Digital heartbeats in a traditional landscape: Part 2 of 2
Originally published in TFR magazine, SIBOS edition, September 2016
So, how can this be achieved? An extract from a report by Deutsche Bank Research [1] provides a key insight to the answer:
Internet firms throwing down the gauntlet to the banking world. In sections of the financial industry there are many web- and data-based financial products that customers cannot obtain from either their bank or a similar provider. This gives rise to a new competitive environment. Non-bank, primarily technology-driven providers are entering the markets for simple financial services. Regulatory differences are of course a major factor.
The recent entry by Financial Technology (FinTech) companies into the world of trade finance provides us with a set of skills and experience not hitherto available. However, barriers still exist and it will require a great deal of willingness on both sides for full digital transformation to be achieved.
The problems faced by financial institutions in the past are fairly well known but bear repetition. It has previously been highlighted that a key factor has been the inertia of tradition and a resistance to change combined with the difficulty of moving from paper to digital data. One commentator has succinctly summarised this by pointing out that the advent of technology essentially took paper-based processes and turned them into semi-automated, semi-electronic processes, but the logic was still paper-based. [2] Slow and cumbersome budget processes based upon former operating models provide no obvious benefit and can, in fact, lead to short-termism with medium / long-term projects losing out to those that can provide an immediate return within 12 months. In addition, financial institutions are not always as agile as the FinTech sector and, in the main, take longer to bring a solution to market.
Whilst many of these issues may not be a particular concern for FinTech, this sector does face other concerns. Those who are currently involved in Trade Finance are fully aware of the growing issues that must be faced with regulatory, legal and compliance aspects of the business. Such experience and knowledge is not so readily available to those in the FinTech sector and must be carefully appraised. Furthermore, financial institutions have an existing client base that may not be easily accessible to new entrants and, despite the reputational hits that have been incurred since 2009, financial institutions are still trusted when it comes to trade finance.
The key will be for both sectors to work collaboratively in building client-facing solutions that will take the industry forward.
Based upon recent developments, it is clear that a lot of attention will be focussed upon the Blockchain. An overview of Blockchain can be found in an earlier article. [3] The aforementioned IoT will need, by default, a ‘Ledger of Things' [4] and this is where Blockchain will play a key role.
In essence, it is a distributed (decentralised) ledger for validating and recording transactions with no need for a trusted third party: a ‘ledger in the cloud', a ‘trust protocol'. A network of computers validates, verifies and authenticates a transaction. Amongst many other things, this can facilitate transfer of ownership; ease the formulation of contractual agreements; digitally produce commercial, notarised, insurance and other types of documents and certificates. There would no longer be a need for two (or more) institutions to record and monitor a transaction, leading to a dramatic reduction in cost and time.
The digitisation of international trade and trade financing is now well underway, the inevitable result of a convergence of technological capability, commercial drivers and market adoption. Service providers, including trade finance banks, must make a strategic decision: commit to the development of digitised channels and propositions, or prepare to cede market share to a new generation of providers that have already seized the imperative to respond to market evolution in international commerce. [5]
As to when this all will happen, commentators provide varied estimates ranging from 2 to 10 years. Using a musical analogy, my personal perspective is that we are at the ‘punk-rock' stage: disruptive, challenging the status quo, all about attitude and achieving change, a ‘can-do' approach to upset the ‘inertia of tradition'. Punk rock took time and was denigrated by many at the time, but ultimately has influenced many disparate types of music and musicians.
Here's hoping the same happens in our industry!
[1] Fintech - the Digital (r)evolution in the financial sector, Deutsche Bank Research, November 2014.
[2] Blockchain Revolution Chapter 3, Vikram Pandit former CEO of Citigroup, May 2016
[3] What is Blockchain technology, David Meynell & Gary Collyer, TFR blog 9th October 2015, http://www.tfreview.com/blog/what-blockchain-technology
[4] Blockchain Revolution, Don & Alex Tapscott, May 2016
[5] Digital Trade and Trade Financing, SWIFT & OPUS Advisory Services International Inc., May 2016