Skip to main content

Glass-box transparency

Shedding light through the old black-box in banking

Historically, banks’ operations and processes have been hidden and closed off to the public. Borrowers generally have little to no control over where their money is going and have no idea about where it has come from.

The history of most business models is based on a belief that businesses need to create some form of information asymmetry to be competitive. In the old days, when I have something to sell to you, I want to protect as much as possible and for as long as possible, my superior knowledge of the condition of the item, while engaging in as much positive spin as I can muster.

But over time, as banks and other businesses are exposed to more and more reputational risk through their core activities, a counter pressure emerges that often favors a more transparent stance toward information.

On the one hand, banks are coming under increasing levels of regulation. There is an increased need for disclosure, monitoring and testing. On the other hand, customers are demanding more transparency from banks. Given these considerations, banks are required to be more transparent and accountable to maintain public trust and meet regulatory and compliance standards.

We like to describe this with a metaphor, businesses (and banks in particular) need to move from black box business models to glass box business models.

Some of the pioneers who bucked conventional orthodoxies to initiate a greater openness are

Priceline, Travelocity, Orbitz, and Expedia who all tried in various ways to democratise travel planning, making it more transparent, user centered and self-service oriented; Hotel Tonight, Trivago and others learned to do this with hotel rooms, in cahoots with property owners that wanted to quietly address the problem of perishable inventory.

Mortgage lenders historically engaged in a variety of practices that appeared formula based, but in practice were contaminated by bias. In some parts of the US, it is becoming common to pay reparations to minorities where they were subjected to bias and discrimination. Having seen pioneer businesses transform markets through transparent business models, it is inevitable that consumers want more and businesses are looking at transparency as a lever to maintain their social license to operate.

In recent years, the advent of blockchain-based smart contracts is an exciting way to engineer trust into decentralised systems. As is often the case when a technology is new, there are many charlatans and bad actors leading early trends, but long-term, these technologies will have real staying power.

If we consider transparency is a virtue, then the important question becomes: what specific conditions make it especially valuable? Unpacking this question enables us to more effectively choose when and where to challenge industry orthodoxies. We have identified three key conditions where glass box transparency trumps black box opaqueness.

  • Situations that are both complex and rapidly changing. Think of determining issues like network security, high frequency trading systems, or managing an air traffic control system. In such systems, the stakes are high, and time is short to make critical decisions.

  • Situations where there is an imperative to deal with perishable inventory. Think hotel rooms, airline or train seats, sports events, concerts, and some food systems. In these cases, getting even fractional revenues above marginal costs of serving one more customer nets profit. So, there will always be pressures in such cases to offer very low prices, or even to permit the buyer to bid whatever price they deem fair.

  • Situations where trust is paramount. Think pharmaceuticals, gems or artworks for example. These fields often now lead the way in providing documentary evidence of provenance, connected to robust audit and/or supply chain tracking and tracing.

Banking certainly fits into the category of a business where trust is paramount. Traditionally, providing transparency to the outside world would present great challenges to a bank. An enormous amount of resource in IT, people and time would need to be invested to create bespoke solutions for the collection, preparation and disclosure of data.

Modern software engineering, supported by cloud, helps address these challenges by providing composable systems, low code/no code solutions and embedding more observability into the system.

These capabilities open the mysteries inside a traditional black-box approach. The operating model inside the black-box can be difficult to explain to stakeholders. A glass-box approach adopts clear and transparent reporting methodologies and frameworks that support programme leaders to easily explain their progress to internal and external stakeholders.

The beauty of modern cloud-native banking systems is their limitless potential to tap into data sets previously not available to banks and integrate this data in their decision-making process, financial products, and external reporting. Think of tracking the banks' lended dollars' final destination via satellite solutions like Satelligence, tapping into weather data via geospatial analytics to understand climate risk, or helping consumers understand the footprint of their own spending via solutions like Doconomy to change behaviors and redirect dollars to less impactful products and services.

Mambu's cloud banking platform enables this value creation by the very nature of its composability approach where it can plug in virtually any tech sustainability solution to its core engine and create bespoke sustainable finance solutions or build glass-box banks. Platcorp, an impact finance investment management holding company that primarily invests in non-banking lending subsidiaries is a Mambu customer who adopted a glass-box environment. Platcorp utilises Mambu as a data repository for all client and product data. This allows the customer to analyse their portfolio against key criteria to understand different demographic dynamics and performance. Moreover, Platcorp stores data associated with loan usage to better understand what their loan products are being used for. For example, they track how different loan usage categories change over time such as agricultural, education, medical and manufacturing purposes. This allows the customer to deepen data analysis of their portfolio and better understand their clients and the performance of products, in addition to improving ESG reporting.

Banks will increasingly need to become more transparent, and they will need to think about how to build in observability into their operating model to enable glass-box transparency so that every transaction, interaction or decision can be monitored, analysed or disclosed as needed. 

A bank should be engineered to enable it to provide timely information to evidence its social and regulatory obligations. This will require banks to ensure fair customer outcomes throughout the customer lifecycle are defined, aligned with strategy and understood across the bank with clear accountabilities in place. They will also need to ensure they have effective people, processes, systems and governance to enable a transparent operating model around supporting this, coupled with a highly configurable and secure underlying technology platform, with monitoring capability that can create and maintain a complete record of everything that happen within and surrounding the bank.