As I have written about before, we are in the middle of a sea change in terms of how commercial markets are organized.
Much of this change is being driven by blockchain technology, which can be used to replace the vertical, siloed industry structures we know today – structures that are fragmented and full of friction – with radically decentralized, open and fluid ecosystems.
Having been in this space for quite a while now, and having worked with a large number of companies and projects, I am more convinced than ever that this vision of new ecosystems in the enterprise space is a fantastic growth opportunity. I also find that the true dimensions of what is going on here are becoming clearer.
Up to now the blockchain discussion in the enterprise space has generally been about efficiency gains – about bringing down the costs of existing processes. What I see more and more is that the horizontal, fully integrated value chains of the future can be a tremendous engine for growth as well. And this is where it gets interesting.
All together now
Let’s have a look at how this looks in practice.
We are for example advising am European bank that is working on a horizontal, blockchain-based real estate ecosystem. In this space, the bank sees itself as one part of a fully integrated value chain in which all the products and services around selling, buying, moving in or out of a home are digitally integrated into a single open platform. This can include everything from the mortgage application and acceptance to title registry to securing building and renovation permits to tax assessment and payment to arranging for the moving company to hooking up the telephone and internet and engaging the landscaper.
Such a platform, if it could be built, would of course be great news for the home buyers and sellers. Instead of dealing with different vendors who do not know anything about what the others are doing, with blockchain and smart contracts, everything can be digitally contracted for and coordinated in a single space.
What I think enterprises need to keep in mind, however, is that the new market platforms and business models that will come out of this kind of integration will be very interesting for them too.
In any marketplace, all participants have to be connected. Today this is achieved through a hub and spoke model. Industries and businesses exist in their own silos, and then rely on some sort of market platform to come together and do business.
Google and Amazon are obvious examples of such platforms whose business model is to integrate market participants and facilitate transactions. That has proven very useful, but having a proprietary market platform also adds cost and friction. More importantly, these platforms also disintermediate the customer interface, transferring the customer relationship from the business providing the product or service to the owner of the platform.
With blockchain we can build new kinds of market platforms that are collectively owned by the participants.
This technology by its nature makes it easy for large, disparate groups of market participants to communicate, collaborate and – most importantly – safely transact with each other. In a blockchain ecosystem, all participants can also observe the entire state of the market at any time, as opposed to in a proprietary platform, where only the platform owner has the full overview.
Cross-enterprise workflow engine
By adding smart contracts to the mix, we can build a cross-enterprise workflow engine, moving business logic out of the enterprise and into the collective ecosystem layer. This would allow market participants to easily codify market rules as well as individual partner agreements in a way that is transparent, trustworthy and easily enforceable.
Such platforms, which exhibit a high degree of automation, are highly efficient. Without intermediaries, they are also inexpensive to use. By getting rid of the need to build and maintain costly data and transaction silos, not to mention the APIs and reconciliation mechanisms required to connect these silos together, such platforms can be built more quickly and far less expensively than traditional ones. That can represent significant cost savings within the enterprise. Perhaps more importantly, once built such platforms can facilitate cross-selling, reduce acquisition costs and potentially radically increase the customer base.
As has been pointed out, moving to blockchain-based horizontal ecosystems can also have advantages within the enterprise by catalyzing the breaking down of value chains into their component parts. In place of the monolithic legacy systems businesses are used to, enterprises can then move to a microservices architecture built on the foundation of blockchain and smart contracts. That will let them develop lightweight, dynamic, easily scalable and more robust applications that they can plug into the ecosystem, and withdraw, as needed.
Worth the effort
Of course, it won’t be all smooth sailing. Challenges to overcome include the complexities in the initial setup, in particular the operating model discussions (designing the ecosystem, reaching consensus on the desired rules, working out partner agreements).
Once the ecosystem is running, there will certainly be governance issues to deal with as well. Perhaps as challenging will be the mindset change. While enterprises have long been used to cooperating with competitors in strategic partnerships, this brings such “coopetition” to a whole new level. People will need to get used to it.
I believe the potential rewards will be well worth any such growing pains.
There should be no doubt by now that initial coin offerings – token sale fundraisings by startups – have established themselves as new and very compelling forms of capital raising.
Startups, primarily in the blockchain world, raised $4.6bn in various forms of token launches in 2017, a quantum leap from the $0.2 billion raised the year before. While this may not seem like much compared to the $188.8bn raised in traditional IPOs in 2017, five of the largest ICOs in history took place in October and November so there is clearly strong momentum.
This has begun to disrupt above all the traditional venture capital model by providing a compelling alternative fundraising mechanism for startups. An ICO lets a startup take its idea directly to investors for near-instant validation through the crowd, and relieves founders of the often significant time commitment needed to pursue fundraising through traditional means. This in turn gives them more time for their real job: innovation. With a successful ICO, startups can also potentially meet all their capital needs in a single raise rather than needing to constantly raise fresh venture funding.
So it is no surprise people are beginning to ask if ICOs will make venture capital obsolete. I think the new model will almost certainly disrupt the way VC firms do business. But it won‘t mean the end for them.
VC firms still offer founders a lot. Their participation in a project is a strong validation of the idea and they can offer valuable advice in terms of refining concepts and developing business plans. While a single, all-encompassing funding round through an ICO can be tempting, windfalls can lead to excesses. Venture capitalists, which traditionally provide funding in series of smaller rounds, can help ensure founders remain prudent spenders and push them to meet deadlines and achieve milestones.
There are also parts of the ICO market that need to mature before it can attempt to replace venture capital.
The biggest area that requires attention remains regulatory uncertainty. While regulators around the world have generally been attentive to the rise of ICOs, and have worked hard to understand them, there are still a number of thorny legal and regulatory issues to be addressed. There is disparity between jurisdictions and most countries have yet to address cryptocurrency tax questions in a meaningful way.
