It was announced this week that four of the world’s #banks—Santander, UBS, BNY Mellon, and Deustche Bank—are collaborating, along with brokerage firm ICAP, in order to produce what they’re calling a “utility settlement coin,” or USC, run on #blockchain #technology, originally the rails beneath #bitcoin and now the talk of the financial, corporate,Read More
Bank Innovation
While the concepts and potential of distributed ledger or #blockchain #solutions are becoming better known, the implementation of them in the financial services has run into some fundamental challenges.
Is this a fundamental shortcoming of blockchain concepts in general or the current solutions?
What if there was a new blockchain methodology approach that mitigated the challenges by design as opposed to the current approach of iterative improvements on current, available solutions with diminishing or unrealizable returns?
The current solutions tackle the issue of confirming a shared ledger by different means.
Problem 1: Speed and Logistics
Beyond the computing power that is required to run these methodologies, all of them introduce latency, capacity constraints, throughput limitations and ever expanding active memory requirements (i.e. scalability issues) on the networks that run them. Current innovations are attempting to speed these processes up or bi-pass them. Some of these methods include:
Sharded consensus – a divide and conquer mechanism for quicker, fragmented consensus.
Lightning Networks – transactions agreed off the chain and then recorded to the chain later.
For their benefits, do these solutions introduce more risk as it relates to control, integrity and protection from malfeasance?
The core processing of a distributed ledger is the creation and sharing of contracted transfers of value and updates to a shared ledger that records positions of value through those agreed transactions.
Although it sounds counter-intuitive or even improbable, if there was a means to confirm a ledger’s integrity by the transactions alone and without the need either to gain consensus with other network participants or to involve the network in puzzle solving problem, the computing power of the network would only be dedicated to processing and verifying transactions. The latency, capacity and throughput of the network would then be purely a function of the network participants’ processing and communication hardware.
Problem 2: Reality (Securities and Transactions)
Cryptocurrencies are wonderful because they are not “perfected” (i.e. held and proven to exist) by a central authority. Any national currency is perfected by a central bank and any security is perfected by a depository, sub-custodian or transfer agent. Any blockchain solution that deals with securities, which are not issued into and perfected by that blockchain’s network, has to have a relationship with the securities’ perfecting entities or it will not work.
Looking at the publicized blockchain solutions that are being built, they primarily focus on:
The properties that these transactions and markets all have in common is that they are:
These represent the least complex use cases in the industry. However, in most cases, they still have to allow for the posting of collateral or the transacting in the underlying securities and those positions must easily be settled between the blockchain solution and the current markets in conjunction with the securities’ “perfecting” entities.
While a blockchain solution for the above products may provide benefits, they will be customized rather than holistic and translating them to other types of transactions will be very difficult. Regardless, beyond flexibility, have they solved for the prior issues including: capacity, throughput, latency, ever expanding accessible memory requirements (i.e. scalability issues) and confidentiality?
The financial services businesses are demonstrably very parochial when it comes to products and functions in the industry. Most of the solutions are customized and pursue implementation paths of least resistance. These practices and behaviors will not create an optimal blockchain solution.
Is it the temptation to take an off-the-shelf solution and inflexibility that is preventing the realization of a realizable, innovative solution?
In all the publicized solutions, there are also real, unaddressed challenges of how the market actually works – including short transactions and financing. The obvious use case is market making but what about a Fund Manager selling a security that is on loan by his/her custodian to a Broker who sold it short for margin financing to a Hedge Fund and the settlement of that sale was to a broker who sold it to another investor whose money, for now, is in a money market fund, not in his/her custodial bank account?
What distributed ledger entry do you reference for securities and cash that you don’t own or can’t point to at the moment of execution?
Without a consideration for all the above issues, any blockchain solution for the financial services comes up short (no pun intended).
After a presentation, earlier this year, by William Mougayar, renowned author of “The Business Blockchain” (available on YouTube: https://www.youtube.com/watch?v=l5hK4YKxPSo ), the moderator’s first question after the presentation (at 18:45 into the video) was “What about the scaling issue?”. Mougayer’s response was telling. He basically said that this was a known issue and there are smart engineers working on it and someone will solve for it.
While altruistically optimistic but not definitive, does that response and the questions above about current solutions’ shortcomings make an extract from a Gartland and Mellina Group press release, made earlier in the year, worth a second read?
