Category: Digital Disruption

Singapore banks will benefit from regulatory push to strengthen artificial intelligence capabilities

From Moody’s

On Monday, the Monetary Authority of Singapore (MAS) announced that it is collaborating with the Economic Development Board (EDB), Infocomm Media Development Authority (IMDA) and Institute of Banking and Finance (IBF) to accelerate the adoption of artificial intelligence (AI) in the financial sector. The four agencies will jointly facilitate research and development of new AI technologies and adoption of AI-enabled products, services and processes. The effort will encompass three key initiatives: developing AI products, matching users and solution providers and strengthening AI capabilities.

The increased use of AI and data analytics by financial institutions, including Singapore’s three-largest banks, DBS Bank Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Limited (UOB, will help them achieve greater operational cost efficiencies and tap new revenue opportunities, and is positive for their profitability. In addition, the banks will also benefit from a greater number of financial technology (fintech) companies with AI capabilities with which they can work to strengthen AI capabilities in their digital transformation.

In the collaborative effort, the EDB will augment MAS’ Artificial Intelligence and Data Analytics programme by providing support for AI solution providers locally and globally to conduct both upstream research and product development activities and create new AI products and services for Singapore’s financial sector. The MAS will work with EDB and IMDA to facilitate link-ups between companies in the financial and technology sectors, and pair local companies seeking AI solutions with credible AI solutions providers. The MAS will work closely with IBF and IMDA to equip financial industry professionals with the necessary skill set to transition into new jobs arising from the use of AI in financial services.

As part of their digital transformation, the three Singapore banks already have adopted the use of AI and analytics across various parts of their organizations and businesses. According to the banks’ managements, leveraging AI technology, for instance for machine learning and data analytics, has allowed them to automate repetitive and time-consuming manual tasks and processes, strengthen their risk management capabilities in handling complex surveillance activities and improve the productivity of their sales force and marketing efforts.

In November 2017, UOB reported that it adopted robotic process automation to handle repetitive data entry and computation tasks for its trade finance operations and retail unsecured loan processing function, which were able to substantially cut down processing time compared with the time taken to complete the tasks manually. Also in November 2017, OCBC unveiled its plans to work with fintech company ThetaRay to implement an algorithm-based solution to detect suspicious transactions in its anti-money laundering monitoring. According to the bank, the accuracy of identifying suspicious transactions increased by more than four times using the new technology.

OCBC also set up an AI-powered chatbot application in April 2017 that is able to address customer questions and compute debt-servicing requirements. The application managed to convert customer enquiries into new loan approvals totaling more than SGD100 million in 2017.
DBS reported that its sales productivity improved after relationship managers were provided with customer analytics on a mobile platform, raising the income per head by 57% over three years.

We expect Singapore’s banks to remain committed to their digital growth strategies to keep pace with customer expectations for more digital services and solutions, and remain competitive given the increasing number of fintech companies in the ecosystem. At the same time, we expect that banks will actively engage fintech companies in collaborative ventures to enhance their digital capabilities.

Fintech Athena Home Loans Direct Model Funded

From The Adviser.

A new fintech Athena Home Loans founded by two former NAB executives has received $15 million from major investors to facilitate its entry into the Australian mortgage market. This was reported in the AFR on Monday.

Cloud-based digital mortgage platform Athena Home Loans has closed a Series A raise of $15 million with investment backing from Macquarie Bank, Square Peg Capital, Apex Capital and Rice Warner.

Athena, founded by former NAB executives Nathan Walsh and Michael Starkey, pulled in a $3 million seed round in June 2017 and has now set its sights on disrupting the $1.7 trillion Australian mortgage market.

Speaking to The Adviser, co-founder and CEO Nathan Walsh noted that Athena plans to bypass the banks, offering super fund-backed mortgages directly to borrowers through its cloud-based digital portal.

“We know that the big banks are very constrained by customer pain points that are caused by ageing technology in the manual, paper-based processes, and we know there’s a real opportunity to improve on that,” Mr Walsh said.

Chief operating officer Michael Starkey claimed that Athena’s super fund-backed investment model would also allow it to offer lower interest rates than its competitors.

“By investing in home loans directly with Athena, super funds can cut the spread between what mortgage borrowers pay and investors receive,” Mr Starkey said.

