Tag: Financial Services

If you want to implement GDPR, don’t ask an expert

Posted on July 14, 2016 - 12:00 am by

On 27th April this year, the European Parliament voted to adapt the new General Data Protection Regulation (GDPR). As the first EU data protective directive for more than 20 years, it aims to ‘strengthen citizens’ fundamental rights in the digital age and facilitate business by simplifying rules for companies in the Digital Single Market.’ After the law is adopted, there is a two-year ‘grace period’ for adoption, but organizations should, of course, start the work as soon as possible.

The arguably most publicized change is that violations by companies can lead to huge sanctions: 4 percent of annual turnover or €20 million (‘whichever is higher’). It remains to be seen whether this option will be exercised, and to what extent, but it has certainly received some attention. Other changes include the need to report incidents within 72 hours, a requirement for organizations in the scope to appoint a Data Protection Officer (DPO), and a general strengthening of the rights of citizens over their own information.

The GDPR joins a long line of compliance requirements that have been hitting organizations for the past decades. For a few years, I was Head of Compliance for a Fortune 500 company and saw the increase firsthand. It seemed that every other week we were asked by customers, governments or international organizations to comply with rules in new areas: security, privacy, occupational health and safety (OHS), conflict minerals, and environment and corporate social responsibility, along with many other national and international requirements that put a lot of stress on the organization.

Every time a previously unknown requirement popped up from a customer, we looked within our organization; most often, there was an expert somewhere. The experts were then called into the headquarters to set up a compliance response to the new requirements. But over time, we found that we could not give the expert the lead on the integration. Why not?

The plus sides are obvious: the expert is knowledgeable and often very committed, but the problem with experts is that they have – by definition – narrow expertise. If you are an OHS or security expert, it is very rare that you have any wider experience of management. The typical response, then, is to treat each new requirement as something fundamentally new. That leads to the creation of tailored responses that do not integrate with already existing solutions. All of a sudden, you have one management system for security, another for privacy, and yet another for conflict minerals. In the worst-case scenario, you have one of each in each country you operate in. You can forget about scale and skill then.

Most compliance regimes have a lot in common. For example, they all require some sort of demonstrable management commitment, documentation, policies, etc. Within IT jurisdiction controls – like change and patch management – are requirements of many different standards. That means that a lot of work can be done on a common level to address several different compliance requirements. Once those elements have been addressed, it is possible to address unique aspects of different legislations or standards. That is where the experts come in.

For example, to address the GDPR, companies need to know where in their IT environment they have personally identifiable information (PII). Privacy risk assessment workshops need to be set up and conducted efficiently. An expert can help with that. But the requirement to report to authorities within 72 hours is not so clear-cut. For most, if not all, organizations, this requirement will need to be carefully integrated with other reporting procedures, such as the whistleblower and the IT incident reporting procedures. The person leading that effort cannot be (just) a privacy expert, they have to be someone who understands the complexities and challenges of general management.

So, what should you do to address the GDPR without creating a completely separate management system?

  1. Put the ownership of implementation with someone who has an overview and understands the challenges of day-to-day management. This is not a role; it is a person. It is someone with the intellectual faculties to be able to tackle complex issues, the experience to know what works, and the diplomatic skills to negotiate a ‘good-enough’ solution that fits all needs without costing a fortune.
  2. Make sure s/he has the expert support s/he needs, but retains ownership of the process.
  3. Have as few controls as possible, and let the people who are normally in charge of the processes work out how to make them as effective and efficient as possible.
  4. Follow up qualitatively, as well as quantitatively, to ensure that the controls are meeting their objectives.
  5. Let senior executives do the actual follow up as often as possible. It will help them understand the integration of different requirements under their responsibility and immediately address problems that are discovered.

[1]http://europa.eu/rapid/press-release_MEMO-15-6385_en.htm

The Strategic Dimension of Regulatory Initiatives

Posted on October 13, 2016 - 12:00 am by

Since the financial crisis of 2008, the permanent flow of new regulatory and compliance initiatives within the financial services industry has seemed endless. Across the world, governments and regulatory bodies have been empowered to push reforms for financial service institutions in order to reduce their risk, increase their stability, provide greater transparency, protect their customers, exchange information between tax authorities, strengthen their capital basis and increase their liquidity. Today, regulations cover the whole value chain for financial services institutions.

