information to currency, even the banks’ core exchange function is threatened.  Expect to see banks focusing on information management and the conversion of information to consumer value as their core business.  Their primary asset is their reputation for safety so expect them to leverage that aspect as well.  Some examples come to mind:

• Warranty facilitation.  The bank knows when you buy that power tool or whatever.  They can keep e-copies of the relevant docs on your behalf so you don’t need to.  The banks already provide extended warranty service through their elite credit cards.  This would be a natural integration into Personal Information Management.
• Virtual Safe Deposit Boxes.  Essentially an encrypted storage where you hold the key.  Think of a consumer-ready implementation of a TrueCrypt vault hosted in Google Drive but with feature-rich client-side software that included OCR, metadata capture, image processing, index, search, reporting and so forth.
• Information metadata management, including temporal aspects.  Is that data held by the bank on your behalf solely or jointly owned?  What happens to it after the divorce?  How much of it is searchable by the kids and at what age?  The system falls apart if we negotiate these things anew at every incident.  Indeed, failing to anticipate the need may make such adjudication difficult or impossible after the fact.  Banks can apply their existing experience in this area to build frameworks to address 80% or 90% of the cases and services to cover the most difficult cases.
• Policy enforcement.  The banks’ core functionality is policy enforcement on behalf of regulatory bodies and internally on behalf of business users.  It’s no stretch to imagine providing the same services for individuals.  You are not going to want to manually approve every individual 3rd party access request in real time so you may allow certain activities by known vendors to post without intervention and queue up the exceptions for review.
• Integrity verification.  Having received a copy of some data in the past, the bank can provide cryptographic assurance of the integrity of the data in the present.  This might apply to any long-lived document such as vital records, property records, corporate records, works of authorship, invention disclosures, etc.
• Identity verification.  The bank may become a more authoritative and trusted source of identity verification than the Department of Motor Vehicles.  They certainly know more about their customers than does the DMV, the lines are shorter, the offices are more convenient and they give you a lollipop for stopping by.
• Location independence.  This is perhaps the most important single things that banks can add to the mix.  Most vendors see proprietary information formats and vendor lock-in as an asset.  So you can’t keep the same information in Evernote, One-Note and Google Keep, or at least if you do it’s because you brute-force entered it into all of these.  Banks have always dealt in external information exchange.  But personal information is not like money so the short sighted among them may see an opportunity to build proprietary walled gardens.  However, the fact that personal information is not like money opens up a much better opportunity.  If the data is transportable, a person might (and probably would) store the same data across multiple banks.  If I put $100 in the bank, I can’t put the same $100in a different bank.  But I can store the same passport images, living wills, powers of attorney and other vital documents in two places.  Who needs a bigger piece of the pie when you can just clone the pie?  This only works if the data is relocatable, though and banks are best positioned to recognize that.

I applaud Barclay’s for testing the waters but if I could I’d sneak up behind them and push them into the pool.  This is not a question of “if” but rather a question of “when.”  If banks expect to remain relevant they will need to go public with what has been an open secret for a few decades now: the core business of banking is information management.  They need to do this before ordinary people come to the realization en masse that the core business of business, and life in general in the digital world, is also information management.