Transaction Banking by DSign
A Blog by Professor Michael Mainelli
Travelling Is Infectious
A friend recently flew to a Commonwealth country. On entry, his mobile phone alerted him to local apps for insurance and payments. After asking around and checking out local opinion, positive, he took one of each. The insurance app was designed for some local health cover which he fortunately didn’t need. The payment app was designed for remittances. He used the remittance service to change some money, and then to make local payments. He was impressed at how simple it was, how good the exchange rates were, and how little the payments cost him in fees. For the past few weeks he’s been seeing how much he can save using his overseas app for payments in Europe. So far, the app’s European coverage is patchy, but still saving him some money. With increasing penetration of standardised technology, and increasing globalisation, many more people will be bringing home infectious transaction apps from foreign climes.
There is no shortage of things to keep transaction bankers awake at night - a nightmare list of regulation, capital ratios, non-bank competitors, dis-intermediaries, cyber-threats, cost pressures, shrinking margins, and the perpetual trio of market, credit, and operational risk. Beneath all of these nightmares lurk the denizens of globalisation and technology. Customer experiences are transforming expectations. Newly minted tourists from Asia return home with higher expectations. As do old Western hands who return from Asian trips with experiences of superior service. Technology travellers bring tales of adventure from other online markets. They roam an internet of easy-to-navigate systems with accurate records and helpful apps and bring legends back to a home country full of hidebound, creaking Western banking systems. Like my friend, customers are visiting new lands and new devices where transactions work faster, better, and cheaper. Customers experience consumer-based technology dissonance in so many sectors, clashes between what they’ve come to expect on their phones and what they experience in commercial practice.
Expectation Experience Dissonance
The technology dissonance between experience and expectation in transaction banking is perhaps highest in the corporate market. Here, corporate workers try to make antiquated payment systems work, but sigh while remembering what they can do out-of-office worldwide on their mobile phones swiftly and accurately. Dig deeper into the architecture of new transactions and we see again the Scylla and Charybdis of globalisation and technology. New systems are being built that bypass national payment systems, that bypass SWIFT. High on our list of disruptive technologies for both consumers and corporates has to be the global blockchains that drive bitcoin and other cryptocurrencies.
A blockchain is a distributed transaction database shared by participating nodes – a public ledger that prevents making the same transaction twice, and is nearly indestructible. Every new block of transactions contains a hash of the previous block, creating a chain of blocks from the ‘genesis’ block to the current block. A full copy of a blockchain contains every transaction ever executed. You can keep a paranoid copy of everything, or naively entrust a record of your transaction history to the internet. The consumer experience of cryptocurrencies is variable, but the blockchains have proved robust. Working since 2009, forged in a global furnace of libertarian money, trade, avarice, criminality, espionage, and law enforcement, Bitcoin and other cryptocurrency experiments provide increasing confidence that blockchains are robust in harsh environments and have a bright future.
Block To The Future
Regulatory announcements from some jurisdictions, such as the Isle of Man or Alderney, show they realise blockchains are about much more than coins. At a recent Long Finance event in London over 50 financiers examined what blockchain technology might mean for traditional financial services. For consumer interaction, there might be identity blockchains to prevent fraud, preserve insurance contracts, or share health records. For corporate transactions, suggestions ranged from asset registries for ships, aircraft and art to wholesale market trade reporting, consolidated tapes, corporate voting, tax registries, accounting registries, or multi-entity contracting and deal rooms. Some start-ups are building new financial exchanges using blockchains and it is only a short while before some established players will use them to replace rickety systems that need a robust, semi-open transaction ledger at their core. So both consumer experiences of money and corporate experiences of new information technology are transforming expectations.
Whenever we hand goods or services over for consideration, there is risk. The buyer may not get what he or she wants or needs. The seller may not get paid. These problems may not be due to deception or delusion, perhaps just miscommunication. So commercial transactions frequently introduce a trusted third party. With what the third party is trusted varies. In commodities trading, certain standards specify how a third party defines a commodity or the delivery of a commodity. In trade finance, the third party typically releases funds when goods or services of an appropriate quality have been exchanged. Blockchains are picking away at the ‘trusted third party’ concept, particularly by preventing contradictory transactions and providing an historic ledger.
Transactions Are Infectious
By lowering trust and technology problems, blockchains are likely to increase transaction volume and frequency. The first, ‘identity’ introduction to any blockchain will be crucial, and an excellent role for a bank. Moreover, blockchains need to fund their consumption of processing power as they ‘forge’ or ‘mine’ the chain. Cryptocurrencies have a bootstrapping approach, paying in their own specie. Bitcoin miners are paid in bitcoin. For more traditional transactions, banks have a key role in taking fees to organise the processing.
A few transaction bankers might pursue a strategy of introducing blockchains rapidly, perhaps becoming more systems suppliers than bankers. Most will pursue a technology of adapting. Reminiscent of Giuseppe Tomasi di Lampedusa, “If you want things to stay as they are, things will have to change”, transaction bankers have no choice but to embrace the new technology as it arrives. Is there a more strategic response for the adaptive?
For transaction banks not pursuing a technology-based strategy, one clear strategic response is to get even closer to the customers. Be the bank that facilitates access to blockchains by providing excellent service on confirmation of identity. Be the bank that enables ‘single log-on’ type access to multiple blockchains. Be the bank that provides the best dashboard and analytics for blockchain management. Be infectively enthusiastic about the future of new trusted third party technology for the sake of your customers. Or as the children’s Smiling Is Infectious poem concludes, “Start an epidemic, And get the world infected.”
Professor Michael Mainelli is Executive Chairman of Z/Yen Group and Principal Advisor to Long Finance. His latest book, The Price of Fish: A New Approach to Wicked Economics and Better Decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.