Think The Blockchain is Interesting But Bitcoin Isn’t? Think Again

Whilst the “Blockchain is interesting” narrative has merit, it created a dismissive approach to Bitcoin that misses a trick.  If you don’t want to miss that trick, read on.

Banks have gotten into this “Blockchain” thing like it’s the new snake oil,  a conversation about “Blockchain” will open any door and liberate a little budget.  As this Dilbert remix excellently sums up

dilbert chain

This isn’t the first post to explore “Bitcoin bad, Blockchain good”, but there are some things I felt still needed to be said. There is an excellent post by Richard Brown (which I recommend reading as pre-text to this) and another by Chris Skinner. Both make the point that saying “Blockchain not Bitcoin” is dangerous.

The subject has become too binary, either you believe Bitcoin will eat the world, or it is incompatible with current banking regulation and practices.

It may be helpful to understand why the banks instinctively warm to the Bitcoin bad narrative. There are three main misconceptions and one thing I agree with fuelling this:

  1. The Misconception: It’s easier to launder money with Bitcoin
  2. The Misconception: Bitcoin is not secure
  3. The Misconception: Bitcoin would not be profitable for banks
  • The Interesting Truth: There are valid, exciting and profitable use cases for the technology outside of Bitcoin’s architecture

I’ll tackle the misconceptions later in this post, but first it’s worth a quick refresher on what’s interesting about Bitcoin.

Bitcoin’s Got Talent

Perhaps the reason there are so many misconceptions because so few people understand Bitcoin. It has a number of unique properties that banks are seeing as a threat, rather than an opportunity.  Think about the problem of Cash for banks…

Cash Got Problems (yo)

When you have money in your bank account, it’s not actually yours legally. The bank owe’s it to you (as ever there’s an excellent Richard Brown post that goes into more detail on this). They’re using that money on the stock market to make a profit.

The more you use debit and credit cards, the more profitable you are. If you draw out your entire wage as cash every month you’re one of the least profitable customers.

Paper cash is expensive. There are an army of vans moving cash around the country, from supermarkets to vaults and back again.  A logistical nightmare that adds a ton of cost compared to digital money.

Paper cash is also risky, it’s near impossible to trace because it exists physically and carries its value as it moves. Do you know where the cash in your wallet came from or who had it last? What about before then? If you ran a drug cartel, it would be very helpful to have a network of chicken shops to take all of that cash and get it into the banking system.  In developed markets cash is slowly being displaced (not nearly as fast as you might think!)

cash is king

But in developing economies it’s a different story

Cash Can Reach Where Banks Can’t

220 Million Agricultural Workers are paid in cash. If you live on a remote farm, or are urban poor, there’s a good chance you’re not profitable as a current account customer. You wouldn’t put enough money in the account per month to make the cost of giving you an account make sense for the bank.  Banks have to maintain branches, servers, data centres… all of that cost makes you expensive unless you’re giving them a significant amount of money per month to profit from.

If you get paid in cash, you’re trapped in a cycle of cash.

Recent years have seen the emergence of mobile airtime being used in place of cash… this helps, but only solves part of the problem. You’re still getting paid in cash and you still can’t save or borrow. You’re still not financially included.

Bitcoin As Digital Cash

When I send you money from my bank account to yours, my bank owes me less, your bank owe’s you more.  I haven’t paid you, my bank paid your bank.

This isn’t a possibility for under 18s or billions of unprofitable potential customers. This is where Bitcoin has huge potential. As a digital token that holds value, it can transact as cash. When I send you a Bitcoin, you receive it, not your bank.

Can a Bank Make Bitcoins Make Sense?

Regulation aside (for a moment), the mechanics for a bank to accept Bitcoins instead of cash would be relatively trivial. They’d just need an exchange capability. As soon as the “Bitcoin cash” is collected, it wouldn’t have to be physically moved anywhere.  If you look at it purely as a cash replacement, it actually makes sense.

Sure Bitcoin is a bearer asset (your bank can’t use it on the stock market – yet), but it reaches where the bank can’t.  It’s also got another trick up its sleeve…

Bitcoin is Permissionless

Permissionless innovation was a phrased coined to explain how the internet changed the telecom industry and created opportunity. Before the internet, all of your communications had to be compatible with the telecoms operator you used. The internet created a new set of rules. In a different way, Apple did this with the “App Store”. Inviting the world in to build whatever they like with a set of lego bricks.

Bitcoin similarly is an open set of lego bricks, that will always work no matter who you are. This property does not apply to the bank use
cases of what they call “Blockchain”.

A closed distributed ledger system has many advantages over today’s technology, but it’s not permissionless. It will therefore, never reach the types of customers truly permissionless innovations can.