ICOs also continue to face a serious threat that traditional forms of fundraising do not: that of hacking. We have seen money stolen from token launches through fraud, for example through phishing schemes or fake websites, as well as security flaws in cryptocurrency wallets. If the ICO community cannot address such cyber security issues, it will have a hard time catching on with mainstream investors.
None of which is to say ICOs will be unable to deal with these issues. Various initiatives are underway to improve regulation, security and investor protection.
These include efforts by the industry to regulate itself, for example through codes of conduct like the one we recently developed at the Crypto Valley Association. Increased focus on cyber security is likely to see more structures designed to protect investors, such as lock-up periods forcing investors to more carefully evaluate projects and discouraging ‘pump-and-dump’ schemes, and pre-registration requirements.
In the future we are likely to see more structured funding rounds as well, with caps, increased transparency regarding the need for funds, and innovative ways to govern the use of funds – from voting by investors to smart contracts to ensure that pre-agreed capital expenditure plans are adhered to.
But for the time being, although ICOs are clearly a disruptive development in the world of startup funding, they do not stand to replace traditional venture funding – certainly not yet.
And even as the ICO industry matures there is every reason to think venture capital will remain an important part of the startup process. Venture capitalists could work alongside ICOs by providing funding and advice to refine an idea and develop a business plan before attempting a public funding round.
In fact, combining the benefits of both VC funding and ICOs may turn out to be the best choice for venture capitalists, founders and the broader investor community alike.
For startups, it means access to important expertise at perhaps the most critical moment for the whole venture: its inception. And for VC firms it means still having the chance of getting in early on projects, either with an equity share, early participation in the eventual ICO, or both.
Oliver Bussmann is founder and managing partner of Bussmann Advisory; ex-chief information officer at UBS and SAP; and President of Crypto Valley Association, a Swiss blockchain network.
2017 was a year of tremendous growth for blockchain, though not in the expected ways.
At the beginning of this year, I and others predicted that 2017 would be the year that blockchain moved from proof-of-concepts into production. We did see some notable successes in this regard.
Ripple became a fully operational platform with over 100 members and payment volumes in the billions, and industries began to form blockchain business networks, for example, the Digital Trade Chain consortium (DTC) in trade finance.
But overall, I expected to see more “go lives” than we did. On the other hand, I don’t think anyone expected the unprecedented growth in the market capitalization of cryptocurrencies or the related ICO boom.
So, what will the new year bring? Despite the obvious perils in making predictions, I feel confident that, among other things, we will see the following:
Blockchain solutions will continue to come into production as the “low-hanging fruit” are addressed.
Cryptocurrencies will continue to grow, fueled by traditional asset management players and techniques.
Companies will focus on changing business models as blockchain begins to transform market structures.
New ecosystems with smart contract technology will arise as integration platforms between existing industries.
The ICO will become “professionalized” and morph into IPO 2.0.
Scalability and performance of blockchains will become a critical issue, and there will be interesting new approaches
People will increasingly recognize that local blockchain ecosystems are a critical success factor.
Now, let’s unpack the details.
Although it was quieter than expected this year, I believe we will continue to see blockchain solutions come into production as enterprises address the “low-hanging fruit” by digitizing businesses and use cases where blockchain can make the most impact.
In fintech, the two most promising use cases remain payments (where there are $50–60 billion of potential savings to be had) and trade finance (which stands to save some $15 billion).
As we saw payments do in 2017, I expect we will see trade finance begin to go live on blockchain in 2018. In payments, momentum will pick up and volumes will increase as larger banks, including correspondent banks, get into the act. These players will be tempted by the advantages blockchain brings in terms of real-time processing, lower risk profiles, lower costs and transparency.
Blockchain can serve as a stick as well as a carrot, simply by proving that there are better alternatives to the status quo in many industries. We can imagine, as an example, that blockchain has had a hand to play in the European Banking Authority’s EU-wide transparency exercises.
We were all somewhat surprised – if pleasantly so – by how well cryptocurrencies did in 2017 as a speculative asset. Indeed, growth was spectacular, with the asset class rising from $14 billion in December 2016 to over $450 billion in December 2017 in terms of market capitalization.
I think this growth will continue to be fueled by traditional asset management approaches, including bitcoin futures, crypto hedge funds and the like, all of which will increase the demand for cryptocurrencies and tokens.
New business models
As blockchain continues to change market structures, companies will increasingly focus on changing business models.
In a world where middlemen are becoming obsolete, companies will have to learn to stop thinking in silos and be more open to becoming partners in ecosystems or on broader platforms. That, in turn, means deciding what kinds of business models they want – whether it’s platform plays, product plays, omni-channel strategies, and so on.
These discussions will become multi-dimensional, encompassing both existing services and, increasingly, the new kinds of services that blockchain enables – particularly as blockchain combines with IoT and AI to create new kinds of marketplaces where industry silos come down in favor of broad, horizontal structures.
One of the most satisfying parts of 2017 for me was being able to see this start to happen close-hand among some of the companies I have the privilege to work with. (See disclosures below.)
Deon Digital has partnered with Mercedes Benz to develop a new operating system that will help break down silos in the mobility space. Skycell is a good example of IoT and blockchain opening up the pharmaceutical supply chain to embrace payments, invoicing and insurance. TEND is rethinking investment management by creating a Sharing Economy 2.0 for high-value assets.
One space I think we should keep a particular eye on in 2018 is the fund industry, where firms like Melonport are using blockchain to rethink asset management. I think we will see more of this, and that the fund industry will start to be significantly disrupted next year.
This will start with the management of crypto assets, but over time we will see traditional assets increasingly being tokenized, migrated onto blockchains and managed on-chain.
The morphing of ICOs
With startups raising over $3.5 billion in ICOs, 2017 was clearly the year of the token launch.
To me, though, the ICO boom is significant, not necessarily because of the amounts raised, but because we are seeing the beginnings of the democratization of venture capital. And though the concept had a great 2017, change will come to the world of ICOs in 2018 as more traditional players get involved.
