While the “get-rich-quick” cryptocurrency bubble came to an end, the underlying blockchain technology that makes it work has continued forward across financial services, banking, and capital markets. It is a fundamental change in how financial transactions work. Very few new technologies change the way business in done or how an industry operates.
Most advances in technology are incremental in nature, adding new features to an existing product. For example, battery powered cars are the new rage in transportation. Yet, the number of cars actuality purchased hasn’t dropped, nor have they convinced people to stop using public transportation. Every year smart phones come out with new features, Microsoft announces a new PC operating system, and McDonald’s introduces a new sandwich. Each of these products are incremental improvements to existing products. They make the products better, sometimes cheaper, and maybe more compelling.
Blockchain is different. It is disruptive. It will change the fundamentals of entire markets.
Truly disruptive technologies are rare. The internet has certainly been disruptive. In 2017, Americans spent over $353 billion shopping online. Globally, ecommerce sales have reached $2 trillion. These numbers don’t even include one of the biggest sources of revenue on the internet, advertising.
On the negative side, look at the large book stores and book store chains that have mostly disappeared, with the exception of Barns & Nobles. eBook readers and Amazon killed them. Many book publishing companies have either disappeared or dramatically reduced operations. How many people remember one of the fastest growing companies of the 90’s, Blockbuster Video? Shopping centers are going bankrupt and large retail chains are either filing for bankruptcy protection or significantly reducing their brick and mortar stores.
On the positive side, many new online businesses have been created – Amazon, Google, Uber, Facebook, YouTube, and eBay. Each became multi-billion-dollar companies overnight. Blockchain, just as the internet before it, will disrupt entire industries causing some companies to experience spectacular growth while others disappear.
No industry will see a bigger change due to blockchain that the financial services industry.
Why?
The general response to this question is a list of blockchain features such as, it’s a decentralized distributed ledger, it is secure, immutable, permission-less, or trust-less. All of these things are true, but they are features that come from blockchain, not benefits. More than anything, people seem to know that blockchain is generating a lot of interest and lots of money and they don’t want to miss-out.
Ultimately, blockchain is disrupting the financial services market because of its impact in three fundamental areas:
- Speed in which capital is exchanged;
- Reliability of transactions; and,
- Operations by eliminating many third party, counterparty, and back-office processes.
These three benefits are the core reasons financial services companies will eventually integrate blockchain into their information technology.
Speed – Instant Settlements
Depending on the type of transaction, settlements can take anywhere from several hours to weeks. With blockchain, those same transactions can be completed in minutes or seconds. This means the buyer receives their assets promptly as well as making the funds instantly available to the seller. It also removes the need for various middle-office and back-office staff at banks, when transactions settle instantly. While the loss of some fees charged by banks for back-office services may be lost, the prospects of significantly reducing the operational expenses of back-office staff and systems will more than offset the lost of revenue.
Reliable Transactions
One of the main features of blockchain is that it removes the need for a trusted intermediary and makes peer-to-peer transactions possible. Thus, eliminating the fees charged by intermediaries such as banks and credit card companies. It also goes to the heart of why transactions settle quickly.
In addition, data recorded on the blockchain is immutable. Any data that is recorded on a blockchain can be tracked in real-time, leaving a very detailed audit trail. As such, it eliminates error handling and reconciliation. Increased transparency also improves regulatory reporting and monitoring by regulatory authorities, providing they have access to the blockchain.
Operational Optimization
Blockchain offers better capital optimization, due to a, significant, reduction in operational costs. Whether it is because of the elimination of counterparties or back-office operations, the total costs of the blockchain ecosystem are shared among all participating companies which significantly reduces cost.
In addition, blockchain “smart contracts” execute automatically once certain preset conditions have been met. It is important that those smart contracts are firmly rooted in law and regulatory compliance across jurisdictions. Especially complex financial asset transactions can benefit from blockchain, due to automatic settlement using smart contracts under the control of an incorruptible set of business rules or governance.
Conclusion
Blockchain is affecting assets and capital markets in the same way the internet affected brick-and-mortar retail stores. Eliminating the middle-man (counterparties and third-parties) will have a profound effect on transaction cost. Yet, the benefits don’t stop there – transactions become more reliable, transparent, and settle faster.
New financial services companies that grasp the paradigm shift will emerge and become billion-dollar companies overnight, while many established companies will disappear.