Regulation is nothing new to the financial services industry, but where financial services institutions previously passively implemented regulatory requirements, these companies now link regulatory requirements directly to company strategy. Most financial services institutions have gone through three phases in terms of how they have managed regulations:

Phase 1: Operative Implemented

As a first step, the majority of financial institutions managed the process of handling regulatory requirements in a more traditional, reactive mode. New directives from the regulator were analyzed in detail in order to understand their impact on the company. Finally, these new requirements were implemented in as lean a way as possible in order to minimize the distraction to business.

Phase 2: Business Combined

In recent years, as a result of the enormous regulatory requirements and the involved costs, financial institutions have begun to consider additional aspects and recognize the value of proactively combining regulatory and business requirements in order to achieve a competitive advantage and contribute to the bottom line. As a result, banks increasingly linked large regulatory initiatives with business requirements. A shift took place and several financial institutions started to consider such a project as an opportunity rather than an annoyance. They started to combine the regulatory requirement with business initiatives such as efficiency improvement, business process reengineering and CRM revitalization in order to achieve several objectives at the same time.

Phase 3: Strategy Linked

Today, several financial services institutions are even one step ahead, with regulatory matters having become a key part of their strategic agendas. The link-up between regulatory strategy and business strategy is becoming increasingly important – something that other industries, such as life sciences and aviation, have known for years. The necessity of understanding the strategic dimensions of the regulations and their impact on a business is one reason why Senior Regulatory and Compliance Managers are increasingly involved in strategic planning.

Changing Requirements

This rapid development has had an enormous effect on the composition and structure of Regulation and Compliance departments, and projects within the industry. The requirements for key professionals have continuously changed over all phases.

During phase 1, the priority is primarily to understand the regulations legally and technically, and more or less ‘instruct’ the relevant businesses what to do and how to comply.

In phase 2, a comprehensive and combined understanding of business, product and regulatory issues is required in order to contribute to the bottom line of the business; subsequently a different set of capabilities is necessary, for example: experience in business process reengineering & target operating modelling, understanding of change management, knowledge in client relationship management (CRM) and technical experience (e.g. digitisation, FinTech, InsurTech), etc.

Today, several global institutions have already reached phase 3, and have established special departments in order to combine strategic regulatory initiatives and projects with business strategy. The overall complexity involved in handling these initiatives is enormous, and the requirements for the professionals working in these areas are immense. For example, to coordinate a TBTF project (Too Big To Fail), which, on the one hand is a global initiative, but, on the other hand is largely driven on a national level, requires professionals with much more than just technical regulatory capabilities.

Currently, based on our experience, a combination of the following requirements is needed in order to successfully deliver on a strategic regulatory project:

  • Strong consulting background (e.g. strategy and organization development, target operating model, business process reengineering, etc.)
  • Comprehensive financial services knowledge (e.g. asset management, wealth management, payments, EAMs, insurance, etc.)
  • Broad legal and regulatory understanding (e.g. legal background and the capability to get into regulatory content very quickly)
  • Sound stakeholder management experience (e.g. actively driving the interface between business and regulatory, etc.)
  • Experienced project management (e.g. strategic decision support, change management, etc.)

Depending on the regulatory initiative and its objectives, the characteristics of the required capabilities might differ, but the overall combination remains more or less the same.

At a-connect, we focus on establishing a full understanding of our clients’ business challenges and project needs, allowing us to choose the best talent for them from our unrivalled network of independent professionals, who usually combine a top-tier consulting skillset with extensive industry, regulatory and management experience.

With their unique skillsets and our expertise, we seamlessly integrate a-connect professionals into project management organizations along all capability areas – worldwide and in a tailor-made way.

Asian Financial Sector – Rocks and Hard Places

Posted on March 27, 2017 - 12:00 am by

SITUATION

Despite optimistic market and media hype about global financial markets, there are currently very few businesses and industries that are not experiencing tough and volatile trading conditions. The Asian financial services sector is undergoing a particularly tough time – despite its strength only a few years ago.

Just over a decade ago, banks were rushing to Asia to establish a foothold or expand existing business. China’s economy was comfortably the fastest-growing economy in the world. Asia was booming, and all corners of the financial world were looking to join the party. And what a party it was – in 2015, almost half the banking industry’s global profits originated in Asia!

HEADWINDS

However, having survived the global financial crisis of 2008, the Asian financial sector is now facing strong global and regional headwinds that have developed over a relatively short period. These forces have put intense pressure on players in the Asian financial services sector, with companies experiencing the following challenges.

