In London, Researchers Look at Blockchain Beyond Financial Services
CoinDesk speaks with a senior researcher from Imperial College #London‘s #cryptocurrency R&D efforts.
fintech techcrunch
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Open Letter: Open Standards & Consensus Ledgers
The history of how #open #standards have developed in the Western World is a valuable source of information for the future of #Consensus Ledger #technology (#blockchain tech for most everyone else, I know I am stubborn and contrarian). I have previously written on my blog about the necessity of open standards in the crypto space and am doubling down with this open #letter which is a cry to arms.
Engineers of all stripes – mechanical, electrical, chemical… &8211; got together in the United States and the UK to create open standards in the 19th century. They tinkered, tested different paths and settled on a consensus method out of which the current organizations in charge of creating and managing standards emerged.
There are roughly four methods to create open standards. Two of them are hierarchical and fiat driven, one is market driven and the last one is a hybrid.
The first two methods are a) legislative and b) regulatory driven. These bodies are administrative and bureaucratic, highly hierarchical and deliver mandates for the creating of open standards. The results are usually poor and sub-optimal. The third method is purely market driven &8211; let the best market participant win, develop its IP and create standards &8211; and produces equally non-optimal results. One of the best examples of a market driven approach is the market dominance Western Union reached in the 19th century around the intellectual property it built and managed in early telecommunications and finance. The result limited competition and innovation until new organizations took wrestled the mantle of open standards for themselves and cooperated to create a more level playing field.
The fourth method is a hybrid method that incorporates market and hierarchical vectors. This hybrid method is governed by a neutral body that drives towards consensus by involving all market participants while developing clear rules that all abide by.
The key to success for a hybrid method are:
1) Involve as large a network of stakeholders as possible
2) Create a set of transparent rules and a framework to develop, manage and govern open standards so that no one party can distort and control the process
3) Ensure that open standards are grounded, leverage the new technology, and deliver value to all professionals in a given field.
4) Sustain involvement from industry participants through open collaboration going forward so that open standards and the body that manages and governs them is a living entity.
Not developing open standards or developing sub-standard open standards has its downside. the absence of widely approved and appropriate system architectures means lack of interoperability, waste and duplicative efforts and eventually material delays in the widespread acceptance and use of a new technology.
I posit that consensus ledger tech is at an inflection point. Get open standards right and this new technology will see accelerated adoption sooner than most thought leaders predicted. Miss the opportunity and we may experience disappointment for a while. This is especially important as consensus #ledgers tech can and will be applied and used by more than one industry and for many use cases, and because each industry is the sum total of specific properties such as regulation, legal frameworks and business processes that have evolved specialized work flows and processes over time &8211; none more so than the financial services industry.
To be more specific, any industry or business models that incorporates use cases that can benefit from peer to peer platforms, disintermediation, some level of de-centralization, transactional and data transparency, is poised to benefit from consensus ledgers. This means the capital markets, insurance and payments sectors within the financial services, marketplaces within the retail industry, social networks, media &8211; social and traditional &8211; higher education, data management in general &8211; data monetization and identity management &8211; to name but a few, are poised to benefit from consensus ledgers.
Therefore, the wide adoption of consensus ledger tech is a function triangulating between and optimizing for regulatory concerns, existing legal frameworks, existing standards &8211; as developed for data, data handling, data messaging, data taxonomy &8211; and existing software and hardware engineering practices/standards, existing operating systems and existing industry needs ACROSS heterogenous industries. (One also needs to take into account existing payments systems and practices given and how these may interact with consensus ledgers.) Further, the development of open standards will invariably have an impact, through feedback loop mechanisms, on current and accepted ways of doing business as well as how these accepted ways are regulated and legally bounded.
Additionally, and to add complexity to the mix, we are dealing with three competing stacks already and the inevitable interoperability issues that raises: a) ethereum, b) #bitcoin and c) ripple/stellar. This makes it even more crucial to arrive at agreeable top level open standards and avoid balkanization to the extent these stacks will co-exist, users may favor one or the other for specific use cases or more than one in other use cases.
