All posts by Sy

Innovation Lead in the Payments Processing Market. Looking for fun in all the right places :)

How will Brexit Impact Banks and Fintech in the UK?

adele

It may not have escaped your attention that the British Public voted to leave the EU. Although in the aftermath it’s still unclear quite what that actually means, this morning bank shares have taken a significant hit with Lloyds off 8%, Barclays 10% and RBS down 15% leading the LSE to halt trading in those stocks.

There are a number of theories about what happens next. Are people concerned about retail banking operations, corporate banking, investment banking or all of the above? Here are some ideas.

Theory 1: Rate Cut hits Bank Profits

The devaluation in the sterling and depressed economic activity immediately following Brexit will lead to a rate cut at the BoE. Rate cuts are bad for banks, since their business is predicated on lending against money held in deposit accounts. The higher rate they can lend at, the more money they make, and vice versa. Low interest rates = low profits.

Impact: There’s likely to be a short to medium term sell off of UK bank shares. Monetary policy response will be key, but banks are generally better capitalised than they were in 2008. Liquidity will likely remain strong, but the question now is contagion globally.

Response: Banks will need to weather this storm and look for profit centres away from net interest income.  Banks may also look to promote higher margin products in different geographies / sectors. The need for innovation in banking has never been stronger, especially in business model.

Theory 2: UK No Longer EU Gateway

UK banks position as a gateway to Europe for international banks and corporates will be threatened because they will be removed from various legislations or passporting agreements. This one is a little trickier. London has been a global finance and trade centre for centuries owing to its position in the world (time zone), talent pool and unique position as capital city, financial centre, tech hub with very strong universities (LSE, UCL, ICL). Specific legislations such as MIFID 2 and Basel III are still likely to apply to investment banks being already committed to them. Corporate banks are likely already and will continue to be SEPA compliant.

The question comes with, what happens next? What happens when the EU passes new legislation for which the UK banks had very little lobbying influence and are bad for London? A UK alternative would require a strong and articulate response from UK authorities, and what’s scaring markets is that at the moment there appears to be a vacuum of leadership. If there’s one thing markets hate its uncertainty.

Impact: Banks have a strategic option to consider, do they start hedging now, or do they focus on being compliant with all existing legislation and look at contingencies for staying in the UK. We will likely see a split depending where a bank is Headquartered. A number of global banks have R+D centres in Dublin which as Chris pointed out on CNBC, shares a language and is fully in the Eurozone.

Response: There may be different good answers for different banking divisions. My own view is that I wouldn’t bet against London coming back strong and whilst there is still a strong liklihood Britain negotiates a “Good Brexit” banks should take some time to consider these options.

Theory 3: Bad Loans and Tight Liquidity

Traditional Banking will be impacted as the UK Economy falters in the coming years. Higher unemployment, lower wages and more bad loans is a risk, albeit we will have to see what the impact is on the real economy outside of the banking sector. Some areas appear resilient (Pharma, consumer goods), although the weak pound will impact the UK as a net importer. The impact on small businesses and corporates in the coming quarters may well be reasonably significant. As significant as 2008? By the look of the FTSE and sterling yes, construction appears to be taking a hit but there is a question if this is the Brexit that broke the camels back rather than a direct result of Brexit.

The market may have been in need of a correction, after 8 years of low interest rates most UK corporate and Retail banks have remained strong, whilst the investment banking division has suffered.

Impact: Investors and banks will be looking at their loan books more tightly, with some RWAs no longer looking attractive

Response: It may be hard for banks to avoid tightening on lending, but this is an opportunity for a fintech approach. Identifying bad loans in banks is an exercise in drawing a line on a on a spreadsheet, below which everything is bad and above which everything is good. This is a poor response and will restrict growth in the real economy. Banks should consider how technology can help quickly identify performing loans vs non performing, regardless of rating. There are ways to ingest this data as spreadsheets or from core systems and quickly, rapidly respond to the change in market. An ability to show strength in a loan book will make a significant difference to market sentiment about bank stocks.