Over the next 12-18 months, I expect people with experience and expertise in the IPO world will embrace tokenization as a technical platform, and the whole business will be professionalized, with book building, pricing, startup evaluation and so on happening more along traditional lines.
As we’ve already begun to see, it will be harder to get funding simply on the back of a white paper. Investors will demand sound business plans and high levels of transparency, with all that entails.
Scalability and ecosystems
One of the key challenges of existing blockchain technology is scale and performance. I predict that next year we will see alternatives to current blockchain technologies that will be more scalable, faster and minimize energy consumption.
IOTA, which has gained a lot of traction lately, is, I think, a project to watch in this regard.
I also believe people will increasingly find that local blockchain ecosystems, where critical services are co-located in one geographical area, are critical success factors for blockchain projects.
This is certainly what we see in the “Crypto Valley” in Switzerland. As the President of the Crypto Valley Association, I hope readers will forgive me for predicting – or at the least, pitching for – the continued success of Switzerland as a blockchain ecosystem.
Crypto Valley has a high concentration of all the services blockchain projects will need to raise money and set up shop, including legal, advisory, tax, accounting, smart contract platforms, KYC/AML utilities and marketing expertise.
This coupled with Switzerland’s other advantages, from its state-of-the-art infrastructure to its highly skilled workforce, will, in my opinion, mean it should remain a great draw for blockchain companies – in the new year and hopefully for many years to come.
Disclosure: Oliver Bussmann is a strategic advisor to IOTA, Deon Digital and Tend, mentioned in this article.
These days I speak and write quite a lot about my conviction that, thanks to blockchain and other emerging technologies, businesses will increasingly move to decentralized models. These new models will be based on large-scale, public platforms that will enable greater integration of value chains, blurring silos between industries and replacing business verticals with horizontal, cross-industry ecosystems.
In my work as an advisor I have the privilege not only of exploring such concepts and sharing ideas with other thought leaders, but also of working with people who are starting to put these ideas into practice.
The TEND project, which I advise, is one of these I think worth noting.
I believe it serves as an excellent early example of how the new blockchain-based ecosystems will likely look, as well as illustrative of the kinds of new business models that blockchain-based platforms will make possible.
A very blockchain vision
As mentioned, the core function of TEND is to provide a platform for users to co-own, enjoy and trade high-value assets. Blockchain and smart contracts allow TEND to do this in a highly efficient, digital way.
These technologies, for instance, make it easy to create co-ownership arrangements tailored to the specific asset and experience in question, and to store these agreements on a decentralized, independently verifiable and tamper-proof public ledger.
As a result, TEND users have full transparency on the terms of their agreements and, more importantly – since smart contracts are self-executing computer code – can be sure that they will be carried out as written. That makes the platform both highly efficient and trustworthy.
Blockchain also gives TEND users a high degree of confidence in the assets themselves. Vetted and verified when they are onboarded, all pertinent information about each asset is indelibly recorded on the public ledger and constantly updated.
That means TEND users can view, and trust, the entire asset history up to the present moment. This level of transparency and trust is particularly important for high-value assets like the ones on TEND, but is hard to achieve in non-blockchain settings.
Blockchain’s trust-creating properties also provide peace of mind on a platform level. Because all transactions are immutably recorded on the blockchain, users can have complete trust in the transaction history. Because they can be sure this data cannot be manipulated in any way, users and partners can place the same faith in the TEND platform as a whole – despite it being a completely new business. This too is important in a platform dealing with high-value assets.
Finally, by running on Ethereum, TEND leverages an already existing, robust market infrastructure. That makes it extremely efficient to run, and hence very cost-effective for users. Ethereum makes TEND highly scalable as well, supporting its longer-term ambition of building a global platform.
Sharing Economy 2.0
TEND is predicated on the belief, which I share, that the blockchain has a crucial role to play in helping to create a hyper-connected, decentralized, and transparent world.
In the case of TEND, these qualities are being used to enable what we might call the Sharing Economy 2.0: a token-based economy with no intermediaries in which technology helps to democratize, in a secure and trustworthy fashion, access to assets and financial solutions that before were available only to the wealthiest few.
This is a different world in many respects.
In the Sharing Economy 1.0 we have today, the platforms in the middle still take the largest slice of the pie. In the new sharing economy, blockchain and smart contracts eliminate these middlemen by enabling direct one-to-one relationships between the parties of a transaction. That allows the participants to capture most if not all of the value created by their arrangement.
In this new sharing economy tokenization also makes it easier, and provides new incentives, for parties to work together directly. That drives adoption of these platforms, making them broader and ever more useful.
In a blockchain-based platform users enjoy a balance of privacy and connectivity that is not available in the centralized systems we have today. That’s because blockchains can give users complete control over their data, allowing them to share only the information they deem necessary and to control its use. That’s an extremely strong value proposition that will lead to new, and more powerful, kinds of network effects.
It may have been possible to integrate investment, experience, risk mitigation and the various stakeholders in a single platform like TEND before blockchain, but it certainly would not have been as easy or quick – or, for that matter, as secure.
I am convinced that such ecosystems are the wave of the future, and that projects like TEND can serve as an excellent indication of how that future may look. Please note that I am a Strategic Advisor to Tend Technologies.
In a previous post we pointed out that corporate banks were in danger of falling behind the technology curve. We also said that banks needed to respond through full-scale digitalization.
In this post we’d like to take a deeper look at the principles we think should guide this transformation.
Give them it all
We strongly believe the future will be one of platforms and ecosystems in which large networks of providers contribute to the collective value chain. Banks, however, have traditionally taken the opposite approach, serving most if not all of their value chain themselves.
This will not be sustainable in the coming world of regulatory mandated open banking, nor in a technology environment where banks but also third-party providers and clients can already easily consume financial services on broad-based platforms (think SAP Cloud, AWS, Google Cloud or Microsoft Azure).
We’ve seen other industries, like manufacturing, successfully implement multi-provider value chains. We think banks must focus on putting the infrastructure in place to build such value chains in financial services too – for example, by taking advantage of the burgeoning third-party Fintech offering.