“Blockchain #technology, the new frontier in transaction processing, offers powerful real-world financial applications but presents a number of challenges that must be overcome before it can be adapted to securities transactions. Secure, near real-time trading, settlements, and reporting would significantly reduce the capital requirements and costs associated with enterprise processes #banks and brokerages currently use for post-trade operations.
Principals at Gartland & Mellina, a management consulting firm focused on the financial services industry, have been engrossed in the research and development of this new blockchain technology application to better approach future client and industry needs. GMG’s Managing Director and Blockchain Solutions Lead in the Financial Services Strategy and Solutions Practice, Paul Dowding, explains, “By understanding the current utilization of blockchain as used in cryptocurrencies, we identified the core challenges involved in applying the technology to the financial services industry as a whole. By resolving these challenges, we were able to design a unique, holistic set of blockchain solutions for the whole industry that is product, transaction and functionally agnostic.”
GMG’s solution solves the core challenges of applying blockchain technology to the financial services industry by offering:
This revolutionary design and approach helps GMG overcome many of the challenges facing the financial services industry today. It addresses growing industry needs for superior security, enhanced data acquisition, quicker transaction times, scalability, and lower costs. John Gustav, Partner of Financial Services Strategy and Solutions at GMG said, “Blockchain technology is considered by many to be the key ingredient to disruption within the financial services industry. It certainly has the potential to create a paradigm shift similar to the way the internet did. Our holistic, product-agnostic approach to blockchain is very different from the other publicized solutions within the financial services industry at this time.”
With blockchain technology, a decentralized network stores the value of all investor assets in encrypted records. This allows contractual transactions, transfer of value, safekeeping and settlement for asset positions to occur digitally in near real-time without the need for a trusted third party. As forging a transaction, stealing or double spending requires overpowering a majority of the computers across the decentralized network at the exact same time, blockchain has an inherent level of security unavailable anywhere else. “Our patents include a generic mechanism to translate financial services transactions into the blockchain’s simple logic and secure code,” Dowding continued. “Benefits include significant cost reduction, near-real-time settlements, new business, product and revenue opportunities and process, and balance sheet and capital efficiencies.” GMG is currently in discussion with different parties to leverage and develop blockchain capabilities as a utility.”
[linkedinbadge URL=”https://www.linkedin.com/in/paulfdowding” connections=”off” mode=”icon” liname=””] is Managing Director, Financial Services Strategy & Solutions Practice at Gartland and Mellina Group and this article was originally published on linkedin.
The discussion around digital transformation in #banking has long revolved around the nexus of technologies that are globally driving this change. Technologies such as mobile, social, big data and cloud computing are surely impacting significantly all industries, but for financial services there are other silent technological revolutions taking place that, at the very least, can massively accelerate the technological disruption occurring in the sector.
If mobile, social, big data and cloud computing are the core technologies of digital transformation, for financial services the emerging underlying substrate are APIs (Application Programming Interface). Now, APIs have been around ever since someone wrote a piece of computer code that was meant to be reused by someone else and are common parlance in IT. However, the threat of fintechs and regulations such as the revised Payment Services Directive (PSD2) are elevating the IT lexicon to board-level discussions. Bank boards, in many cases for the first time, are being exposed to IT concepts and jargon that, not only they cannot afford to dismiss, but in effect they need to deeply understand as it becomes a key part of the future of competitive advantage in a digitally transformed industry.
Why should #banks care about APIs?
APIs expose banks’ products and processes for use by third-parties. Since banking products are inherently digital and processes already are or can largely be automated, the development of an #API strategy drives three key advantages for banks:
I. Vertical disintegration of banks and ecosystem integration
The various impacts of globalization and #technology in the financial services industry led to the emergence of niche providers, specializing in key activities of the banking value-chain. Most traditional banks tend to be vertically integrated organizations with relatively fixed cost structures and, as transaction costs decline, some of the key activities in the banking value-chain suddenly become cheaper to procure externally than to execute internally. As a result, we see a move to vertically disintegrate these activities and outsource them.
