Open Agentic AI And True Personalisation

Sixteen years on from my own initial posts on the subject of a personal assistant that can privately find and buy stuff for you on the web, and we have 'open agentic AI'. But are you really any closer to the automated selection and purchase of your own personalised products without needlessly surrendering your privacy or otherwise becoming the victim? Should this latest iteration of open generative AI be autonomously making and executing decisions on your behalf? 

What is Agentic AI?

An 'agentic' AI is an evolution of generative AI beyond a chatbot. It receives your data and relies on pattern matching to generate, select and execute one of a number of potential pre-programmed actions without human guidance, then 'learns' from the result (as NVIDIA, the leading AI chip maker, explains). 

A 'virtual assistant' that can find, buy and play music, for example, is a form of agentic AI (since it uses AI in its processes), but the ambition involves a wider range of tasks and more process automation and autonomy (if not end-to-end). 

You'll see a sleight-of-hand in the marketing language (like NVIDA's) as developers start projecting 'perception', 'understanding' and 'reasoning' on their agentic AIs, but computers don't actually do any of those human things. 

It's certainly a compelling idea to apply this to automating various highly complex, tedious consumer 'workflows' that have lots of different parameters - like buying a car, perhaps (or booking a bloody rail ticket in the UK!). 

Wearing my legal hat, I also see myriad interesting challenges (which I'd be delighted to discuss, of course!), some of which are mentioned here, but not all...

Some challenges

The main problem with using an 'agentic AI' in a consumer context is the involvement of a large language model and generative AI where there is a significant (e.g. economic, medical and/or legal) consequence for the user (as opposed to a chatbot or information-only scenario (though that can also be problematic). Currently, the household or device based virtual assistants are carrying out fairly mundane tasks, and you could probably get a refund if it bought you the wrong song, for example, if that really bothered you. Buying the wrong car would likely be a different matter.

There may also be confusion about the concept of 'agency' here. The word 'agentic' is used to mean that the AI has 'agency' in the sense it can operate without human guidance. That AI is not necessarily anyone's legal 'agent' (more below) and is trained on generic training data (subject to privacy, copyright consents/licensing), which these days is itself synthetic - generated by an AI. So, agentic AIs are not hosted exclusively by or on behalf of the specific consumer and do not specifically cater to a single end-customer's personalised needs in terms of the data it holds/processes and how it deals with suppliers. It does not 'know' you or 'understand' anyone, let alone you.  

Of course, that is consistent with how consumer markets work: products have generally been developed to suit the supplier's requirements in terms of profitability and so on, rather than any individual customer's needs. Having assembled what the supplier believes to be a profitable product by reference to an ideal customer profile in a given context, the supplier's systems and marketing/advertising arrangements seek out customers for the product who are 'scored' on the extent to which they fit that 'profile' and context. This also preserves 'information asymmetry' in favour of the supplier, who knows far more about its product and customers than you know about the supplier or the product. In an insurance context, for example, that will mean an ideal customer will pay a high premium but find it unnecessary, too hard or impossible to make a claim on the policy. For a loan, the lender will be looking for a higher risk customer who will end up paying more in additional interest and default fees than lower risk customers. But all this is only probabilistic, since human physiology may be 'normally distributed' but human behaviour is not.

So using an agentic AI in this context would not improve your position or relationship with your suppliers, particularly if the supplier is the owner/operator of the agentic AI. The fact that Open AI has offered its 'Operator' agentic AI to its pro-customers (who already pay a subscription of $200 a month!) begs the question whether Open AI really intends rocking this boat, or whether it's really a platform for suppliers like Facebook or Google search in the online advertising world. 

It's also an open question - and a matter for contract or regulation - as to whether the AI is anyone's legal 'agent' (which it could be if the AI were deployed by an actual agent or fiduciary of the customer, such as a consumer credit broker). 

Generative AI also has a set of inherent risks. Not only do they fail to 'understand' data, but to a greater or lesser degree they are also inaccurate, biased and randomly hallucinate rubbish (not to mention the enormous costs in energy/water, capital and computing; the opportunity cost of diverting such resources from other service/infrastructure requirements; and other the 'externalities' or socioeconomic consequences that are being ignored and not factored into soaring Big Tech stock prices - a bubble likely to burst soon). It may also not be possible to explain how the AI arrives at its conclusions (or, in the case of an agentic AI, why it selected a particular product, or executed a specific task, rather than another). Simply overlaying a right to human intervention by either customer or supplier would not guarantee a better outcome on theses issues (due to lack of explainability, in particular). A human should be able to explain why and how the AI's decision was reached and be able to re-take the decision. And, unfortunately, we are seeing less and less improvement in each of these inherent risk areas with each version of generative AIs.

All this means that agentic AI should not be used to fully automate decisions or choices that have any significant impact on an individual consumer (such as buying a car or obtaining a loan or a pension product).  

An Alternative... Your Own Personal Agent

What feels like a century ago, in 2009, I wondered whether the 'semantic web' would spell the end of price comparison websites. I was tired of seeing their expensive TV ads - paid for out of the intermediary's huge share of the gross price of the product. I thought: "If suppliers would only publish their product data in semantic format, a 'widget' on my own computer could scan their datafeeds and identify the product that's right for me, based on my personal profile and other parameters I specify". 

By 2013, I was calling that 'widget' an Open Data Spider and attempted to explain it further in an article for SCL on the wider tech themes of Midata, Open Data and Big Data tools (and elsewhere with the concept of 'monetising you'). I thought then - and still think now - that: 

"a combination of Midata, Open Data and Big Data tools seems likely to liberate us from the tyranny of the 'customer profile' and reputational 'scores', and allow us instead to establish direct connections with trusted products and suppliers based on much deeper knowledge of our own circumstances."