  • Higher skill costs: There are skill shortages within Asia, with expanding businesses driving competition for talented staff.
  • Lower revenues: Margins in wealth management are shrinking. Global banks are losing their share of new issue businesses in the region, particularly the China-related transactions.
  • Increased capital requirements: Global regulators are implementing new capital requirements.
  • Operational complexity: Many new compliance regulations have been introduced by regulators, with more regulations to follow. Banks are more sensitive to compliance and reputational issues, both of which generate operational complexity.
  • Restrictions in China: China’s capital markets are not really open to non-Chinese institutions. To curb capital flight, authorities are restricting capital flows, making business more difficult and unpredictable.
  • Disruptors: Robo-advisors, external asset managers and exchange-traded funds (ETFs) are disrupting the financial services space.

Slowing macroeconomic growth

Historically, one of Asia’s biggest attractions to global markets has been its high gross domestic product (GDP) growth rates. Growth expectations are now much lower; however, Asia is likely to remain one of the fastest-growing regions in the world. For banks with operations in Asia, this is a double-edged sword – each institution will fiercly defend its shrinking revenue pool as much as possible, but will also appreciate that existing business models are unlikely to deliver the results expected in Asia. Regional managers must develop and implement strategies that are adapted to the Asian market – indeed, their boards will expect nothing less.

THE PRIMARY RESPONSE OF BANKS

As is to be expected, the banks have responded to the situation in the Asian financial sector – but, while these responses have had a positive impact, they have generally not been revolutionary. Banks have:

  • Shed expendable members of staff.
  • Actively reduced the total compensation of remaining staff.
  • Implemented ‘low-hanging fruit’ projects (the lowest expenditure for the greatest impact).

Banks in Asia now generally find themselves between the proverbial rock and a hard place. They have taken some painful actions to mitigate the difficult business conditions; however, these headwinds are not dying down – in fact, they are looking more like a permanent feature than a cyclical phenomenon.

The financial industry is now in the process of making tough decisions about the actions required to continue to operate profitably in Asia’s changing financial environment. These deliberations require the development and implementation of some, or all, of the following:

  • A revised or updated strategy that aligns with banks’ core capabilities and strengths.
  • Lower-cost client interactions.
  • Projects and changes that will deliver more efficient infrastructure.
  • The process of growing business by expanding scale, introducing new products and/or providing new services.

Of course, some organizations will not have the luxury of having large capital investments at their disposal – so these players would have fewer potential future strategies available.

INDUSTRY OUTLOOK

Due to the ever-changing global financial landscape, banks operating in Asia will need to develop revised strategies and implement new business platforms to help them stay ahead of the curve. This may require seeking advice from experienced consultants or perhaps investing in additional project staff. But, before doing so, there are some important trends to consider.

Established or evolving trends

There are several business trends that currently face the Asian financial services industry, each of which further complicates the development of a successful business model in Asia.

  • Insurance distribution: Insurance companies are urgently expanding their sales and distribution networks. Bancassurance partnerships with banks are popular; however, it is not clear whether both parties will end up with what they originally desired!
  • Client segmentation: Several global banks have enforced stronger client segmentation. These measures create client differentiation and some operational efficiencies, but do not offer big changes to operating models.
  • Security trading: Global banks with big security trading operations have trimmed costs. The bigger equity operations have more than 70 percent of orders processed as non-touch orders, and efficiency gains are increasingly difficult to achieve. Bond trading operations have been drastically cut due to increased capital requirements.
  • Private banks: A lack of critical mass in Wealth Management is an issue – several businesses in Asia have already been sold, with more expected to be sold in the future. A common view is that private banks with client assets less than USD 20b are not profitable.

Paths of least resistance (risk)

Some banks that are operating in Asia may consider major backbone IT investment projects to reduce costs; however, the time, risks and capital costs of these projects will deter many institutions from going down this road. Several banks have chosen to use their IT investment budget by developing new client engagement tools and models, justified by their lower project risks. They are developing, for example, front office, mobile banking and client analytics tools – offering new client experiences and developing internal efficiencies. With Asian populations being relatively e-friendly, this is becoming a popular strategy amongst banks.

There is also much discussion around resource sharing; some deals that extend client offerings have been announced, as well as discussions relating to banks sharing operational centres to reduce costs.