To use Bitcoin you needn’t go to a branch and provide a birth certificate (which is quite difficult if your nearest branch is 5 hours away and you don’t have a birth certificate!) A mobile network operator tomorrow could decide that their airtime will be tradable for Bitcoins on a Bitcoin exchange.

It would then simply require someone to wrap these two things into a proposition for remittances (like say BitPesa) to make it really easy for Ex-Pats to send money home to their family to be received as airtime.

 

Bitcoin As a Customer Acquisition Opportunity

Perhaps then Bitcoin is the technology equivalent to the student account. A loss leading outreach programme to win a new generation of customers because they’ll be valuable over their lifetime.  This might actually be feasible if local regulation allowed it.

Because the Bitcoin blockchain (ledger) is so very transparent,
you could actually watch Bitcoin wallet behaviour and use that to build risk models.

In other words, you’d be able to identify customers who may be low risk for a savings or loan product.

Granted, there’s a number of sizeable challenges before that could be possible, like consumer acceptance or the regulatory acceptance.

To make any of this a possibility will require a little imagination, a lot of opportunism and overcoming some key misconceptions…

Overcoming Misconceptions

Won’t People Launder Money With Bitcoin?

The recent Silk Road arrests suggest the FBI found it relatively trivial to collect evidence and arrest those involved. The issue is the network itself doesn’t require an identity. In itself, not having an identity to transact digitally is incompatible with existing regulation.

Yet if you see Bitcoin as cash-like, that doesn’t compute. I don’t need to identify myself to hold a small amount of cash. I just need to identify myself to put it in the bank. Which is why we’re seeing regulation focus on wallets and exchanges.

I think this is where regulators need some imagination, or to resist to the urge to look at new technology as if it is something existing
regulation can work with. It’s a hybrid of digital money and cash. So a risk based approach would say the regulation too should be a hybrid.

Regulation focussing more on what CAN be done with the technology, rather than what CANNOT be done will lead to the most innovation.

Is Bitcoin not Secure?

Mt Gox isn’t a Bitcoin problem, it’s a Mt Gox problem. The metaphor would be, if everyone in the room gave their cash to say – Chris Skinner – and Chris left the wallet outside in the street. That isn’t the fault of the bank, it’s the fault of Chris (or in Mt Gox in this case). Actually, Bitcoin has never been hacked. That is a remarkable achievement for a public utility and open source software.

Something that can’t be said for the very expensive Payment Card Industry (PCI) with all its regulation, pain and cost, we still see things like the TARGET hack.

Each day we build a higher wall and each day the attackers get closer. With Bitcoin there are no walls. The funds are so distributed it’s harder to find points to attack

If it’s Cash Surely It’s Not Profitable?

Because it’s digital cash, because it’s permissionless and because it’s transparent I think there are opportunities there. Those opportunities require imagination. They’re not based on the same business model the banks are comfortable with or used to.

If the banks have the imagination to see an internet like world of people who could be potential customers of savings or loan products.  Bitcoin could be very profitable as a customer acquisition tool.

The Alternatives to Bitcoin

The points above don’t suggest that what Ripple, Eris or Ethereum are doing is wrong. If anything some of these new entrants may have a better short term impact on traditional finance than Bitcoin does as regulators struggle to get their head around Bitcoin. There are huge potential cost savings and opportunities with distributed ledgers and smart contracts that don’t require Bitcoin.

However, just because a narrative is comfortable and fits your world view doesn’t mean it’s right. If the Telco’s had said “We like the
internet technology, but think it should be closed for just Telcos to use” – people would rightly think it’s crazy talk. Technologies that
treat value as a liability (an IOU), will never be able to displace cash in the same way Bitcoin does.

I don’t see why this argument has to be binary. Either you’re for Bitcoin or against it, it seems.  I’m for Bitcoin AND for it’s alternatives.  They’re both interesting.  Arguably the alternatives more so to traditional banks in the short term.

Prediction Time

We’re going to see banks adopt some permissioned distributed ledgers in the coming years and it will be largely invisible to the end customer.  Most of the action will be in those large contract movements between banks.  Banks will see major benefit from doing so, and doing so aggressively.

During that time we’ll also see non traditional wallet players and remittance companies gradually warm to the open / simplicity of Bitcoin (and / or it’s competitors / upgrades). For this long tail of airtime users and cash users having something that is interoperable and global will be a huge advantage.

The question then is how will PayPal react? Or Alibaba?

The Opportunity Cost for banks of not at least considering Bitcoin could be huge.

The 5 Myths Preventing Bank Fintech Innovation

Banks are now big complex machines that risk losing sight of why the existed in the first place.  Banks protect your money (take deposits) and in return are able to lend some of that to help the economy grow. Somehow we ended up with organisations employing 100s of thousands of people & riddled with complexity.

