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Over the past three years, the World Economic Forum (WEF) estimates that some US$ 1.4 billion have been invested into blockchain technology with companies having filled over 2,500 patents during that same period of time.
Over 90 corporations have joined blockchain consortia and 80% of #banks say they would initiate blockchain projects by 2017.
As blockchain has become a buzzword in the financial services industry, WEF has conducted a 12-month research to better understand the implication and potential of blockchain technology in the sector.
Blockchain technology has great potential to drive simplicity and efficiency through entirely new financial services infrastructure and processes.
For instance, it can reduce and even eliminate manual efforts required to perform reconciliation and resolve disputes. It can also enable real-time monitoring of financial activity between regulators and regulated entities, reduce counterparty risk, enable asset provenance and full transaction history, and disintermediate third parties that support transaction verification and validation thus accelerating settlement.
Distributed ledger technology should be viewed as one of the many technologies that will transform the foundation of next-generation financial services infrastructure. It should be seen as &8220;part of a toolbox&8221; that includes biometrics, cloud computing, cognitive computing, among other emerging technologies.
Blockchain technology can be used in many different areas with each use case leveraging the technology in different ways.
For instance, in trade finance, blockchain enables real-time multi-party tracking and management of letters of credit, as well as faster automated settlement. For global payments, it allows for near real-time point-to-point transfer of funds between financial institutions, removing friction and accelerating settlement. For automated compliance, blockchain technology provides faster and more accurate reporting.
Blockchain technology can be used for digital identity, &8220;a critical enabler to broaden applications to new verticals,&8221; as well as digital fiat currencies.
A fully digital system for storing and transferring identity attributes, when directly integrated into a distributed financial infrastructure, can provide faster and accurate anti-money laundering (AML) and know-your-client (KYC) processes, as well as seamless customer onboarding.
Distributed fiat currencies issued by central banks, when employed within a distributed financial infrastructure, can eliminate the need for an inefficient bridge between cash and a new financial infrastructure.
The most impactful blockchain applications will require collaboration between all key stakeholders in the financial services ecosystem, including incumbents, innovators and regulators. This will require balancing competing interests, significant time and investment to replace existing financial infrastructure, as well as changing existing regulations, standards of practices and creating new legal and liability frameworks.
New financial services infrastructure built on blockchain technology will redraw processes and &8220;call into question orthodoxies that are foundational to today’s business models.&8221; This includes question the need for individual books of record through immutable and distributed record-keeping, challenge existing competitive advantage models that leverage information asymmetry, allowing for on-demand and immediate monitoring and reducing the need to trust and rely on counterparties.
That said, there are still a number of questions that need to be answered in order to move forward. These include assessing blockchain’s feasibility, quantify benefits and analyzing implementation details.
&8220;Cost-benefit analyses need to be conducted to determine the financial viability of distributed ledger technology,&8221; the #report says. &8220;Roadmaps need to be developed to achieve market participant collaboration and establish standards; governance models, backed by societal-level discussions, need to be envisioned to support technology accountability; and regulatory, legal and jurisdictional-specific tax frameworks need to be established and well-understood.&8221;
It’s a funny thing, #productivity. Very easy to define – producing more with less &8211; but more difficult to measure. Productivity is easier to define for a given company (revenue per employee for example), somewhat easier to compare amongst like minded companies in the same industry, more difficult to use as a metric across industries, complex when applied to #services as opposed to manufacturing industries and utterly bewildering when taking into account qualitative factors.
Productivity occurs when firms “innovate”. I use quotation marks because there are so many different ways to segment and qualify innovation. At meta level, innovation is the application of better technologies to an economic process &8211; a #technology being a technique or collection of techniques invented by man.
The narrative unfolds as such: a) we invent new technologies, then b) we innovate by applying these new technologies, and as a result c) we become more productive.
Over long periods of time this cycle benefits societies as goods and services in a given industry become better and cheaper. As an example and as a result of productivity gains, there are now less individuals engaged in food production and the cost of food in our daily budgets has plummeted. In other words agriculture has become vastly more productive.
Contrary to what many may think, the #financial services industry has always been a heavy user of technology. To name but a few, advanced telecommunications applied to financial services have facilitated cross border transactions, advanced computing has helped the securitization industry, advanced data science has helped intricate trade and investment strategies. I would therefore state that financial services firms, on the aggregate, have always been innovators.
