A recent report by PwC shows that existing financial service providers - specifically in banking and payments - are at a high risk of disruption in the next four years. This shake-up is, in fact, being led by fintech startups and not by the incumbents themselves, as many wrongly assumed. Chief arrow in the quill of these disruptors is blockchain technology. And the old guard has no idea what to do about it.
Not that we needed more affirmation, but a recent report by PwC highlights the massive potential impact of fintech startups and underscores that disruption is, in fact, coming from these new businesses and not the evolution of incumbent players. Of particular interest is survey findings that show existing players’ inability to deal with the most disruptive technology of this era: the Blockchain.
In Blurred lines: How FinTech is shaping Financial Services, PwC highlights online payments, data analytics and Blockchain as the leading drivers of disruption, making businesses focused on those areas, such as AlphaCode members Isazi Consulting, Yoco and Bankymoon perfectly placed within the market. But it’s the Blockchain that shines most notably in the report which shows how fintech is transforming the sector “from the outside in”.
Putting numbers to the risk of disruption, PwC suggests that more than 20% of today’s financial services leaders will have their businesses severely disrupted by 2020. Consumer banking and payments are at the highest risk, with 80% and 60% likelihoods of disruption for incumbent players.
Born of the distributed ledger that underpins Bitcoin, the Blockchain - meaning the Bitcoin Blockchain specifically, as opposed to the other ledgers being devised by financial institutions - is already being used for asset transfer and contract verification beyond currency exchange. The PwC report highlights that the industry understands the potential disruption that is imminent as a result, but has no idea what to do about it, with 57% of businesses surveyed reporting that they are unsure about or unlikely to respond to it.
While the industry is at best scratching its head about Bitcoin, and at worst trying to emulate it through banking consortiums attempting to create their own “blockchains”, next-generation technologies have already entered the market that will supplement Bitcoin and perhaps even replace it as the imminent blockchain.
Ethereum, for example, builds on what Bitcoin started with a blockchain platform that was devised from the ground up for application development, allowing anyone to build contract systems for any class of asset or other value transfer on the fly. No banks required, and no permission needed in practical reality.
According to the report, “Compared to the other trends, blockchain ranks lower on the agendas of survey participants. While a majority of respondents (56%) recognise its importance, 57% say they are unsure or unlikely to respond to this trend. This may be explained by the low level of familiarity with this new technology: 83% of respondents are at best “moderately” familiar with it and only very few consider themselves to be experts. This lack of understanding may lead market participants to underestimate the potential impact of blockchain on their activities.”
Where PwC differs in opinion from your humble author is in how they see this unfolding for the industry. According to the report, “In our view, blockchain technology may result in a radically different competitive future in the FS industry, where current profit pools are disrupted and redistributed toward the owners of new, highly efficient blockchain platforms.”
Ahem. If we already have robust, scalable and - most importantly - widely distributed blockchains in the form of Bitcoin and Ethereum, to name just two, why would the “owner” of any proprietary Blockchain sway the market? Just like the internet itself, or Linux which powers almost all of the world’s servers, open blockchain systems will win in this space, or I’ll eat my shoes at an AlphaCode event in 2020.
PwC continues to say that, “Not only could there be huge cost savings through its use in back-office operations but also large gains in transparency that could be very positive from an audit and regulatory point of view. One particular hot topic is that of ‘smart contracts’ – contracts that are translated into computer programs and, as such, have the ability to be self-executing and self-maintaining. This area is just starting to be explored, but its potential for automating and speeding up manual and costly processes is huge.”
On that we can agree. The blockchain is here to stay and we have a perfectly good one already. Existing banks seem to be good at explaining how they are building their own version, but not at exactly why they think that is the answer. Meanwhile, the fintech startups that do understand the technology are hitting the ground hard and fast, with the existing industry’s lunch in their sights.