Personalised assistants are evolving to some degree, in the form of 'personal [online] data stores' (like MyDex or Solid); as well as 'digital wallets' or payment apps that sit on smartphones and other digital devices and can be used to store transaction data, tickets, boarding passes and other evidence of actual purchases. The former are being integrated in specific scenarios like recruitment and healthcare; while the latter tend to be usable only within checkout processes. None seems to be playing a more extensive role in pre-evaluating your personal requirements, then seeking, selecting and purchasing a suitable product for you from a range of potential suppliers (as opposed to a product that a supplier has created for its version of an 'ideal' customer that you seem to fit to some degree). 

Whether the providers of existing personal data stores and digital wallets will be prepared to extend their functionality to include more process automation for consumers may also depend on the willingness of suppliers to surrender some of their information advantage and adapt their systems (or AIs) to respond to and adapt products according to actual consumer requests/demand.

Equally, the digital 'gatekeepers' such as search providers and social media platforms will want to protect their own advertising revenue and other fees currently paid by suppliers who rely on them for targeting 'ideal' customers. Whether they can 'switch sides' to act for consumers and preserve/grow this revenue flow remains to be seen.

Overall, if I were a betting man, I'd wager that open agentic AI won't really change the fundamental relationship between suppliers, intermediaries and consumers, and that consumers will remain the targets (victims) for whatever suppliers and intermediaries dream up for them next...

I'd love to be corrected!

How Britain's Economic Future Still Depends On Brussels

Britain has a services-based economy: 80% of our output and employment is in services. Professional services, finance, travel, telecoms/computing are all key areas, as is degree to which retail sales are online. This is clearly an advantage for a set of islands when it comes to exports, because services don't need to be shipped. But services may be subject to other trade barriers, such as licensing requirements when offered in other countries, as well as unfair trade practices by local competitors and suppliers. Rules and how well they're enforced are important issues. About half our trade is with the EU, because it's closer than the rest of the world. The EU is also a market of 448m people, 412m of whom are internet users, with 288m online shoppers. That makes enforcement of the EU's new Digital Markets and Digital Services Acts all the more critical, regardless of the fact that the UK no longer sits at the regulatory table.

Scale of UK services exports to the EU

While we generally import more than we export, that overall trade deficit being £33bn in 2023. That's the result of a deficit of £187bn in goods imported over exports, offset by a surplus of £153bn in exported services (including services that overseas customers bought here in the UK, as well as services performed by UK firms working abroad). 

Brexit has obviously made the EU market less accessible for UK firms, so the loss of the free movement in goods, services, people and capital makes earlier comparisons unreliable. But based on trade data for 2022: 

• the EU accounts for 36% of Britain's total services exports;
• we have a trade surplus in services with 14 EU countries and a deficit of trade in services with 13 countries, our closest neighbour being the largest surplus (Ireland at £14 billion) and Spain the largest services deficit (£11 billion); 
• our single largest type of exported service was £55bn worth of “other business services”, being legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services, representing 38% of all UK service exports to the EU. 
• exports of financial, travel and telecoms/computing/data services are also very significant.  

The Importance of Digital Platforms

You can see from the nature of our most successful services exports that their marketing and supply depends on digital platforms and related services, including search engines, cloud/hosting, app stores, browsers, e-commerce marketplaces and messaging services. 

While most of the services exported by British businesses will be supplied electronically to EU businesses of varying sizes, the online consumer markets are obviously also very important. In the retail sector, over a third of British business is now online, making the UK the third largest country in terms of the share of retail that is e-commerce, after the US and China. By contrast, about 15.4% of retail sales across all EU countries occur online. In absolute terms, however, the UK only has a domestic market of 66m internet users, while the EU has 412m (92%) of its population using the internet, 70% of whom (288m) buy stuff online. 

At that scale it becomes very important that the EU's digital markets are well regulated, and that businesses and their customers are shielded from unfair competition and trade practices.

How Does the EU Ensure Fair Digital Markets?

The Digital Markets Act (DMA) builds on existing competition law by rooting out unfair practices of very large digital platform operators (“gatekeepers”) when providing services that other businesses use to reach their own customers online. Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft have all been designated as gatekeepers, since they effectively act as private rule-makers who could potentially create ‘bottlenecks’ and ‘choke points’ that limit access, unfairly exploit personal and business data for their own purposes and/or impose unfair conditions on market participants. All face exploratory investigations under the DMA by the European Commission in connection with search services, app stores, browsers and messaging services, to see if they might be luring away customers from other businesses who use those platform services. 

The EU's Digital Services Act (DSA), on the other hand, protects EU-based users of online communication, e-commerce, hosting and search services, by exempting intermediary service providers (“ISPs”) from certain liability for performing certain duties. There are extra requirements for ISPs with at least 45m average monthly active EU users (known as ‘very large online’ (or 'VLO') platforms and search engines). Even UK providers may be caught, where it has an entity based in the EU or has a 'substantial connection' with the EU (i.e. a significant number of users as a proportion of the EU population or by targeting its activities at one or more EU countries). Services such as Bing, Google Search, Facebook, Instagram, Snapchat, TikTok, YouTube, X/Twitter, AliExpress and LinkedIn already face exploratory investigations under the DSA. Basically, the European Commission wants to know how these businesses: 

• mitigate the risks of creating and spreading information using generative AI and risks to electoral processes; 
• block illegal content; 
• protect users' fundamental rights; 
• avoid promoting gender-based violence; 
• protect children; 
• protect users' mental well-being; 
• protect users' personal data; 
• protect consumers; and 
• avoid the infringement of copyright and other intellectual property rights.

How Do British Businesses Benefit From the DMA and DSA?