“In countries such as the Netherlands, where pension systems are similarly advanced, the impact of this model is already evident.”

Mr Walsh added: “The potential savings for a typical Australian family switching from the big four banks to Athena could be as much as $100,000 over the life of the average loan.”

Mr Walsh also noted that Athena aims to settle $100 million in home loans this year, which the CEO said equated to approximately 200 home loans.

The Athena chief went on to say that the online lender plans to ramp up its offerings once it is established in the marketplace.

“We see a big opportunity [for brokers] here,” Mr Walsh continued.

“Next year, [it’s] game on; we really see a big opportunity. It’s a big market and we’re very keen about giving all Australians access to a better deal on their home loan.”

No immediate plans for the broker channel

Mr Walsh revealed to The Adviser that while Athena has no immediate plans to originate home loans through the broker channel, it could be an option in the future.

“[We’re] a direct model, so consumers are going direct to [Athena] and opening accounts directly, but we do know that, clearly, mortgage brokers are an important part of the market and we’ll consider that in our roadmaps for the long term,” the CEO said.

“[We] are considering those options, so I think those are probably things for future discussions.

“At this stage, we’re really focusing on our launch, which is targeting our direct channel.”

Compliance with responsible lending obligations

Mr Walsh also insisted that Athena would ensure it’s complaint with responsible lending obligations, saying that a “huge part” of the build phase has been “the ongoing process of design, legal and compliance review, to really make sure that we’re stepping through each stage of that journey.”

The CEO said: “[We want to] make sure we’re providing those really important protections, but at the same time, managing the complexities so it is a process that borrowers feel comfortable using digital channels. And that’s a really big part of the design thinking that’s gone into building that.”

Square Peg co-founder joins Athena board

As part of Square Peg Capital’s investment, co-founder Paul Bassat is set to join the Athena board.

“We are thrilled to be joining Athena’s journey,” Mr Bassat said.

“This is a great example of the type of team we love to back — smart, driven and focused on solving an important problem.

“The win-win model that Athena offers to investors and borrowers has huge potential to disrupt the way home loans are originated, serviced and funded in Australia.”

Aussie fintech startup wins Barclays’ global “Open Innovation Challenge 2018”

Aussie trade financing deep technology startup, Trade Ledger, has finished ahead of nine other VC-backed companies from across the world to be named the winner of the Barclays UK Ventures “Open Innovation Challenge 2018” in London this week.

The ten finalists were hand-picked by Barclays due to their potential to offer game-changing business solutions across a variety of industries, however Trade Ledger came out on top because of the way it completely transforms processes in business lending, through its world-first technology platform.

“Within Barclays UK Ventures, we’re looking for companies we can partner with to develop and deliver transformational products and services,” said Ben Davey, CEO of Barclays UK Ventures.

“We chose Trade Ledger as they have re-imagined the lending process by improving the processes through automation and opening up lending opportunities to a larger client base, which fully aligns to our Shared Growth ambition.”

The competition involved a face-to-face pitch by each of the ten finalists to Barclays’ technology leadership team. Other finalists hailed from high-tech industries such as AI security, recruitment CRM and marketing automation, process mining software, application performance management, IoT, chatbots, and robotic process automation platform creation.

The event served as a means for Barclays to gain access to some of the most advanced technologies being developed from across the globe.

“These events are a great way for us to uncover solutions that will materially improve our business and the solutions we offer to customers and clients,” said Sean Duffy, Managing Director of Technology Media and Telecoms in Barclays Corporate Banking Division.

“This is the first time we’ve hosted this event in the UK, which is a testament to the growing strength and depth of VC-backed companies in our home market.”

Gaining international exposure through competitions such as this one is an important aspect of Trade Ledger’s “born global” strategy, designed to tackle the £1.2 trillion under-supply of business credit globally.

“We are delighted that Barclays has chosen the Trade Ledger business lending platform as the winner of this global challenge,” Martin McCann, CEO and founder of Trade Ledger.

“It was an incredible opportunity to be able to present our tech and strategy for helping banks address the massive under-supply of business credit, to such a large and diverse group of the bank’s technology leaders.

“We believe the platform will help Barclays accelerate their transformation into data-driven lending, and that our selection proves the unique value of the Trade Ledger platform to support the bank’s innovation and growth ambitions.”