In doing so, they must be careful to position themselves as platform owners. This is very important. Today banks own the customer relationship. If they don’t take the initiative to secure their place as the central players in the new ecosystems, they run the risk of losing that ownership, which would be disastrous.
One way we think banks can keep customers close is by extending their offering.
This can be within financial services, for example by providing insurance, accounting and tax services, or data analytics. Or, it can be by moving beyond financial services: banks offering supply chain finance, for example, could collaborate with partners to offer warehousing and logistics support too.
In this way banks can become a one-stop shop for corporate clients in the same way platforms like Amazon have become for consumers. This may sound farfetched. But with today’s technology, it is hardly impossible. We see no reason why banks shouldn’t explore broadening their business model beyond traditional banking.
The good news is, when it comes to building such ecosystems, incumbent banks have a significant advantage: their reams of customer data. To capitalize they will need to up their game when it comes to exploiting it for useful insight.
We have often asked ourselves why it is that in the enterprise world we can’t ask a question and get an immediate answer the same way we do every day in our private lives with Google?
The secret is being proactive – and predictive. Companies like Facebook and Google don’t just have data on their customers; they have real-time intelligence on what they are asking about. This lets them provide answers more quickly and precisely, and keeps them on the pulse of user needs. Banks must develop the capabilities to do the same.
Yes, the future is now
All of this calls for relentless innovation. Banks must digitalize, build the open infrastructures we have alluded to above, and master the new technologies like blockchain, machine learning, and artificial intelligence that will allow them to put the pieces together into a meaningful whole.
The need is all the more urgent considering that many other industries have already completed this process.
As a result, not only will corporate customers increasingly ask for the type of real-time, on-demand banking services that retail customers receive – they will also have the systems in place to consume them. Those banks that can meet this demand, for example by integrating their offerings directly into their customers’ ERP systems, will have a distinct advantage.
Last but not least, banks must be able to adjust to new business models as market dynamics change.
Take the sharing economy. In the past, people bought their own cars, motorbikes or boats. In the future, people will prefer not to own but to pay per use. We will see similar developments in the enterprise.
Banks as service providers could do well in such a world, but they will need things like advanced analytics to predict usage patterns and so be ready with the right products at the right time.
By mastering platform and ecosystem thinking, we think banks will be able to maintain their positions and even grow their businesses.
For its part, SAP has already reacted to these realities – building both an infrastructure layer (the SAP Cloud Platform) and a digital innovation system, (SAP Leonardo), both of which provide the foundations upon which to grow ecosystems.
We are convinced that the future belongs to platforms and network-based ecosystems. If they can seize the day, corporate banks have an opportunity to play a leading role in them.
If you are interested in learning more about the future of corporate banking, please join the discuss and meet Oliver Bussmann and Falk Rieker at the Sibos in Toronto on October 16th.
Bussmann Advisory helps C-suite executives, entrepreneurs and decision makers stay ahead of the digital disruption curve. With a client base covering top-tier banks, leading blockchain startups, global consultancies and other firms facing disruption, as well as strong connections in the global FinTech community, the Bussmann Advisory team is close to the pulse of the rapid changes facing industry. It provides thought leadership and advisory services above all in digital transformation, innovation orchestration, and business model re-creation.
A great wave of change has been breaking over the financial services industry for some time now. When it finally recedes, we can expect a fundamentally transformed market infrastructure to be left behind in its wake.
Driven by unprecedented speed and adoption of new technologies and business models, and accelerated by game-changing regulatory directives like PSD2 and GDPR, this new world of banking will be one of open architectures and broad, integrated ecosystems.
Banks need to act now to be ready for these changes, or risk being caught in the swell. Unfortunately, while some areas of banking are adjusting, others have not been keeping pace with the new currents of digital transformation.
This is certainly the case with corporate banking.
Many corporate banks are saddled with outdated legacy technology that is expensive to maintain, limiting what they can offer. Services tend to be splintered across multiple channels, making for a disjointed customer experience. Wildly different technologies and formats stand in the way of convenience and interoperability.
Under these conditions, it is understandable if corporate banking clients feel underserved, especially compared with what is available in other industries – or even in retail banking.
This is bad for the clients. It is also dangerous for the banks.
Out in the cold
We see two main areas of concern.
Digitalization has made it easier for non-banks to enter financial services. While the Fintech threat has not been as severe in corporate banking as in other areas, there are companies looking to disrupt corporate banking on any number of fronts. If banks don’t up their game, clients may increasingly look to non-traditional alternatives.
Digitalization is also changing how businesses operate. Enterprises and whole industries are digitizing along the full value-chain, moving towards large-scale, interoperable ecosystems. Those banks that cannot or will not become integral parts of these new digital ecosystems may find themselves out in the cold.
To avoid this fate, we strongly believe corporate banks must pursue full-scale digital transformation.
Among other things, we believe they should:
Think ecosystem. Corporate banks should start thinking in terms of platforms and ecosystems, just like their clients do. Today digital leaders are often platform leaders, and in future we will see industry-specific value chain platforms become the norm in many parts of the economy. Banks will want to be ready to serve such platforms.
Exploit the strengths of incumbency. As incumbents, corporate banks have many strengths. Chief among these is the wealth of data they have about customer needs, preferences, and behaviors. This data can be the oxygen to breathe life into their transformation efforts – but only if banks can liberate the information from the silos in which it currently resides. Corporate banks also have strong personal relationships with their clients, of the kind most Fintechs dream of. These relationships are likely to remain important even in a digital world. Banks should work hard to maintain them.
Innovate relentlessly. Corporate banks need to innovate to lower risks and costs across the whole organization. There is no end to opportunities, from improving the end-to-end client journey, enabling radical automation and process streamlining, and more efficiently managing capital — to using advanced analytics to increase share of wallet — or big data to pursue pricing excellence.