Have they become more productive though? In absolute, or relatively speaking?
Looking at revenue per employee and operating income (OI) per employee as crude productivity metrics for 2015, Bank of America delivers $ 392k in revenue and $ 104k in OI per employee vs Facebook which clocks $ 1.24m in revenue and $ 435k in OI per employee. On the face of it, Facebook is vastly more productive than Bank of America. The comparison gets more interesting when adding Goldman Sachs with $ 1m in revenue and $ 240k in OI per employee and Visa with $ 1.23m in revenue and $ 796k in OI per employees. Obviously some financial services firms are more productive than others and rival tech giants such as Facebook. These comparisons are unfair though as the business models are vastly different. Still, firms like Visa &8211; other likes MasterCard or the CME Group come to mind &8211; are more technology-intensive companies while any bank &8211; with the exception of Goldman &8211; are less technology-intensive.
From an empirical point of view, we know a majority of consumers and entreprises are dissatisfied with their financial institutions. Quality of service as well as user experience are poor, services are slow and inefficient, products and services are costly. Even if it is difficult to gauge the qualitative and quantitative impact Wikipedia has had on our productivity, it is undeniable there has been a positive impact. Even though it is difficult to gauge the qualitative impact of the financial services industry on financial wealth and health in the aggregate, it is undeniable the impact has been in certain instances negative.
From a macro-industry point of view, Thomas Philippon, a professor of finance with NYU Stern School, recently wrote that, as per his analysis and research, the unit cost of financial intermediation had remained constant at 2% from 1886 til 2015, see here. This means that any intermediated asset has cost users 2 cents for every dollar AND has remained constant for well over a century! This is actually the greatest indictment of the financial services industry one could every come up with. Arguably, during this period the costs of many products and services in other industries have dropped while quality increased. Not so for financial services.
To be clear, financial services firms have been innovators and they have become more productive as evidenced by the massive profits the industry has experienced. Shareholders and employees have benefited. (Even after the 2008 financial crisis, financial services profits have reached record highs. The banking industry alone hit a record of $ 1 trillion in profits worldwide in 2014.) The costs of financial products and services has not decreased for the end users. Further, as profits were more than adequate, the costs of delivering products and services did not decrease either.
Innovation and productivity did occur, only for the industry itself though.
When taking into account the massive scale of the financial services industry &8211; between 15% and 17% of total GDP depending the economic cycle and the exuberance of financial markets &8211; this has to result in major challenges for any economy. The primary function of financial services is to optimally allocate capital. In other words the industry needs to help us spend money, send money, receive money, invest money, save money, insure, in the best possible way. If the process whereby all these activities is essentially &8220;rigged&8221;, economic activity suffers. There are obviously high level considerations &8211; fiscal, monetary and political &8211; when analyzing the efficiency of financial services, especially from a macro point of view. I only focus on technology, innovation and the resulting business models that can emerge once &8220;real&8221; productivity takes hold, as opposed to &8220;rent-seeking&8221; productivity.
One can argue that Venture Capital is one of the enablers of sea-changing innovation with the systemic application of new technologies. Indeed, the first wave of #fintech, emanating from the Silicon Valley and focused on backing direct to consumer models bent on competing against financial services incumbents was based on the oft successful VC/Entrepreneur strategy applied to other industries. That this first wave was not as successful as it was originally thought does not mean &8220;end-user centric&8221; productivity will not finally permeate financial services. On the contrary, it was a necessary first wave that shook the industry into action.
Whether incumbent will successfully reinvent themselves, startups will win meaningful market share or partnerships between incumbents and startups is the way of the future is opened for debate. What is not open for debate, is the unavoidable imperative towards finally lowering the marginal cost of delivering financial products or services and eventually lowering the cost of products or services (within reason as one cannot lower the cost of borrowing for example).
All the narratives unfolding under our very eyes &8211; digitization, platform as a service, chatbots, roboadvisory, alternative lending, APIs, cognitive banking or insurance, #blockchain, faster payments… &8211; are emanations of this unavoidable imperative.
I recently checked US financial services payroll on the Bureau of Labor and Statistics&8217; website. Interestingly enough the US financial services industry employed approximately 8.5m people prior to the 2008 crisis. Employment stands now at around 7.9m and is expected to grow to 8.4m by 2020. I am puzzled by this forecast as I expect financial services industry payrolls to continue to decrease in developed countries (US and Europe included) as more inefficiencies are weeded out of the system. (Facebook employs 14,500, Visa employs 11,300 while BoA employs 210,000; there is still much to do.)