Further discussions on a partnership with Barclays are ongoing, and will help Trade Ledger prove product marlet fit within tier 1 banks globally.

Commonwealth Bank confirms loss of details of almost 20 million accounts

More bad news relating to CBA. They have confirmed the loss of data relating to almost 20 million accounts. The event happened in 2016, and they decided not to inform customers, as the data “most likely” had been destroyed.

From The ABC.

The Commonwealth Bank has confirmed it lost the historical financial statements of almost 20 million accounts, but insists its customers’ information has not been compromised.

The statements, containing customers’ names, addresses, account numbers and transaction details from 2000 to 2016, were stored on two magnetic tapes which were lost by sub-contractor Fuji-Xerox last year.

When the bank became aware of the incident, it said, it ordered an independent “forensic” investigation to figure out what had happened and informed the Office of the Australian Information Commissioner (OAIC).

The inquiry, conducted by KPMG, determined the tapes had most likely been disposed of.

Commonwealth Bank’s Angus Sullivan described the incident as “unacceptable” but said the tapes did not contain any passwords or PINs that could compromise customers’ accounts.

CBA said:

Following recent media reports detailing an incident in May 2016, we want to reassure you there is no evidence of your information being compromised and you do not need to take any action.

Here is what you need to know:

  • There is no evidence that any customer information was compromised.
  • In May 2016 we were unable to confirm the scheduled destruction of two magnetic tapes used by a supplier to print bank statements. These tapes contained information including customer names, addresses, account numbers and transaction details.
  • They did not contain passwords or PINs which could enable fraud.
  • We deployed enhanced reporting and ongoing monitoring of customer accounts to ensure customers were protected. These protections are still in place today.
  • This was not cyber-related. CommBank’s technology platforms, systems, services, apps and websites were not compromised.
  • CommBank offers you a 100% security guarantee against fraud for all your accounts, where you are not at fault. We cover any loss should someone make an unauthorised transaction.

 

Fees on paper bills: Assistant Minister Sukkar misses the point

From Keep Me Posted.

Assistant Treasurer Michael Sukkar has encouraged consumers to ‘Go paperless to save money’ launching a national education campaign to help consumers stop paying unnecessary fees to receive paper bills.

The Hon. Michael Sukkar first encouraged consumers to opt to receive digital bills before urging those who need paper bills to find out if they are eligible for fee exemptions. The implementation of an education campaign was first announced by former Minister for Consumer Affairs Michael McCormack following a Consumer Affairs Forum which recognised vulnerable consumers needed to be protected against unfair paper fees.

“This approach from the Minister is not only disappointing but shows a clear lack of understanding on the issues Australian consumers are facing in regards to paper billing fees,” commented Kellie Northwood, Executive Director, Keep Me Posted. “The suggestion from the Minister is to ‘Go paperless to save money’. Yet who will be saving money? Certainly not the Australian consumers who will need to buy a computer, a printer, paper and internet connection to print their bills and statements at home. The only people the Minister is saving money for in this case are the banks and super profit companies.”

Keep Me Posted has advocated for a ban on paper fees on important communications for two years.

The campaign, a coalition of representatives from the print, paper and mail industry, charity, trade unions and community groups, argues that vulnerable Australians are impacted the most by paper fees, those on the wrong side of the digital divide. The latest data from the ABS shows that since 2014-2015 the digital divide hasn’t narrowed and currently, close to 1.3 million Australian households are still not connected to the internet. Data shows that disadvantaged Australians are more likely to be digitally excluded: elderly, low-income households, people living with a disability, and people living in remote communities.

“The Royal Commission into Banking and Financial Services is demonstrating daily the need for strong consumer protections for Australians in this regard,” furthered Northwood. “We believe the
role of the Minister for Consumer Affairs is to protect consumers against unfair fees, not assist corporates in their marketing campaigns for their digital tools.”

Paper fees have been implemented in the banking sector by some of the major providers such as Commonwealth Bank, Bankwest or Macquarie Bank. Ranging between $1.25 and $2.50 for a paper statement, fees can ramp up to $7.50 for a paper copy of a statement requested at a bank’s branch as seen recently with Westpac. Other providers such as NAB have automatically switched their customers to digital communications without requesting proper consent.