Banks in the region have not seriously adopted any robo-adviser, regtech or fintech models. They are certainly not pushing the boundaries, but the bigger players keep a close watch on the space as they could grow into a threat. These new business models are taking root in other parts of the world – they will also come to Asia in the near future. When considering the China heavyweights – Alipay, WeBank, Lufax, etc. (large existing businesses that have capital in abundance and a growing desire to expand beyond China) – these changes could take place very quickly, transforming the banking landscape in Asia.

Financial institutions in Asia are now adapting their business models to work between these many rocks and hard places in this complex and fast-moving environment. There is a natural preference for implementing lower-risk models, but the question is whether banks can do enough to slow the profitability erosion. For banks in Asia, their own future wellbeing is bound into these decisions. We are in for a momentous and exciting few years ahead.

Here at a-connect, we believe that, with the guidance of a team of specialist independent professionals, banks can overcome the challenges posed by the Asian financial sector. Contact us today to find out more.

The Power of Disruption

Posted on May 12, 2017 - 12:00 am by

Here are the simple facts:

  • Even though retail remains the most innovative part of banking, banks have slowly seen their share in payments erode from 80% in 2009 to 46% in 2016.
  • While the banks’ focus has remained on generating revenue from card interest and payment processing, the fragmentation of the value chain has prompted a decrease in margins for both payment processing and merchant acquiring – with even big banks like Barclays unable to buck the trend.
  • Consumer behavior has changed, with key players like Amazon, Netflix and Apple Pay increasing the expectation for instant gratification (‘I saw something that I could buy instantly’) and personalized suggestions (often with a high degree of accuracy).
  • Payments have become the epicenter of FinTech innovation, accounting for 40% of new FinTech companies/disruptors. (Source: McKinsey FinTech Database, 2015)

So, we have to ask the question: have banks simply given up on their dominance over payments? And, more importantly: can banks stop themselves from losing further ground?

I’ll venture a guess and say that, yes, banks have simply given up – though some of them, particularly global banks, may argue that their ability to service retail and corporate clients continues to ensure that they’re uniquely positioned to deliver to a broader client base. I’ll also say that, no, they won’t stop losing further ground – not with their existing mindset and their current approach to running their payments businesses.

Here’s why:

  • Banks have had to face tighter regulation, over the past 8 years, which made it easier for FinTech challengers to enter the market under more favorable conditions.
  • Regulators want to see increased competition. In many European countries, banks own the payment scheme as well as the payment processor. It’s just a matter of time before banks will need to concede control because regulatory intervention will trigger governance reform of payment systems and direct participation by non-members into payment schemes.
  • The widespread adoption of digital tools by customers, plus the banks’ inability to provide compelling digital platforms, even for e-banking, have eroded customer trust and created brand detachment regarding the digital experience that banks can offer.
  • Payment companies are essentially technology companies – banks are still grappling with their legacy infrastructure and have not been successful at identifying and implementing new technologies. In addition, many merchants and payment providers have moved to a cloud-based infrastructure, while banks are typically slow at implementing cloud technology.
  • The digitization of the payment industry has made it possible to add value using customer and merchant data. However, while banks hold enormous amounts of valuable data, they have been unable to meaningfully extract value from it for three key reasons: lack of adequate technology; lack of data science capability at scale; and lack of organizational support, including the decision-making impetus required to generate value from big data.

 

Meeting the FinTech challenge

So where does this leave the banks? I see four potential ways for banks to take action. These are not necessarily exclusive, however, and banks may benefit from combining some of these approaches in various markets:

