On Disruption

I’m asked to many panels with titles that have the word “disruption” in them. I’m not fond of the word, perhaps because my parents raised me to never interrupt, but I like the air of provocation they bring to a discussion. 

People typically refer to blockchain technology as “disruptive” because it has the potential to make some intermediaries (usually trusted third parties) obsolete. While I think distributed ledgers have the potential to change the infrastructure of the financial services industry, I think a distinction has to be made when we use the word disruption. 

Arguably, the biggest disruptive force we’ve witnessed in recent history came through the popularization of the Internet. An electronic network of communication reduced the need for paper (sorry, Dunder Mifflin) but also, and less-obviously, impacted industries such as video rentals, taxis, and grocery shopping. The Internet also created new industries, communities, and recalibrated the skills necessary to succeed in many fields. It’s hard to overstate how differently businesses and people operate today compared to the 1980s, as a result of widespread adoption of this technology.

People often write about blockchains as a force that could potentially have the same impact as the Internet. Usually this commentary is paired with a remark about how banking is going to be turned upside down by some network of decentralized operations. In addition to being a rather naïve remark (blockchains aren’t sentient beings, banks ultimately earn their keep by employing strategic judgement), using the Internet as a comparison gives a suggestion of pending obsolescence for all industries that have blockchain use cases. 

I think of a different industry comparison when I contemplate the impact of blockchain technology in banking: oil extraction in the US. In the early 2000s, the US lagged in oil production. This changed with recent innovations in hydraulic fracking and horizontal drilling technology, leading to a so-called “shale revolution” that has seen US oil production rapidly increase.

While many new companies have sprung up to deploy this technology in new and innovative ways, none of them stand a chance to displace Exxon Mobil. Indeed, many of the big players in oil have taken to adopting recent technological innovations. This is because of another buzzword: synergy. The skills necessary to run a large oil company are complementary to the sorts of innovations being brought to the industry today. The level of talent, capital, and operational challenges are similar among small, nimble fracking companies and established oil producers.* Compare this to the dynamic of Blockbuster and Netflix: do you think the technical expertise to create video rental software corresponds nicely to running brick-and-mortar video rental stores? I’d argue that the talent gap is much wider.

Blockchains address common pain points to many banks and the wider financial ecosystem. At R3, we’re proposing that protocols for transaction processing and registration can be shared among competitors without jeopardizing their respective competitive strengths. This innovation is being taken seriously because banks evaluating blockchain technology aren’t the same thing as Blockbuster evaluating Netflix, the way some articles will have you believe. A closer comparison is ExxonMobil evaluating Pro-Stim Services.

* - Clearly they are not perfect matches but please bear with me here.