No discussion about financial services productivity would be complete without mentioning regulation. Indeed, regulators can be viewed as having been complicit in the building of a rent-seeking industry. The rate of change of technology has accelerated to such a degree and consumer behaviors and expectations have changed to such an extent that financial services regulators cannot afford business as usual. Thusly the novel approach to innovation the Financial Conduct Authority has taken in the UK or the Monetary Authority of Singapore. Every regulator is now actively thinking or devising new ways of engaging the eco-system they regulate and this includes how innovation impacts these eco-systems.
The lesson here is everyone is breathing fintech, from service providers to incumbents to regulators and startups, as a vector to deliver productivity gains.
I want Thomas Philippon to run the numbers in 5 and 10 years from now, and I will be crushed if the cost of intermediating an asset will not have dropped to below 1%. How low can we go?
Watch out #payments industry, #Silicon #Valley #Bank is coming. The bank for startups — officially named SVB Financial Group &8212; said last Friday that it was boning up its payments infrastructure and #services by “leveraging strategic partnerships to offer scalable and sustainable payment solutions to our clients, at every stage ofRead More
#MasterCard has partnered with #Microsoft to #integrate its #cloud-based payments platform with the tech giant’s cloud-based ERP solution, the companies said this morning. The payment platform, Simplify Commerce, will allow the more than 20,000 Microsoft Dynamics users accept online and call center payments, as well as provide automatic updates on securityRead More
#ClearTax, which helps Indians file their tax returns online with minimum stress, is on a roll this year. The Bengaluru-based company, which graduated Y Combinator two years ago, announced a $ 12 million Series A round today, just one month after closing a $ 2 million seed round following an initial $ 1.3 million raise. Read More
London Fintech Week – 3rd annual world’s largest fintech-focused festival – is back!
#London – the most competitive #financial centre in the world &8211; has a thriving #Fintech community. It is nearly unbelievable that how many fintech events are set to take place in London this year. According to EventBrite, there are more than 50 fintech events in London from now until the end of #2016. There will be conferences, workshops, summits, seminars, forums and networking events about fintech segmentations such as #blockchain, insurtech, banking, lending, payments, as well as about startups and entrepreneurships. The main purpose of these events is to enhance the dialog between established multi-nationals, innovation firms, disruptive start-ups, government, media and investors.
One of the notable events coming up this June & July is the London Fintech #Week 2016 from July 15-22. Fintech Week is the world’s largest Fintech-focused festival, and this is the 3rd year it is organised. London Fintech Week 2016 comprises a series of conferences, workshops, hackathons, meetups and drinks receptions.
Special Offer: Sign up now with code FTSW to get 15% discount for ticket registration!
Fintech Week London 2016 &8211; Agenda
This year Fintech Week will start with a Blockchain Hackarthon Weekend, followed by 4 days of conferences focusing on important Fintech sectors such as Money and Payments, Capital Markets, Insurance Innovation, Security and Data and so on. Every conference day will also feature a small number of exhibitors. The 5th day is dedicated to workshops run by our partners. Every evening there will be an official meetup, networking event, or drinks reception taking place in various locations across the City of London and Canary Wharf.
Apart from running a number of conferences, hackathons, meetups and private events, Fintech Week London 2016 also plays match-maker to enterprise corporations and innovative start-ups. The event also helps design and enhance innovation and transformation programmes. Their team members come from diverse backgrounds so they’ve layered a transformation consulting offering on top of their events and world class network.
Join Fintech Week London 2016 now to get inspired, learn something, meet new clients, partners, developers, investors and #find value for your business. Investors will also benefit from having hundreds of startups all in one place.
Special Offer For Fintechnews Switzerland: Sign up now with code FTSW to get 15% discount for ticket registration!
*Another upcoming fintech event in London is FinCoder &8211; a conference tailored especially for Fintech technologist, developers and coders.
Fintech developers are changing the face of the financial #services industry. Discover new opportunities, ways to tackle challenges and the latest trends in financial services #technology. The #next billion pound Fintech firm could be in the room.
Special Offer: Sign up now with code FTSW to get 20% discount for ticket registration!