  • Banks can come together to create a joint, industry-wide, market-wide infrastructure, rather than try to invest in their own legacy payments platforms. Sharing the capital expenditure will allow them to reduce the costs and share the risk, enabling them to focus on delivering front-end payment capabilities to customers and merchants.
  • Banks can become individual utility providers. To do so, they will need to leverage their strongest competencies – that is, risk management and their balance sheet – especially as these are capabilities that challengers are unlikely to invest in. Banks can then step back from fighting for customers and instead lend their expertise to players who are more able to innovate, can deliver faster, and will provide a better customer experience.
  • Banks can define their value chain in a way that allows them to extract value from partnerships with FinTech providers while maintaining some of their core capabilities in-house. In fact, many banks are already involved in collaboration with FinTechs (through accelerators, innovation labs, and VC arms), but this effort has not led to systematic, consistent change in the industry, or to the kind of high-value partnerships that also benefit customers and merchants. Therefore – although I am a great believer in well-constructed partnerships – I would not advocate that banks acquire FinTech companies, as I have seen too many cases of innovation being killed post-acquisition, with neither party able to extract value in the end.
  • Banks can invest in building their own data science capability; indeed, this is the best way for them to extract value from ‘owning’ the customer and merchant relationships and to genuinely exceed their clients’ expectations. Banks don’t necessarily need to build their data science capability in-house, either – it could instead be achieved through a strategic partnership or joint venture. Regardless of the model, banks need to equip their C-suite with the knowledge required to understand data science, artificial intelligence, and related technologies. This understanding will help the management team figure out the importance of these capabilities within the organization. It will also force banks to reconfigure their organizational and delivery models in a way that allows them to compete effectively with their more agile, more innovative competitors. This final option is the most sustainable way for banks with payment capability to compete effectively and buck the trend that sees them losing share to a wide range of challenges.

At a-connect, we understand the intricacies of this evolving competitive landscape – and how important it is for senior management to be well-equipped for the changes ahead. Our specialist team of independent professionals can help you meet the challenges posed in the payments sector, and to develop effective and sustainable approaches to doing business. Contact us today to find out more.

Blockchain-ing the Money Machine

Posted on October 31, 2017 - 2:35 pm by

State of the banks

The financial services industry is today arguably the world’s most powerful industry. The global financial system is responsible for moving trillions of dollars every day, serving billions of people, and supporting a world economy worth more than $100 trillion. A closer inspection of this omnipresent money machine, however, reveals the haphazard ways in which it has evolved. Most notably, the machine is plagued by a helter-skelter patchwork of new technology welded onto old infrastructure. Take, for instance, the somewhat strange co-existence of internet banking and paper check issuance at banks that run on mainframe computing infrastructure from the 1970s. Or the fact that, when a customer uses Apple Pay to buy a drink at Starbucks, the money goes through some five different intermediaries before finally reaching the coffee chain’s bank account – the transaction clears in seconds, but takes days to settle.

Such bizarre ways of working are widespread in the industry. Stock and bond trades clear almost instantly but take two to three days to settle. A foreign laborer in Singapore earning daily wages could wire his money home and, in the process, have to tolerate absurd transaction costs and a long wait, as if it were physical notes making their way across the world. Worse still, such daily wage laborers – part of the almost one billion people around the world living on less than two dollars a day – are seen as unattractive for banks to take on.

The crux of these problems lies with the fact that the gears of the financial services industry are powerful centralized intermediaries that consolidate capital and enforce monopoly economics. This makes the industry exclusive and centralized, leaving billions unbanked and the industry vulnerable to Equifax-like data breaches.

So how can we make today’s money machine efficient, secure and truly global in scope?

In cryptography we trust

In the wake of the global financial crisis was unveiled the world’s first cryptocurrency, bitcoin, by an anonymous person (or persons) under the pseudonym Satoshi Nakamoto. The fundamental message in Nakamoto’s white paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ resonated with the belief that the mass adoption of virtual currencies would ultimately obliterate the institutions – intermediaries such as banks and other ‘trusted’ third parties – that, one could argue, were responsible for the crisis. The white paper proposed a breakthrough approach to owning, exchanging and accounting for value.

So what is bitcoin? It is a digital currency with a security system run by a massive network of total strangers. The technology that underpins bitcoin represents one of the greatest innovations of our time – a true revolution in distributed computing that eliminates the need for trust. This technology, called the blockchain, is an open and immutable digital ledger that stores the history of financial transactions in a decentralized and distributed manner. Because blockchain can be adapted to store any kind of digital information conceivable, systems like bitcoin could be the future of all secure digital transactions, and thus overhaul how today’s money machine works.

How do bitcoin and the blockchain really work?

The blockchain is a decentralized, distributed and secure digital ledger of all past transactions ever made using a digital currency or token such as bitcoin. Owners of bitcoins have a digital signature represented by a two-part key. The private key, kept safe from view, proves ownership, while the public key is stored on the blockchain, which is accessible to anyone with a computer and an internet connection. Individual blocks of the blockchain – components of the ledger – contain multiple transactions, each of which stores a reference to an earlier record in the chain.