Theory 4: Fintech Leaves London

London loses it’s position as global fintech hub because of Brexit. If there’s one thing I think highly unlikely it’s this. There is a concentration of talent based in London that I believe is a mix of tech and former banking talent that chose London for more reasons than it being a good place at a point in time. The access to universities, to policy makers and to the local regulator (FCA) will all continue.

PSD2 is still likely to apply to UK Financial Services provided the UK stays in the single market (which nearly all indications suggest it will), and fintech continues to exist in a global market.

Impact: Whilst uncertainty looms about new legislation, a potential round of headcount reductions at banks will mean more talent flooding the Fintech market.

Response: I suspect Treasury and HM Govt will look at all policy options to keep Fintech stable in the UK. Whilst fintech broadly has cooled since last year, it’s here to stay and growing. PayPal is now larger than 3 of the big 4 banks in the UK. FX businesses will watch the Euro trading piece closely, and passporting licences will be critical (again, likely possible in the single market). However, Fintech businesses want to be where the buzz is, and for the foreseeable future, that’s London.

Summary: Fintech To The Rescue!

For those of us in Fintech Brexit has been seen as universally horrible, now it appears the task is shoring up the dam and avoiding it breaking. The opportunity for fintech in moments of urgency is often overlooked, but a volcano always lays furtile soil.

There’s a real opportunity to support banks by

  1. Identifying ways to shore up loan books
  2. Identifying new profit centres for banks that can be delivered quickly
  3. Regtech that can arbitrage old and new regulations between UK / Europe

Banks in the UK have a rocky few weeks ahead, but the rank and file within banks and those in the fintech community can start the fight back now. We need a good Brexit, Brexit light and we need to solve the real challenges banks face. Call me an optimist, but I think we can.

At 11:FS we see opportunities for banks and fintech across all three categories above.  Talk to me about how you can do this, we’re here and happy to help.

10 Things You Should Know About Blockchains

economist

Lets dive right in.

1) Peak Blockchain hype was October 2015 when it made the cover of the Economist.  I’ve found there are a good number of people want some blockchain without knowing why.  They’re just wondering what they’re missing.  Wanting some magic beans or a silver bullet isn’t enough.  The good news there are people out there who can make sense of this stuff like Richard Brown, Tim Swanson, Ian Grigg or Pascal Bouvier.  I’d recommend talking to those guys before anyone else!

2) The famous public vs private blockchain debate is a side show.  Some will contest you can’t have blockchain without bitcoin.  Some will tell you Bitcoin is evil but we love blockchain.  They’re both wrong.  As Ian Grigg said “who are you and what do you want to achieve?” is the first question to ask. Consider that lens before listening to anyone about blockchain.

3) Gideon Greenspan’s writing on blockchain is a must read. He talks of a database that is replicated by design, and has per transaction enforceable rule sets.

4) Alex Batlin’s musings on smart contracts are also incredibly insightful. UBS actually built a working prototype of a DVLA data management solution using Ethereum

5) Microsoft offering Ethereum as a service is a sign the tools are maturing, but make no mistake, nobody is saying the tools to build Blockchain’s are complete – not even close

6) This means you can’t have an industrial scale blockchain next quarter for inter bank settlement. Sorry.

7) This doesn’t mean that’s not possible, if anything you *should* be investigating those use cases right now.  Chances are your competitors are.

8) What NASDAQ did with Linq is very interesting. Background: start-ups often don’t document initial share ownership when it is agreed in a pub or coffee shop. Problem: When an investor comes to raise a Seed, things get messy, people fall out. Solution: Store this on a Blockchain at NASDAQ which has perfect time stamps, and digital signatures and no database administrator can edit the record without signatures of the founders. Could you do this with a database? Sure, but you’d lose that audit trail.

9) What Docusign and Visa did is interesting. Get into a car, and rent it using a contract displayed on the car dashboard. You have now signed, and recorded on a blockchain for audit purposes your signature. Better than Bitcoin for tamper resistance? No. Better than current paper processes. YES.

