William Mougayar is a Toronto-based angel investor and four-time entrepreneur who advises startups on strategy and marketing. Here, in the first of a three-part series, he discusses how banks dealt with the emergence of the Internet and how blockchain technology is causing these institutions a whole new headache.
A recent flurry of media reports and surveys have touted that some banking and financial services sector players are undertaking interesting projects with blockchains and decentralized ledgers in particular. But this burst of activity is hardly enough to prematurely claim victory on behalf of the few banks who have publicized such initiatives.
It is naive to assume that the blockchain will make the most impact where it is to be adopted early. Rather, it will make the most impact where change is hardest to achieve, and that might take a little longer, realistically.
The blockchain and its derivative technologies are one of the biggest opportunities for reengineering financial services. It’s a looming tsunami, and the big question is whether the banks will fail to reinvent themselves as they did with the Internet, or if they will dare to induce a self-inflicted shake-up and embrace the future.
Based on the early activity that I’m seeing, it appears that the banks are taking a narrow minded view of the opportunity being presented to them. Not unlike how they tackled the Internet in 1995.
If you’re a CEO or senior executive at a big bank or large financial institution, you will remember the advent of the Internet and its subsequent entry into the world of finance. That was around 1994-1997. Having been there too, and involved with some banks in an advisory capacity, I remember well that the banking sector didn’t take the Internet too seriously for at least the first three-to-four years of its commercialization. For example, when it came to Internet payments, banks didn’t want to touch them initially under the pretext that they “weren’t safe”.
Then, a handful of Internet-only banks and online brokerage startups were created, and banks followed by offering online banking, buying the brokerage companies, and much later rushed to develop smartphone apps for their customers.
Even when the banking sector took the Internet seriously, they did so very slowly, and without much innovation and without rocking the boat. When I look at my online banking today, the features are mostly about convenience, but I can’t do too much beyond the basics. My foreign exchange account doesn’t link to my banking card, I can’t exchange money online, and can’t initiate a wire transfer unless I visit the bank or have a fancy business account.
If I was a millennial today, I wouldn’t think twice about not using a traditional bank because most of the services I am attracted to are offered by alternative financial services companies, primarily due to innovative FinTech startups that sprung up in the past decade.
Here’s a typical millennial’s “financial stack”. In fact, a mere $2.3bn has funded the production of 126 FinTech companies in the past few years only. That certainly pales in comparison to the $200bn globally spent each year on IT by the banking sector, a high figure backed by the fact that the financial services industry consistently outspends other industries on technology. But we would be hard pressed to see real innovation coming out of that huge spending, because the bulk of those budgets are for keeping the lights on and infrastructure running.
Indeed, many banks have established so-called innovation and research centers with multi-million dollar budgets. But that’s not enough. These supposedly act as research laboratories with a mandate to run pilots and experiments. But are they really innovating at the pace of external innovation or are they being gatekeepers to the real innovation that’s happening outside banks?
In reality, few of these centers are real innovators. They are still bound by the bank’s current and legacy business models. It is puzzling that your business units couldn’t innovate on their own. Why not issue innovation mandates everywhere, not just in the “innovation center”?
And that’s all before bitcoin in the mix yet.
Enter bitcoin, cryptocurrencies, blockchains, distributed ledgers and more technical jargon.
Hello bitcoin, another banking headache
Bitcoin is the “Internet of money” after all, so that should have gotten a banker’s attention from day one. Then we have the blockchain, the infrastructure behind bitcoin and other decentralization technologies. Well, let’s say it’s like a new type of database that has the potential to wreak havoc for your IT departments. It sounds like a perfect discussion between a CEO and their CIO.
I have said this before many times. The novel field is not bitcoin and it’s not just blockchain. It’s the intersection of cryptography technology with software engineering. We could call it CryptoTech for a lack of a better word.
CryptoTech is not a unidirectional phenomenon. It’s multi-dimensional, therefore it will have different bifurcations. It has multiple identities. And it’s more than just about bitcoin or blockchains. It is simultaneously:
Currency with wings, and no borders
Software Technology with a new development architecture paradigm
Accounting Ledger that is distributed and decentralized
Consensus Clearing network that acts as a “trust layer” that can validate business logic, not just transactions
Real-Time Messaging System that’s built-in, therefore it’s very fast
Global Online Community with special network effects
Transactions Engine that can verify transactions and approval levels
Computing Infrastructure that is global and similar to a cloud-based one
Reengineering Catalyst that enables innovation and new processes focused on enabling decentralization
The larger the organization, the more it needs to address all of these pieces, because it will be touched by each one of them, sooner or later.
So, in addition to focusing on the decentralized ledger properties of the blockchain, the banking sector needs to take a more holistic approach to determining what blockchain technologies (including bitcoin) can do for them.
Look out for part two in this series, coming soon.
This article originally appeared on Startup Management, an edited version has been reposted here with permission.
Bank image via Shutterstock.