The sheer number of blockchain ventures in the market has reached a breaking point – the space is now so fragmented and flooded with hundreds of fintech players that it is inevitable many of these will not survive. If this technology is to be applied successfully to financial markets, we need collaboration, not fragmentation.
Fintech is booming. The changing regulatory and market environment in the wake of the financial crisis has led an era of unprecedented technological development in capital markets.
Investment in fintech is expected to accelerate to more than $150 billion over the next five years, with more than $50 billion already invested in roughly 2,500 technology companies – but unfortunately, a huge percentage of this will be wasted on projects that will never come to fruition. At a time when banks are slashing expenses through head count reduction and other measures, the risk of backing the wrong horse could far outweigh the potential gains.
Unless you’ve been living under a rock for the past couple of years, you will have undoubtedly heard blockchain technology touted as the panacea for all the shortcomings of today’s financial markets. The sheer number of blockchain ventures in the market has now reached a breaking point – the space is now so fragmented and flooded with hundreds of small to mid-size technology players that it is inevitable many of these will not survive.
You only need to look at the early days of the internet to draw a comparison – many of the web companies active then are now obsolete and long forgotten. If this technology is to be applied successfully to financial markets we need collaboration, not fragmentation.
Spending millions of dollars to explore the use of blockchain is both a daunting and risky task for a single bank to take on alone. Blindly investing in small, disparate technology projects is not the solution. Joining collaborative initiatives with other banks to pool expertise and resources and develop industry-standard solutions in the appropriate approach.
This is particularly pertinent to blockchain-inspired technology, as by its very nature its impact is dependent on a network effect, which can only be achieved through an industry-wide collaborative effort. Effective development of this technology is highly dependent on collaboration among banks and the deployment of a common, inclusive platform on which they can interact.
If developed in the appropriate manner, the potential for this technology is huge. As a 30-year veteran in the e-trading space, I’ve seen first-hand how advances in electronic trading technology have dramatically slashed operating costs related to brokerage and execution; but in today’s markets, the spotlight is shining directly on the outdated systems and processes that have prevented the modernization of the middle- and back-office functions.
Taking the necessary action to improve efficiency of spending and resourcing on functions such as reconciliation and post-trade reporting is now at the top of the agenda for every forward-thinking COO.
By enabling the industry to move from duplicated and inconsistent isolated systems of record held at each firm and to cloud-based systems with shared data, business logic and processing, blockchain-inspired technology will facilitate mutualized and consistent middle- and back-office systems that assure that one firm’s view is identical to its counterparts’ view. Moving to the cloud will allow firms to start decommissioning expensive elements of their bespoke infrastructure, break down silos and significantly reduce costs.
Distributed and shared ledger technology protects privacy, replacing many human processes with software; enhances security due to its distributed nature and the use of advanced cryptography; and allows the industry to reduce the costs caused by redundant and non-proprietary processes and shared services.
The application of this technology to finance holds the key to releasing banks and other financial institutions from the technological binds in which they find themselves after years of unstructured investment in multiple generations of expensive legacy middle- and back-office technology. It is now crucial they do not make the same investment mistakes again.
In the wake of the financial crisis of 2008, banks slashed operating costs just to keep their heads above the water. While undoubtedly still challenging, today’s market is very different; managing costs effectively doesn’t necessarily mean cutting costs, it means finding ways to spend your budget more intelligently.
Considered investment in effective and focused collaborative ventures between banks will deliver a future where financial agreements are recorded in the cloud and automatically managed without error, where any qualified actor can transact seamlessly for any contractual purpose without friction.
Markets will move toward models in which parties to financial agreements record them once and collaborate to maintain accurate, shared records of these agreements. Duplications, reconciliations, failed matches and breaks will be things of the past.
Banks are standing on the brink of a brighter future that promises radically reduced costs and massive increases in efficiency – and it starts with collaboration and intelligent fintech investment.
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