Time is passing these organisations by in their current form.  What should really worry you if you’re running a bank is how customers are trending to not recommend you and want to leave.

retention

I read a great quote from Seth Godin this morning:

“…Jefferson, Edison, Ford… most of these radicals would not recognize the institutions that have been built over time.

The question each of us has to answer about the institution we care about is: Does this place exist to maintain and perpetuate the status quo, or am I here to do the work that the radical founder had in mind when we started?

First principles. The quest for growth, or for change, or for justice. The ability, perhaps the desire, to seek out things that feel risky.

All of us are part of organizations that were started by outliers, by radicals, by people who cared more about making a difference than fitting in.” – Seth Godin

There are 5 Myths Preventing Banks from embracing the Fintech revolution

I put it to you that there are a set of beliefs about banking that is holding back the entire industry.  Banks, consultants and their vendors…

  1. We Are Already Very Innovative
  2. We Can’t Use “new” Technology Because it’s Not Secure
  3. Our Future is an “Omni Channel” Strategy
  4. Regulation Prevents Innovation
  5. We Will Become a Tech Company

Let’s challenge some of these beliefs…

Myth 1: We Are Already Very Innovative

For some time bank efforts in innovation have been met with skepticism. David Brear pointed out recently that if you look at the headlines banks are all supposedly spending $1Bn+ each on technology and innovation.

For all of that money there isn’t much to show for it! We hear lots about a mobile app or a venture fund.  Yet when it comes to real measures of success, there is silence. Sure they’ll talk about how many users they have, but how engaged are those users? How profitable?

CapGemeni reported recently that banks digital products aren’t delivering cost savings and as an experience are well below customers expectations.  Fintech disruptors ready to hoover up customers with far better experiences.

In the start-up world there are two key metrics

  1. MAU (sometimes DAU) “Monthly Active Users”,
  2. ARPU “Average Revenue Per User”.

I’ve seen many mobile developments across the European banking sector since 2008 and in that near decade, never once heard these terms inside a bank or it’s vendor community.

Banks desperately want to appear innovative, but getting anything innovative done is very hard for them. As I pointed out in the previous post – Innovation by Committee is not effective. The open secret is that mobile services are table stakes, but to me they’re such a wasted opportunity. Brett King talks about Moven Bank’s mobile only customer acquisition being less than 10% the cost of a bank branch customer acquisition.  Yet banks cannot deliver on the experience customers want in these channels.

Banks are spending billions, not taking cost out and missing consumer expectations

  • What if banks had a mobile only product like Moven?
  • What could they learn about that experience?

Myth 2: We can’t use “new” technology because it’s not secure

Let’s be clear. Security is paramount in banking. The problem here is the perception of security vs the reality. Let’s say you try to
implement Apple TouchID so people can login with their finger print (purely hypothetical – and to prove a point)

Typical security consultant responses include “but Apple devices can be jailbroken” and “the finger prints aren’t stored securely” from people paid £600 a day to point out risks but not offer solutions. (This isn’t exclusively a security consultant concern no doubt there were an army of other risk teams who chimed in too). Raising an objection is seen as “job done” instead of finding a way to make the better experience work.

security

These objections typically take a possibility and turn that into a probability. Confusing these two is criminal.

Many years ago I once heard an executive for a European bank say “but what does analytics about product usage give me that I don’t already have? – It gives you evidence. Evidence you can use to make a decision. The lack of evidence not only prevents you from moving to TouchID, if you don’t accept that the CAP reader has to stay then your sponsor has to sign up to a £10M risk.

 

When £10M is more than the cost of the entire project by 10x, the security objections mean there’s no way to launch the product, because of a hypothetical paper based exercise.

… rinse and repeat – for every innovation.

Without evidence there is no way to see what small things can make a huge difference to product success. Amazon famously discovered a 0.1% page load time improvement had a significant impact on sales. Having used just about every digital banking product, I wonder how much of that thinking is being applied?

  • What if banks used A/B testing here?
  • Could they take a segment of customers and trial something, and then let the evidence decide if change is required?
  • How could vendors support this?
  • How could the consultants promote this idea?

Myth 3: Our Future is an “Omni Channel” Strategy

It’s well known bank systems are old and resemble spaghetti.

You can’t give a great customer experience on mobile if your core system can’t keep up with the mobile app. This is why innovators are able to offer a better experience. They’re starting from scratch and solving a need end to end.

Over the past decade adding an online “channel” has sort of worked. Online banking, mobile banking were delivered initial results. This lead to a perception that when innovation comes, banks should react by creating a new channel above the core service. Yet as the CapGemeni report states - this game is up.  Digital Channel use has stagnated, and is not delivering cost reductions or better experiences.  It is failing.