For these reasons, I strongly believe the hybrid path outlined above is the only optimal path. This path ensures a neutral body is empowered to develop and govern standards applicable to meta issues around consensus ledger tech stacks and interoperability. This does not mean such a body would rule over business logic, i.e. smart contracts, which industry incumbents and service providers would be free to collaborate or compete on depending on appropriateness and strategic goals.
I note various entities have already raised their hands to tackle open standards &8211; for-profit organizations as well as not-for-profit organizations &8211; none of which, to my knowledge, have deep knowledge with managing open standards. I am outlining below who should, in my opinion, be asked to help with open standards for consensus ledgers as well as various paths to the creation of a new standards body.
I see three options for the hybrid path. Either through the creation of a new ad hoc body or via an existing organization.
As for the first option, we can use the example of the Internet Engineering Task Force, IETF, see here which was created in 1986 for the sole purpose of promoting voluntary internet standards. One could envisage a new task force, a truly independent one, without any ulterior commercial motives, to be created with the participating of various stakeholders across industries and manned by professionals hired out of existing standards bodies. A very viable option in my opinion.
As for the second option, it would be a derivative of the first one. The only difference being that a for profit organization would volunteer to seed such a body and allow itself to remain neutral and promote a truly open governance framework.
As for the third option, I see only a handful of candidates that would be truly neutral, global and bring a breadth and depth of expertise in the field of standards creation, management and governance that all industry stakeholders would have no material objections. These are a) the Institute of Electrical and Electronics Engineers, IEEE, see here, which is a neutral and global body and has in its midst many software engineers and computer scientists; b) the International Organization for Standardization, ISO, see here, and the International Electrotechnical Commission, IEC, see here, which both have joined forces and created a joint commission, the ISO/IEC JTC 1 tasked with developing and managing standards in Information Technology, see here.
As an aside, I believe bodies such as the International Organization of Securities Commissions, IOSO, see here, FpML see here, the Financial Industry Business Ontology, FIBO, created by the Enterprise Data Management Council, see here, have a role to play. I am sure other similar bodies in the payments or insurance sectors and outside of the financial services industry would be appropriate value add actors.
My wish is for at least one of either IEEE, ISO or IEC to get involved with consensus ledger technology, or for a for-profit organization to create ad hoc framework with a neutral governance process to step forward. The latter would only be effective at a sector level, i.e. insurance or capital markets for example, thusly we may miss the opportunity to unify standards pan industry which may have negative implications from an interoperability point of view. Would the latter be such a suboptimal path I wonder? Practicality needs to be taken into account obviously and aspirations to boil oceans from the onset usually amount to little in the long run.
Finally, the creation of open standards will also usher the material benefit of allowing the emergence of new tech stacks and/or facilitate the strengthening of existing ones (ethereum, ripple/stellar, bitcoin).
Have I missed anything?
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How the Blockchain Can Avoid the Perils of Futurism
Is the #blockchain community too focused on #futurism? In this opinion piece one developer argues the answer is yes.
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How blockchains could change the world
Ignore #Bitcoin’s challenges. In this interview, Don Tapscott explains why #blockchains, the #technology underpinning the #cryptocurrency, have the potential to revolutionize the #world economy.
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Is Blockchain the Key to User-Controlled Social Media?
#Blockchain industry startups are attempting to capitalize on a growing disillusionment with traditional #social #media platforms.
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SWIFT: Blockchain Won’t Remove All Third Parties in Securities Trade
The research arm of #SWIFT released a new report today which argues that #blockchain #won’t replace all #third #parties in #securities #trade.
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On the Universal Applicability of Consensus Ledgers
I was inspired to write this post while reading and listening to the multiple conversations and narratives addressing use cases and #applicability for #consensus #ledgers – aka blockchains. The space is generating much hype, lots of noise, confusion as well as some excellent work from sharp entrepreneurs and startups and forward thinking corporations.