Over the last two years, Keep Me Posted has distributed thousands of template letters to help consumers request an exemption of paper fees as many are unaware of their rights. More concerning however, is many report struggling to argue their case to their service providers. The newly launched education campaign was expected to assist them, however, Keep Me Posted argues the campaign falls well short and does not support the spirit of the Consumer Affairs Forum agreement.

“Treasury’s consultation paper into paper billing fees recognised that ‘consumers from disadvantaged groups who cannot transition to digital bills are being disproportionately impacted by fees for paper billing’,” said Northwood. “Twenty-eight (28) out of forty-three (43) organisations that publically contributed to Treasury’s consultation supported a total ban on paper fees. This is a strong response that consumers shouldn’t have to pay the price of corporates trying to cut their costs by any means. We are looking forward to seeing Treasury’s recommendations on the issue and hope to see Australia joining the list of many other countries that have already legislated in this regard and provided consumer protections.”

Globally, Austria, Belgium, France, Finland, Germany, Ireland, Netherlands, Spain, and the US State of Pennsylvania have already legislated that print and postage are a cost of doing business that must not be passed onto customers. Keep Me Posted hopes Australia is next.

Online SME lending growing at 79%, could hit $2B by 2020

The online small business lending market in Australia is growing at a faster rate than the US market did at a similar stage of development and could reach over $2 billion in annual originations by 2020, Noah Breslow, OnDeck Global CEO told the AltFi Australasian Summit in Sydney.

“Having grown at a compound annual growth rate of 151% since 2013, we expect to see continued strong growth in the coming years” Noah Breslow said.

Mr. Breslow said that despite over 6,000 banks offering small business lending options in the US, online lending to small businesses has flourished.

“When you compare that to Australia with a more concentrated banking system, there is even more opportunity for online lenders to provide innovative lending solutions to SMEs” he said.

Research shows Australia has overtaken Japan to become the second largest alternative finance player in the Asia Pacific region, second only to China.

“In addition, increased access to data, supportive government initiatives and favourable small business sentiment are all likely to lead to further growth for the industry.

Furthermore, the Government’s ‘Review into Open Banking’ and the introduction of mandatory comprehensive credit reporting (CCR) will likely promote greater competition in the Australian market,” Mr. Breslow said.

Awareness still an issue

Yet despite the Australian market’s growth potential, awareness of alternative finance sources still remains an issue, according to OnDeck’s latest Small Business Owners’ (SBO) Survey, commissioned by research firm YouGov Galaxy.

“Our research shows that despite increasing competition in the Australian alternative finance space, only 30% of small business owners think the number of lending options has increased in the last five years, compared to 70% in the US,” Mr. Breslow said.

The majority of small businesses have been heavily reliant on traditional banks (63%), followed by specialist financiers (29%), credit unions (27%) and family/friends (27%) to source finance.

The research also found signs of unmet demand, with 55% of business owners having been rejected for financing they requested. Difficulties with accessing finance affected the delivery of products and services (37%) and caused layoffs or issues with hiring new employees (32%).

When it comes to future borrowing plans, 33% of Australian SBOs planning to seek additional finance for their business indicated that they would consider an online lender.

“There is a real opportunity for the online SME lending industry to increase awareness of the innovative products and services that are now available, as an alternative to the traditional loans offered by banks.”

OnDeck in Australia

“After pioneering online small business lending more than ten years ago in the US, it is encouraging to see many markets globally adopting similar alternative financing solutions.

For OnDeck, Australia is an exciting market to be operating in and we’re thrilled with the results so far.”

OnDeck entered the Australian market in 2015 via a partnership with MYOB, a leading accountancy software provider, to help close the funding gap between small business financing needs and the availability of capital from traditional sources. The business is also working with brokers and aggregators, including Connective Asset Finance and College Capital.

Globally, OnDeck has delivered more than USD $8 billion in loans to 80,000 small businesses in 700 different industries

Shadow profiles – Facebook knows about you, even if you’re not on Facebook

From The Conversation.

Facebook’s founder and chief executive Mark Zuckerberg faced two days of grilling before US politicians this week, following concerns over how his company deals with people’s data.

But the data Facebook has on people who are not signed up to the social media giant also came under scrutiny.

During Zuckerberg’s congressional testimony he claimed to be ignorant of what are known as “shadow profiles”.

Zuckerberg: I’m not — I’m not familiar with that.

