Jeremy Drane is practice leader of US FinTech, blockchain and smart contracts at 'big Four' professional services firm PriceWaterhouseCoopers (PwC), and Cathryn Marsh is leader of PwC FSI Institute, the company's division for new intelligence, perspective and analysis on trends affecting financial services.
In this special feature, Drane and Marsh outline their predictions for the year ahead in blockchain tech and outline the trends that will likely be key.
The speed at which blockchain technology is being explored and adopted is unprecedented.
We are watching it move from a startup idea to an established technology in a tiny fraction of the time it took for the Internet or even the PC to be accepted as a standard tool. Financial institutions are already beginning to realize the potential of this next-generation business process improvement software to structurally alter shared practices between customers, competitors and suppliers.
In our view, blockchain technology may result in a radically different competitive future in the financial services industry, where current profit pools are disrupted and redistributed toward the owners of new highly efficient blockchain platforms.
We anticipate a lot of changes as we roll into the new year and see three trends we believe will be important:
- Incumbents will focus on protecting their intellectual property as they explore new collaborative opportunities with customers, suppliers, and competitors
- Large financial institutions will need strategic plans to set parameters for technology risk taking
- Market participants will start to develop the processes that surround the transactional layer.
Incumbents focus on IP
If you operate anywhere in the FinTech space, it's likely that you're already considering how to incorporate blockchain technology into your business.
Established players, such as banks and exchanges, are looking for ways to refine and improve all kinds of transactions, while startups and service providers that understand the new technology are trying to learn how best to connect to and complement these business processes.
As we enter 2016, we encourage established financial institutions entering into these conversations to understand what intellectual property they are sharing.
Many industry participants have focused on the positive impact of industry collaboration from a technology standpoint. However, strategic collaboration certainly does not fit this open model.
Consequently, we believe established financial institutions should build a core level of technical proficiency and understanding so they can better determine which information they should share in open forums versus what they should keep confidential.
Strategy drives risk-taking
We see 2016 as a year in which financial institutions will be inundated with many options as new participants enter the market and start to compete with early movers.
In 2015, we saw a large number of market participants begin to talk publicly about their innovative offerings related to blockchain.
However, there were numerous other companies working on solutions. The fruits of those investments will certainly come to market as the year unfolds.
As financial institutions explore their options in 2016, another challenge will be assessing the potential long-term viability of their FinTech partners.
Companies looking to develop proofs-of-concept, pilots and even make direct investments must understand the financial position and strategic focus of their potential partners as well as the ecosystems that support them. We don't know at this point who will survive to see their next round of funding, but we certainly see a divergence of the successful startups from those that are running low on funding or being acquired.
How can financial institutions filter, evaluate, and assess these new solutions to make sure they're a good investment?
We advocate for strategic plans that help set parameters and steer the direction of investments and establish solid criteria for selecting projects and partners.
Building new layers
In 2015, most of the focus of the market was on new transactional-based proof-of-concept solutions. As financial institutions enter 2016, we see attention shifting to the supporting systems and processes that underpin ongoing transactional excellence.
The industry will need to explore governance, auditing and IT security, to name a few.
We also see the beginning of the shift from financial institutions asking, 'How can we utilize blockchain?' to 'How can we establish the supporting processes to leverage this new technology?' and, more importantly, 'How do these new processes impact our risk profile?'
We advocate for early involvement of various corporate functions (such as compliance, risk and internal audit) so that proofs-of-concept don't get stalled and can more easily make the jump to the next round of internal funding.
2016 and beyond
The benefits from new technology are rarely shared equally among market participants. Said differently, there are always winners and losers.
As a result, the business benefits for many players may not materialize as promised.
We see a possible future where savvy market participants partner with only a handful of players (in strategic partnerships that we call microconsortiums) to focus on transforming expensive internal processes into efficient shared platforms. The resulting platforms could then be sold as a service to smaller competitors.
The ability to collaborate on both the strategic and business levels with a few key partners, in our view, could become key to competitive advantage in the coming years.
Given the speed of adoption of blockchain technology, it may feel as though you're sending your recent kindergarten graduate off to college. We see 2016 as the summer break, when a great deal of preparation must be packed into a short time frame.
Our advice? Make sure that you are not teaching too much more than you are learning. You’ll need a strategy for where you are going to place your bets.
And you’ll need to understand much more than the technology itself in order to benefit from it.
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