Here are the four META use cases where consensus ledgers will shine IMHO. All meta use cases share one characteristic: the ability to derive the “state” of someone or something via a decentralized consensus.
1) Proof of PROVENANCE for THINGS: I use provenance loosely and include authenticity, integrity, transparency over chain of ownership. Where did that &8220;thing&8221; come from, who built or created it, for what purpose, is there still integrity associated with its purpose, can we trust that &8220;thing&8221;, the data it generates and the entity/person that manages, handles or otherwise owns is currently.
2) Proof of IDENTITY for PEOPLE: In as much as Google built the search graph and Facebook the social graph, think of a consensus ledger powered entity &8211; or entities &8211; that will build a trust graph &8211; not own it mind you &8211; and deliver a very effective tool for individuals to manage their identity and decide what they want to share with whom for how long and for what purpose. Very powerful.
3) Proof of TRANSFER of VALUE: Mechanisms that will deliver in full or semi dis-intermediated states, in full or semi decentralized states, a consensus over the transfer of any value. One example is any application that addresses post trading activities such as clearing and settlement in capital markets (trading being understood in the capital markets contexts as part of the transfer mechanism). Another example may be any application that facilitates claims management processes in the insurance industry. Proof of transfer can apply to payment or value, or both.
4) Proof of OWNERSHIP: Mechanisms that will deliver in full or semi dis-intermediated states, in full or semi decentralized states, a consensus over the ownership of anything &8211; tangible or intangible, and that also includes data. One example is any application that ports ownership of privately held companies from traditional share registries to a consensus ledger. Another example would be any application that facilitates fluctuating ownership states for real assets used in the sharing economy.
A few additional and non-trivial musings:
a) Consensus ledgers applications may mix and match from the above four meta use cases
b) The number of applications supported by any of the above four meta use cases is limitless. Vey simply put, any work flow that is currently supported by a siloed approach to managing data and where there is n+1 actors involved in the completion of said work flow, can be delivered with consensus ledger tech.
c) Every industry will be impacted, every business will be impacted. Take Auditors as an example and assume proof of transfer of value is powered by consensus ledgers. The first order of change applies to how reconciliation is handled within a firm by internal audit/reconciliation teams. No more data silos, no more manual reconciliation at end of day, end of week, end of month. The second order of change applies to Audit firms performing audits come end of year with drastically different work load, and sometimes much reduced work loads. No need to verify accounts the old way, to do sample testing, to call trading partners, to verify accounts receivables or accounts payables, to scrutinize transactions off of a RDBMS, off of paper records.
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Exploring Banking as a Platform (BaaP) Model
I co-authored this post (and its sequel which will be published shortly) with David Brear, Chief Thinker at Think Different Group
The integration and delivery of financial services is changing as new channels, products and partnerships are being explored. #Banking as a #Platform (#BaaP) is one of the alternatives. Platform strategies require a radically different approach to how a business is architected. Owning an entire business stack may not be feasible nor desirable anymore.
In 2015, it became almost the expected cliché slide at any self respecting financial #technology conference that someone would stand up and reference the interesting infographic highlighting the success of new ‘sharing economy’ players. The references, first discussed by Tom Goodwin on TechCrunch, illustrates how the middle men get cut out and how companies that take over the customer interface are the ones to gain.
If the presenter had an updated slide, they may have referenced Deliveroo, the biggest restaurant delivery service that makes no food.
These companies have grown exponentially in both popularity and success in the last 4 years. They have scaled their business models and platforms to cover more geographies and locations than even the largest global #banks. But while platform strategies have taken the world by storm in many other industries, platform strategies haven’t worked out in banking or insurance.
By platform strategy, we mean those that IBM, Cisco, Intel, Microsoft developed in the 80s and 90s. Equally, Amazon, Google, Apple and the firms previously mentioned have also employed more recently.