Using bitcoin to pay for something triggers a request to update the ledger. This request is sent to a specific class of participants on the distributed network, called miners. Miners are responsible for detecting transaction requests from users, aggregating them into a block, and ultimately ensuring the irreversibility of new transactions. Specifically, they run the new block and all previous blocks through a set of energy-intensive mathematical calculations called hash functions. Here, all miners compete to solve a complex cryptographic puzzle; the more computing power a miner uses, the more likely they are to solve the puzzle first. The first miner to solve a block tags it onto the end of the blockchain and broadcasts it to all other miners, who then check to verify the accuracy of the hash function. Once verified through a 50 percent consensus mechanism, the ledger is updated and the miner that solved the block is rewarded with newly minted bitcoins (12.5 bitcoins or about $75,000 per block today). New blocks are created on average every 10 minutes. Also, the supply of the currency is limited so that there will only ever be 21 million bitcoins.

Solving the cryptographic puzzles on the blockchain is so complex that every new block makes the previous blocks and the whole blockchain more secure. Hacking the blockchain would require tremendous computing power and speed. In order to alter just one past transaction, an attacker would have to change the information in that block and every block that comes after it before the blockchain is updated. With countless miners working on the chain simultaneously, corrupting the ledger would require massive amounts of computing power – more than half of the power being committed to the bitcoin network at any given time. This immutability feature makes the blockchain a database that everyone can see and add to, but nobody can destroy. Additionally, because computers belonging to many different entities enforce these rules, no single party is in charge and there is no need for a central entity such as a bank.

The world computer

Bitcoin is far from the only application that uses blockchain technology. In 2013, a 19-year-old cryptocurrency researcher and programmer, Vitalik Buterin, developed Ethereum. Ethereum is a decentralized platform on which one can build and deploy virtually any kind of decentralized application. The breakthrough with Ethereum is that it allows one to build smart contracts – digital triggers that self-execute and manage enforcement, performance and payouts. Applications deployed on Ethereum, called decentralized applications or ÐApps, run exactly as programmed without the threat of downtime, censorship, or third-party interference, thereby enabling secure and transparent governance for communities and businesses.

The Ethereum protocol, which is powered by a digital currency called Ether, makes the process of creating blockchain applications easier than ever before. Instead of having to build new blockchains for every application from scratch, Ethereum enables the development of any application imaginable on one single platform. For this reason, the Ethereum protocol is often referred to as the ‘world computer’. ÐApps have the potential to profoundly disrupt a wide range of industries – from financial services, healthcare and ride-hailing to social media and music.

The great upheaval

With its decentralized and distributed features, blockchain technology has clear potential to bring about a profound paradigm shift, busting the monopoly of large powerful intermediaries and offering end-users the chance to shape how they want to manage their money. One of its greatest advantages is the consensus mechanism that eliminates the need for trust. This has implications for today’s banks and insurance firms. ÐApps have already demonstrated the power of blockchains to make banking truly digital and distributed, secure and tamper-proof, inexpensive and inclusive, and able to run intelligently with significantly fewer intermediaries.

We now have the power to transform not only the payments world, as bitcoin has shown, but also other parts of the machine such as insurance, risk management, securities trading, capital raising, accounting, and auditing. There are essentially five core functions of the money machine that are ripe for blockchain-based disruption. These are as follows.