British businesses will not want to spend heavily to acquire and deal with customers via gatekeepers' services, only to see the gatekeepers take those customers on directly. That's where the DMA comes in. It should not matter that a foreign business is among those who suffer any violation, since that will also affect EU businesses and customers that the DMA is primarily designed to benefit. 

More widely, British businesses trading online the EU customers should also be reassured that the DSA regime is designed to ensure those customers are treated well and fairly in the intermediary environments. Otherwise, they risk losing both the channels through which they attract and deal with EU customers and/or the EU customers who are unwilling to engage with those channels. Equally, businesses will want to know that they are taking on genuine customers and dealing with reputable service providers online, rather than risking exposure to fraud and intellectual property rights infringement via their EU sales and marketing channels.

Either way, it's clear that Britain's service exporters are highly dependent on the EU trade bloc and its regulatory regime, regardless of Brexit.

Whether they can expect the same protection at home is another matter...

In Brexit Britain Retail Will Be Mainly Online

When high street goods retailers call for increased taxes on e-commerce to subsidise their local business rates, you know their business models no longer make sense. Online retail sales now represent 17% of total retail sales in the UK, up from 5% in 2008. E-commerce is steadily taking over and UK consumers cannot afford to resist. Consumer debt is at its highest in history. So, add the rise in zero hours contracts with a Brexit headwind, and the shift to mainly online sales of goods should happen even faster. That in turn should boost the market for online sales more generally.

In typically populist fashion, all the usual suspects are blaming someone else. Tesco’s CEO has dubbed his plea for a 2% tax on any goods sold online an “Amazon tax”. He reckons this would raise a meagre £1.25bn but wants that spent on lowering the business rates for his physical stores. In other words, like newspapers, he doesn't make enough through his own online sales to subsidise his own under-performing bricks-and-mortar. 

Such a small sum will barely touch the sides within Tesco, yet it will increase all consumer prices for the ever-increasing volume of online sales. But the UK's over-indebted consumers simply can't afford that - and even if unemployment remains low, the number of zero hours contracts has tripled to account for a quarter of employment growth, and 2.8% of overall employment.

 

Similarly flawed is the UK Chancellor's populist "threat" that tech companies face a “digital services tax”.  It sounds good, but will be futile to protect UK offline retailers and simply raise consumer prices that won't be affordable.

The problem is high street retailers' failure to adapt to the long term trend of rising online sales. You can't blame that on the tax system. Taxes are something businesses have to factor into their planning, not the other way round. And taxes should be technology neutral, rather than making consumers and taxpayers subsidise legacy technology over innovative competition.

So, the sale of goods on the UK high street is doomed as we know it. But as they adapt or fade away, e-commerce for goods should boom. That will boost the market for directly related online services, such as point of sale finance, as well as the market for online services more generally.

Is There Really A Single EU Market?

Some sobering figures from the European Commission for single market fantasists enthusiasts (as if Greece wasn't sobering enough).

EU cross-border services account for 4% of all online services, as opposed to national services within the US (57%) and in each of the EU member states (39%). 

15% of EU consumers bought online from other member states, compared to 44% who bought online nationally, with online content seeing double-digit growth.

Only 7% of SMEs sell online across EU borders - and it costs an average of €9,000 to adapt their processes to local law in order to do so. 

The cost/price of delivery is (obviously) cited as a major problem, as well as differing VAT arrangements. But suggested solutions seem to ignore these and other key barriers to cross-border retail that have been cited in previous market studies, such as lack of marketing strategy, preference for national brands, language barriers and local employment law challenges. Presumably, that's because the Commission can do little to address such fundamental practicalities. Instead, they want to focus on:

• stronger data protection rules;
• broadband/4G roll-out;
• use of 'Big Data' analytics; and
• better digital skills amongst citizens and e-government by default.

The sense of futility that permeates such reports by Eurocrats only emphasises the fact that the law follows commerce; it doesn't catalyse markets.  

Yet, ironically, in areas where commercial and consumer pressure to enable cross-border activity is emerging, such as crowdfunding and crypto-technology, we find European institutions taking an unduly restrictive approach.

When will they simply get out of the way?

The Beginning of The End of Consumer "Banking"

Funny to see a story from John Gapper in the FT this morning, saying technology will hurt retail banks but not kill them, only a few pages before First Direct admits it mis-sold complex investment products to consumers.  While I agree that innovation doesn't 'kill' anything, and must co-exist with what it is replacing, John seems to have a misplaced faith in retail banks' ability to maintain their direct relationships with consumers.  Banks are steadily being relegated to the back-office of retail finance.

 

John may be right to point out that banks lose money on the limited activity of offering current accounts, and possibly even savings account functionality, so that these are not attractive areas in themselves for technology businesses to enter. But of course you can't view those 'products' in isolation. They are just part of the 'bait and switch' routine that banks operate to persuade people to part with their money so the banks can earn far more from using those funds for their own ends.

To understand what the tech companies are doing, you have to consider how much money the banks make out of the end-to-end activity of robbing investors/depositors of yield while fleecing borrowers with expensive loans - and making everyone pay a lot for slow-cycle payment processing. 

 

It is wrong to say that technology companies are merely playing at the edges of 'banking' by offering payment services and person-to-person loans. This is all part of the strategy for disrupting the 'banking' sleight of hand.

 

Tech companies know that if they can provide a decent, transparent consumer experience to savers/investors on the one hand, and those who need the funds on the other, then they are in a position to cut the cost of moving money between the two. In fact, the money may not even have to move at all: the important issue is who is entitled to it, and whether it is available. 

 

You don't need a bank to keep the data and transaction records that tells you who owns the funds. It's all just data, as Marc Andreessen is quoted as saying. 

 

And it's far safer to separate the transaction processing and record-keeping function from the cash, which should be held separately from the processor's own funds. That's how e-money institutions, payment institutions, P2P lending and crowd-investment firms are set up...  They may rely on segregated commercial bank accounts for holding that cash, but the banks who provide those accounts have no control at all over which consumers own the money in them, or what those consumers choose to do with it amongst themselves.