10) A colleague described the 5 stages of Blockchain understanding. Dismissive, Curious, Incredibly excited, Understanding followed by a harsh realisation of how tough the really big changes will be to make.  There is no magic bullet, but there are a collection of genuinely novel ideas here.

In conclusion:

Transformational ROI from blockchain for corporates will take a good number of years. Smaller bits of ROI can be achieved tomorrow if you have the right buy in and strategy and partners.

There are strategies for:

a) Educating a large organisation
b) Delivering quick wins
c) Building a blockchain strategy

But they require understanding it first.

Why Banks Are Sleepwalking Into Extinction And What To Do About It

money-toilet

Earlier this week Michal Panowicz shared this stunning stat that demonstrates how much money banks are throwing away holding on to the past:

The top 25 global banks spend more on their branch network, than the top 25 global tech companies spend on R+D by 2:1.

To put a number to it, in ONE YEAR – $50Bn was spent by those 25 banks on branches alone.

Banks are spending a huge amount on “Technology” too -(just look at these headlines: Headline 1Headline 2  and Headline 3) . Not only are branches an albatross of cost, but the technology spend is enormous.  Banks are being disrupted by Fintech players who operate at orders of magnitude less technology cost, and require no branch network.

IDC Tech Spend

 

To compete banks have seen boom in technology costs, but this is not being off set by branch closures. Not even close.

Fools Gold: Digitising a Paper Process

When banks moved to computerise in the 1970s, having all of their core accounting come out of the branches seemed like a great way to reduce errors and remove cost. In fact, it was. It worked.

Naturally not all bank branches adopted computerisation at once. Banks kept account numbers and sort codes, so the branches (and other banks) that weren’t yet computerised could still talk to each other with cheques, cash and letters of credit. At the time this was the logical thing to do.

Layer on top of that the international nature of banking. Banks needed a way to move money around the world, and in the 1970s realised they needed to create standards to do so. Despite many new standards and updates, the core internal and external systems function much the same way as they did in the 1970s. Banks talk to their customers and each other in a digital representation of the paper world in the 1970s.

40 Years later, this technology is creaking at the seams, and forcing banks to keep their branch network alive.  High Street Bank technology is predicated on the existence of branches.

Worsening Service – Increasing Costs

By taking the decision making power out of the branch, but keeping backward compatibility with the paper banks now have the worst of both worlds. Banks still have the cost of paper processes and  now branches unable to give the type of community service and instant decision making they once could.

It would seem logical that banks are spending as much as they are on technology, recognising the need to get better at service and cut their own cost base to compete with Fintech and Tech companies (as well as each other).

So Where Does All of That Technology Spend Go?

Yet when you break out the £1Bn or so a Tier 1 bank claims to spend on technology more than 97% of this goes on keeping the lights on, or incremental product releases.

(Note: A lot of incremental products get called “Innovation” in banking – but keeping a mobile app running, or creating a new loyalty scheme is outside my definition of disruptive or R+D innovation.  I’m also not including “venture funds” inside of R+D.  I’m defining pure R+D as developing new products intended for launch in more than 24 months time)

When you look at pure R+D banks spend £970M to avoid having to replace core systems and £30M investing in their future in my estimation.

Now look at the amount of money the big tech players are spending on technology R+D, innovation and disrupting markets.

Somewhere between 5 to 20% of revenue. For Google with revenues of $15Bn in 2014, that’s $1.5Bn on pure R+D Innovation!

Now let’s look at the Big 4 UK Banks (and switch back to Sterling)

  • Lloyds 2014 revenue – £18.4Bn
  • Barclays 2014 revenue – £25.7Bn
  • HSBC 2014 revenue – £14.2Bn
  • RBS 2014 revenue – £15.2Bn

Average revenues of £18.3Bn – . If they were spending 5% of revenue on pure R+D that would be £918 Million, not £30 Million. To compete with a Google level of investment (at 10% of revenue), that would be £1.8Bn on innovation alone. Until banks:

  1. Close significantly more branches and
  2. Transform Culturally and Technologically
  3. Get Honest about the Definition of “Innovation”

they cannot compete in a fintech future. Top line will continue to erode and banks will cost cut “just enough” to make it to next week.

