Financial services: getting up to speed with cryptocurrencies
Simon Raymer, Chief Information Officer at Fraedom, explains how new cryptocurrencies and the blockchains that power them can majorly overhaul financial services, and why it’s so for firms act soon…
While blockchain remains an emerging technology, it has huge potential to radically change the financial services sector, and transform the way transactions are carried out.
Across the sector, the use of peer-to-peer (P2P) transactions that bypass the banking channel is gathering pace. We see this especially in developing nations like India, where traditional banking and financial services are not as well established, and consumers and businesses are jumping directly to P2P transactions providers.
The saturation of smartphone devices has also driven growth and this usage is likely to grow further as apps become more widely accepted across the P2P delivery platform. Currently, the strongest growth of P2P is taking place in the B2C space but many new start-ups are embracing the P2P concept and trials are taking place using blockchain and P2P-based approaches
It’s true that the direct transactional P2P model does not typically use blockchain today, but with faster and more cost-effective processing as a by-product, it’s a matter of time before its use becomes widespread.
That, in turn, will help drive further growth in already burgeoning cryptocurrencies, like bitcoin, ethereum and ripple. Almost every one of these new secure payment mechanisms uses blockchain as its underlying infrastructure, with its success in doing so raising prospects for the cryptocurrencies also. Ultimately, though, what does the rise of blockchain and cryptocurrencies mean for established financial services providers?
Opportunity or threat?
Currently, blockchain is heralded as enabling new technology entrants to challenge established financial institutions and the services they offer. Bitcoin, for example, allows peer-to-peer financial transactions to take place in a decentralised marketplace without restrictions, and without the barriers of usage or entry that would have been present if it was centrally-owned and managed by an established financial institution.
This, in theory, allows any organisation to create a service offering to utilise bitcoin as a payment medium without the traditional barriers or regulatory zeal oversight. It also obviously creates a risk-fuelled scenario where consumers and businesses using this service and medium have no protection, or at best little legal recourse if things go wrong.
Scoping the challenge
From one perspective, established financial services businesses face a large line up of new start-ups taking aim at their customer base. These start-ups require little capital and, because this is an emerging technology, have few barriers to entry to slow them down. Cryptocurrencies can act as a key catalyst, creating new ways to deliver traditional financial services by embracing new technology approaches such as peer-to-peer transactions.
On the other hand, established businesses who embrace blockchain and/or cryptocurrencies also have the great opportunities to drive innovation themselves in these areas. They have the chance not only to deliver both existing and new services to the market using new technology but also to bring their own established trusted brands to the table.
While a lot of consumers and businesses are willing to take a risk with a small start-up, many are hesitant to either try or commit at a large scale without the backing of a trusted established brand, and the sense of control, security and maturity that comes with that. This encapsulates the opportunity that established financial services businesses are likely to have by embracing these new technologies – but they must not delay too long. The success achieved already by P2P and cryptocurrencies, together with the growing number of start-ups using traditional financial services, acts as a warning shot to any established financial services business that they cannot ignore these new technologies and start-ups.
If they do, they are going to find their once dominant positions rapidly eroded, especially as traditional barriers blocking entry are removed by these new technologies. These new start-ups are quick, and while their focus typically is on a small subset of a financial service, en masse, they will quickly cut into established client bases, especially where profit margins exist and are now viewed as unsustainable.
Need for a new understanding
Yet, there remain many challenges ahead for the established financial services businesses before they can start to successfully embrace these new technologies and use them to their advantage. A process of education is required. That’s because in general there remains today a low level of understanding of the impact, both perceived and real, of new cryptocurrencies.
At the moment, most discussions around cryptocurrencies are directed or based on the perception of bitcoin. There is generally a great deal of misunderstanding about bitcoin and blockchain, especially in the media where they are both hot topics. With bitcoin itself, the media coverage is mixed, varying from its reported usage for terrorist and illegal dark web exchanges, to its failures such as with Mt. Gox, for example, and its relative unstable exchange rate.
The real merits of such perceptions can be extensively debated. However, many established financial services organisations have a mixed understanding of the impact both blockchain and cryptocurrencies can and will have on their businesses. In particular, the way decentralised transaction mediums and P2P are likely to reshape the way businesses interact with financial services (such as loans, or cross-border financial exchanges) is something of a grey area, as is how it will affect the way businesses pay or receive payment for their goods or services.
Added to that, there are a host of other challenges these businesses face in embracing cryptocurrencies. These include creating expensive innovation centres within existing teams. Moreover, gaining senior support to provide budgetary allowances to obtain subject experts who understand these technologies to educate and champion them within the organisation is a difficult task, as is supporting the technical entrepreneurs to use these technologies to find the right business opportunities to challenge the market with.
Tapping into expertise
That’s where we see a role for third party technology providers with knowledge and understanding of how new technologies, not just limited to blockchain and cryptocurrencies, can best be taken advantage of to challenge and disrupt the market in the right way.
Traditional financial services providers need to tap into the experience and expertise of their peer group, the key providers in the marketplace. In addition, they need to tap into those in the industry who can help them to navigate these new technologies successfully, quickly and with less cost, than if they try to do it alone.
It’s important that financial services organisations keep fully up to date with the latest technological trends. They need to have the courage to experiment and embrace the entrepreneurial spirit but they also need to be open to tapping into the experience and expertise of others. That’s especially true when it comes to blockchain and new cryptocurrencies. These are technologies that the established players simply cannot afford to ignore.