 

In the EU, the regulatory support for such new business models began in earnest in Europe in 2000, with the advent of the first E-money Directive, and has snowballed with the Payment Services Directive in 2007, a new EMD in 2009 and the proposed revamp of the PSD. There are now hundreds of these payment institutions in the UK alone. And it's no coincidence that the UK has led the way in both creating and regulating P2P lending and crowd-investment platforms.

 

All of this spells the beginning of the end for consumer 'banking'.

 

 

Unload The "Digital Wallet" Before Someone Gets Hurt

And that's not all...

The term "e-wallet" or "digital wallet" has always caused a physical reaction. But what started as a small twitch over my left eye in November 1999 now involves diving under a table. The term has become so loaded with giant concepts like 'identity', 'privacy', 'authentication', 'security', 'payment' and 'funds' that it's simply too dangerous to wave around in meetings.

We need to focus on more of the detail if business presentations are to have any meaning and projects are to deliver anything.

The term 'digital wallet' is impossible to define, anyway. The Oxford English Dictionary has no home for it, and it's wise to ignore suppliers' self-serving, product-specific definitions. Th'internet merely yields a confusing mish-mash: [my emphasis] "a system that securely stores users' payment information and passwords..." (investopedia) and "encryption software that works like a physical wallet during electronic commerce transactions." (webopedia). Unhelpfully, the Free dictionary explains "the wallet data may reside in the user's machine or on the servers of the wallet service. When stored in the client machine, the wallet may use a digital certificate that identifies the authorized card holder." 

Such definitions are confusing because they keep jumping the rails from party to party, feature to feature and function to function, each of which has different implications for transaction flows, data flows and funds flows (to the extent payment is even involved). 

Perhaps the only consistent aspect in the use of the term 'digital wallet' is the sense that it refers to a specific individual, or at least it should be capable of doing so. Otherwise, the term means so many different things that it's useless. FinVentures defined it to mean, "A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc." Indeed, a 'digital wallet' could be a feature within an application or service, or an entire application or service, a database, a set of permissions and so on. It could reside on virtually any digital device, including a smart card or just a microchip. It could enable a specific person to initiate or conclude any kind of transaction, or merely be used in the course of intiating or concluding such a transaction.

So when you next hear the term 'digital wallet', seek cover behind a large, heavy object and try to defuse the situation by asking: 

• which parties are involved;

• which party is agreeing to do what, how do they agree, what actions are taken as a result and by whom;

• where the related data is stored and where it flows; and

• where any related funds are and where they flow.

It could save a lot of time and money.

Image from Tenets in DM.

Facilitators and Institutions Defined

The distinction between 'facilitators' and 'institutions' is a theme that has emerged quite strongly in this blog and is discussed in Chapter 2 of Lipstick On a Pig. In essence, I've defined "facilitators" as organisations that exist to solve their customers' problems; and "institutions" as organisations that exist to solve their own problems at their customers' expense.

To be more specific, I've extracted the following characteristics that I believe mark an organisation as being one or the other. Broadly, these characteristics group into themes of alignment, openness, adaptability, transparency and responsibility.

So, a 'facilitator' is organised to solve its customers’ problems, operates openly, adapts well to changing circumstances, is committed to transparency and takes responsibility for the impact of its activities on the wider community and society.

I update this post from time to time and am interested in any comments you may have.

Facilitators:

 Alignment

• exist to solve problems that their customers encounter day-to-day as part of wider end-to-end activities (i.e. customers don't 'pay' or 'bank', they make a payment as a single step in a much longer purchase process);

• don't presume to 'own' the relationship with people who use their products, and see customers as the controllers of that relationship;

• accurately define real problems, assess their real scale, identify root causes and implement proportionate, efficient solutions;

• view the world through the eyes and experiences of people who use their products;

Openness

• are prepared to work with complimentary businesses to support their users' end-to-end activities (including linking to material produced by others);

• seek feedback, welcome input and criticism;

• interact well with users in open forums;

• are 'free-rider tolerant';

Adaptability

• are highly adaptable and responsive to criticism; 

• allow ideas to develop from staff and users bottom-up, generating passion and connection amongst them;

• see uniqueness, change and adaptability as a source of competitive advantage;

Transparency

• work to simplify their products and users' experience;

• their terms and communications are clear, fair and not misleading;

Responsibility

• seek to make the world a better place in which to live, addressing the impact of their activities on the wider world.

Institutions:

Alignment

• Exist to solve their own problems at the expense of 'their customers';

• View the world through the lens of their own products (whether goods or services), rather than the activities in which users are engaged when acquiring or using those products;

• Regard themselves as controlling the relationship with users. 

 Openness

• Resist criticism and change – believing that their own processes, judgement and publicity should prevail;

• Impose their own views on staff and 'their' customers, top-down;

• Interact poorly with users (if at all) in open forums, experiencing 'vicious cycles' of adverse publicity; 

•  Are 'free-rider resistant';

• Mandate the use of their own add-on services, even where these are inferior those available from third parties; 

 Adaptability

• See running with the herd, or 'fast-following' as a source of competitive advantage;

• Demand that 'their' customers must become more capable if their products or experiences are to improve; 

Transparency

• Deliberately adopt complex pricing, conditions and 'pressure' techniques in their sales and marketing activities;

• Rely on cross-subsidies to distort the attractiveness of new products;

• Their terms and communications tend to be unduly complex and legalistic;

Responsibility

• Avoid addressing the impact of their activities on the wider world.