The only exceptions in the banking sector may be found with Visa and MasterCard who, as networks, had to develop a platform strategy where issuers, acquirers, startups, various payments service providers and merchants are symbiotically linked. In that sense, most banks are part of Visa or MasterCard’s platform strategy, but do not have a platform strategy of their own. In insurance, developing a network of agents, brokers and master general agents does not really qualify as a platform as it is limited to a distribution channel.
Why Didn’t Financial Services Organize As Platforms?
There are three main reasons why financial services industry incumbent did not organize as platforms:
1. Current Business Models – Banking and insurance company business models do not currently lend themselves to network effects. They do benefit from economies of scale – although this may be hotly debated – but not network effects. Without the benefit of network effects, it makes more sense to own one’s stack entirely and not share it. Why create a platform with partners when the benefits will be linear at best?
2. We’re Number One, So Why Change? – Up until recently, banks and insurers were the perfect intermediaries. They were the best positioned to make credit or underwriting decisions. Why create a platform with partners when no one else knows how to lend or insure better than the current players?
3. We ‘own’ the customer – Up until now, how individuals or corporations interacted with one another and between themselves lent itself to a top down organization for the selling of financial services. If the industry owns the narrative of how a financial product gets pushed to an end user, why create a platform with partners?
These conditions have been unique and protected the financial services industry incumbent players from the reality faced into by many other industries and individual organizations. Today, though, we live in a world where computers and algorithms are proving to be very adept at pricing credit and underwriting risk. And where in the past data that was not readily available, it is very abundant and available in real-time today.
Technological innovations, coupled with significant regulation changes, have lowered the barriers of entry into these markets to a staggeringly low level. Completely new organizations like Mondo Bank in the UK, Simple and Moven in the US, and some of the largest technology firms, like Apple and Google, now move freely into these markets at will.
As this occurs, banks and insurers run the risk of losing their dominant position as primary intermediaries for customer interaction and engagement.
Network Effects Have Changed The World
Network effects impact us all on a daily basis, via social networks and other marketplaces. These same social networks and marketplaces, after having gotten us used to interacting with one another in a different way, are now encroaching on financial services, with payments and lending initially being their target.
Smartphones, broadband internet, the 24/7 availability of commerce and data, and social networks have made us organize ourselves very differently than in the past. The Millennial generation, weaned on this new paradigm, now have completely different expectations than their parents or grand parents of communication and commerce.
There are other reasons why financial services industry incumbents need to shift to a platform strategy. For example, financial services startups, competing against these incumbents, is one narrative brandied about. Frankly, the startup competition is a by-product of the root causes rather than a driver.
Without #fintech competition, financial services industry incumbents would still need to think about platform strategies, as the root causes are much more fundamental than that. Financial services industry incumbents need to transform into “fintech incumbents,” with a complementary platform business #model to better compete.
We recommend the book Platform Leadership by Annabelle Gawer and Michael A. Cusumanoto to those who want to explore further what platform strategies are. In the book, the authors’ outline four sets of strategic choices that are part of platform leadership:
- Determine the scope of the firm: Is it better to create product complements internally or let someone else do it? How far into the technology value chain should a firm extend?
- Design the product with strategic intent: What degree of modularity is appropriate? Should product interfaces be open or closed? What information should be disclosed to other companies?
- Shape relationships with external complementors: How can the company balance competition and collaboration with outside players? What’s the best way to create and sustain relationships with complementary product providers?
- Optimize internal organizational structures: What processes and systems will allow the company to manage internal and external conflicts of interest most effectively? What’s the right way to resolve the tensions between industry players?
7 Levels of FinTech Platforms
For a bank or an insurance company to become a platform for financial services, profound transformations need to happen. Becoming a “digital bank”, if taken in the strictest sense of the term (i.e. bringing distribution channels to the digital realm) is not enough.
A platform architecture implies transformational changes across the business/technology stack as well as fundamental choices that dictate how product, service, technology and HR resources are articulated between, 1) What is delivered internally by the core; and 2) What is delivered externally by partners active on the platform.
The distinction is important as it defines the company and the core differentiator in the market. What do we have to be awesome at? What can we let other people do? How do we exceed consumer expectations?