  1. Authenticating identity: The banking industry is, at its core, a trust broker. These intermediaries ultimately decide who gets to access banking services via establishing trust and verifying identity. The blockchain eliminates the need for trust altogether by relying on cryptographic technology, and enables peers to establish identity that is verifiable and cryptographically secure. Blockstack, a blockchain startup, uses a blockchain to track usernames and encryption keys – the basis of a new identity system that relies on decentralized information not tied to any single social network or other website. Using a similar system, banks can collaborate to authenticate identity, lower their compliance costs of individually having to perform Anti-Money Laundering (AML) and Know Your Customer (KYC) checks, and more easily provide services to a segment that was previously ignored.
  2. Moving and exchanging value: The financial services industry is responsible for moving money around the world, ensuring no double-spending. The blockchain does exactly this for anything of value, but at a much lower cost, regardless of geographical borders. Given that several intermediaries can be eliminated, the blockchain can cut settlement times on all transactions from days and sometimes weeks to mere minutes. Further, in countries with low financial inclusion, building a blockchain payment rail and connecting it to mobile phones can enable billions of currently unbanked individuals to send funds across borders quickly and cheaply, and participate in the world economy. Coins, a mobile-first, blockchain-based platform in the Philippines, does precisely this; it has partnered with financial services firms and retail outlets to create a distribution network of more than 22,000 cash disbursement and collection locations. Over half a million users use Coins for remittances, bill payments and mobile airtime top-ups.
  3. Managing risk: Risk management is intended to protect against uncertainty, but a common complaint is a lack of transparency of how risk is measured, especially in the developing world. Blockchain-based insurance systems have the power to run more transparently, simplify cumbersome claims processes and lower premiums. A distributed ledger can enable the insurer and any third parties to instantly and seamlessly access and update relevant information such as claim forms, police reports and third-party review reports. BITPARK, a blockchain-based startup, strives to provide an insurance service that is both transparent and user-directed by offering a peer-to-peer insurance model. Built on smart contract technology, the service offers customers fulfillment of contractual obligations, an approval and compensation system managed between users, a user-based evaluation system, and more.
  4. Funding, investing and lending: Raising capital has traditionally required intermediaries such as investment bankers and venture capitalists. Initial Coin Offerings (ICOs) – new crowd-funded ways to raise capital on the blockchain – are fast replacing venture capitalists. ICOs have raised a combined $3 billion to date, with more than $800 million of that raised in September 2017 alone. In addition, on the blockchain, anyone will be able to issue, trade and settle traditional debt instruments, allowing consumers to seamlessly access loans from peers. The blockchain automates many functions of investing such as making dividend and coupon payments but in an efficient and secure way through the use of smart contracts.
  5. Accounting for value: Accounting is a multi-billion dollar industry, but there are questions over whether it can survive the velocity and complexity of modern finance. The blockchain ledger is an already audited trail. Blockchain-based accounting methods will make auditing and financial reporting transparent and able to occur in real time, thereby dramatically improving the way regulators can scrutinize financial actions in large corporations. Since the data stored in distributed ledgers is continually updated, it offers finance teams the possibility of real-time reporting to both management and external auditors. This could free up auditors to offer more value-added services to their clients.

Is any of this possible today?

We have a banking system that is in dire need of overhaul, and what seems to be the perfect, foolproof approach for disrupting the machine. So what is stopping us from going full steam ahead? Several factors, such as enormous electricity usage (if bitcoin were a country, it would rank 69th in the world for annual electricity usage), limited scalability, and the lack of a well-defined and universally accepted regulatory framework all pose challenges to the blockchain technology going mainstream.

Of these, limited scalability is a particularly hard problem to solve. To put things in perspective, PayPal clears 200 transactions per second, Visa manages 1,700 transactions per second, and the Shanghai Stock Exchange clears significantly more than 10,000 transactions per second. The most promising blockchains of today are orders of magnitude away – the bitcoin blockchain is realistically limited to seven small or three complex transactions per second. Ethereum fares marginally better at between seven and twenty per second.

The scalability limitation is a side effect of decentralization; the consensus mechanism necessitates that every fully participating computer in the network process and validate every transaction and maintain a copy of the ledger. As a blockchain grows in size, the requirements for speed, bandwidth and computing power required by the network will increase exponentially. This could reach a point where it becomes unfeasible for every node in the network to play the same role, leading to the risk of centralization.

Slowly but surely

The blockchain technology is still in its infancy. To truly overhaul the money machine, the crypto-technology world would need to first figure out a way to scale while keeping power consumption in check. Regulators would need to develop strong legal frameworks and agree on how inherently decentralized protocols should be governed. In addition, the financial services industry would have to agree on standards, develop easy-to-use programming modules, and clarify regulatory uncertainties.

As innovation in the space progresses at breakneck speed, governments and various factions of the crypto-technology and financial services industries are currently working to solve these complex problems. In the meantime, the industry and both its users and non-users should prepare for an inevitable revolution in the way they manage anything of value. 

References:

[1] Blockchain Revolution by Don Tapscott and Alex Tapscott

[2] https://hackernoon.com/blockchains-dont-scale-not-today-at-least-but-there-s-hope-2cb43946551a

[3] https://www.weforum.org/agenda/2017/06/3-ways-blockchain-can-accelerate-financial-inclusion

[4] https://www.cbinsights.com/research/report/blockchain-trends-opportunities/

[5] https://digiconomist.net/bitcoin-energy-consumption