Regulatory Creep And Overkill For Closed Loop Payments

The Treasury reports that it received no support for its proposal for voluntary consumer protection codes for ‘closed loop’ or limited network stored value, which are exempt from European E-money regulation. These include store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems - nothing like the collapsed retail pre-payment schemes that have previously lost their customers' money Farepak (Christmas hampers) and WrapIt (wedding gifts).

However, the rejection of the need for voluntary codes arguably opens the way for formal regulation, as the Treasury had seemed to be firmly of the view that more protection is necessary for the reasons summarized below. As a next step:

“The Treasury has asked the Office of Fair Trading (OFT) to provide some advice on the prepaid market, the effectiveness of current self regulatory solutions for protecting consumers, and the interaction between the regulated and unregulated sectors. This advice will be fully considered before the Government decides what, if any, action to take.”

Ominous? Well, it depends on what they mean by "prepaid". If the Treasury means retailers who require people to pay for products weeks or months prior to shipment, then I wonder why it's taken them so long to address a really obvious problem. But if they mean gift vouchers to make sure your nephew spends his birthday money on something educational instead of 5kgs of sweets, then this is over-kill.

I’ve extracted the summary of responses on this aspect below:

"3.10 There was little or no support for voluntary codes as a solution to improving the safeguards for consumers in the unregulated sector.

3.11 Responses fell into two broad categories: those that argued that tougher regulation and enforcement than voluntary codes is necessary to address perceived shortcomings in the unregulated sector; and those that felt that there was no justification for action due to the low risk of consumer detriment. The main reason for the general dissatisfaction with voluntary codes was that, although models vary, supervising and enforcing a voluntary code is often thought to be difficult. There are usually no limits to the number of violations a company might have, no financial incentive to abide by a code, and weak rights of recourse for consumers.

3.12 Some respondents argued that no action was necessary because the perceived risks are low. It was also argued that voluntary codes would be unworkable in practice because the average amounts outstanding on unregulated products (mainly gift cards) are less than £30. These responses concluded that the risk of loss per customer did not warrant a new protection mechanism."

Call for Self-regulation of Limited Network Payment Schemes

The UK Treasury is calling for self-regulation to ring-fence funds relating to stored value in “limited network” programmes, citing examples such as store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems. The call is part of the Treasury’s consultation on the second E-money Directive which imposes similar obligations on the operators of 'general purpose' stored value programmes. While limited networks will remain exempt from E-money and payment services regulation, the Treasury will consider “whether further [regulatory] action is warranted” if what it sees as adequate self-regulation does not emerge. Consultation ends on 30 November.

Potential reasons cited by the Treasury for segregating limited network funds from operators' own corporate funds include:

• Apparent uncertainty as to the scope of the limited network exemption;
• A large number of consumers/businesses rely on limited network programmes and may suffer if programmes fail;
• A limited network failure may harm the reputation of other limited network programmes as well as regulated e-money providers; and
• Limited networks enjoy a cost advantage over regulated general purpose stored value programmes, partly through not needing to ring-fence funds equivalent to the outstanding stored value.

Whether each of these is really a problem is very much debatable. Guidance can clarify what is considered in or out of the regulatory scope, and the existence of 'grey areas' at the perimeter is no argument for definitively expanding the scope by requiring self-regulation. Of course, not all customers or businesses rely on all limited network programmes, or even the programmes of the same type. Similarly, the failure of one programme does not necessarily reflect on them all. That's clear from the collapse of retailers that entirely rely on pre-payment Farepak (Christmas hampers) and WrapIt (wedding gifts) which have provided the genesis for concern in this area generally, though neither was a stored value programme. Finally, why shouldn't there be cost advantages to running a programme whereby value can only be spent within a limited network, rather than one where stored value can be spent anywhere? The latter is always going to be much larger in scale and purpose, and entail far more operational risk.

While the evidence of detriment is less than clear, positive reasons not to introduce requirements to safeguard customer funds in limited network schemes include:

• The potential for additional requirements to be imposed in the course of the proposed self-regulatory exercise that needlessly increase the cost of operating the network;
• No one operating a dodgy scheme would sign-up for stringent self-regulation;
• It may be far more costly and onerous to ring-fence funds in certain types of limited network programmes than others, so some operators may be unfairly discriminated against by not signing-up on legitimate economic grounds; and
• Increased costs associated with self-regulation may result in fewer limited network payment programmes for customers to choose from and higher retail prices for customers overall.

A proportionate alternative might be to focus on improving the management of operational risk in businesses that rely entirely on pre-payment for specific items, as Farepak and Wrapit did. A nice, long chat with their auditors might also be in order...

Image from Newbusiness.co.uk

Buried!

Has a week gone already?! The distinct lack of posts has been due to my being buried by business-as-usual, plus:

• Consultations on the implementation of the new E-money directive by both the Treasury and the FSA;
• The latest edition of the EC's Consumer Markets Scoreboard;
• Excellent discussions on where bankers and social thinkers disagree and agree;
• All the other great stuff that I tweeted or retweeted, to which I may yet find the time to return; and
• Last but not least, agreeing the topic for discussion at the inaugural meeting of the SCL Junior Lawyers' Group on 20 January 2011 - be there!

Have a great weekend!

Image from PubSub.

Could An EU Contract Law Catalyse A Single Market?

Not content with the dog's breakfast of European consumer and retail finance directives, the European Commission now wants to harmonise all contract law in the European Union.

The latest fry-up is yet another futile attempt by the EC to catalyse cross-border retail markets of the same scale as national markets within the EU. This is spawned partly by a dogmatic interpretation of single market policy. But it also reflects the difference between the common law view of the world (do anything until the government says 'stop') with the civil law view (wait for the government to tell you how it can be done).