That’s alarming, given that we have been discussing this element of Facebook’s non-user data collection for the past five years, ever since the practice was brought to light by researchers at Packet Storm Security.

Maybe it was just the phrase “shadow profiles” with which Zuckerberg was unfamiliar. It wasn’t clear, but others were not impressed by his answer.

Facebook’s proactive data-collection processes have been under scrutiny in previous years, especially as researchers and journalists have delved into the workings of Facebook’s “Download Your Information” and “People You May Know” tools to report on shadow profiles.

Shadow profiles

To explain shadow profiles simply, let’s imagine a simple social group of three people – Ashley, Blair and Carmen – who already know one another, and have each others’ email address and phone numbers in their phones.

If Ashley joins Facebook and uploads her phone contacts to Facebook’s servers, then Facebook can proactively suggest friends whom she might know, based on the information she uploaded.

For now, let’s imagine that Ashley is the first of her friends to join Facebook. The information she uploaded is used to create shadow profiles for both Blair and Carmen — so that if Blair or Carmen joins, they will be recommended Ashley as a friend.

Next, Blair joins Facebook, uploading his phone’s contacts too. Thanks to the shadow profile, he has a ready-made connection to Ashley in Facebook’s “People You May Know” feature.

At the same time, Facebook has learned more about Carmen’s social circle — in spite of the fact that Carmen has never used Facebook, and therefore has never agreed to its policies for data collection.

Despite the scary-sounding name, I don’t think there is necessarily any malice or ill will in Facebook’s creation and use of shadow profiles.

It seems like a earnestly designed feature in service of Facebooks’s goal of connecting people. It’s a goal that clearly also aligns with Facebook’s financial incentives for growth and garnering advertising attention.

But the practice brings to light some thorny issues around consent, data collection, and personally identifiable information.

What data?

Some of the questions Zuckerberg faced this week highlighted issues relating to the data that Facebook collects from users, and the consent and permissions that users give (or are unaware they give).

Facebook is often quite deliberate in its characterisations of “your data”, rejecting the notion that it “owns” user data.

That said, there are a lot of data on Facebook, and what exactly is “yours” or just simply “data related to you” isn’t always clear. “Your data” notionally includes your posts, photos, videos, comments, content, and so on. It’s anything that could be considered as copyright-able work or intellectual property (IP).

What’s less clear is the state of your rights relating to data that is “about you”, rather than supplied by you. This is data that is created by your presence or your social proximity to Facebook.

Examples of data “about you” might include your browsing history and data gleaned from cookies, tracking pixels, and the like button widget, as well as social graph data supplied whenever Facebook users supply the platform with access to their phone or email contact lists.

Like most internet platforms, Facebook rejects any claim to ownership of the IP that users post. To avoid falling foul of copyright issues in the provision of its services, Facebook demands (as part of its user agreements and Statement of Rights and Responsibilites) a:

…non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (IP License). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it.

Data scares

If you’re on Facebook then you’ve probably seen a post that keeps making the rounds every few years, saying:

In response to the new Facebook guidelines I hereby declare that my copyright is attached to all of my personal details…

Part of the reason we keep seeing data scares like this is that Facebook’s lacklustre messaging around user rights and data policies have contributed to confusion, uncertainty and doubt among its users.

It was a point that Republican Senator John Kennedy raised with Zuckerberg this week (see video).

Senator John Kennedy’s exclamation is a strong, but fair assessment of the failings of Facebook’s policy messaging.

After the grilling

Zuckerberg and Facebook should learn from this congressional grilling that they have struggled and occasionally failed in their responsibilities to users.

It’s important that Facebook now makes efforts to communicate more strongly with users about their rights and responsibilities on the platform, as well as the responsibilities that Facebook owes them.

This should go beyond a mere awareness-style PR campaign. It should seek to truly inform and educate Facebook’s users, and people who are not on Facebook, about their data, their rights, and how they can meaningfully safeguard their personal data and privacy.

Given the magnitude of Facebook as an internet platform, and its importance to users across the world, the spectre of regulation will continue to raise its head.

Ideally, the company should look to broaden its governance horizons, by seeking to truly engage in consultation and reform with Facebook’s stakeholders – its users — as well as the civil society groups and regulatory bodies that seek to empower users in these spaces.

Author : Andrew Quodling PhD candidate researching governance of social media platforms, Queensland University of Technology

How you helped create the crisis in private data

From The Conversation.

