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.
Huge expectations
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.
Challenges
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.
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 Brexit was a shock to large parts of the UK business community. This is certainly the case in the financial technology, or FinTech, sector.
FinTech is a catch-all term used to describe the exploding number of technology companies – both startups and established firms – building products and services to improve and transform financial services. It has become a significant industry, attracting over 25 billion US dollars in investment globally in 2016. Since FinTech arrived on the scene the UK has been one of this nascent industry’s clear leaders.
After the referendum this position is no longer secure, and UK FinTechs are concerned. As someone who, through his work, has come to know the UK FinTech scene quite well, I can understand.
Here are what UK FinTechs are particularly worried about when considering their post-Brexit future:
Talent. By far the most pressing concern for UK FinTechs is the future of their workforce. Both finance and tech are highly globalized, internationally oriented industries, dependent on an international talent pool. In a report last fall Innovate Finance, the non-profit organization that represents UK FinTechs, noted that the founders of almost a third of its members were non-British. (It also noted that over 40% of workers in Silicon Valley are foreign born, underscoring just how global tech talent really is.) Anything that restricts access to skilled people will hurt UK FinTechs.
Access. Brexit represents a break with the UK’s largest trading partner – a significant market of over 500 million people. As part of the EU, UK FinTechs requiring a financial license enjoyed easy access to this market through a process known as passporting, by which a UK-based license is generally enough to do business in other EU countries. The UK government has said it will ensure full access to the EU post Brexit, but the Europeans have been more reticent on the subject. Any loss or increased difficulty of access will be a blow.
Investment. While global investment in FinTech has been rising, it has slowed down in the UK lately, mostly due to Brexit-fueled uncertainty. It’s too early to say if this a long-term trend. Yet there is no doubt that if confidence in UK FinTech is eroded, that would make it less attractive for foreign investors. An exit from the EU also likely means the loss of EU-based seed funding for VCs and startups, which has been a useful source of support for innovation in the past.
Time to act
What can the UK and its FinTech community do? There are several things.
First of all, the government should ensure the country remains open to tech talent and tech entrepreneurs no matter where they hail from – for example by relaxing visa requirements for skilled workers. It can also do more to nurture home-grown tech talent through education and skills policy.
Though it will be easier said than done, during the Brexit negotiations the UK government should do its best to assure its financial services companies, including FinTechs, maintain access to the European market. Failing that, the government should concentrate on making it as easy as possible for UK FinTechs to enter from the outside. One way is to harmonize UK financial services data standards with those coming into force in Europe.
The UK government should also do what it can to ensure UK FinTech startups have access to VC and other early stage funding, particularly if EU-based sources, like those currently supplied by the European Investment Fund (EIF), dry up. It can do this through tax and other policy, including strengthening the role of the British Business Bank (BBB).
The road ahead
To be clear, I am not saying that Brexit has sounded the death knell for UK FinTech. Quite the contrary: there will doubtless be opportunities as well as challenges.
Outside the larger EU framework, the UK government might have more room to introduce FinTech-friendly regulation or pursue policy to make it easier for these firms to find financing. It would also find it easier enter into bilateral agreements with other countries. If the UK can for instance get closer to the US administration on the FinTech topic, bringing each country’s FinTechs and investors closer together, UK FinTechs would no doubt profit.
A fierce battle is underway to define the future of blockchain, with multiple types of public and private networks all competing. So when I read about industry efforts to build a corporate version of Ethereum — which is more commonly thought of as a public blockchain platform — I am intrigued.
Development is in the early stages, but if a viable enterprise Ethereum emerges, it could be a strong contender for that blockchain standard crown.
An enterprise version of Ethereum could be used almost immediately to build robust, large-scale private blockchain implementations in almost any industry or for almost any purpose. More importantly, because of Ethereum’s roots as an open-source, public blockchain, an enterprise Ethereum would be equally well suited to eventually building global, freely-accessible and consumer-oriented business platforms.
Public versus private
I strongly believe the future lies in such open, decentralized platforms, and that Ethereum is an excellent candidate to make that future a reality.
As has been pointed out elsewhere, Ethereum is a highly attractive blockchain implementation for business and has already garnered a great deal of enterprise interest. This is because Ethereum is readily available, easy to learn and use, and also fully programmable — or, as it is known, Turing complete. Therefore, developers can adapt the technology for any business purpose. Individuals, companies, consortia or even whole industries can easily build their own platforms on top of the public protocol.
To date, adapting the public-network technology for corporate platforms has however been slow. Execution has not yet been possible for a number of mostly technical reasons. To understand why a viable enterprise Ethereum would be so compelling, we need to look at those reasons in some detail.
One of the fundamental distinctions in the blockchain world is that between permissionless and permissioned chains. A permissionless blockchain, like the original one for bitcoin, is an open platform. Anyone can join. Permissioned blockchains, meanwhile, are restrictive. Some authority must grant access.
When bitcoin burst onto the scene, the enterprise community quickly understood the potential of its underlying blockchain technology. But it also quickly saw the limits in the business environment of the kind of public, permissionless distributed ledgers the bitcoin blockchain represented. Such limitations related to speed, security, privacy, cost, lack of programmability in the original bitcoin blockchain. The list goes on. Many of these issues are a result of the functionalities needed to make a public blockchain viable (for example, the consensus mechanisms that prohibit cheating).
By controlling access to only allow trusted users onto the platform, developers can sidestep many of these problems. As a result, we have seen Ethereum used for various kinds of private, permissioned chains in any number of individual projects or in larger consortia like R3 CEV or Hyperledger Project.
But while permissioned chains make sense from a security and confidence perspective today, the picture looks different down the line.