With the threat of fintechs and neo-banks looming, an API strategy enables banks to streamline their internal value-chain, becoming at once leaner and more focused, while at the same time, transparently integrate themselves into a broader ecosystem exploring new revenue streams and business partnerships. For instance, consider the ability of a car dealership to provide an immediate loan for a customer at the point-of-sale. In this scenario, the cost of sales would be handled by the car dealership. From the dealership standpoint, they would be able to close a sale on the spot providing great value and a great experience to the customer. Also, consider the fact that this is a contextual sale, where additional products, such as auto insurance with multiple coverages, can (and should) be recommended with increased probability of acquisition by the customer. Now, I’m not naïve to the point of disregarding the many existing hurdles of this or other similar scenarios, such as compliance and legal issues. However, even compliance and legal are prone to disruption by APIs and automation as well as by self-regulating technologies such as distributed ledgers and smart contracts (but that’s a topic for another post).
II. Healthy coopetition with fintechs and neo-banks
There’s no longer any question about the threat that fintechs, neo-banks and non-banks pose for the future of traditional banks. After the boom of late 2014, the #fintech “movement” came of age during 2015 and is now competitive across all categories – lending, personal finance, payments, retail investments, institutional investments, equity financing, remittances, consumer banking and more. CB Insights reports that global fintech investment is rising and that Q4 of 2014 was the busiest of the last 5 years with a total of $3.1 billion invested across 214 deals – that’s an average of $14.5 Million dollars per deal. There’s also increased acquisition activity, mostly by established fintechs rather than by traditional banks.
Additionally, regulations such as PSD2 will inevitably push traditional banks into the playground of fintechs and neo-banks. Strategically, it’s a dangerous place to be in for traditional banks, since most of them are not yet ready to compete with these new enterprises in their own ground. However, with the right invesments, such as APIs and open banking, banks are starting to develop the resources that’ll be a key part of the answer to long-term prosperity in an evolving and growing eco-system. Here are four key areas of cooperation and competition with fintechs and neo-banks that banks can explore in the course of their API/open banking strategy:
III. Looking within for innovation
It’s true that when talking about APIs and open banking, we usually address it from the standpoint of an outward-facing competitive advantage that can enable incumbents to compete and/or partner more effectively with fintechs. However, looking within traditional banks, we can also find areas where APIs and an open platform can help drive increased performance and efficiency.
To be fair, through the years banks have made significant investments in IT and in services platforms, primarily driven by interoperability and modernization rationales. The problem with these approaches is that they have mostly been IT-led and for a long time there wasn’t really a great business justification for them so they weren’t typically discussed from the business standpoint as a key strategic investment. Where these investments occurred, banks are now taking a new look at their IT assets and resources and realizing that they are better off than they actually thought. Some of those past IT investments have become key in this new digital economy, particularly when it comes to simplifying business processes and products.
Internal APIs are also key to driving innovation from within. They can work as a sandbox for internal development of ideas before external exposure to partners and others. In this area we see several banks hosting internal Hackathon events, pairing business and IT people in the development of new digital products and in the automation and simplification of internal processes. Internal innovation is key as the rate of change accelerates in the industry. Simpler processes, new innovative products, and a leaner organization will drive growth and efficiency for traditional banks. I believe that in the short term, we’ll see an increased focus in using APIs to build resilience into the banking business model, whether through innovative products and services, or through the ability to replace internal processes and services with external providers.
[linkedinbadge URL=”https://www.linkedin.com/in/josealmeida” connections=”off” mode=”icon” liname=”José Almeidaos”] is digital advisor at Microsoft and this article was originally published on linkedin.
UBS, Deutsche Bank, Santander and BNY Mellon announced their “utility #settlement coin,” a new digital asset they hope will become the industry standard for #blockchain settlements. They expect #banks will initially use the coin for post-trade settlement and clearing by early 2018, after they secure blessing from regulators and central banks.
While this development signals significant market traction for an institutional use of digital assets, I have to say it’s deeply misguided. A bank-issued digital asset can only really efficiently settle between the banks who issued it. Then, two scenarios can play out.
Scenario one: all banks around the world put aside competitive and geopolitical differences, adopt the same digital asset, agree on its rules, and harmoniously govern its usage. Fat chance.
Scenario two (the more likely scenario): banks not in the issuing group issue their own digital assets with their own sets of rules and governance.