Below is a potential view of a financial services industry incumbent platform state. For the purposes of the analysis, we dissected the levers into 7 components (vs. the four in the Platform Leadership book).
Because of current legacy mindsets and structures, a platform play would be very difficult to implement for the vast majority of organizations.
Making a Platform Play in Banking Possible
It is clear that any success in developing a platform strategy for banking (BaaP) will be largely dependent on wholesale cultural and technology mindset changes. Traditional business models are far easier since banks are in full control. Financial services industry incumbents created products and sold them to their customers. Value was produced upstream by the banks and consumed downstream by the consumer.
Unlike traditional models, a Banking as a Platform structure does not just create and push products. The BaaP structure allows users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other to consume.
This is a massive shift from any form of financial services model that exists today. Creation of network effects is more important than simply bringing in users or charging all users to make money.
In this model for financial services, software and technology are not the end product. Instead, they simply serve as the underlying infrastructure that enable users to interact with each other. Most importantly, the business itself doesn’t create all the value.
This post originally appeared on The Financial Brand in a different format
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Dynamic Pricing in Alternative Lending & P2P Lending
#Dynamic #pricing in the #alternative #lending market may be driven by the potential for relationship pricing in conjunction with traditional banking partnerships.
As a follow-up to our article, “A Business Case for Dynamic Pricing in Banking,” there is a great deal of discussion regarding the role of dynamic pricing in lending and how it may be applied in the alternative lending market. Lending is steeped in risk and every nuance of a lending product is crafted to mitigate that risk. Is dynamic pricing even possible in the alt-lending market?
With the obvious heavy hitters like Lending Club, Kabbage, Prosper, and OnDeck garnering the lion’s share of attention, there are still approximately 1,300 companies in the US offering services to about 1% of the overall market – one projected to be upwards of USD$ 350 million by 2025. That leaves the 6,500+ traditional American bank providers fighting for the remaining 99%. Where’s the competition, you ask?
In the #banks’ view, that 1% constitutes the “unbankable” or “undesirable” loans. But there is strong evidence that it’s not the retail consumer with bad or no credit history that the alt lenders are going after, but the small/medium enterprise (SME) business customer pool that is the primary, and most profitable, target.
Be it consumer or SME, what makes alt lenders attractive to customers comes down to pricing.
In the consumer market, peer-to-peer lenders like European based Zopa and Funding Circle offer investors (depositors) interest rates typically between 5-6%, attractive to those offered 2-3% traditional bank returns. Granted, borrowers face much higher interest rates (6-33%) than traditional unsecured loan rates from traditional banks (average cap of 16%).
The market sets the price (as do the Central Banks). And no lender is in this for charity – they want a marginal return that covers operational costs, liquidity coverage requirements, and profit. How individual lenders, alt or not, manage their appetite for risk determines a portion of those margins. So, does risk lend itself to dynamic pricing?
Can we Dynamically Price a Single Product?
How elastic is single product price? We’ve asked this question in our previous post, and concluded that relationship pricing is difficult in singularity, but a competitive differentiator and a smart strategy when offerings are bundled. Questioning how the lending market may adapt to adopt dynamic pricing leads us to believe that alt-lenders will slowly start behaving more and more like traditional banks to take advantage of a pseudo-dynamic pricing strategy.
Before we rationalize this assumption, let’s look at two pricing strategies that we predict will play a role in the lending market.
Abandoning Strict Cohort Analysis Pricing: This method of pricing to market segmentation usually means lumping potential customers into a single risk assessment category based on FICO or credit scores. This is the primary factor that determines the price of unsecured risk. Including other factors like age, education, employment and salary history, geography, and potential lifetime earnings, as well as potential repeat lending business to assess risk is a nod to relationship pricing (and lifetime customer value to the lender) that paints a unique profile for each potential customer. With big data and behavioral analytics, the straight jacket of strict cohort pricing loosens up, and pricing inches closer to reflecting the lender/lendee relationship value.