Banks are spending the right amount of money on the wrong things

Fintech could be the answer, but playing with Fintech whilst still trying to carry the burden of under performing branches and 1970s core technology is little more than PR. Innovation starts at the core and works out.

I imagine most banks would love to spend this amount on R+D but their budget is locked away for other things.

Innovation in banking is near impossible…

Because of two sins in HOW banks operate

  1. Everything is Based Locked in Paper
  2. Risk Is Managed With Tick Box Processes

Paper is Killing The Banking Industry

Stupid things happen when transactions live in paper. Stupid things charging the wrong fee to a customer because what was inputted to the charging system wasn’t the same as what was on the paper. Or when the market moves against the banks (like in 2008) banks scramble around looking for the piece of paper losing billions with each passing minute.

Perhaps the worst example is account opening.  To do this the bank has to find the paper that proves you are who you say you are. Most people and companies are incorporated in paper somewhere (either with a Government or Companies House equivalent). Giving a bank account or performing a very large transaction requires finding all of these pieces of paper, translating them and then understanding all of the rules written in paper. Translation errors, ambiguity in international law and having to rely on a network of other banks to have performed their own due diligence makes this a near impossible task for banks.

This stuff is NOT EASY, because banking is complex and relies on paper as the golden source of truth.  Paper + complexity of transaction = errors

Tick Box Approach to Risk Management is Killing Bank Profitability

The way a bank reacts to incredibly difficult regulatory and legal requirements is by creating a tick box process inside a spreadsheet. The way a bank meets its regulatory requirements is by creating a committee who “sign off” against a high risk transaction (either with email or paper) by checking that all the tick boxes were ticked.

If all the tick boxes are not ticked? Fill in another tick box, logging which tick box wasn’t ticked and get an email from someone senior
saying it’s ok to to go ahead, because the tick box about not ticking the box was ticked. This is the same process that has been followed for decades, yet the fines keep coming. Those regulatory fine numbers are far bigger than the innovation investment figures.

There is a real need to change HOW banks address their problems.

The vendors and the consultants all fall for this group think. When the supplier selling you digital solutions replicates your tick box
process, and the consultant recommends a new tick box process, the whole thing becomes a case study in the death grip of paper.

Surely – There are digital solutions to…

  1. Create a Digital Core (remove paper in operations)
  2. Create Digitally Savvy Control Functions (replace tick boxes with data, dashboards and decisions)

The Digital Core

There are three main options when looking at really rebuilding the internal technology stack (as David Brear points out)

  1. Stick with what you’ve got but update it
  2. Go for the latest version of SAP / some other vendor name here – and create incremental improvement
  3. Go for something much newer that may not even be on a Gartner magic quadrant

Option #3 is always the hardest to take. To make your core accounting and payments engine run on something you may have never heard of is a scary thought. Yet this is the key, if you ever want to grow the topline again as a banking CEO, compete with Fintech players and delight customers with digital. This is the best option. Chris Skinner has some great thoughts on What is a Digital Bank?

The Digitally Controlled Bank

The earlier example of onboarding a new customer demonstrates how banks being locked in paper really holds them back. If I look at your passport and a utility bill, maybe even your credit score, how much do I really know about you? You’re a real person and you’ve bought some credit products at some point in history. I’d argue that is far less than a branch manager in the 1950s knew about you. Yet this is how a bank is going to decide if it give you a mortgage. Because they’re locked into processes they built in the 1970s, predicated on paper.

What if instead we learned the real lessons of Big Data? Get past the marketing hype and the change here is cultural. Don’t believe the
paper, believe the data. How many people bought a coffee at the same place, at the same time as you this morning? Then paid for a new tube pass in the same place, at the same time as you did? And tweeted from the same location as you, with the same account at the same time?

With three data points I can be pretty sure you are who you say you are. The burden for those inside the bank is to prove this to their
internal compliance teams and to regulators, that it’s inside existing policy, regulation and legislation. It can be done, but the tick boxes
processes make it near impossible.