As Facebook’s Mark Zuckerberg testifiesbefore Congress, he’s likely wondering how his company got to the point where he must submit to public questioning. It’s worth pondering how we, the Facebook-using public, got here too.

The scandal in which Cambridge Analytica harvested data from millions of Facebook users to craft and target advertising for Donald Trump’s presidential campaign has provoked broad outrage. More helpfully, it has exposed the powerful yet perilous role of data in U.S. society.

Repugnant as its methods were, Cambridge Analytica did not create this crisis on its own. As I argue in my forthcoming book, “The Known Citizen: A History of Privacy in Modern America,” big corporations (in this case, Facebook) and political interests (in this case, right-wing parties and campaigns) but also ordinary Americans (social media users, and thus likely you and me) all had a hand in it.

The allure of aggregate data

Businesses and governments have led the way. As long ago as the 1840s, credit-lending firms understood the profits to be made from customers’ financial reputations. These precursors of Equifax, Experian and TransUnion eventually became enormous clearinghouses of personal data.

For its part, the federal government, from the earliest census in 1790 to the creation of New Deal social welfare programs, has long relied on aggregate as well as individual data to distribute resources and administer benefits. For example, a person’s individual Social Security payments depend in part on changes in the overall cost of living across the country.

Police forces and national security analysts, too, gathered fingerprints and other data in the name of social control. Today, they employ some of the same methods as commercial data miners to profile criminals or terrorists, crafting ever-tighter nets of detection. State-of-the-art public safety tools include access to social media accounts, online photographs, geolocation information and cell tower data.

Probing the personal

The search for better data in the 20th century often meant delving into individuals’ most personal, intimate lives. To that end, marketers, strategists and behavioral researchers conducted increasingly sophisticated surveys, polls and focus groups. They identified effective ways to reach specific customers and voters – and often, to influence their behaviors.

In the middle of the last century, for example, motivational researchers sought psychological knowledge about consumers in the hopes of subconsciously influencing them through subliminal advertising. Those probes into consumers’ personalities and desires foreshadowed Cambridge Analytica’s pitch to commercial and political clients – using data, as its website proudly proclaims, “to change audience behavior.”

Citizens were not just unwitting victims of these schemes. People have regularly, and willingly, revealed details about themselves in the name of security, convenience, health, social connection and self-knowledge. Despite rising public concerns about privacy and data insecurity, large numbers of Americans still find benefits in releasing their data to government and commercial enterprises, whether through E-ZPasses, Fitbits or Instagram posts.

Revealing ourselves

It is perhaps particularly appropriate that the Facebook scandal bloomed from a personality test app, “This is your digital life.” For decades, human relations departments and popular magazines have urged Americans to yield private details, and harness the power of aggregate data, to better understand themselves. But in most situations, people weren’t consciously trading privacy for that knowledge.

In the linked and data-hungry internet age, however, those volunteered pieces of information take on lives of their own. Individual responses from 270,000 people on this particular test became a gateway to more data, including that belonging to another 87 million of their friends.

Today, data mining corporations, political operatives and others seek data everywhere, hoping to turn that information to their own advantage. As Cambridge Analytica’s actions revealed, those groups will use data for startling purposes – such as targeting very specific groups of voters with highly customized messages – even if it means violating the policies and professed intentions of one of the most powerful corporations on the planet.

The benefits of aggregate data help explain why it has been so difficult to enact rigorous privacy laws in the U.S. As government and corporate data-gathering efforts swelled over the last century, citizens largely accepted, without much discussion or protest, that their society would be fueled by the collection of personal information. In this sense, we have all – regular individuals, government agencies and corporations like Facebook – collaborated to create the present crisis around private data.

But as Zuckerberg’s summons to Washington suggests, people are beginning to grasp that Facebook’s enormous profits exploit the value of their information and come at the price of their privacy. By making the risks of this arrangement clear, Cambridge Analytica may have done some good after all.

Author: Sarah Igo, Associate Professor of History; Associate Professor of Political Science; Associate Professor of Sociology; Associate Professor of Law, Vanderbilt University

That contract your computer made could get you in a legal bind

From The Conversation.

There is a lot of hype in the business world surrounding the emerging blockchain technology and so called “smart contracts” – computer programs which execute the terms of an agreement. But like all computer programs, smart contracts can malfunction and even develop a mind of their own.

