The high rate of disruption caused by new technologies is leaving incumbent giants in many industries struggling to survive, yet curiously, many continue to underestimate the impact of potential change. Financial services retailers are finding themselves in exactly this position when it comes to what could be the most significant disruptor in financial services over the next few years: blockchain.
For those not yet familiar with the phenomenon, a blockchain is a distributed public ledger that securely records any information relating to an asset, including ownership. Transactions on a blockchain can be completed with minutes or even seconds, bringing an exciting new dimension to the financial services space. However, despite the benefits and surrounding buzz, blockchain’s potential to disrupt all areas of the financial industry – from current accounts, to cards and payments, to clearing and settlement – is also proving to be an obstacle for more established players.
Some appear to justify their position because of the questions surrounding the handful of blockchain-based offerings currently available. Bitcoin, the original open source blockchain, is mired in controversy and (ironically) opacity. Financial institutions are understandably wary of this model, as it sits uncomfortably with the intense regulatory oversight and security regimes to which traditional players are subject. Many of the other seemingly more “legitimate” examples have been hacked or had other visible challenges, and the combination of odor and flaws seems to make complacency or inaction a reasonable response. But even so, inaction is still a mistake, because history shows these things never go away; think 90s-era “too clunky” cell phones, or Mondex, the first stored value card deemed both revolutionary and useless in the same breath.
Many of the players in the industry are aware of the potentially huge blockchain iceberg that awaits the financial services industry: a recent global survey of 500 senior executives in the financial services and insurance industries found that nearly two-thirds who have some understanding of blockchain believe it will prove to be the most significant technological development since the internet. Despite this awareness of blockchain and its significance, nearly half took a gloom and doom approach to its encroachment on the financial services industry, indicating that the combination of blockchain wallets and peer-to-peer lending could bring about the “end of banking as we know it.”
However, despite the evidence that the blockchain iceberg is truly straight ahead, many financial services institutions haven’t yet changed course and, in some cases, seem to be pretending it isn’t there at all. The same study found that more than 35 percent of all global respondents admitted they have never heard of blockchain, while of those who had, 23 percent said they had no understanding of the technology.
These statistics show some opposing opinions within the financial services industry. On the one hand, many industry executives understand blockchain’s significance, innovative qualities, and potential to completely disrupt the financial services industry as a whole. On the other hand, another segment of those surveyed doesn’t have a strong grasp of what’s on the horizon. The latter group is particularly troubling, as they seem wholly unprepared to get ahead of this emerging industry trend.
Although it’s too early to say if increased expectations from customers for blockchain-stored data will revolutionize the industry to the extent that newer, more agile providers can threaten the business of traditional banks, it’s never too early to investigate and prepare for change. But the majority of survey respondents indicate they’re not yet at the stage when they’re dealing with blockchain: only 17 percent of financial services executives already have a strategy in place for dealing with the impact of this new technology, and just 16 percent have a team of people in place working purely on blockchain.
This indicates a complacent attitude toward impending technological change. Although this is perhaps understandable – any challenge to the market means a new set of logistical actions to take and the introduction of blockchain is no different – it is neither wise nor healthy. The sooner financial services organizations can take the time to understand the impact, assess the risk, and develop appropriate strategies to deal with blockchain, the better their chances will be of keeping their heads above water. By implementing agile and digitally-focused technology that allows for rapid change and evolution in the face of disruptors, financial institutions can ensure they are prepared not only for blockchain, but other innovations that are certain to appear in years to come. In other words, these firms must take action for both their future and for that of their children.
Blockchain has the exciting potential to completely change the way we use, depend on, and gather data in customer transactions – everything from personal information to details of financial assets to real-time data from virtual currencies. Financial institutions still not embracing these impending changes need to transform their organizations to a culture that seeks out and welcomes new technologies with open arms; it will be the key difference between sinking and swimming.
Graham Lloyd, Industry Principal of Financial Services, Pegasystems
Graham Lloyd is an industry principal for Pega’s financial services business line. He is responsible for Pega’s understanding of the banking industry and its institutions and how economic, social, and technological trends are impacting them. Graham draws on his extensive experience as both a senior line executive and management consultant in several different geographies. A JPM and Wells Fargo alumnus, he latterly ran Westpac’s financial institutions group. As head of PA Consulting’s Asia-Pac Transformation Practice, he designed and delivered BPAY, Australia’s renowned payment system.
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