In his new book Ten Arguments for Deleting Your Social Media Accounts Right Now, Jaron Lanier argues that platform companies such as Google and Facebook have “weaponized advertising.” Recent events suggest he may well be right about how social-media platforms use the personal data we once held dear to feed their omnivorous profit engines. Could these same companies weaponize financial transactions? Given their limited financial-product reach so far, not yet. But, as we noted in a client report earlier this week, U.K. regulators are already scared stiff about what one calls a looming “algocracy” in which algorithms – not rules or free-market choices – define winners and losers.
Should financial regulators view platform companies with the same dread with which Robert Oppenheimer saw the atomic bomb as those around him rejoiced at its power? Could new technology really destroy financial intermediation and the payment system as regulators believe we should continue to know it?
The head of the U.K. Financial Conduct Authority, Charles Randell, went out on a limb when he described his algocracy fears. As our analysis of a new report from the European Banking Authority detailed, other regulators are deeply worried but not yet ready to throw the switch to turn on specific policy remedies. U.S. regulators are farther behind this curve as many of them are even more loathe to intervene in what can legitimately be described as innovation that enhances market efficiency and consumer convenience.
The usual rationale in the EBA, Basel Committee, and FSB for wary watchfulness is that nothing bad has really happened yet. Mr. Randell is fearful that soon it could, but his cautious colleagues are reluctant to counter such powerful entities even if many of their long-time financial-industry constituents increasingly wish they would.
Many banking, insurance, and securities firms are well aware that giant platform companies that turn to retail financial services could quickly relegate traditional providers to the ignominy of Main Street retailers. If this were all that was at stake, then global regulators should indeed stay their hand – regulation of course should not preserve the competitive status quo just because legacy firms fear change.
But, this isn’t all that’s at stake. As Mr. Randell makes clear, fundamental premises of financial-market operation are also at risk.
The most important he cites is rarely mentioned but of vital importance. Although we have grown so used to it that we never even talk about it, the entire body of U.K., U.S., and most free-market law, rule, and market theory and functioning is based on one axiom: Given sufficient information and time, customers make free choices among product offerings and are responsible for any mistakes they choose to make.
As any of us who shop on Amazon know, this is no longer true – we generally pick among the products Amazon thinks are right for us. On Google, we of course go to their preferred providers, and so it goes – this is indeed weaponized advertising because we pick based on what algorithms think we would like and can afford, not based on what’s on offer. There’s a lot of convenience to this, but also embedded, opaque, and even discriminatory conflicts of interest. Is that product really right for me based on objective machine learning or does Amazon just think I’ll fall for something from which it profits more than the other things I might prefer if I had time enough to look all over the web for what I might really like?
Of course, what platform companies do is not unprecedented. Were markets really ever the land of the free? All too often, they needed to be the home of the brave. Well before AI was born, banks offered products only to white men and then often only to those that bank management knew from church. Still, the scale, scope, and market power of a few bankers with blinders on is nothing compared to the market-bending power platform companies already exercise in their target markets.
Mr. Randell is right – wait too long and we’ll all just be numbers in some giant financial algorithm and, if we try to check out of the platform, we’ll just be zeroed out of the financial system. In his speech, he cites an iconic television program, “The Prisoner.” In it, the hero insists that “I am not a number; I am a free man.” Shout all he likes, the giant, autonomic, deadly balls roll over him if he tries to leave.