Regulation Makes This Hard but Not Impossible

The reason why it’s so hard to build a real competitor to banks is that managing regulation requires experience and cost. Trying to go around regulation when dealing with people’s money or their house is quite different to disrupting taxi services or retail shopping (e.g Uber vs Bitcoin).

Some regulatory regimes are purposefully not tough on new sectors to allow them to grow and self regulate to a degree. Ultimately there comes a point when building something new you have to interact with the regulator. Having the people with the experience to engage strategically with regulators, as well as come up with creative / automated regulation solutions is the key gap in fintech and banking.

Banks are used to going to the regulator and saying “this tick box process is how we’ve solved the problem”, regulators are used to hearing banks say “this is our tick box process”. The cycle repeats. Yet at the most senior levels, there is a disappointment on both sides of the lack of innovation here. There’s a chasm between people who write the rules and those who then enforce / follow the rules.

Fintech companies and challengers that are successful are good at approaching regulators and saying “this is how we meet your rules” often with a low cost, digital approach. It can be done. Banks can do it too.

Digital Isn’t Easy

A word on paper. There is an argument that if we relied purely on digital, the meltdown in 2008 would have continued without a check or balance. Sometimes slow technology is useful. There are also plenty of examples where spending money alone doesn’t deliver digital transformation.

A strong team that can deliver in banking requires experience in the tech sector and experience with financial regulators. There aren’t many with that skill set but I look at a company like Circle Internet Financial as a start-up disruptor who have built exactly that team. For the amount of Exec salary on offer, it must be possible for banks to create the environment for these people to succeed!

Perhaps the key here – is to *start* by changing HOW things are done.

Key Questions and Suggestions for Bank Execs

  • Is your business run in paper?
  • Do your compliance teams get digital?
  • Do your legal teams get digital?
  • Do your security teams get digital?
  • How are risks recorded?
  • How are programmes delivered?
  • How are cost decisions made?
  • Can you change the how?
  • How are you protecting innovation from tick boxes?
  • How do you then commercialise that innovation without tick boxes?
  • Does your culture rely on sign off from execs to get anything done?
  • How can you empower change with data and automation helping compliance?

Delivering change the same way you delivered change before is both a paradox and ironic. Much like everything in banking. I’ve seen far too many “Agile delivery programmes” become waterfall with monthly release cycles.

Actions To Take to Transform Banks to be R+D Capable

  • Study how technology companies deliver and create those small pockets of excellence.
  • Make sure the entire top team gets how paper is killing the company
  • Make sure they’re doing the same with their team
  • Get very close to the top 150 programmes by spend in the group and understand and change the how

When it comes to core system transformation – make sure once the “how” is fixed and digital, that the core digital transformation is the top of the agenda. Consider this. Newer bitcoin companies creating “bank like” products can run technology infrastructure to support Millions of customers for $130,000. For a bank to deliver a new product / UI, successful or not is often in the region of $30M to $100M successful or not.

Down to those same two reasons

  1. Being locked in paper (Paper at the core)
  2. Tick Box Risk processes (Not trusting data)

Banks are sitting on a gold mine of opportunity. They can give their customers the gift of advice, help and support to meet their ambitions, but to do this they must get out of their own way!

What are your thoughts? Do you work in a bank, around a bank or a fintech company and see it differently?

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?

How To Fix a Bank in 100 Days

Banks have existed in a world of comfort. The high barriers to market entry like regulation and capital controls mean banks have enjoyed stable profit for decades.  This made competing with banks on their terms very difficult.