Be ready for next-generation business models. Most importantly, we think banks must prepare for next-generation business models. In Industry 4.0, technology will connect buildings, vehicles, sensors, and machines which will significantly increase productivity. At the same time, the Internet of Things will generate new types of clients and processes as our machines become autonomous agents: self-driving trucks, for example, which thanks to smart contracts can enter into their own agreements and spend and receive their own money. Banks must be ready to service these clients, and this way of working, too.
Riding the wave
This brave new world will open any number of possibilities for those banks that can adapt.
In a world of trillions of nanosecond micropayments and smart contracts, we think banks will increasingly be seen as trusted providers and fraud risk managers, for instance. This could generate new service opportunities and revenue streams, particularly for banks that have developed industry-specific capabilities.
We think digitalization will also allow banks to move from a one-to-one model based on traditional products to a one-to-many approach featuring new digital products and services. That’s good for clients but also banks – as many of these new digital services can be offered at scale while still being easily customized.
There are a host of other possibilities we might name.
While corporate banks may have been hiding their heads in the sand up to now, we think they can no longer avoid the wave of digital disruption.
Those that dive into the water now should be able to ride this wave to new heights. Those that don’t may very well sink.
Bussmann Advisory helps C-suite executives and decision makers in global enterprises stay ahead of the digital disruption curve. With a client base covering top-tier banks, global consultancies and other firms facing disruption, as well as strong connections in the global Fintech community, the Bussmann Advisory team is close to the pulse of the rapid changes facing industry. It provides thought leadership and advisory services above all in digital transformation, innovation orchestration, and business model re-creation.
For the past months, few industries have been riding the Artificial Intelligence bullet like financial services. Whether it’s Wall Street or High Street – most of the big names in banking have launched various attempts at harvesting the promises of deep learning, language processing or reasoning algorithms. Some with recognizable success stories in the likes of automating legal work or quantitative trading, others overselling the introduction of merely rule-based systems like robo-advisors or process automation as machine intelligence.
As of today, there are hundreds of vendors and consultants selling AI into financial services. More and more Fintech players also claim to use some form of Machine Learning, seen as a quality stamp helping to sell their applications into the financial industry. While this trend ups the pressure to rethink the value proposition of many products and services, it adds a whole new level of complexity and lock-in risk for traditional banks. Given the immaturity of many vendor solutions, they will almost exclusively rely on heavy training with banks’ data. What’s also seldom mentioned is that AI solutions are far from finished products, with a long path to readiness for integration and deployment in a large enterprise context. Moreover, there is a noticeable push of vendors that traditionally dealt with banks’ IT departments towards marketing their tools directly into the front office. Selling whatever buzzword gets their attention may make bankers fall in love with AI tools and speed up the their traditionally slow buying cycle. But buying technology for the sake of having technology typically won’t do the trick. Many business functions tend to start searching reasons to implement a certain tool; often without a clear concept of which client problem to solve, nor sufficient judgment of the effort needed to train algorithms or integrate a tool into existing IT architecture.
There is one theme that banks seem to have unofficially declared their favourite AI application: Chatbots. From San Francisco to New York, from London to Oslo and from Singapore to Shanghai – there are already various implementations of text-based chatbots answering client questions to more ambitious virtual assistants executing tasks like transferring money or scheduling advisor meetings. Add to that the first applications for devices like Alexa or Google Home, an even more challenging discipline given restriction to voice control plus unresolved data secrecy and authentication issues from their heavy reliance on cloud technology.
First learning curve
What most conversational agents have in common however is that their current user experience is mediocre at most. The vast majority are nothing more than dumb Q&A bots. Yes, Natural Language Processing is still the most challenging discipline in AI. And yes, users do give you a novelty bonus for the time being – after all we are still in the age of narrow AI. Currently most bots are capable of little more than linear, single-turn conversations. Many struggle with contextual background, let alone switching context during conversations. Navigating between content levels or understanding the status of a request is difficult. So is building shared context, which would make for a true dialog. With the memory of a certain Disney fish, and often helpless at facing sarcasm or fragments of sentences and words, today’s bots are far from enabling natural conversations. Numerous banks find themselves having to ramp up expert resources that spend their days scripting ever new contents into digestible answers. Many are genuinely surprised at the amount of training data needed to feed a bot with domain knowledge, the effort of getting even a single user intent right, and the lower-than-expected rates of correct intent detection. Add to this the challenge of generative replies and inferring new facts from user content, and it’s plain to see why many first generation chatbots have been shut down after only weeks in operation or trial. Humans have a habit of asking complicated questions, and humans tend to be annoyed quickly.
While bots hold the promise of easier, increased and more seamless interactions with clients, it will only be kept if the bank actually solves their most pressing needs. Don’t get me wrong, I’m all for innovation in financial services. But within reason. We are near the peak of inflated expectations and many banks seem unconscious of the deep trough likely to follow. It’s easy to fall victim to a hype, but when your own tech maturity speaks for starting with easier machine learning on structured data, it’s less smart to attempt automated client conversations first. It is essential to think through processes to the end – a conversation ending with a forced branch visit or waiting for physical mail will still be considered broken.
Multi-turn, multi-intent, multi-language, natural conversations are currently wishful thinking and still a thought for tomorrow. In the meantime, it’s worth considering whether the time is ripe for facing clients with automated chats today. This cannot be taken lightly. It is essential to gain experience with user behaviour and establish a viable strategy on how to tackle conversational commerce. Determine preferred channels, interfaces and ways to structure your data sources. Select your vendor carefully and get a reference from its existing clients. Don’t outsource this decision or overload yourself with unrealistic ambitions or complexity from the beginning. Give the bot a frame on what it can say and what statements may be problematic due to their legally binding nature. Start trials with internal users and work your way towards clients. Define minimum thresholds for quality KPIs and measure them. Learn to deal with emotional responsiveness and what makes for a convenient conversation. Be transparent about the fact that users talk to a machine, make clear what it can and cannot do. Give your bot a recognizable, likeable, but neutral persona. Think through how to deal with data secrecy. Determine below what probability of generating the right reply the conversation is handed off to humans, and don’t forget to learn from your service centre’s written replies. Run analytics on conversations and monitor how users’ needs and behaviours change.
