I am certain you have already heard about fintechs being the next big threat to banks. With about $20 billion of investment in the last few years, the fintech industry is extremely active and agile. Fintechs target financial services that are low hanging fruit when it comes to using technology to deliver greater convenience and reduced fees. They can be categorized as disrupting incumbent players, leading traditional financial services firms to fast track digital transformation programs, hire new skill sets and carry out radical transformational changes with mergers and acquisitions.
Fintechs are often compared to Uber for taxis or Airbnb for hotels. Uber’s business model is simple. It connects passengers with drivers for 20 percent of the fare. Uber’s role is very much like any bank in managing customer assets, risks or services but it cuts costs by being smarter at using technology to operate its service.
The principles behind this new economy are not much different from what traditional banks have done for years—acting as a broker between people and service suppliers. However, fintechs execute better and faster because, like Uber and Airbnb, they leverage technology and do not have to overcome legacy systems, culture and staff.
A paradigm shift
What if a new technology is about to radically disrupt the business models of services like Uber and fintechs themselves? And what if this new technology was to become even more disruptive than fintechs have been for banking?
This is what some people believe Ethereum (a blockchain based solution) will do—removing middle tier organizations between customers and service providers altogether. Ethereum is a decentralized platform (a kind of global computer) that runs smart contracts in the blockchain. It does not belong to any organization, government or enterprise. It is used by the people for the people.
Ethereum-like solutions will revolutionize how people transact, contract, exchange and distribute content. It is a brand new paradigm based on the following principles:
- True peer-to-peer services – no need for middle-tier trusted third parties
- Undisputable traceability using a shared ledger
- Decentralized autonomous organizations (DAO) i.e. no government nor enterprise involvement
- Smart contracts
The applications are endless and will develop fast as connected objects will power up the Internet of Things (IoT).
Some people want to invest money to obtain a higher return compared to what banks offer. Other people want to borrow money to buy cars. The blockchain mediates the relationship between lenders and borrowers, and smart contracts control the relationship between them. Lenders share their risks in the blockchain and they are reimbursed each time borrowers process payments. As banks and other middle tier institutions are cut out of the process, borrowers enjoy lower APRs while lenders obtain higher return on investments.
The same logic could well apply to self-driving cars bypassing Uber. Already a service like Arcade City dreams to kill Uber by providing a true peer-to-peer taxi service. Mortgages, loans, car insurance, contracts, etc. are all at risk as well. These kinds of services are emerging in the UK with Heyguevara, in France with Inspeer and in Germany with Friendsurance.
Large organizations such as Lloyds, Santander, Allianz, HSBC and AXA are investing millions in this technology. For instance, AXA has invested $55m in start-ups like Blockstream and Microsoft is already supporting Ethereum in its Azure platform.
Coming soon however…
There are many challenges ahead, despite the blockchain being a battle-tested technology, such as:
- Government acceptance of services based on this new technology. For instance, Bitcoins have been banned in China.
- Control over illegal activities. How will it be possible to control the nature of content circulating between people as it is comprehensively encrypted?
- Speed of the technology. A bitcoin block takes up to 10 minutes to process but does not inhibit peak traffic as it delays processing when necessary. But what if the number of transactions explodes, reaching a limit for processing data? Check out these statistics.
- Ethereum product maturity. Ethereum Homestead has recently been launched and more mature versions are planned in the coming months.
With so many changes in the banking industry, technology providers are looking into how the blockchain is bound to disrupt the status quo. The blockchain, bundled with intelligence (e.g. smart contracts), is set to replace core banking systems—at least some of their capabilities. Everyone accessing it on an equal footing (i.e. banks, fintechs or any other players) will leave traditional banks to invest in the customer experience in order to differentiate from the competition. Technology partners will help to be agile in order to leverage data in the blockchain, delivering a state-of-the-art customer communication and customer experience on mobile, web and even print.
Antoine Hemon-Laurens is banking customer communications management expert at GMC Software Technology. His focus is on helping banks and credit unions better engage with their customers through mobile solutions, customer engagement and digital signatures. Contact him at firstname.lastname@example.org or on Twitter @anthemlau.