I'm an avid fan of cross-border markets, but long experience and the EC's own research has shown that they can't simply be mandated. Regulation is the least significant of the numerous barriers to cross-border retailing. Cooking up a bunch of extra regulation that doesn't solve a real problem merely adds legal costs for everybody to no end. Or worse: it's ironic that the EC's changes to VAT on electronic services from 2015 actually removed a significant driver for firms to structure their activities in a way that boosted cross-border e-commerce in the first place.

When will this expensive, Quixotic tinkering end?

Well, economic reality may be pointing away from a single European market of the scale envisaged by the EC. Some describe the north-south divergence in the EU and others herald a return to national currencies, or at least regional versions of the Euro.

But if, as I suspect, this latest Green Paper is intended as a frantic signal that the single market is not dead, there'll be plenty more such concoctions before the whole thing finally comes apart at the seams.

The Cheetah Generation: Will Facilitators Grow Faster In Africa?

Recent problems in the Eurozone, coupled with the shock announcement of the UK's worsening trade deficit have heightened the need to find new markets. So perhaps it's a great time to recognise the step-change in technology adoption amongst sub-Saharan Africa's "cheetah generation".

Africa represents a vast array of people and socio-economics, as Hans Rosling brilliantly illustrated at TED, including a communications divide. As at 2006, "Egypt had 11 times the fixed line penetration of Nigeria. While sub-Saharan Africa (excluding South Africa), had an average teledensity of one percent, North Africa (Algeria, Egypt, Mauritania, Morocco, Tunisia) had a comparable average of eleven percent. Almost three quarters of the continent’s fixed lines were found in just 6 of the continent’s 55 countries."

Enter: the mobile phone:

As TMS Ruge explains in his "stirring article on Africa's booming tech space":

"By the end of 2011, the entire continent of Africa will be connected to no fewer than nine undersea broadband cable initiatives. Africa will have access to over 17 terabytes of designed broadband capacity. If mainframes and punchcards served as the innovation catapult for Silicon Valley’s cheetah generation, then connectivity is poised to be Africa’s innovation catalyst. Since mobiles first went mainstream in Africa at the turn of the century, mobile penetration has exploded to approximately 450 million subscribers...

Africa’s growing list of technology hubs are the cheetah generation’s digital proving grounds Appfrica Labs opened its doors in Uganda in 2008. Since then, three additional tech hubs have opened around the continent. Limbe Labs Ventures Cameroon and Banta Labs in Senegal launched in 2009. Nairobi now has its very own centre of excellence in the iHub innovation center...

Keep a very close eye on Africa’s young population, that 450 million number growing up with a mobile phone in their back pocket."

Vodafone has clearly been doing just that, backing M-Pesa, the successful person-to-person payment system. The explosive growth of that business also suggests that Africans may be more willing to rapidly embrace disruptive finance models than Westerners. No doubt this is partly because they've been more poorly served by banking and telecommunications to date (though 'mobile banking' has also grown rapidly in South Africa). But is it also because African communities share a greater sense of personal trust than in the West?

At any rate, it seems the trend toward the growth of facilitators at the expense of institutions is set to grow fast in sub-Sahara Africa, at least on mobile networks.

Image from Run For Africa

Role of Social Media in Consumer Finance

Recent discussions about whether new entrants are pushing banks to the back office of the consumer finance space have prompted me to update several previous posts on the role of social media and brands vs facilitators.

Of course, "social media" refers to the co-operative mix of internet and mobile  network services that are themselves increasingly networked. Look at all the platforms or applications that enable people to send and receive Twitter "updates" for example. This enables sharing of content amongst users at a time and location that suits them and whatever activity they're engaged in at the time. Unlike the off-line media, we can  even have all our social media available on one screen. So any single social medium is merely a hint of something very much larger:

Anyone who believes we can predict the social network service that people will choose to manage their finances will be disappointed. Human physiology may be reasonably predictable, but human behaviour is not. There is no "mass" of consumers, no bell-curve to accurately describe their behaviour to enable us to predict with any precision how each person is likely to behave next. Even Twitter could disappear in a sudden puff of user indifference, like others before it. Black Swans are lurking - surprise events that have a huge impact and which we rationalise by hindsight.

Yet it's tempting to try to explain the social media as a reflection of numerous trends that signify a desire to assert control over our own personal lives and experiences. Perhaps this at least explains the birth of social media, if not the basis on which it will be sustained.

At any rate, the commercial challenge the social media currently presents for any business is how to facilitate the individual's desire for control, rather than be shunned for failing to do so or even for trying to resist or subvert that desire. This means presenting services that are designed bottom-up and which are highly flexible and adaptable, rather than inflexibly geared to suit the product provider's top-down view of the world.

To distinguish the two approaches, one might call providers of bottom-up, adaptable services 'facilitators', and the providers of top-down, inflexible products 'institutions'.  Another way of summarising the difference between them is that facilitators primarily exist to solve their customers' or users' problems, while institutions are primarily driven by the need to solve their own problems (like 'delivering value to shareholders').

The requisite flexibility and adaptability is delivered by the "architecture of participation" of the kind created by various Web 2.0 facilitators and their users that has enabled us to break down and personalise the one-size-fits-all experience traditionally offered by music labels, book publishers, retailers, package holiday operators, banks and political parties. Such facilitators make the difference between us 'raging against the machine' on customer 'help' lines in a lone, fragmented way and achieving real change by acting as individuals, yet in a concerted fashion.

In the social media environment, the consequences of institutions putting their own needs ahead of their customers can't be overstated. The institution risks tapping into the dark side of the trends mentioned above, and being exposed in a borderless environment of interested, active people. In public policy terms that means being exposed to the sense of frustration and disillusionment responsible for both the plunge in faith in society's institutions and declining articipation in formal politics over the past 30 years, and the corresponding increase in political awareness, informal political action and consumer activism over the past decade. In terms of change theory, people have recovered from their shock at the parlous state of  'the system' and are doing something about it. Similarly, that sense of frustration and disillusionment marks the turning point between vicious and virtuous circles of consumer sentiment and related publicity. This was a key difference between President Obama and the other guy.