Innovation isn’t something you do at the edges. It start’s with the key platforms and works out.

Thinking in channels, suggests the customer experience can be carved off from the core product experience. They are the same thing. It’s the careful union of the core and the digital front end that creates an experience. The term Omni Channel would suggest more investment in the front ends, mobile apps etc.

Problem: That’s creating more spaghetti. Creating more complexity. Creating more cost. Creating a disjointed experience.

Re-architecting the core not only gives your front end so much more capability, it also unleashes innovations that have promised so much but delivered so little like “Big Data”.

  • What will it take to get bankers to accept that the core has to change?
  • Can the amounts bank spend on “tech” be put to better use?

Myth 4: Regulation Prevents Innovation

Banks have had a kicking from regulators in recent years. Approaching the regulator is a tricky thing to do for a bank, the
regulator will tell a bank what the rules are but not how to implement them.

When faced with a spiders web of different regulations the banks react by employing a small army of specialists and ensuring all those
specialists give advice. That advice is then logged in giant spreadsheets to be tracked and traced. Often this means when a new regulation comes out that is designed to support a particular type of customer (small businesses, innovators, money service businesses – take your pick), it actually has the opposite effect. The customer type becomes a “hot topic” and anything in that sector goes under the microscope and is poured over by specialists tracking things on spreadsheets.

The same happens with new products. Banks look at every new idea that crosses their radar as if it’s rolling out a new current account product to the entire customer base. The irony here is it’s not the regulation that’s prevented the innovation (although the lack of guidance from regulators about “how to implement” doesn’t help), it’s how banks react to it. With the only tool they have.

spreadsheets

The irony is forcing everyone to do mandatory training, having committees, councils, Excos, Manco’s and Steerco’s hasn’t actually fixed many of the core problems they’re intended to fix. They make banks feel more effective and provide spreadsheets for the regulators to look at…

The definition of insanity is doing the same thing you did yesterday and expecting a different result.

I believe there is a recognition of this issue in some corners of the industry and regulator community, and some ideas about how to change it. If banks are going to innovate though, they’re going to have to internalise the idea of experimentation.

  • What if banks took ideas like A/B testing of new products to the regulator?
  • What if different ways of bringing new products to market were trialled in small / low risk areas?

Myth 5: We Will Become a Tech Company

This is a noble aim, but at the risk of going against previous advice, perhaps it’s better to embrace Tech in ways that focus on the core of
what banks are good at: banking. If any Tech company spent $1Bn on tech and had so little to show for it, investors would revolt.
Fortunately, banking is a profitable business if you have some scale.   Therefore the question is, how do you maximise that investment to benefit what already bank does?

My own view is banks should focus on being banks but come
into this century digitally.

I’ve been a proponent for a long time that banks need to focus on making their core platforms as easy to integrate with as possible and less on “bundling” value. The fear here is the 1990s thinking that being a “wholesale bank” is the same as being commoditised and will erode revenue and margins. The inverse is also true, this is the path to volume and precisely how banks can take advantage of the wave of Fintech Innovators.  Fintech innovators will migrate to the easiest to use bank platform.

BBVA and Credit Agricole have app stores now, but these are just scratching the surface of what’s possible. The bank as a platform allows the bank to focus on what’s really important: managing the liquidity. Innovators will do the front end far better than a bank can ever and take the banking sectors products to new markets and new verticals.

The icing on the cake of thinking as a wholesale platform business is that your retail (both to consumer and corporate) parts of the bank would have a much more flexible set of choices for how to build out the customer experience. Fintech is a giant opportunity not being taken advantage of. The fintech disruptors are now doing the individual products better than the banks can. I think this is a good thing. They all ultimately need a bank behind the scenes, but are able to offer better, more targeted customer experiences.

The game is attracting deposits and liquidity.  Learn from tech companies, but aspire to be a great bank.

  • What if banks focussed on their core and stopped trying to be Apple?
  • Is volume and opening up to 3rd party innovation a strategy banks are missing?

Take Away’s

  • Banks aren’t doing innovation right but they could if they just focus on what they’re good at
  • Challenging for usability has to come from the very top. It’s a board level issue.
  • There is no excuse, core platform investment is now mission critical.
  • Experimentation will help manage new customer segments
  • But don’t try to be a tech company – be a bank that embraces some good tech company ideas

I speculate that by investing in the core, many of the usability and security concerns would be eased. The key here is culture. Culture eats strategy. Knowing when to not use miles of spreadsheets and when to experiment is what will unblock the user experience woes they currently suffer from.

What are your thoughts?

Simon Taylor – Making Innovation Work