The problem is there are now players entering the market who play by entirely different rules. The days of being comfortable and relying on a strong cash flow / stable customer base are over. For banks it’s war time, just look at the facts:

  1. The major disruptors are now making inroads into banking after years of threatening to do so. Alibaba has a banking licence, credit scoring capability, insurance, takes deposits, facilitates payments and lends… and it has ~750 Million customers. It’s able to execute with the scale and efficiency of a technology company not the lumbering slowness of a bank…
  2. Start-ups such as Lending Club and Funding Circle are winning the small business loans market that banks just can’t play in because acquiring those customers is too costly. Not to mention nutmeg and Wealth Front taking some of the more profitable advisory business away.
  3. Increased capital requirements mean that more equity is required on the balance sheet for the same level of Interest Income. At the same time regulators pushing for increased competition in Retail banking means less deposits are available to make Interest Income.
  4. We’re not out of the Sovereign Debt crisis and bank balance sheets are still a long way from where they should be. Deflation is a real probability too, so how should banks react?

These are some almighty headwinds.  So it makes sense to look far and wide to see how to react.

What Strategies Are Out There?

If we look at all the different types of company eyeing fintech, they all have some characteristics that could be useful.   Below I’ve focussed on four research areas, Tech Players, Start-ups, Incumbents and Looking Internally.  Warning, this is not business as usual!

What can we learn from the Tech Players?

Technology is the focus of the entire business, not a department that is subservient to the business. In Tech companies some business based staff bemoan being second class citizens, in banking it’s the opposite. The CEO needs to be a technology focussed (or better yet obsessed) character to deliver the type of technology it takes to compete in the Tech arena. This doesn’t mean being a coder or founder, I’d look at Tim Cook of Apple or Satya Nadella of Microsoft as individuals who are obsessed with how Tech will meet customer needs.

Technology companies are arguably the best in history at building massive scale. Apple has sold over 800 Million iPhones, Alibaba, has ~750 Million customers, Facebook has over 1.3 Billion DAILY Active Users, the majority of which are mobile. These companies have built the technology to support this scale and used two key techniques to achieve this kind of growth

  1. Don’t Dabble. In banking having an accelerator or venture fund are considered table stakes, but getting the most of them is a different thing. Rather than being some the tech department can play with, they must become central to corporate strategy. Alibaba knows  exactly what they want to acquire, and are willing to pay hundreds of millions, if not billions to get it. Name a bank playing in that league? Look at Apple and Google acquisition history, it’s strategic, and based known strategy goals of the business.
  2. Growth Hack. First, hacking isn’t a bad word. Now we’ve got that sorted, if you’re not familiar with Growth Hacking and you’re a CEO or executive in a bank. Study it, internalise it, live it and breath it. The core concept is having the flexibility to tweak product appearance, settings and features and watch the reaction on user growth.

To do this you need products that can be adjusted real time, the analytics to watch the results and the skillset internally to manage that process. Facebook famously industrialised their growth hacking and (pre-IPO) saw user growth as it’s core metric. How will you Growth Hack to increase customer numbers? What’s your developer to user ratio?

The additional insight from Uber and AirBnB is one banks may not immediately feel comfortable with, but I think there are strategies where you can implement regulation digitally and with creativity. I would go as far as to say regulators are consistently underwhelmed by creativity coming from banks, and banks are like a puppy who has been kicked. Scared to go near the regulator with anything but spreadsheets and deference.   Regulation can and should be more automated.

What can we learn from the start-ups?

Segmenting the market works. Most of the really good Fintech success stories of the past decade haven’t been new banks, but in meeting a need not met by the major banks. PayPal, TransferWise and WealthFront all fit into this category. New proposition development in a bank plays in known boundaries, with assumptions about markets it can and cannot serve.

Constraints create innovation. When you have 4 employees and $100k in seed capital, paying $500k for a web server is not an option. So you’d instead buy a little AWS cloud and let it flex up and down as required. A bank’s risk teams will find 1000 things wrong with doing this, but it works so well for start-ups that often its not until they hit hundreds of millions of users they build their own data centres. How many data centres per user does your bank have I wonder?

Acquisitions are a nice exit if you’re a start up. Again look to Google, Apple, Amazon et al here. It’s not the only path to growth if
you’re an incumbent but it’s a damn good one. Start-ups want to partner with banks, banks just need to get a lot better at meeting them half way.

What can we learn from the incumbents making moves?