Going with the flow
For one thing, private chains are not as scalable as public ones, which can be a major limitation. Take a use case like trade finance or a global loyalty points scheme. You don’t want to limit these to an inner circle of members. Rather, you want to make it as easy as possible for the largest number of entities or users to connect. Public chains — open to all — are more flexible in this regard.
A privately owned chain is also reliant on the skill, expertise and continued investment of its owners. That means cost and effort to build. It also means potential risk for clients of being tied to the decisions — and perhaps the mistakes — of the developer. Private chains also generally mean private standards; therefore, they may not be as interoperable as public ones.
The enterprise Ethereum project seems to be a serious effort to deal with these issues by bringing the public, open consumer side of the equation together with the business side. In doing so, a community of some 10,000 Ethereum developers around the world — a group with profound experience developing the platform as well as working in a decentralized environment — could unite with the traditional business/enterprise development community. This would be a powerful mix, and would correspond with other broader important trends in the blockchain community.
I believe distributed ledgers will tear down information silos. As a result, the line between what is enterprise and what is consumer will fade, as will the lines between different industries. We get a hint of this today with the weakening of the information silos separating supply chain management and trade finance.
Centrally managed platforms dedicated to a single sector will struggle to cater to such environments. Open platforms are more flexible; therefore, they are better able to handle and facilitate cross-industry usage of information and services as well as integration of different types of entities and users.
As the Internet of Things matures and billions of devices come online, we will see an explosion in the sheer numbers of entities needing to interact. Private, permissioned platforms will have problems handling such large-scale hyper-connectivity. Open platforms that are easily accessible and extensible by the community are more suited to this kind of world.
The sky is the limit
Increasingly, I believe that a decentralized model is the only way to manage and transact in a highly distributed world of the kind taking shape today – and that we will end up with some kind of public cloud environment for enterprise blockchains, as for much else. It won’t happen overnight, but the signs point that way.
If this seems farfetched, remember that there were similar discussions in the early days of the internet. Back then, some said AOL should be the global platform precisely because it was private, more secure, and so on. But the open standard won out in the end.
We will have to wait and see what comes out of an enterprise Ethereum project, if anything. But I think it’s something to keep a close eye on. If it can be made to work, enterprise Ethereum has a real shot to become an open, global blockchain standard.
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.
When people think of vibrant FinTech hubs, cities like London, Singapore or New York usually come to mind. Fewer would put Istanbul on their list of major centers for financial services innovation.
Unjustly, in our opinion.
The truth is, Turkey has been a hotbed of financial innovation for quite some time. Thanks to support from the government and the Turkish financial services industry, we think it has what it takes to soon be counted among world’s top FinTech locations.
Here’s why we think so.
Young, and plugged in
Turkey has a history of embracing new technologies, including mobile banking and peer-to-peer payments, ahead of other nations. Turkish banks, to take one example, were pioneers in the development of digital wallets allowing clients to make direct payments to vendors and each other. They have also championed innovations, like biometric authentication at ATMs, that are still rare in most other jurisdictions.
Part of this success in financial innovation can be put down to the country’s natural advantages. With half of its 80 million inhabitants under the age of 30 it is a nation of young people, many of whom are very well educated. Turkey also leads many other Western nations in terms of internet speed and smartphone penetration. This makes it a good environment for digital innovation in general and FinTech in particular. Under these conditions it’s no surprise that Turkish bank clients have shown such a keen appetite for adopting new technologies.
Turkey’s innovation track record is also a result of government policy. In 2009 the Turkish government launched the Istanbul Financial Center Initiative with the goal of making Istanbul a global financial center by 2023 (and of turning Turkey into the world’s first fully cashless society by the same date). Since then the government has passed laws to bring Turkish financial markets closer to their EU and US counterparts, merged its stock, gold and derivatives exchanges to form Borsa Istanbul, the largest exchange in the region, and built a Canary Wharf-style financial district on the Asian side of the Bosporus. The government has also announced plans to create a Finance Technopark in Istanbul in cooperation with the Turkish exchange and a leading university.
Fintech Istanbul: The next step on the road
The launch early this year of Fintech Istanbul, with which Oliver has been collaborating closely, is an important milestone on this journey.
Sponsored by BKM (Interbank Card Center) – the only company in Turkey providing switching, clearing and settlement for card transactions, as well as the operator of the National Digital Wallet, BKM Express, plus the national payment scheme TROY – the new organization aims to foster FinTech collaboration and help position Istanbul as an important FinTech hub through a number of different activities.
These include:
FinTech 101 trainings focusing on teaching local entrepreneurs the basics of Fintech as well as digital innovation.
FinTech meetups as a regular platform for all members of the ecosystem to meet and share their experience and expertise.
Information dissemination through posting the latest FinTech news and views on social media and the fintechistanbul.org website.
Cooperation with other FinTech hubs through developing its global network, including as a new member of the Global Fintech Hubs Federation (GFHF).
Collaboration as key to innovation
Fintech Istanbul is also keen to attract outside experts to the Bosporus to share their knowledge and so help the hub mature. That was why when BKM heard Oliver was regularly in Istanbul on an advisory project for one of Turkey’s larger banks, it invited him to give the keynote at the graduation ceremony for its first Fintech 101 class.
We expect this collaboration to continue. As Oliver has written elsewhere, FinTech ecosystems and innovation management and orchestration, is required to be successful. With farsighted policy and its natural advantages, there is no reason to think that Turkey won’t continue on its path to the top leagues of FinTech.
We invite all those searching for the next great FinTech hotspot to learn more about Istanbul and Turkish FinTech. They may very well find what they are looking for here on the Digital Bosporus.
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.
