Let’s start with good news: Finance is getting on the move. Most actors, aware of the upcoming challenges, have started their transformation to face the ongoing digitalization of the sector or to endure the regulatory pressure. They have launched major programs to embrace agility, data citizenship and customer centricity while setting up new data architecture that will break organizational silos and support continuous improvement.
Now comes the bad news, those are just baby steps. Opening your business through APIs or developing the next platform-based market won’t make you a digital champion.
It is always a real pleasure for me to advise companies with recognized know-how in these difficult moments. I am involved to help companies to acquire new skills, new mind-set and co-develop their Data strategy. Those new practices help finance leaders, thanks to real-time data acquisition and processing, to create on-demand analytics for their most critical businesses.
Through this post, I want to share with you my recent thoughts on the challenges of digitalization in Finance industry and to introduce “Rockchain”, a distributed data intelligence platform for decentralized finance infrastructure.
Winner takes all
Increasing revenue is of course the core motivation of reconstruction. Another one is the pressure made by the regulation, such as MIFID2 in finance.
These two subjects of reconstruction are a real challenge for most financial institutions, especially for those who didn’t consider for years their IT as a critical center of the business.
In addition, there is a real dichotomy between the openness of the new economy, based on collaboration between incumbents and new entrants with Bank as a Service/APIs or Platform, and the will of centralization of the market infrastructure by authority to impose its control. There are other forces that are moving the economic system and markets which are the desire of trust and transparency in the market. Without fair revenue sharing between contributors to support continuous improvement and open collaboration, all new business models are doomed.
A recent study on Bank API shows that is it difficult to find one model that satisfy most participants. As Facebook, Amazon or Google hegemony demonstrates, any platforms models or other “winner take all” economy will be observed with real cautiousness…
What is mainly slowing finance transformation?
First, the same usual suspect: culture, which is based in banks on secrecy and not collaboration. Banker will never ever share any trading algorithm, risk model or anything. They don’t do it inside their organization with their colleagues, they won’t do it outside with the competitors.
Secondly, most data manipulated by Bank are privileged data which means that they are highly sensitive information on customers’ business. A compliance service will never give access to those customer data through API without high level of security in place, tons of justifications and without the customer agreement. This is especially the case when you are talking about enterprise strategy such as investment or mergers and acquisitions. Trust, for what remains, is the base of relationship between bank and his customers. If customer entrusts bank with their most sensitive data, this is not to retrieve them on a market place even in an aggregate form. To be sure you get the complete picture, even in the same organization in the same business line, data are not shared between teams that work on the same financing operation. Team on different geographic areas can be in competition for a structured financing operation (depending on the country, tax and local law can make difference on the final proposition).
At last, the another major limiting factor is the numerous stakeholders in every product originated by financial institution. With a low interest rate economy, many companies, that have based their business model on selling financial products, want to move their revenue on services model. But how to propose digital services if you don’t have access to your own customers? This is a real concern in Asset Management where the market is done through intermediary. Of course, disintermediation is a risky strategy as you could cut yourself from your main sources of revenue.
I will give another example to illustrate the challenge that faces Finance industry in their transformation and the real complexity of the ecosystem. It is in Securitization. It may not be the easiest and certainly not the most popular financing activity but this is one I am working on right now. Securitization is the process of transformation of illiquid asset into tradable security. In most financial practices, there are many companies or subsidiaries that take part into a Securitization deal. A dozen of contributors (originator, issuer, backing services, arranger, depositary, rating agency, SPV, investors, etc..) collaborates during a long process (from origination to transaction management). How do you fairly finance the digital transformation of such activities if it benefits mostly to one or two parties? Is it the most concerned actor that should pay for the renewal of all contributors’ infrastructure for unsure revenue? For example, to optimize their funding strategy, the team in charge of the conduit management could expect to have access to the details of the claims engaged from the backing services. Do they have to sponsor the full project? Most of the time, this kind of effort is too important to consider a renovation project especially with legacy systems. Regulatory reporting in such a complex process is a baffling problem. Who is in charge? If data must come from every players (MIFID2), the cost could be tremendous. Who will realize the consolidated report (remember granular data requirement)?
The complexity of the ecosystem and the inter-dependency of actors are a real challenge in Finance digitalization.
Rockchain (distributed data intelligence platform on ethereum)
To sum-up, what are the main showstoppers on the road of finance digitalization:
- Secrecy culture over collaboration
- Sensitivity of customer data
- Complexity of the ecosystem and number of stakeholders in every activity
- Fair revenue sharing model to support innovation investment
- Regulation pressure that drive to centralization
That’s a lot of problems to solve and as stated earlier, APIs, Open Bank initiative and platform are not a response to solve those ones.
On decentralized finance, blockchain technology is a promising answer and give a clear direction. Platform like Ethereum has been conceived to build decentralized collaborative business model with integrated revenue sharing based on smart contracts. All initiatives based on private blockchain are out of the scope in my opinion as they reproduce the same centralization issue and tend to keep strong dependency over few organizations.
The Rockchain project is an open platform that extends ethereum characteristics with integrated security, data privacy and distributed processing capacity. With Rockchain, it is possible to implement distributed collaborative application that could process and aggregate data distributed in different locations and guarantee the preservation of privacy on stored facts and algorithms. With Rockchain, any computation on data, static or as stream, are dealt in accordance with privacy requirements.
This is a really promising technology which can be used as the foundation of the decentralized finance. Based on this technology, we can imagine how easily actors can collaborate to create new products and services on the public blockchain, sharing securely sensitive data and processes. The integrated revenue sharing mechanism, based on a distributed rules engine, can be dynamically adapted to match the effort in innovation. The open nature of the project will let new entrants, such as fintech, to participate in existing organization. You can imagine a RegTech with Trusted agreement by central authority that can securely access to sensitive data to perform regulatory reporting in a decentralized way and send aggregated results to regulator.
I worked with some people involved in Rockchain project. I know them well and they have a great team with a clear vision and deep knowledge of crypto-currency and its ecosystem. It clearly solves many of my issues that I face on my projects in Finance industry. While discussing on the future evolution of their platform, they asked me if I could advise them to develop the decentralized finance use cases and it is with great pleasure that I accept. Rockchain is closing the pre-ICO (Initial Coin Offering) soon and has their ICO planned for September.
If you want more information on Rockchain project, don’t hesitate to contact me. It will be a pleasure to introduce you.
We are entering a new era which requires changing our way of thinking Finance and adopting new technologies.
We begin to see the direction in which we must go!