This is nicely illustrated by the "Influence Ripples" graphic from David Armano's "Logic and Emotion" blog.

What struck me about this graphic was not so much the ripple effect of conversations about a product, but the 'aerial' view of the customer community (specifically in the case of Twitter, blogs and other "Level 2 Ripples"). This would seem to be a great tool to communicate about, and focus resources on, the architecture of participation users are relying on to personalise their use of a provider's products - a 'virtuous circle' - or bitch about them - the 'vicious circle' of adverse comment.
There are several instances of this dynamic at work, driven by privacy concerns (Phorm, the Data Retention Regulations) content ownership (see the ripples emanating from Facebook's revision to its privacy and content ownership terms) and straight "us vs them" (e.g. Ryanair's collisions over its 'idiot blogger' remark, which viciously spiralled on reports they were going to charge £1 for answering nature's call).

The dynamic relationship between facilitator/institution and its customers is extremely complex, largely because it is driven by the activity in which each customer is engaged at the time of interaction, as well as the stage at which each individual customer has reached in his or her relationship with the facilitator/institution or its product(s). The  following (rather crude) slide is my attempt to illustrate this complex dynamic in the consumer finance context (click to enlarge):

Finally, this dynamic is perhaps even more critical for B2B product providers to understand. Not only may their immediate business customers have their own social media presence (even if only to relate to retail customers), but the B2B service provider's own product is also part of the end user's experience. If the B2B provider's element of the consumer service or experience is unsatisfactory, sooner or later that fact will show up in the 'ripple analytics', and the B2B provider will come under intense public (and published) pressure to resolve the issue. This is happening increasingly in the area of public sector projects, for example, as taxpayers become alarmed at the terrible state of the public finances.

In this environment it's pretty much terminal for a business to ignore the social media or the supporting facilitators, and not to see itself as part of the social media mix. In fact, since we have the Webby Awards honouring business excellence on the internet, why don't we offer Webley Awards for businesses that don't get it (as in the old imperialist who retires to the library with his service revolver and a bottle of port)?

The Great Aussie Firewall - The Game

The Guardian reports on the latest response to the Australian government's efforts to control the internet.

Internet Regulation Won't Stop Black Swans

I enjoyed Professor Michael Froomkin's recent "Golden Eggs" lecture on internet regulation. He foresees the future regulation of the internet being shaped by the tension between the 'Cypherpunk' vision for a distributed, democratic , libertarian environment - and 'Data's Empire' - where established institutions respond to the perceived threat of the internet by trying to create a centrally controlled environment. He cautions us not to be complacent or 'technologically deterministic'. There are opportunities for us to make real choices to avoid "killing the goose that is giving us golden eggs of innovation, decentralization, and personal empowerment".

This model does not only describe the two broad forces at work in the online regulatory environment. Generally, our individual desire to control our own experience tends to be opposed by institutions' desire to retain control of how they deal with us. Indeed, it might be said that explosive Internet adoption occurred because individuals pragmatically recognised and seized an opportunity for individual empowerment in the face of comparatively rigid institutional control in the offline world.

Yet institutions try to catch up, and the cycle continues. Michael hints at this when he notes "to a surprising extent both sets of trends have manifested themselves simultaneously. The question is whether those two trends can continue, or if instead we are witnessing the start of a collision between them." Of course, we are seeing collisions everywhere, all the time, between individuals and institutions each trying to control their relationships. Just consider all the markets, services and activities impacted by the Web 2.0 phenomenon, and the realisation that brands must become facilitators rather than institutions.

But we should also consider that 'control' is illusory. Human behaviour is not predictable and, while it may appear that people are acting in a controlled way in certain scenarios or under certain regimes, radical change is never far away. The fall of the Berlin wall and the credit crunch are two of many situations or activities which appear to be under fairly strict, central control but are in fact not - or at least not in any sustainable way. This is not a technologically deterministic view. It simply acknowledges the nature of the world. We are constantly exposed to the risk of "Black Swans" - surprise events that have a major impact which we rationalise by hindsight, as if they had been expected. Andy any inquiry into the why's and how's of such events is largely academic, albeit tantalizingly so.

So, while real regulatory choices of the kind Michael mentions may remain to be made, we should not count on those choices as having the intended effect of delivering 'control' for any sustained period of time. Regulation cannot possibly cover every eventuality, and is too slow to create, too blunt and too easily circumvented by anyone sophisticated and determined. Cryptography and the sheer volume of users and data make a mockery out of online access and content controls, centralised 'mining' and monitoring. We do rely increasingly on facilitators to find desired data and/or edit/adapt it in some way to make it more manageable for us or our devices - and these represent natural 'chokepoints' for regulators and commercial institutions, as Michael Froomkin points out. However, these chokepoints are also easily circumvented, either as described or by the rapid rise of the next facilitator or competitor, and related technological innovation.

This is not to say that those who purport to edit more actively what people see should not be subject to democratic controls over their exercise of editorial discretion. There seems to be (a somewhat surprising) acknowledgement of this in Google's decision to fund the Advertising Standards Association's efforts to regulate online marketing activity. The point is that new standards won't protect us from calamity.

The ultimate challenge, as Nicholas Taleb warns, is to minimise or avoid exposure to the potential downsides posed by Black Swans, while maximising one's exposure to the potential upside. To illustrate this in financial terms, it would be a mistake to borrow money to 'short' stocks, but worthwhile to invest a small proportion of your savings in Hollywood films. In the online world, Black Swans would seem to loom most obviously in the content arena - or perhaps fraud. Regulation is heavily focused in this area, but that is merely a signpost. We must take responsibility for our own practical choices. These include whether to share thoughtful or sordid content, to engage in copyright violation or to openly publish key personal financial data or photographs of your family. It's worth considering that the internet hasn't changed our propensity to behave well or badly, but may have amplified the outcomes.

