TORI Perspectives Summer 17 01

Recommendations

Info

BLOCKCHAIN – A Bank Killer? By Oliver Charlton The hype surrounding Blockchain has been in full swing for some time now, with much clamouring about its potential uses. One of the most popular statistics to be bandied about is that Blockchain could reduce banks’ infrastructure costs by between $15- 20bn a year by 2022 1 . An impressive statistic no doubt and not something to be sniffed at. But my question is this; is Blockchain a bank killer? To clarify, by “banks” I am referring to retail banks as opposed to investment banks. But before I venture into the nascent world of Blockchain, some context. Much has been made by the rise of the FinTech industry, particularly here in Britain. It has been acknowledged for some time now that the FinTech industry is pinching the lunch of the incumbent banks. It has also been noted that the banks are beginning to worry about this. A recent report from PWC suggests that “83% of the respondents from traditional financial institutions believe that part of their business is at risk of being lost to standalone FinTech companies; it reaches 95% in the case of banks” 2 . Areas such as payments, FX transfers and Peer to Peer (P2P) lending services have been noticeable FinTech fortes so far. But until recently the more core banking services such as current accounts and wealth management have been noticeable absentees from the FinTech resume; that is until the likes of Atom, Monzo and Starling have received full banking licences from the UK regulator. The well-established banks seem to be responding in a number of ways that are not without contradiction. At a Brexit debate at the Oxford Union, the MEP David Hanan gave an impassioned speech on British business, but was alarmed at some of the conduct of the banks. He expressed his surprise when beginning his tenure in Brussels at the lobbying of banks for more regulation – it was only the big banks that had the pockets deep enough to pay for the compliance bills 3 . “Blockchain sits at the confluence of the reputation economy and technological progression.” Conversely, there have been murmurings of large banks trying to partner with FinTech whippersnappers, although there doesn’t appear to have been anything of note yet. Technological disruption is not the only thing worrying the big banks. It is no secret that after the Financial Crisis the reputation of banks took a hammering. By way of concrete evidence for this, the Millennial Disruption Index revealed that 71% of millennials would rather go to the dentist than listen to what their bank has to say! Furthermore, half of millennials are counting on tech start-ups to change the way banking is done today 4 . Those two statistics will certainly not surprise anyone, but the global recession of 2008 triggered something more unexpected – a new type of economy; the reputation economy. Companies such as Uber and Airbnb have been the two most notable surfers of this reputational wave. Talking to an Uber driver recently, he told me that being held at knife point in his minicab for the cash he was carrying, triggered his move to Uber. But it is not only the cashless element of Uber that has been fundamental in its success. The bilateral reputation scoring, and the trust that it instils in the service, for both Airbnb, Uber and many others, has been the hallmark of the reputation economy. It is no coincidence that Airbnb recently ‘acquirehired’ a Bitcoin wallet company for their expertise in Blockchain; the CTO and co-founder Nathan Blecharczyk, mused recently “The question is whether there’s a way to export [a user’s reputation] and allow access elsewhere to help other sharing economy models to really flourish” 5 . Blockchain sits at the confluence of the reputation economy and technological progression. So why should banks be worried? As mentioned earlier, the constituent parts of retail banking have been broken down and consumed by various FinTech companies – a banking buffet if you will. But several items have been out of reach. I’d argue that whilst banks may save $15-$20bn a year through the use of Blockchain - it is a double edged sword. This is because Blockchain gives access to areas of banking that have previously been unappetising to FinTech companies, due to their heavy regulation. Whilst there is no sign that the level of regulation will diminish, Blockchain offers a route to market previously unavailable. 4