As plain as it seems, an industry built on trust cannot afford to jeopardize user centricity.
When the blockchain first arrived on the scene, people concentrated on its potential to disrupt the financial services industry. This included banks and other financial services players, who for several years now have been intensely studying and pondering the implications of this new technology for their businesses.
Over this time, we have seen similar levels of interest in many other industries too, from global trade to healthcare.
One notable exception to this rule has however been the life insurance industry, where we have seen very little movement to date. Unlike others, life insurance does not appear to believe its business models are ripe for disruption by distributed ledger and smart contract technology.
We think this is a mistake. Here is why.
A dangerous complacency
The life insurance industry has traditionally depended on large, complex, closed distribution networks.
In Europe, for example, distribution is often handled through exclusive arrangements with banks, often called bancassurance. In other parts of the world distribution is typically carried out via brokers, agents or other distribution partners, also generally on an exclusive basis.
This exclusivity is not just rooted in contractual arrangements, but is strongly reinforced by the generally outmoded technology and processes involved.
Today’s insurance industry relies to a great extent on 1970s-era IT architectures, where data lives in large, proprietary, static databases and is pulled, processed, and returned by separate, equally complex legacy applications.
Such systems are highly costly to build, maintain and connect to. Many of the business processes that support these systems remain heavily paper-based, requiring a lot of trained staff. That makes them expensive and inefficient too, but also difficult for others to emulate.
The result is in effect large, impenetrable distribution silos. Thanks to the sometimes astronomically high cost of connectivity, it is not easy for brokers to change networks or extend their offering. Because data is not easy to share, it is difficult for brokers or end customers to compare prices or conditions.
As long as they remain under their control, such silos can of course be advantageous to the life insurers. Unfortunately for incumbents, their great walled towers are set to fall.
The frictionless future
Thanks to blockchain and smart contract technology, we will be able to replace the old silos with large-scale, open, non-exclusive life insurance distribution networks that will offer great benefits in terms of cost, connectivity and transparency.
With the blockchain, for instance, we can design and implement frictionless digital processes that are more efficient and far less costly than the expensive, cumbersome processes in use by the industry today. This will significantly lower the barrier to entry for new players.
As blockchain platforms are highly interoperable, almost anyone can easily connect to them. This will bring the current high cost of onboarding onto distribution networks down to near zero. The result will be increased competition as new waves of digital brokers, broker platforms as well insurance providers come online.
Blockchain-based platforms also make it easy to share data, which will increase transparency by orders of magnitude. Large insurers will find themselves competing on price and service for the first time, something they are not used to.
When you add smart contract technology on top of the blockchain, then the possibilities – and the threats for incumbents – are greatly increased. That’s because smart contracts allow us to put business logic directly on chain.
Today all business logic with regards to insurance policies, including their administration, is part of the IT application layer. In the blockchain future, the business logic becomes part of the smart contract and hence part of the chain.
This introduces radical automation into the picture, as everything from signing policies to checking if payments have been made to handling lifecycle events to paying claims is automatically executed by the contract.
This will not only make it easier for ever more providers to offer ever more products. It will also allow them to introduce new and highly innovative solutions with relative ease.
Getting even smarter
We believe incumbents should not underestimate the innovation potential inherent in smart contracts.
At Deon Digital – where Oliver serves as Chairman of the Advisory Board and Florian as Chief Technology Officer and Founder – we are building a smart contract modelling language that is blockchain technology agnostic.
This language will make it very easy for business analysts and process designers to model business processes in a high-level way, and then convert those models directly to contract code. By choosing such a distributed ledger-agnostic language, insurance product development becomes dramatically simplified, resulting in faster, cheaper and more agile product innovation.
This is just one example of the kinds of innovation that will make it easier for new companies with new ideas to design and execute new products. That will reduce barriers to entry and increase competition even more.
For these reasons, we think the apparent complacency of the life insurance industry with regards to these new technologies is misguided.
From the point of view of the blockchain, life insurance seems ripe for the picking.
It’s hardly a secret that the winds of change have been howling through the financial services industry. From post-crisis regulation to the Fintech revolution to the emergence of disruptive technologies like blockchain, there is probably no subject more hotly debated in the industry than its future.
It’s good that banks are taking these changes – and their attendant threats – seriously. They are researching, considering, and examining what to do. Yet while we see a focus on innovation, there seems to be a marked reluctance from some bank executives to recognise the degree of transformation required.
To some extent, this is understandable. There is an unfathomable amount of change happening at the moment, especially on the technology front, making it difficult to keep up. The degree of change that is being talked about – not just adjustments but profound rethinkings – can seem daunting too, making it hard to know how to react.
The prospect of the consequences can be intimidating. Banks are complex, often mature institutions that have already made significant investments in expensive technologies and processes. It can be difficult to accept the thought of abandoning them, as well as certain businesses, for the unknown.
We can sympathise. Both Antony, as the former CEO of Barclays, and Oliver, as the former Group CIO of UBS, know very well what it means to be on the inside of a global bank facing the gale force winds of transformation.
Having both now left these institutions for the front lines of this new, emerging world – Antony as CEO of 10x Future Technologies and Oliver as Founder and Managing Partner of Bussmann Advisory – we think we have a good perspective on what is in store.
That is why we are concerned that our old banking colleagues may not have the right sense of urgency.
Let us make no mistake: for banks the time for research and deliberation is over. As the financial services sector grapples with its Uber moment, so banks may soon face their Kodak moment – a rapid diminution in the relevance of banks to their customers as technology provides the means for others to offer a radically superior experience. The time to act is now.
In this short paper, we try to explain why. We summarise the situation facing banks today, examine its causes, and suggest what we think needs to be done – bringing the perspectives we have gained with our experiences on both sides.
