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.
Here’s why.
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.
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.
These are:
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.
In a previous post I wrote about my belief that the world was ultimately moving to large-scale, public, decentralized technology models, and these would give rise to global, public, decentralized platforms for enterprises.
The impetus for that post was the announcement of the Enterprise Ethereum project, and my focus was on blockchain and the debate around permissionless or permissioned ledgers.
Blockchain, however, is only part of the picture. Today we are seeing a grand convergence of several technology mega trends that, working together, will make these future platforms extremely smart, fully autonomous, hyper-connected, fully decentralized, and very broad-based.
While it is the technologists who are building these platforms, it will fall to business decision makers to figure out how best to use them commercially. Certain industries are racing ahead in thinking about the radically new business models this future will bring. Others – including financial services – seem to me to be lagging.
I think that’s a mistake, as I intend to discuss in a later post. Here I would like to look at this convergence in some detail, as I think enterprises really need to understand the new environment they will eventually being doing business in.
All together now
Today, as people have recognized when for example talking about the fourth industrial revolution, we have at our disposal the various technological ingredients needed for radical automation and radical decentralization.
Most prominent among these, at least in a commercial context, are artificial intelligence (including, but not limited to, machine learning), big data, the Internet of Things (IoT), and edge computing.
Advances in each of these fields represent extremely interesting new technological capabilities in themselves. But to be truly useful for platform building, they need to work in tandem. That’s because they have a number of dependencies.
For example, thanks to artificial intelligence we can teach computers to think for themselves and make autonomous decisions orders of magnitude faster and, at some point, orders of magnitude better than we can.
But thinking machines first need to be educated – either by being fed a steady stream of information so they can learn on their own, or by being given robust enough models of the world to allow them to make intelligent choices without our help. The prerequisite for this is having enough information around in digital form with which to train our machines. This was impossible before big data.
Once our machines can “think”, we will want to “do”. To drive true large-scale automation, our AI decision makers will need to manipulate real-world devices outside of themselves. But this only works on devices that can receive messages, understand what they are being asked to do, and autonomously carry out their instructions. This was not possible before the IoT. And, as we are learning, for IoT-enabled devices to be able to react quickly, and so be useful in a decentralized world, they will not be able to wait for data and instruction from the cloud. Hence the current interest in developing edge computing, in which data and computation takes place on the devices themselves (the “edge” of the network) and not in central nodes. This prediction was described by Peter Levine, a partner at Andreessen Horowitz in his talk “Return to the Edge and The End of Cloud Computing”. In following video, Peter discusses the pressures that our pushing toward edge computing and away from the cloud:
Last but not least, no decentralized platform can be built if the nodes on the network, whether machine or human, can’t easily, securely, autonomously, transparently, traceably and quickly share data. Where can we look for a technology to allow them to do this? To the blockchain or other distributed ledgers, of course. For this reason, I think blockchain will play a key role in the coming convergence, as the communications, trust and auditing hub. But it is only a part of the picture.
New world, new model
There is no doubt that the radical decentralization and automation this will enable will have a radical effect on business models too. The new environment will just be too different for business as usual.
I expect that, thanks to far greater integration of value chains or between businesses and customers, business verticals will blur. The silos between industries will also come down.
Enterprise decision-makers will need to keep this in mind. In subsequent posts I will lay out in more detail how I think these new models will look, and how in my experience some industries seem to be doing a better job than others in preparing for the decentralized future.
There is no doubt that 2016 has been a tumultuous year.
From Brexit to Trump and the Ukraine to Syria, we have seen many upheavals on the geopolitical front. A lot has happened in Fintech, too, although here the upheaval has in my opinion been almost all positive. Today FinTech is firmly established as one of the biggest sectors in all technology.
What will next year bring?
We can look forward to more tumult I think. If there is one overarching FinTech trend, I would say that several things that were only “potentials” in 2016 will become much more concrete. That could make 2017 the “year of getting real” on a number of fronts.
Here are some of my thoughts.
The year ahead: Predictions for 2017
The year of the pilot. 2017 will be the “year of the pilot” for blockchain in financial services, as it moves from proof-of-concept into production. We should see this in particular in cross-border payments and trade finance. Overall however blockchain will still be restricted to the “low hanging fruit” in banking. I remain convinced that broad-based application of DLTs will happen more quickly outside of financial services.
The year of the standard. We may see significant progress in blockchain standards during the year. If so, it will be driven by small groups working on specific use cases as opposed to large, complex consortia. Indeed, I expect we will see consolidation in the blockchain consortia area.
The year of the platform. On the back of increased standards and interoperability, we should see broad-based platforms and ecosystems continue to emerge, driving banking as a service and the creation of new business models. Look for this particularly in the robo-advisory and lending businesses.
The year of the attack. The number of cyber-attacks on organizations will increase significantly, and we can expect a steady stream of revelations about hacks. Denial of service is becoming much more threatening and dangerous for banks and in 2017 banks and others will be called on to toughen their defenses. This will be reflected in cyber-security spends, which among wholesale banks will increase from 5% of total tech budgets to 7-8%.