Issue 7 | <strong>Summer</strong> 20<strong>17</strong> Blockchain can allow start-ups to access areas such as mortgages, personal and business loans (although this has already been disrupted somewhat by the likes of Funding Circle, Kick Starter and Crowdcube), current accounts and credit cards. The reason for this is partly down to credit checks, KYC and AML, all of which can become more readily available and cheaper. There are a number of other reasons why Blockchain can help the smaller companies competing in this space. Top of the list is audit and compliance – not the hottest of topics – but a rather expensive and time-consuming one, that smaller companies would rather not do. Deloitte have said that “companies would benefit in many ways: standardisation [through Blockchain] would allow auditors to verify a large portion of the most important data behind the financial statements automatically. The cost and time necessary to conduct an audit would decline considerably”6. Smaller companies could also reap the benefits of smart contracts which would help drive automation up and costs down. “The cost and time necessary to conduct an audit would decline considerably” There are already those that have noticed the opening up of potential market share through the use of Clockchain. For instance, Chris Gledhill who was an innovation technologist at Lloyds Bank has started Secco, a Blockchain inspired bank which has yet to acquire its banking license, but is certainly at the leading edge of this new type of banking. Theoretically, there is nothing to stop banks using all the benefits of Blockchain (and many are already looking to exploit the benefits). They could buy their way to Blockchain bliss through acquisitions or through building internal capability. A couple of issues remain however. Firstly, the time that it takes for incumbent banks to figure out how (and then implement) the integration between Blockchain technology and its existing infrastructure, is a window of opportunity for the start-ups to exploit. But there is a more esoteric reason for why banks may struggle to defend their market share; they will have to be bold. This article may have seemed a bit doom and gloom, especially if you’re reading it from the viewpoint of an incumbent. The coming together of the reputation economy, dissatisfaction with traditional banking and trust technologies such as Blockchain, are all good news for customers. If you are reading from the perspective of an incumbent bank, then Steve Jurvetson, partner of VC firm Draper, Fisher, Jurvetson has hit the nail on the head: “big companies will never do something substantial or worth thinking about or worth writing a history book about in their core businesses” 7 . Innovation naturally occurs outside of the core business and that is precisely where big banks will need to focus if they are to be successful in riding the Blockchain wave – if not they’re heading for a wipe out! WHAT IS BLOCKCHAIN? Blockchain is best thought of as a database, the contents of which is distributed across a network. Blockchain was developed to provide the platform for the cryptocurrency Bitcoin, and is a form of distributed ledger. A distributed ledger is the method by which records are distributed across a network, thus meaning the entire network has access to the data on the ledger. The transparent nature of Blockchain creates a ‘single version of the truth’ that can be verified by everyone on the network. The excitement surrounding Blockchain is due to the possibilities surrounding the disintermediation, security and traceability of units of value (whether that be company stocks, diamonds or personal information). 1 The Fintech 2.0 Paper: rebooting financial services – Santander Innoventures, Oliver Wyman & Anthemis 2 Blurred Lines: How FinTech is shaping Financial Services – PWC 3 EU Debate - Oxford Union. Daniel Hannan MEP, https://www. youtube.com/watch?v=tzNj-hH8LkY 4 The Millennial Disruption Index, http://www. millennialdisruptionindex.com/ 5 Quartz, Airbnb just acquired a team of bitcoin and blockchain experts, http://qz.com/657246/airbnb-just-acquired-a-team-ofbitcoin-and-blockchain-experts/ 6 Deloitte, Blockchain Technology: A game breaker for accounting? 7 Mckinsey & Company, Inside the Mind of a Venture Capitalist, http://www.mckinsey.com/industries/high-tech/our-insights/insidethe-mind-of-a-venture-capitalist 5
Page 1 and 2: www.toriglobal.com/insights/perspec
Page 3: Issue 7 | Summer 2017 Welcome back!
Page 7 and 8: Issue 7 | Summer 2017 C-Suite Chit-
Page 9 and 10: Issue 7 | Summer 2017 Purplebricks,
Page 11 and 12: Issue 7 | Summer 2017 What are your
Page 13 and 14: Issue 7 | Summer 2017 In that sense
Page 15 and 16: Issue 7 | Summer 2017 Jonathan Wadd

TORI Perspectives Summer 17 01

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?