New banking models
We are convinced that the banking business model will be greatly disrupted over the next five to ten years as the result of a complete re-architecting of the underlying market infrastructure. We are already seeing the end of the first stage of this process, in which apps and contactless technology have led to enormous changes in how we use bank branches and cash. This is nothing, however, compared to what is coming. We believe we will soon see a new, unprecedented wave of change influenced by a number of factors, including:
Broad-based platforms driven by standards and interoperability: The continued development and increased use of standards, along with ever greater technological interoperability, means that it will be increasingly feasible to build ever more broad-based platforms and ecosystems with other companies and FinTechs. As these systems are built, it will drive the creation of new business models.
Open platforms driven by regulation. Banks and other financial services institutions are preparing for the implementation of the revised EU payment services directive, PSD2, in 2018. This directive will force banks to open their customer accounts to third-party service providers; we can expect similar developments in other jurisdictions. This will lead to the creation of open banking platforms, allowing third parties – either as partners with banks or competitors – to create more exciting customer experiences than are available today, as well as provide increased transparency on performance and fee structures.
First-mover blockchain use cases. Blockchain has been tipped as a major disruptor of financial services for a while now, but only this year have we started to see blockchain-based platforms moving from proof-of-concept into production. The first movers have been focusing on areas like global payments, trade finance, automated compliance, post-trade processing and cryptocurrencies. That makes sense. It has been estimated that blockchain technology could drive efficiency savings of between USD 80-110 billion, a powerful incentive. And as the low-hanging fruit are successfully picked, it will only add to blockchain’s momentum.
An intensified war for talent. As the underlying market infrastructure changes, so too will the skills needed to build and run it. In financial services, these new skills will be in areas like artificial intelligence (in particular, robotics and machine learning), as well as big data, distributed ledger technology, and cybersecurity. We can expect a war for talent in these and related disciplines, as banks and FinTechs battle for the people with the right skills as well as the right domain and technical expertise.
Crumbling legacy architecture. To bring in the new, what to do with the old? Incumbents have long been dealing with the pressures of their high-cost, highly vulnerable legacy systems. These pressures will continue to grow.
Growth of FinTech challengers. As banks deal with their legacy systems, the door will open for more innovative, less encumbered FinTech providers. That will continue their push to ever greater market share.
Open for new partners
The opening of the financial services industry will present a completely new world for banks.
For one, this will mean getting used to different kinds of partnerships. Banks have traditionally been closed shops, designing, building and maintaining their systems themselves. While this worked in the past, it does not work in an age of highly complex, interconnected and rapidly changing technology.
In place of the standalone approaches of the past, banks will need to function as parts of larger ecosystems, joining networks of partnerships with FinTechs and other providers in various areas of their business. While challenging on the one hand, these partnerships can also help banks assemble best-in-class capabilities to create innovation and transformation at the speed and scale they will need, helping them stay competitive.
These open ecosystems will also create a new world for consumers. We will see this perhaps most dramatically with customer data, which will increasingly come under the control of customers themselves. With more say over how their data is used and which institutions they share it with, customer relationships will be far less sticky than they are today. The new freedoms customers enjoy with their data will enable them to seek more personalised advice and services from a wider set of providers. It could even conceivably be a source of income: in a world where personal data is a valuable commodity, customers may be able to request payment for its use.
Storm clouds of the 21st century
As financial services are disrupted, there will be no shortage of issues to overcome. Consider, for instance, the changes being wrought by PSD2. Here banks will face significant hurdles in areas like cybersecurity, enabling the integration and then onboarding of third parties, testing, and training. We can expect similar challenges in other areas of the banking business as the market transforms.
While this may seem like a lot of storm clouds on the horizon, banks should focus on the many silver linings. To return to the PSD2 example, banks that focus simply on doing what is necessary from a compliance perspective risk missing new opportunities. Those that take a broader view have a real chance to build a better customer experience, and with it new opportunities for revenues.
Banks should also be careful not to let the gathering storm clouds obscure their vision. Looking inward, they must be wary of an excessively risk-averse culture, which can lead them to move too cautiously. Looking outward, banks will want to be sure they don’t overlook where the real competition is coming from, and get blindsided.
To get an idea of the form such competition might take, consider what happens on our smartphones. Based on our behaviour, location and other factors, platforms like Google are already able to predict the next apps or services we may want to use, or information we may want to have. In the future, these platforms will be able to look at our financial preferences, consolidating our account balances, spending patterns and other information to provide us with highly personalised recommendations to help us manage our money and work towards achieving our life goals.
In other words, the financial advisor of the future doesn’t have to be a bank. It can be a machine, and not necessarily one that’s owned by a financial institution.
Facing new realities
So what do today’s banks need to be thinking about in the face of these new realities?
For one, banks will need to innovate beyond banking to reimagine the customer experience. That will mean taking a radical approach to reinvention. The current incremental approach to change and innovation will not be enough to survive in the future, let alone thrive. Nothing short of transformation is required. For this level of transformation to work, banks need to think beyond solving today’s problems. Instead, they must anticipate the needs and problems of tomorrow and actively help to shape a future that meets them.
In the real-time, connected world that will be enabled by such technologies as the Internet of Things and smart contracts, financial services will be increasingly embedded in the value chains of other industries. Banks need to understand what that means for them. They will also need a better understanding of the data in their possession, as data will be the oxygen that will feed the transformation and reinvention of financial services. The good news is that banks already have a wealth of data about their customer’s needs, preferences and behaviours. The bad news is that it resides in fragmented, closed and ageing systems, which prohibits them from aggregating and optimising it to offer better banking experiences. Those banks that can bridge their internal data silos will have a significant competitive advantage.
In the future banking marketplace, trust will become a key differentiator. We believe the definition of trust itself will change due to profound shifts brought about by the disintermediation of financial services and the adoption of distributed ledger technologies. If, as we maintain, customers will in future own and manage their own accounts and data, then the old question of whom I can trust with my money will be replaced by the new question of whom I can trust with my data. Those banks that can win trust will win business – though they should keep in mind that, once trust is given, customers will expect significant value in return.
