More than bitcoin, blockchain is interfering with the margins and business models of the finance world. The technology is also challenging our banking institutions’ longstanding platform as intermediaries.
Last year was particularly remarkable for the technology, attracting close to $1 billion in investments for both bitcoin and blockchain firms, according to industry reports. While some banks are excited and inspired by the innovation, there are many who apprehensively await the lesser known implications the emerging technology may have on their traditional business lines.
There are a handful of leaders already experimenting with the technology - they are benefiting from reduced costs and increased influence/reach; the end goal is to identify and eliminate inefficiencies found within the traditional system. Do expect to hear more about blockchain innovation labs and R&D investments in the months to follow.
Banks are worried that their own innovations around blockchain will cannibalize existing revenue streams. Other factors, such as costs sunk into networks and legacy technology, make the decision to deploy blockchain even more difficult. Further, the new technology demands dramatic cultural shifts towards disruption and innovation from within…scary concepts to our friends in the traditional banking establishment. It is recognized that these are not simple, everyday obstacles or challenges for any such institution to carry out; given the looming threat of blockchain though, many banks have rallied their forces to begin thinking and acting like a fintech company. Make no mistake, those entities who identify as being a bank first - and not a technology company - will be outperformed and ultimately, outpaced.
Some banks are opting for internal innovation, experimentation and R&D in hopes of striking blockchain gold. This may not be as productive as co-innovating with a consortium like R3 - which is focused on creating blockchain standards and is already working with a handful of leaders in the space such as Banco Santander, Danske Bank, Scotiabank, Citi, Bank of America and Morgan Stanley.
Banks working in isolation fail to appreciate and fully understand that blockchain is an open, Internet-based network that relies upon the community for scale and muscle. Such isolated banks are unable to experiment effectively as the R&D path is known to be complex and execution challenges do exist.
Banks are fortunate to have dozens of use cases to experiment with at their disposal - though prioritizing them from a market attractiveness perspective can be difficult. Banks also struggle in determining which tools are best to employ in their testing e.g. proprietary tools with Intellectual property right restrictions, open source, etc. Banks may also consider investing in proprietary firms to gain a competitive advantage? It must be noted that converting a successful proof of concept into a business-justified real-world product is no easy task.
What’s a bank to do? How does an institution work its way through the blockchain maze without getting lost? The secret lies in describing the following aspects that simplify use case ratings later: primary and secondary actors, business activities required inside the blockchain, existing support activities (outside the blockchain) that need modification and new activities (outside the blockchain) that need to be created, and phased experimentation options
Using business and technical factors can simplify rating use cases on complexity, these include:
Business factors: Complexity of business process/rules within the blockchain, complexity of business process/rules outside the blockchain, number of parties inside/outside the organization that would need to adopt the technology
Technical factors: Implementation complexity of core blockchain platform features, complexity of data validation/business rules/variety of sources for activities outside the blockchain and number of integration points.
Once the use case complexity has been rated, banks can then judge its attractiveness by considering the following traditional and novel factors:
Traditional factors: New revenue potential, existing revenue at stake, net cost saving potential, customer experience improvement, complexity/cost of any POC and pilot
Novel factors: Whether an idea is a competitive advantage for the bank or an ecosystem of players and synergy with bank’s incubator companies
It has been found that use cases with unique competitive advantages (or those that do not require ecosystem adoption) carry higher attractiveness ranks. Alternatively, when highly attractive use cases are paired with higher implementation complexities, it has been found that experimentation is often phased out. This effectively lowers complexity and enables fail-safe, fail-early execution.
A combined effort employing use case complexity and attractiveness exercises - set to a fast-paced consultative approach - will clear the path for effective blockchain exploration and implementation.
Hari Subramanian is a consulting partner for banking and payments at Wipro.