Pete Harris, Principal, Lighthouse Partners
There’s no doubt that the financial services sector – banking, insurance and capital markets – is deeply interested in the potential of block chain technology. It’s also very clear that innovation in the space is accelerating, with around 100 startups already focusing on the technology. So is block chain’s future in financial services assured? The general opinion seems to be a guarded yes, assuming some early technology issues can be overcome. For myself, I believe it will need some of the major IT vendors to back block chain for it to take off. Which is a bit of a problem right now.
Firstly, a quick overview of block chain technology for those new to it. Block chains are a very unique form of fully distributed database where data recorded in it cannot be changed or deleted. It is a block chain that underpins the bitcoin crypto currency, enabling secure peer-to-peer transactions between entities who might not be known to one another, without any trusted third party intermediary.
In recent months, the financial services sector has become extremely interested in bitcoin’s underlying block chain technology, for a wide range of applications, including trade processing, securities administration, corporate actions management, interbank payments, trade finance and even as a solution to manage systemic risk.
In order to get themselves better acquainted with the technology, major financial services players have set up exploratory labs (like UBS), created hackathon contests (Santander is the latest) and even invested in startups (USAA is just one example). The result of these endeavors is that a number of established global financial services players are forming some solid ideas for how to leverage block chains.
But ideas and prototypes only go so far. To turn them into production systems, the major financial services firms traditionally turn to global IT vendors for assistance and the heavy lifting required to deploy scalable, reliable and secure systems that conform to agreed service level agreements. Historically, that’s been the case for deployments such as big data analytics, cloud computing and mobile services.
Which is why the major IT vendors will likely need to play a key role in turning block chain experiments into reality. The current problem, though, is that they seemingly have little to offer when it comes to block chain expertise.
That’s a view I formed after conducting a simple survey* of 100 big IT vendors, reviewing each of their websites for information on block chains. As detailed in the resulting report – Searching in Vain for The Block Chain – just 23 had anything at all to say about it, and that number dropped to 15 when management consultants and IT analysts were not counted.
In my view, unless the IT vendor community becomes educated in block chain technology – along with its benefits and business potential – there is real chance that the roll out of this innovation within the financial services sector will be slowed.
That said, given the potential business opportunity of playing a role in re-architecting the infrastructure the runs the global financial services space, there are a lot of good reasons for the big IT vendors to get up to speed on the technology.
Looking forward to 2016, I believe that a number of these large vendors will rapidly educate themselves on block chain and how to deploy the technology, and begin to offer advice and guidance and ancillary services to their financial services customers.
Some vendors will go further, forming partnerships with (and possibly acquiring) promising startups to that they can offer their own products and services, either to their customers or in competition with them.
This disintermediation scenario is one that the venture capital community – which has ploughed around $1 Billion to date into block chain startups – is keen to see develop, so that their portfolio companies become the financial services heavyweights of tomorrow. It could happen, but not without the global IT vendors playing a leading role.