That means banks will need to lead with the right values, particularly in the sometimes fraught worlds of digital data, privacy and cybersecurity. In these areas, customers will settle for nothing less than the highest standards.
Banking’s big moment
So what should banks be doing?
For one, banks will have to accelerate their innovation efforts while at the same time considering how to create transformation. That means breaking out of a ‘reactionary’ approach and mindset, breaking free from the burden of legacy infrastructures, and pursuing continuous instead of incremental innovation – among other things by learning from the dynamic, rapid culture of today’s new digital companies.
Doing so will most likely mean partnering with startups, FinTechs and other e-commerce players to accelerate change, grow new revenue opportunities and so achieve competitive advantage. This means adopting a Business Development 2.0 approach and embracing the FinTech ecosystem with an end-to-end orchestration – from setting the agenda to ideation to proof-of-concepts to go-live. 10x Future Technologies is a platform designed to enable such transformation, and can serve as an example. In a sector plagued by legacy technology, which prevents incumbents from reacting nimbly to technological threats, we believe the best platforms can only be designed from the bottom up, with the bank’s precise requirements and future-proof adaptability baked in from the outset. In doing so, banks can build significantly improved customer experiences at dramatically lower operating costs and with full transparency for bank management.
Last, but certainly not least, banks should be aware of the new perspectives all this change will bring. We think it is perfectly possible for banks to seize the opportunity presented by the Uber moment they are experiencing today, while avoiding the massive destruction of shareholder value that would result from a series of Kodak moments.
While it will require leadership and courage to provide the requisite focus on transformation, we believe there has never been a more exciting moment in banking, for those prepared to be bold.
Antony Jenkins is CEO of 10x Future Technologies and the former Group CEO of Barclays
Oliver Bussmann is Founder and Managing Partner of Bussmann Advisory and ex-Group CIO of UBS and SAP
About 10x and Bussmann Advisory
10x Future Technologies reflects today’s changes in infrastructure and business models by providing a holistic solution for banks to address their current challenges. 10x’s future-proof core banking platform will empower banks and non-banks to optimise their customer data and interactions in order to offer new innovative and compelling customer experiences in a secure and trusted way. This will put power back into the hands of the consumer and society and generate new revenue opportunities and models for banks.
Bussmann Advisory helps C-suite executives and decision makers in global enterprises stay ahead of the digital disruption curve. With a client base covering top-tier banks, global consultancies and other firms facing disruption, as well as strong connections in the global Fintech community, the Bussmann Advisory team is close to the pulse of the rapid changes facing industry. It provides thought leadership and advisory services above all in digital transformation, innovation orchestration, and business model re-creation.
But there was plenty of substance too. From announcements like the record R3 funding, the Enterprise Ethereum Alliance tripling its membership and JP Morgan’s partnership with ZCash, to the demo of Blockstack’s new decentralized Internet browser or Toyota’s pioneering work in blockchains for mobility, you could see how this technology was making its way out of the lab and gaining toeholds in the real world.
This was not lost on my clients, of course. One of the questions I get most frequently these days is where does it go from here?
The six levers
While we do seem to be nearing some inflection point in blockchain, much remains uncertain and hard to predict.
To try and find some clarity, I have taken to analyzing near-term developments in blockchain technology in terms of six key levers I believe are needed to catalyze a full-scale breakthrough.
First mover use cases. As only makes sense, first movers in this space have been focusing on the lowest-hanging fruit. We are seeing particular interest in areas like global payments, trade finance, automated compliance, and post-trade processing. With potential savings from efficiency gains of between 80 and 110 billion US dollars, we can expect some dramatic wins. It pays to keep track of how early successes are faring.
Business networks and consortia. I believe the “end game” for blockchain will be as the backbone of large-scale, open, decentralized business platforms. A first step along this road is for companies to organize themselves into blockchain-based business networks and consortia. I don’t mean technology-oriented consortia like R3 or Hyperledger, but rather platforms around actual use cases. Ripple, for example, has built a blockchain-based direct settlement network with some 30 banks. Seven banks recently got together to form Digital Trade Chain, a project to build a blockchain-powered cross-border trade finance platform for small and medium-sized companies in Europe. Others can profit by observing how such early networks and consortia function.
Technology convergence. Blockchain, of course, is only part of this picture. Tomorrow’s business platforms will be powered by a convergence of a number of key technologies, from big data and machine learning to edge computing and robotic process automation. A result will be a blurring of the lines between industries. It is important to understand how this blurring will transform the way we all do business.
Decentralized business models. New, decentralized business platforms mean new, decentralized business models. While we have long talked about business model disruption, we are now starting to see it. Storj, for instance, has built the world’s largest decentralized digital storage platform on blockchain. Lykke is building a global, decentralized financial marketplace. Chronobank is doing the same with recruiting talent. Anyone looking at new models for their business should be aware of the approaches used by these pioneers.
Tipping point. Success is often a question of timing, and it will be no different in this space. When can we expect large-scale breakthroughs? The tipping point for a new technology is generally when it approaches 15% of the market. To be a first mover you will want to be in position latest by then.
Blockchain ecosystem Finally, a main driver of blockchain breakthrough will be successful collaboration within the blockchain ecosystem. Here is where the technology-oriented consortia like R3, the Enterprise Ethereum Alliance or Hyperledger play a big role, as well as industry specific consortia, associations, regulators and even central banks. Companies should be aware and actively manage their ecosystem landscape.
The time is now
I think these levers can be a good lens through which to try and make sense of what is going on in blockchain. They can also be used as bellwethers: paying attention to developments in these areas can provide indications of where and when significant breakthroughs could appear.
The important thing – at least in my opinion – is to keep your eyes open and start to get active.
If there is one thing I tell my clients who are looking at blockchain for their businesses, it’s that the time is now.