Eye on the prizes: Trends to watch in 2017
Along with the above “predictions”, here are some of the trends I think worth keeping an eye on in the coming year.
PSD2 pushing partnerships between banks and FinTechs. Banks and other financial services players will have to spend 2017 preparing for the implementation of the revised EU payment services directive PSD2 in 2018. With the creation of open banking platforms, there will be opportunities for FinTechs to partner with banks to create more exciting customer experiences and provide increased transparency on performance and fee structures.
Competition among financial centers for FinTech innovation. 2016 was the year of regulatory sandboxes with the FCA and MAS Singapore leading the change by establishing themselves as business developers with a mandate to attract business to their respective jurisdictions. In 2017, leading regulators will strengthen their position with global collaboration and implementation of new policies and laws based on learnings from their “sandbox” environments in order to reduce uncertainty in the FinTech ecosystem.
The continued rise of smart machines. It’s no secret that there are great strides happening right now in artificial intelligence. Advances in machine learning and robotics will I think continue to sweep the business world. Startups will continue to get funding in the areas of risk assessment, research, investment management, trading and back office automation.
An intensified war for talent. Banks and FinTechs will be competing for people with the right skills. The key expertise in financial services will be in artificial intelligence, in particular robotics and machine learning, where the game will be to attract scientists with Masters Degrees and PhDs. There will also be a battle for domain and technicaly expertise in finance, distributed ledger technology, and cyber security.
A new road
Finally, 2016 was a very big year for me personally.
2016 was also the year of the launch of Bussmann Advisory, with the goal of helping companies stay ahead of the digital disruption curve.
The company has gotten off to excellent start, better than I could have imagined. For that I am grateful, to my new clients and all those who have collaborated with me and supported this move.
With that, I would like to wish everyone the best of the season and a happy and healthy new year. It promises to be an interesting one.
In September we – Oliver and Nick – published a joint blog post on why we didn’t think blockchain would be disrupting banks first. This caught some by surprise, since not only does blockchain seem predestined to disrupt financial services, but every day seems to bring new developments in this space.
On December 1 we had a chance to clarify our position at the Credits Blockchain and Bourbon fireside chat, where some 80 guests joined us at Level39 to quaff and question us about our views on the future of this tech – as well as share theirs.
We found the event interesting on two counts. One, it gave us a chance to clarify where we think blockchain is going in the immediate future. Second, it was a good sounding board for discussions on some of the larger blockchain trends we think will be of interest during the coming year.
Getting real
First, to our “predictions”.
From proof to pilot. 2017 will be the “year of the pilot” for blockchain in financial services, as it moves from a proof-of-concept technology into production, especially in the cross-border payment and trade finance areas.
From slow to fast. This will move more quickly than expected, and we could reach a “tipping point” over the next 12 months if enough players with enough financial capacity come together, as seems to be the case in several areas at present.
A better experience. Players have to prepare for the implementation of the revised EU payment services directive PSD2 in 2018. With the creation of open banking platforms, there will be opportunities for FinTechs to partner with banks to create more exciting customer experiences.
Fending off the attack. Cyber-attacks on organizations are on the rise, with denial of service becoming much more threatening and dangerous for banks. 2017 will be a year to strengthen defenses.
Banks still lagging. Financial services blockchain implementation will apply to the “low hanging fruit.” We stick with our main thesis that broad-based adoption of blockchains will happen more quickly outside of financial services – in areas like supply chain management, in e-government, or health care.
Racing ahead
Besides putting ourselves out on a limb with our concrete predictions for the coming year, we had a chance to discuss some longer-term trends and issues with our guests. Here are a few things we think worth keeping an eye on.
Breakthrough constellation. Technological breakthroughs usually happen at that moment when the five or six technologies needed to make a real change become cost-effective and convenient to use. With advances in secure hardware (IoT and smartphones) coupled with the improved algorithms in blockchains, we think the constellation is coming together for Distributed Ledger Technologies (DLT).
Race for innovation. In financial services we will see a ramping up of the already intense race between jurisdictions to push FinTech innovation, driven by regulators.
Setting the standard. We may see significant progress in blockchain standards during the year. If so, it will be driven by small groups working on specific use cases as opposed to large, complex consortia. We believe that attempts to establish standards before real-world, full-scale applications take off are likely to fail, and that it is always better to derive standards from successful implementations as opposed to the predictions of standards bodies.
DLT-enabled financial use cases resemble many of the broader FinTech use cases in that they enable the unbundling of previously combined functions. As FinTech unbundles specific services such as retail FX exchange, we can expect DLTs to be used to unbundle the on-boarding and trust relationships from the end execution in a wide number of sectors.
Great debates
One final thought. During the Q&A after our talk the broader societal implications of distributed ledgers was raised several times. The issues, while hardly new, can be thorny. Blockchains, for instance, are sure to intensify discussions about the balance between privacy and security.
We make no predictions here. But if we do start to see large-scale implementations of blockchains during the year, we wonder if these and other broader societal discussions might become more pronounced in government circles and potentially among the general public.