Alt-Lending/Bank Partnerships: While not a pricing option per se, a partnership is a risk mitigation strategy and customer service tactic by banks. It is also a way for banks to bolster their offerings, but the end result is more pricing flexibility. A recent partnership announcement between Regions Bank and alt lender Fundation underscore the advantage to banks:
“This unique agreement….allows Regions Bank to expand loan-product offerings and method of delivery for small businesses while also cultivating long-term revenue and loan-growth opportunities.”
RBS and Funding Circle have a similar program, something that Santander and Funding Circle did first, back in 2014.
A referral requirement in the UK has pushed banks and alt lenders into partnership, but the US market could see a similar push towards alliances.
Relationship pricing in this partnership context is possible when the customer’s portfolio from both the bank and the alt lender is taken into consideration when the risk pricing/rate is offered. This is especially true if a current bank customer is referred to an alt lender – because the bank doesn’t have appetite for that risk that customer poses – but has some assets at the bank the alt lender could consider collateral. We don’t see it now, but we could.
If It Walks Like a Duck, and Talks Like a Duck …
Let’s return to our assumption that alt-lenders will start to resemble traditional banks by offering non-lending products. While they may not accept deposits in the same way as a traditional banks, there is still a strong resemblance.
SoFi, primarily known for its student loan refinancing, accepts cash “providers” and pays them a higher yield rate (up to 6.5% as opposed to the typical 0.03% banks pay out) for managing those loans to borrowers. It can be argued that “providers” are in fact depositors, just depositors who aren’t insured by the FDIC or subject to regulations imposed by the Federal Reserve or Office of the Comptroller of the Currency. They can call it one thing, but the subtext is “super risky deposit”.
Zopa calls their product “savings”, but it’s the same principle. Deposit money that is in turn loaned out, and get paid a higher rate on those “savings”. It’s essentially a higher risk deposit not backed by the UK government’s Financial Services Compensation Scheme.
Payments is a natural next step … isn’t a credit/debit type product issued by alt lenders just on the horizon? Alt lenders could easily provide a card or app that draws on those ‘savings’ or taps into the line of credit. This is because loans are not inherently sticky products, and “underbanked” and “undesirable” lending customers even less so. Because of the high risk, they’re not attractive to banks, so there’s no incentive to encourage loyalty, let alone cultivate customer lifetime value.
But when an alt lender can provide savings and payments, as well as credit, the stickiness factor increases, and individual customer profitability margins can increase. Relationship pricing for even a small bundle of products is now viable. Nuanced pricing of loan rates could easily be tied to volume of payment product transactions, add in periodic reviews of the volume of payments and make the interest rate adjustable, dependent upon payment volume. The more the customer uses the payment product to dip into “savings”, the better the loan or savings rate.
While this isn’t relationship pricing in strictest sense of the word, it can be dynamic.
Of course once multiple product offerings become the de facto norm (or there’s even a whiff of it becoming a trend), regulatory scrutiny follows. What a new regulatory framework looks like is anyone’s guess, and we’re not exactly clairvoyant. But we do like to read the tea leaves.
Alt-Lenders Expanding Their Reach
Risk priced products are nearly impossible to price dynamically or in context of the customer relationship when offered as a stand-alone product. The current alt-lending market can’t adopt this pricing strategy. However, it can inch closer to dynamic pricing by approaching cohort analysis differently. And new bank/alt-lender partnerships crack open the door to more nuanced risk pricing.
Our prediction is that alt lenders will start to offer new, non-lending products. If so, then the door to dynamic pricing swings ever wider and we will see bundled offerings that can be relationship priced.
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Fintech: from Solid to Plasma
Not a day goes by that I do not read or hear about how #technology is finally disrupting the financial services industry. Entrepreneurs and traditional VC firms fueled the first wave of #fintech frenzy by respectively building and funding fintech startups intent on disrupting the status quo. These same actors fueled the second wave where many existing startups pivoted #from b2c to b2b models and started selling to finserv incumbents – many new startups went b2b directly too. We are living the last innings of this second wave in my opinion as most finserv incumbents have now woken up to the reality of technology change in their industry. It remains to be seen how the third wave will shape up &8211; I have my own views which I will reserve for a future blog post.
