Blockchain in Financial Services: The Hype and the Reality of the Adoption Cycle

One thing I love as part of my job is an opportunity to interact with startups; especially those in the financial technology (fintech) space that are challenging the status quo and making the large banks rethink their operating models. At a recent Boston fintech event, more than 60 percent of the firms showcased how they are leveraging blockchains to create the next big thing.

But while the blockchain hype cycle is at its peak and investors are pouring in billions of dollars, some of the banking senior executives I speak with are struggling to find ways to filter the noise and focus on what’s real.

“My role has flipped in a matter of months from trying to interest people here in thinking differently about the potential of the blockchain to struggling to contain their expectations. It isn’t the answer to all banks’ problems,” Simon Taylor, vice president of blockchain research and development Barclays, recently told Euromoney.

Blockchain has the potential to have a significant impact within the financial services industry as capital markets spending on blockchain technology is projected to continue to rise in the coming years—up to $400 million USD by 2019, according to Aite Group.

What is important to understand, however, is the challenge of adopting blockchain technology in financial services.  That requires looking beyond the hype cycle and figuring out the reality of how it works for you and your customers.

What can blockchain do for financial services?

At its core, Blockchain has the potential to make trading processes more efficient, improve regulatory control and eliminate unnecessary intermediaries. It could also displace traditional trusted third-party functions in banking, securities and insurance.

Blockchain technology can further help banks cut their IT infrastructure expenses by ~$15 to $20 billion per annum by 2022, according to a 2015 report from Santander. 

Blockchain: The reality check for financial services

With general turmoil in the market conditions, IT dollars are scarce. So how do you balance the need to focus on the core of what is the “bread and butter” for your business and what you need to invest in technologies like blockchain?

To answer this question, I find that a framework approach helps you evaluate readiness to adopt blockchain technology.  Some key factors to consider:

• Regulatory—How does blockchain fit into your existing regulatory framework? A certain level of legal/regulatory legitimacy can enable viable market implementations and acceptance. For example, “permissionless” blockchain will contradict most regulatory frameworks and might not be ideal for your organization.

• Strong Customer Use Case—You have to look beyond the hype and evaluate blockchain and build strong customer use cases. Experimentation is good but relevancy to your customer needs is critical.

• Legacy System Integration—Unlike startups, large institutions have a huge technology legacy. Replacing those is an expensive, time consuming process but critical for modernization of banks. A number of firms are on multi year transformation journeys to replace their legacy footprint. Blockchain solutions need to work with these legacy systems and integrate with the transformation roadmaps.

• Partnership Model—Blockchain is a multi-party, multi-market participant technology. The success of making it work is ensuring multiple stakeholders have the buy-in, willingness and incentive to make it work. 

• Talent Requirement—There is strong competition today for a limited talent pool that understands blockchain and financial services. With startups competing for talent, how you fill your ranks with the right people internally or with external partnerships will drive long-term success.

Whether you are looking to evaluate blockchain for foreign exchange and remittance, building “smart contracts” to model complex asset classes or payment systems or using blockchain in other ways, it is vital to have a grounded framework in place to ensure that you are spending your scarce dollars on the right kind of experimentation with blockchain.

As Nate Silver, the famous American statistician says, “Distinguishing the signal from the noise requires both scientific knowledge and self-knowledge.”

Blockchain will evolve over the next 12 to 18 months and like any new technology innovation will get past its hype cycle. In the meantime, separating the reality from the hype of what blockchain can do for you requires a strong framework that fits within your organizational goals and creates a successful partnership ecosystem internally and externally.