We’re kinda seeing this already, as the FT points out, with Citi’s Citicoin and Goldman Sachs’ SETLcoin. The result would be an even more fragmented currency landscape than what we have today. If banks of different digital asset groups want to settle trades with one another, they’ll have to make markets between their unique digital assets or trade between their digital assets and a common fiat currency. What a mess!
The second big problem with the “utility settlement coin” is it seems it’ll be backed by a basket of currencies. Once backed by cash, it’s no longer an asset; it’s a liability. Trading liabilities then ultimately requires moving cash across borders, re-creating today’s system but adding more friction!
We strongly believe banks need an independent digital asset to enable truly efficient settlement and we believe XRP is best positioned for that role. It goes back to the fundamentals of what makes digital assets unique and special – they’re universal currencies, meaning anyone can use them as units of value anywhere in the world. That universality gives digital assets global reach and the ability to settle much faster than traditional assets.
Compared head to head with other independent digital assets (like #bitcoin or ether), XRP settles the most efficiently cross-border, in just seconds. In fact, we’ve run tests with global banks to prove XRP can lower liquidity costs for cross-border trades. More to come on that front.
[linkedinbadge URL=”https://www.linkedin.com/in/bradgarlinghouse” connections=”off” mode=”icon” liname=”President and COO at #Ripple“]
According to BusinessInsider.de Bank app users in the U.S. may become more willing to pay a small monthly subscription fee to use their #mobile banking app. This conclusion is based in a recent study by S&P Global Market Intelligence.
Though the majority of survey respondents, which included 3,897 US bank app users, said they’re unwilling to pay, 21% of respondents said they’d pay $3 a month, and 40% said they’d be willing to pay $1 a month. The survey results suggest a concerted shift in consumer behavior in regards to subscriptions for #apps.
The same survey suggests interest in using subscription fees for mobile apps is gaining traction for a number of reasons:
An advice to businesses is made to be careful when considering shifting from a free service to a paid service, lest they risk alienating users. Customers unwilling to pay for an app could easily move to a competitor offering the service for free. One workaround to this problem could be the implementation of a tiered or freemium service, in which users get the basic app for free, and can pay a small subscription to receive a premium service.
Nevertheless, S&P’s survey shows how implementing a subscription model to an app has the potential to add a sizeable revenue stream to a previously free service. Other apps, such as gaming platforms or virtual assistants, could find similar interest should they investigate a subscription model.
The shift toward mobile bank apps is particularly pronounced among millennials, as more of them are moving toward digital banking. And as a result, they’re walking into their #banks‘ traditional brick-and-mortar branches less often than ever before.
This generation accounts for the greatest share of the U.S. population at 26% and the employed population at 34%, so it’s easy to see why their behaviors and preferences will have a profound effect on the future of the banking industry, particularly with regard to the way banks interact with their customers.
Third parties are expanding their role in providing services that consumers use to manage their money. And the more that role grows, the more it will disrupt the relationship between banks and their customers.
To paint a clearer picture of the future of the banking industry, John Heggestuen, managing research analyst at BI Intelligence, Business Insider’s premium research service, surveyed 1,500 banked millennials (ages 18-34) on their banking behaviors and preferences — from their preferred banking devices, to what banking actions they perform on those devices, to how often they perform them. That rigorous research led to a report entitled The Digital Disruption of Retail Banking that according to Businessinsider.de dives deep into the industry by: An analysis on how millennials use bank branches and why – even though there are a large share of millennials who still use branches, making significant investments in these channels isn’t a good move for banks. Explaining how mobile payments and mobile point-of-sale adoption by small retailers will make the ATM obsolete. Describing how digital channels, particularly the smartphone, will become the foundation of the bank-customer relationship.
BusinessInsider.de points in the article some take aways from the report:
Images: businessinsider.de / bi intelligence Digital Banking Survey Q3 2015
Source: businessinsider.de
[linkedinbadge URL=”https://www.linkedin.com/in/armindom” connections=”off” mode=”icon” liname=”Bruno Macedo”] is Corporate Senior Executive #Fintech Technologist | Researcher, Lecturer and Speaker and this article was originally published on linkedin.
Much has been written about the #future of #banking. In the end, it all seems to come down to one question: will #banks become platforms or #pipes?