We would certainly welcome that. From the Silk Road to the DAO, DLTs suffer from bad press. As well as being a year of maturation for this technology, it could also be the year we begin to make a better case for it.
As two people who have been working closely with blockchain for a while now – Oliver as a FinTech advisor and former Group CIO of UBS, Nick as the CEO and Founder of Credits – we have no doubt about the technology’s potential to radically transform the financial industry.
A far better way to build and maintain interconnected ledgers – the heart of the financial system – it seems predestined for the job.
But while banks and FinTech companies around the world are busy developing blockchain-based solutions, we are likely to see blockchain “go live” in other industries first.
This is something of a paradox, and so we think worth a closer look.
Regulation, regulation, regulation
As Oliver can attest from his own experience, the main drag on implementing innovation in financial services is regulation.
As part of one of the most highly regulated sectors in the world, banks will need to wait for regulatory certainty on any number of issues before they can release blockchain-based platforms. Stringent rules regarding collecting, storing and sharing customer data add layers of rigorous validation, verification and internal signoff on top of the regulatory approval.
The fact that banks are coping with dwindling IT budgets, as well as heavy legacy IT investment, is an obstacle as well. As to an extent are legacy mindsets: The financial industry is heavily invested in centralized models; blockchain represents the opposite worldview.
More fertile ground
We believe blockchain will be implemented first in more lightly regulated sectors, particularly those which face challenges in managing data access control and ensuring data integrity. This can be sensitive personally identifiable information (PII) such as health care records, competitive secrets or other internal corporate data. Or it could be intellectual property, as with managing copyright for music or art.
Areas poised for takeoff include e-government, supply chain management and finance, insurance, real estate and the Internet of Things. BHP Billiton’s announcement last week that it was using blockchain to improve its supply chain processes is a perfect example of how this is already happening.
Useful use cases for all
At Credits, Nick has been observing this trend closely too. The company has been exploring a number of use cases outside of financial services, such as proof of identity, procurement processes, and interdepartmental payments. It recently worked with a client on a corporate identity blockchain solution.
Credits has also been very active in e-government, where blockchain has the potential to inject trust and accountability into many processes. This includes providing means to share sensitive personal data between departments that prevents data leaks while still allowing for data integrity checks.
The good news for banks is that many of the non-financial use cases also provide compelling first customers for the eventual financial ones. If we can solve supply chain management, for example, then we are not far from solving supply chain finance.
So while we may not see distributed ledgers taking over in financial services right away, that shouldn’t be interpreted as meaning it will never happen.
When it comes to blockchain and banks, there is no escaping destiny.
A transformation is underway in global financial markets, driven by startup firms and disruptive technologies, and investors’ needs are changing too.
The pace of change has been dramatic. When I read that global investment in FinTech ventures tripled to $12bn between 2013 and 2014 (Accenture 2015), it cements my belief that the fintech revolution could be the greatest opportunity the banking industry has ever seen.
We need to be part of this growing ecosystem.
Yes, start-ups have the power to disrupt as they’re quicker, more agile, and less confined by rules, regulation, or legacy technology. But we bring something to the table they don’t have – in-depth understanding of our clients. This is why it’s so vital that startup firms and big banks work together, share ideas and combine their skill sets. It’s how we will maximize the business opportunities in our evolving industry.
With over 150 years of experience and a global reach, UBS has value we can add to the innovative process. How do we scale our ideas? Are we delivering what clients really want? Are we exceeding their expectations? The technology can be built and proven, but start-ups will still need to ask themselves these questions. We explore some of these issues and more in our new Life’s Questions series.
So how do we go about collaborating with these new and fast-growing firms?
It starts with making sure we’re part of the conversation. That’s why we were the first bank to establish a presence in Canary Wharf’s Level39, home to over 170 startups, and why we have established an innovation presence globally.
At Level39, we’ve created an innovation lab, a unique platform from which to explore emerging technologies such as cryptocurrencies and the tools that power them, such as blockchain. How will revolutionary ideas like these impact financial services in the future? We want to play a role in how these solutions develop.
Our specialists act as mentors to entrepreneurs, giving them a sounding board to help them answer the big questions facing their businesses, from regulatory issues to the best way to handle the next stage of expansion. We know expanding a business can be daunting, so our new brand campaign focuses on how UBS can help company founders get over the hurdles to growth.
But that’s not all we do. Another new initiative helps us find the innovators of the future namely our Future of Finance Challenge, a global competition to find fintech startups with potentially disruptive technological ideas and solutions that could reshape our industry. We’re looking forward to revealing the winners of this competition following the regional finals in November.
As well as tapping into the wider FinTech community, we know how important it is to make sure our own house is in order. So we have been investing heavily into new technologies within the UBS group.
Extensive market research is helping us to understand what tomorrow’s clients will expect from us, and we are building a state-of-the-art IT structure which will help us to deliver it.
As the world’s largest wealth manager, we want to stay at the forefront of thought leadership, whether in technology, services or products.
FinTech innovation is reshaping the landscape of financial services, and we’re excited to be part of that ecosystem