To bring it down to a personal level, I maintain my anti-virus protection and avoid or minimise sharing what I'd regard as 'key' personal or financial data, even though there are comparatively fewer people out there who would use it to my disadvantage, since the impact their activity is so personally disruptive. However, I do acknowledge that the benefit to sharing certain limited personal transaction data - with credit reference agencies, for example, and some retail or social networks - can outweigh the downside of misuse. In these circumstances, you might think that more regulatory and commercial resource should be dedicated to quickly and efficiently restoring a person's control of their own identity once control is lost, rather than drastically limiting the availability of personal data or intervening too much in the exchange of information in social or retail networks.

Similarly, I post my thoughts and share others' because I hope they are better shared than consumed by me alone - and the (small) chance that millions might find such a thought worthwhile represents a very positive potential experience ;-). Conversely, I would not (even if I wanted to) create or share sordid content because it represents exposure to an extremely negative outcome. That said, I acknowledge a middle ground where (within reason) the assessment of what's merely in good or bad taste is hugely subjective and may change. For example, I recall being struck by the fact that 'topless bathing' was deeply frowned upon in Sydney one summer yet utterly commonplace on Bondi Beach the next. Similarly, we'll hear the last 'cautionary tales' of people losing their jobs over embarrassing photos of university hi-jinks once the 'Facebook generation' become middle managers.

The point remains, however, that we must take responsibility for our own personal vigilence, even if employers come to tolerate the odd embarrassing photo, or the government succeeds in tightening internet content controls. Those Black Swans will still be out there.

Why She Buys

Interesting tips from a book Why She Buys, by Bridget Brennan, posted on the Amazon Payments blog:

• don't hide your customer service number


• simple checkout process


• use trusted payment methods, confirm orders/shipment immediately by email


• have a decent returns policy


• recommend complementary items


• show examples of gifts


• allow zoom on product shots


• keep your site clutter-free


• be transparent about shipping costs

Reminds me of some research that challenged the idea that women aren't comfortable with technology. As others have pointed out that, sure it should be stylish, but it also has to work simply. That means minimising the need for instructions and cables like spaghetti.

Intel also found that women are very influential when it comes to the gadgets guys buy, and even spend more time online gaming than young men.

Oh, and check out GeekSugar, 'where geek is chic'. Hat-tip to AllWomensWeekend.

New Firms Best At Leveraging Social Media?

A hat tip to Mark Nepstad for pointing out Chris Perry's article on the challenge for any established business trying to leverage the social media. Just as the military potential of the aeroplane was not fully realised until the challenge was eventually handed over by the Army to a newly created Air Force, Chris suggests that marketing teams need to be re-engineered in order for businesses to realise the potential afforded by a phenomenon as 'revolutinary' as the social media.

But this misses the wood for the trees.

The rise of the Air Force and the success of Google, eBay, Amazon etc. illustrate that leveraging horizontal technological innovations is not achieved by shuffling the deckchairs in the marketing department of established organisations, but by forging new and separate businesses.

That leaves the challenge for the old guard to engage with the upstarts in order to leverage their greater success with the new technology. Time Warner (AOL), NewsCorp (MySpace) and even eBay (Skype) have famously demonstrated that acquiring one of these new firms doesn't necessarily result in successful engagement. So it seems that established businesses should both encourage new businesses to flourish around significant new horizontal innovations, and focus on co-operating with them to serve their customers, rather than outright ownership. Some, including the Wharton Business School, have called this 'coopetition'.

Figuring out how to compete by co-operating shouldn't necessarily entail wholesale reorganisation, especially when deep knowledge of the capabilities and shortcomings of your own business is key to knowing what's needed from the other party. Indeed it might be more beneficial to give managers and staff 'permission' to admit their organisation's shortcomings and figure out where they need help to adequately serve their customers, rather than to drive the organisation through complex wholesale change programmes.

At any rate, the scale of the challenge posed by horizontal technological shifts may at least partly explain why the average lifespan of a major western corporation is 40-50 years...

Reboot Earth - Open Government Data

There are great efforts to encourage open government using the latest technology - particularly in the US and the UK, judging by this Google search. And recently we had the excellent, rather stirring example of Reboot Britain, one aim of which is to draw entrepreneurs and the public sector together.

Of course, it is vital that individual public bodies permit open access to the publicly funded data that they control. However, this doesn't mean "Open Gov" initiatives should be geographically constrained. Otherwise, we'll miss not only the big, global picture, but also the similarities between countries and regions and the people and demographics within countries and regions, worldwide. It is trite to say, but a worthwhile point to make here, that only by understanding the true state of the world now, and the trends that are shaping it, can we know where and how to achieve meaningful change. A need that is perceived to be weak and unworthy of attention in one region, may resonate with the same need that is attracting resources elsewhere. Similarly, mistaken assumptions about wealth trends in certain regions may mean great opportunities go begging. Yet public, cross border collaboration is lacking even in the EU, where forging a single market is the top priority.

That a worldwide approach is necessary was brought home to me by Hans Rosling's presentation at TED 2006, which I've embedded here. It was added in a comment by Steve Har on a recent post on O'Reilly Radar speculating on the future of the US open gov initiative. Hans does a wonderful job bringing public statistics to life, in a way that challenges lack of understanding and preconceived notions about the state of the world, its regions and people.

PS, 1 October 2009: Hat tip to FreeLegalWeb - the UK government has called for developers to contribute to the usability of data.gov.uk , and the Australian equivalent just went live (US data.gov led the way in May)