In reality, there’s no question at all. Platforms are the winning business model of the 21st century and the banking industry is well aware. In fact, banks have been platforms for decades — #fintech is merely creating the latest set of bank #platform extensions. Earlier incarnations include ATMs and online bill pay for consumers.
That said, what’s happening today is forcing banks to rethink how fast they extend their platform to avoid becoming just the pipes. The advent of the cloud and the software revolution in Fintech with billions of capital being invested every quarter has brought more innovation to banking in the past two years than it has seen in the past twenty. Still, the current David taking down Goliath narrative surrounding the future of banking and finance ultimately fails to account for the reality of the situation.
While it often goes unnoticed, a great many fintech startups today rely heavily on banks to enable their innovative services. The success of financial innovations like Apple Pay for instance is happening with a great deal of participation and cooperation between #technology companies and financial institutions.
This relationship between banks and fintech underscores the reality of the financial services industry’s future. Yes, finance is evolving alongside the accelerating curve of technology, and yes, fintech is driving much of this change, but banks are – and will remain – squarely at the center of the financial universe for quite some time to come.
For one, banks have been the backbone of the modern economy since its inception. They are far too ingrained in the financial system to be removed within any foreseeable time frame.
Banks also have deep pockets, infrastructure and experience. Large market caps and long track records are clear signals to customers that banks can weather the inevitable downturn. Startups, on the other hand, are more susceptible to turbulence and market volatility — things banking customers, especially business customers, would rather avoid.
Big data is yet another boon to banks’ staying power. Banks have been collecting data on customer transactions and behavior for decades. This creates major advantages for banks. When used in the right way, this data can be leveraged to do things like identify customers that are ripe for new payment services or to mitigate and underwrite risk in innovative ways.
But despite all this, there is one hazard currently menacing banks: disintermediation. Starting with the ATM, technology has been distancing consumers from banks for quite some time. Today, their relationship with the consumer is slimmer than ever.
Meanwhile, fintech is picking up the slack. While traditional banking experiences can feel clunky, fintech products and services are designed to work with people’s lives and deliver value in new and unexpected ways. These upstarts pride themselves on delivering superior customer experiences — banking that is intuitive, mobile, cloud-based, responsive, available 24/7, you name it.
Fintech companies are also agile and built for rapid iteration — skill sets banks don’t yet have internally. This allows fintech companies to focus heavily on usability and keeping their user interfaces modern. At Bill.com, for instance, we iterate our onboarding experience every two weeks. By comparison, most banks have outsourced many key functions to third-party service providers like Fiserv and Jack Henry, severely limiting their ability to make product changes outside of rigid, long-term release cycles.
The comparative lack of innovation by banks is no surprise. For decades, banks have spent most of their resources driving to meet quarterly earnings targets, delivering consistent results and ensuring compliance — the key objectives most highly-regulated, publicly-traded financial institutions must focus on to meet its obligations to shareholders — leaving fewer resources and funds for experimentation, learning and new product development. This makes it difficult for banks to keep up with shifts in customer preferences and behavior the way that fintech can. Banks know this and it is exactly why they are starting to shift their strategies to reflect being a platform and not just the pipes.
When banks become platforms for their customers and fintech partners, they increase the value of what they have built over the past several decades and disintermediation on the consumer front becomes irrelevant. Instead, as banks fuse their platforms with fintech, innovation will accelerate creating tremendous value for everyone in the food chain.
[linkedinbadge URL=”https://www.linkedin.com/in/renelacerte” connections=”off” mode=”icon” liname=”René Lacerte”] is CEO/Founder Bill.com and this article was originally published on linkedin.
A new digital currency built for #central #banks is designed to make it easier for more people to use two powerful tools: real-time settling and cash.
CoinDesk
Four #banks have reportedly partnered on a #blockchain project aimed at creating a means to clear and settle transactions worldwide.
CoinDesk
One of Russia’s largest #banks is in discussions to join a domestic bank #consortium that would study #blockchain #technology.
CoinDesk
#Apple and three of Australia’s Big Four #banks are fighting about mobile payments — and both sides are appealing to #regulators for help. National Australia Bank, Commonwealth Bank of Australia and Westpac have united to fight the Cupertino, Calif.-based giant &8212; which is bigger than all of them combined. Australia and New ZealandRead More
Bank Innovation
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