Smart contracts are popular because they promise cheaper, more secure and more efficient commercial transactions, so much so that even the federal government is investing millions of dollars into this technology.

Transactions in smart contracts are enforced by a network of people who use the blockchain– a decentralised, digital global ledger recording transactions. The blockchain effectively replaces traditional intermediaries such as banks, credit companies and lawyers because smart contracts can perform the usual “middleman” functions themselves.

Smart contracts can not only perform the terms of a contract autonomously, but can also be programmed to enter the human parties that created them into subsequent, separate follow-on contracts.

Whether these follow-on contracts are legally binding is not so straightforward. In fact, it highlights the complex intersection of new technology and old law.

What are smart contracts used for?

US law professor Harry Surden says financial firms often program computers to contract with other parties in security trades. Another example of smart contracts is the pricing and purchasing of certain types of advertisements on Google, which are negotiated autonomously between computers without any human intervention.

Companies are now using smart contracts to instantaneously buy and sell real estate, compensate airline passengers with travel insurance, collect debts, make rental payments, and more. But if a smart contract goes rogue, there can be significant consequences.

For example, in June 2017 Canadian digital currency exchange QuadrigaCX lost US$14 million worth of the cryptocurrency Ether when its underlying smart contract platform reacted to a software upgrade. The contract merely locked itself and subsequently lost the money.

Smart contracts on the blockchain are designed to be immutable, meaning the transactions they carry out cannot be amended or interrupted. So if things go wrong, there is little recourse.

When smart contracts make new agreements

So what would happen if a smart contract, which has been coded to make decisions, decided to enter parties into a another contract? In some cases, the human has final say to approve or reject the follow-on contract.

However, if the coding of a smart contract allowed sufficient intuition, it could bypass a human’s consent. Contracts written with code are capable of learning and may occasionally behave in a manner inconsistent with their instructions.

This possibility, and the questionable status of follow-on contracts, was raised in a white paper issued by renowned international law firm Norton Rose Fulbright in November 2016. The paper highlighted a number of possible legal views regarding follow-on contracts.

One view is that a programmed smart contract might be seen as the legal “agent” of its human creator and therefore has the power to make binding agreements on their behalf. This view has been rejected by some English courts on the basis that computer programs lack the consciousness of a human mind.

Some American courts have gone the opposite way, deeming a computer program acting autonomously in entering and violating contracts as acting with the dispatcher’s authority. In Australia, section 15C of the Electronic Transactions Act 1999(Cth) makes clear that a contract formed entirely through the interaction of automated message systems is:

…not invalid, void or unenforceable on the sole ground that no natural person reviewed or intervened in each of the individual actions carried out by the automated message systems or the resulting contract.

The law can imply an agency relationship in certain circumstances. Legally, then, a follow-on contract might be regarded as pre-authorised by the human creator of the original smart contract.

An alternative view is that a follow-on contract is not enforceable because the parties did not necessarily intend to create them. Legal intent is one of the core elements of contract validity.

However, in law, this is determined objectively: would a reasonable person in the position of the parties think a follow-on smart contract was acting with the legal authority of its human creator?

Some academics suggest that the answer may be yes, as the parties made the initial decision to enter into the smart contract and therefore indirectly assented to be bound by the system in which it operates.

As one commentator has argued, if a human intentionally coded a smart contract to make its own decisions, they must have intended to accept those decisions as their own.

The law generally presumes that commercial contracts are intended to be legally binding, even where computers play a part in the bargain.

Should we pull the plug?

So should we be hesitant to use smart contracts? Not necessarily: they offer enormous opportunity for businesses and consumers.

Blockchain technology is maturing rapidly and so it is only a matter of time before smart contracts feature more prominently in commerce.

Rather than being fearful, prospective users should be aware of and address the legal risks, including that autonomous smart contracts may be programmed with the capacity to spontaneously enter binding follow-on contracts.

Author: Mark Gianca, Lecturer in Law, University of Adelaide

It’s time for third-party data brokers to emerge from the shadows

From The Conversation.

Facebook announced last week it would discontinue the partner programs that allow advertisers to use third-party data from companies such as Acxiom, Experian and Quantium to target users.