Most finserv incumbents claim to have seen the light and profess their new found fervor towards adopting new technologies. “Adapt or die” some say. &8220;Let’s partner with fintech startups&8221; others declare. &8220;We have to integrate these new technologies within our existing business models&8221; others assert.
Fine, yes, maybe.
To the risk of being provocative, most of these views are equivalent to peddling horse manure at a fishmongers&8217; market. In other words these views are inadequate and originate from a fundamental misunderstanding of the new norm every corporation, big or small, is or will very soon be faced with when it comes to technology.
Technology should not be viewed as a discrete building block anymore, where one decides on a technology solution, buys/rents/partners with hardware and software, and runs such a solution mostly in the background, separate from and supporting the &8220;real&8221; business. I would characterize this view as the &8220;#solid state&8221; view of technology.
To the risk of being even more provocative, any finserv incumbent that treats enabling technologies and fintech startups as solid building blocks of matter to adapt, integrate and implement within their existing business models will fail.
Rather, technology should be viewed as the &8220;#plasma state&8221; vector that will reinvent how a corporation is architected, where technology and business ideas fuse together to create vastly different ways of delivering value to users, consumers and customers. To be a tad more precise, it will be more and more difficult to discern between business models and technology as technology becomes more pervasive throughout a corporation.
This means finserv incumbents need to think about a) the human resources they need to attract and retain to run a plasma state business, b) the business models they have to or can create due to technology changes, and c) the strategic focus they have to or can chisel due to technology changes. Adapting by mere addition to protect a legacy business will fail. Adapting through fusion to create new paradigms is the key.
The technology world we live in is making available to us new perspectives:
&8211; peer to peer models
&8211; decentralization of decisioning models
&8211; scalable trust graphs
&8211; intelligent automation
&8211; news way to understand and share risk
&8211; instantaneity of transaction processing
&8211; frictionless value transfers and value sharingIt stands to reason that these new perspectives will be part of the core of what it means to be a finserv corporation too.
I do realize achieving &8220;plasma&8221; properties is easier said than done. The best fintech startups exhibit such traits from inception &8211; they live and breathe the fusion of business and technology. For a finserv incumbent the proposition is somewhat more complex. I have the utmost respect for many of the industry&8217;s leaders. To speak only of #banks, most CEOs and Chairmans are sharp visionaries and leaders, and contrary to many pundits I believe they mostly &8220;get&8221; the challenge they are faced with. Their problem, as a very astute Managing Partner of a bank corporate venture fund I know puts it, is the pesky contingencies of day to day life where running behemoth organizations is a non trivial endeavor. In other words, to date, not enough executive bandwidth is dedicated to the plasma view I am outlining.
We are currently witnessing massive a/b testing within the banking world &8211; I use banks as a proxy for all finserv incumbents and my comments apply to insurers equally &8211; where C-suite executives are tinkering with:
&8211; innovation labs
&8211; on balance sheet venture investing
&8211; off balance sheet investing via corporate venture arms or traditional VC funds
&8211; hackathons
&8211; accelerators and incubatorsWe witness this a/b testing via industry buzzwords and initiatives such as API banking, digital banking, omni channel banking, proof of concepts, pilot projects, partnerships and joint ventures with startups.
I am convinced what we are witnessing is but an intermediary stage towards a more comprehensive incumbent response &8211; at least for those incumbents that will successfully transition to the future. I have advocated in previous posts that one of the responses incumbents need to articulate is a platform strategy, see here. I am even more convinced this approach will only be successful if it includes, at its core, a strong fusion of business models and technology.
Focusing back on fintech startups, what I wonder is, both for those vying to be service providers to finserv incumbents as well as those competing against them, what will be their evolving natural responses and business strategies in light of eventual finserv incumbent plasma success.
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