Graham Mudd, Facebook’s product marketing director, said in a statement:

We want to let advertisers know that we will be shutting down Partner Categories. This product enables third party data providers to offer their targeting directly on Facebook. While this is common industry practice, we believe this step, winding down over the next six months, will help improve people’s privacy on Facebook.

Few people seemed to notice, and that’s hardly surprising. These data brokers operate largely in the background.

The invisible industry worth billions

In 2014, one researcher described the entire industry as “largely invisible”. That’s no mean feat, given how much money is being made. Personal data has been dubbed the “new oil”, and data brokers are very efficient miners. In the 2018 fiscal year, Acxiom expects annual revenue of approximately US$945 million.

The data broker business model involves accumulating information about internet users (and non-users) and then selling it. As such, data brokers have highly detailed profiles on billions of individuals, comprising age, race, sex, weight, height, marital status, education level, politics, shopping habits, health issues, holiday plans, and more.

These profiles come not just from data you’ve shared, but from data shared by others, and from data that’s been inferred. In its 2014 report into the industry, the US Federal Trade Commission (FTC) showed how a single data broker had 3,000 “data segments” for nearly every US consumer.

Based on the interests inferred from this data, consumers are then placed in categories such as “dog owner” or “winter activity enthusiast”. However, some categories are potentially sensitive, including “expectant parent”, “diabetes interest” and “cholesterol focus”, or involve ethnicity, income and age. The FTC’s Jon Leibowitz described data brokers as the “unseen cyberazzi who collect information on all of us”.

In Australia, Facebook launched the Partner Categories program in 2015. Its aim was to “reach people based on what they do and buy offline”. This includes demographic and behavioural data, such as purchase history and home ownership status, which might come from public records, loyalty card programs or surveys. In other words, Partner Categories enables advertisers to use data brokers to reach specific audiences. This is particularly useful for companies that don’t have their own customer databases.

A growing concern

Third party access to personal data is causing increasing concern. This week, Grindr was shown to be revealing its users’ HIV status to third parties. Such news is unsettling, as if there are corporate eavesdroppers on even our most intimate online engagements.

The recent Cambridge Analytica furore stemmed from third parties. Indeed, apps created by third parties have proved particularly problematic for Facebook. From 2007 to 2014, Facebook encouraged external developers to create apps for users to add content, play games, share photos, and so on.

Facebook then gave the app developers wide-ranging access to user data, and to users’ friends’ data. The data shared might include details of schooling, favourite books and movies, or political and religious affiliations.

As one group of privacy researchers noted in 2011, this process, “which nearly invisibly shares not just a user’s, but a user’s friends’ information with third parties, clearly violates standard norms of information flow”.

With the Partner Categories program, the buying, selling and aggregation of user data may be largely hidden, but is it unethical? The fact that Facebook has moved to stop the arrangement suggests that it might be.

More transparency and more respect for users

To date, there has been insufficient transparency, insufficient fairness and insufficient respect for user consent. This applies to Facebook, but also to app developers, and to Acxiom, Experian, Quantium and other data brokers.

Users might have clicked “agree” to terms and conditions that contained a clause ostensibly authorising such sharing of data. However, it’s hard to construe this type of consent as morally justifying.

In Australia, new laws are needed. Data flows in complex and unpredictable ways online, and legislation ought to provide, under threat of significant penalties, that companies (and others) must abide by reasonable principles of fairness and transparency when they deal with personal information. Further, such legislation can help specify what sort of consent is required, and in which contexts. Currently, the Privacy Act doesn’t go far enough, and is too rarely invoked.

In its 2014 report, the US Federal Trade Commission called for laws that enabled consumers to learn about the existence and activities of data brokers. That should be a starting point for Australia too: consumers ought to have reasonable access to information held by these entities.

Time to regulate

Having resisted regulation since 2004, Mark Zuckerberg has finally conceded that Facebook should be regulated – and advocated for laws mandating transparency for online advertising.

Historically, Facebook has made a point of dedicating itself to openness, but Facebook itself has often operated with a distinct lack of openness and transparency. Data brokers have been even worse.

Facebook’s motto used to be “Move fast and break things”. Now Facebook, data brokers and other third parties need to work with lawmakers to move fast and fix things.

Author: Sacha Molitorisz, Postdoctoral Research Fellow, Centre for Media Transition, Faculty of Law, University of Technology Sydney