Embracing Growth Hacking.  I particularly liked this statement from the BBVA CEO – that they saw a

“10% increase in online mortgage sales from simply changing the colour of the calculator”.   BBVA CEO Francisco Rodriguez

Who’s doing that in your bank?

Buying and Building Innovation.  BBVA’s recent investment in Coinbase turned some heads,.  What I like about it this example is that they’re not just buying into another bank, but something quite different.

Experimenting with New Technology. UBS, Rabo and ING have all made public statements about the importance of experimenting with (for example) Blockchain technology.  As CEO if you were to look at your IT Departments R+D capabilities, would you rate them against PayPal’s for experimenting with such technologies?

What can we learn from the challenger banks?

To me the two most interesting challenger bank types are the Branchless of the late 1990s (ING, First Direct), and the Mobile First banks of the late 2000s (Moven, Simple etc).

First Direct and ING carved a comfortable niche with a strong focus on the customer experience and leaving the pain of the plumbing to someone else. Whilst stagnating in recent years, these challenger brands have been useful to grow the customer base for their larger parents.

The newer brands (MovenSimple etc). have renewed the focus on customer experience. It seems the new entrants are able to get closer to what a customer wants than the incumbents can, and if maximised with existing bank scale could be a major tool for attracting customers.

Especially when you consider customers are most likely to be delighted by Mobile and Digital products, they use them far more frequently too…

customer-loyalty-in-retail-banking-2012-fig-09-02_embed

What Can We Learn by Being Critical of Banks Current Operating Norms?

Operational costs are inflated by poor senior level understanding of the Tech best practice, and under empowered junior staff. Banks are still building late 1990s style IT architecture, with standard software being forced onto servers whether or not its needed.

IT Spending will need to increase by an order of magnitude to compete going forward. To unlock this spending, banks will need to be more efficient about how they spend (much more efficient) and unlock cash from other cost bases around the bank. We’ve seen the beginnings of downsizing the branch network, but this needs to go much further if the image below is anywhere near accurate.

IDC Tech Spend

If you’re about to spend this much, it pays to be critical about how you spend it, and how you measure success

SImply having a Mobile App isn’t enough anymore. Sure your app has grown by 200%, but is it making you any profitable revenue? Do your users actually like it? If your App can’t cross sell or open accounts, it’s simply serving the customers you already have. Having X million App users that can’t generate you any profit doesn’t allow you to close branches.  Benchmarked against the Tech Companies the User Experience Banks Offer isn’t good enough either.

In summary, the evidence suggests banks need to increase customer numbers, by focussing on user experience, M+A and an order of magnitude increase in Tech spend / efficiency.

What would I do if I were CEO of a bank for 100 days?

After the strong response to last week’s False Certainty Post  David Brear asked me a very interesting question

“What would you do if you were CEO for 100 days?” (other than buy a snappy suit)?

I have some sympathy for bank senior executives. Making a decision isn’t enough. Having the budget isn’t enough. You can send all the emails you want, but the bank has evolved to put in place lots of checks and balances. Much like politics, making any real change isn’t about having the title it’s about having the strategy, people and capability to execute like a Technology Company. To institutionalise the change I propose some key strategic shifts, organisational change and prioritisation of budget.

Strategy Focus Points:

1) Become A Technology Company that Does Banking

Create more of a technology company culture. I’ve seen this go wrong and create a culture clash in the financial services industry. Technologists and bankers struggle to meet in the middle, but is there a way to get your employee base engaged? I’m willing to bet the vast majority own smartphones. How many of them have access to the sheer amount of openly available, free software development resources out there? A start-up does. If even 1% of the workforce started to build in a sandpit the snowball would start to roll. Google Mail and Google Maps both started as pet projects by staff. How many bank products start that way vs on a powerpoint slide?

Embrace DevOps There is simply no excuse in 2015 for not embracing DevOps. DevOps (short for Developer Ops) means instead of having one set of people that provide new services, and another set of people who develop code. The developers use automated tools to spin up new servers in real time *click* new server, *click* new server. That simple. Unleashing developer creativity is central to the entire company’s strategy of becoming more technology focussed.

2) Become Laser Focussed on Scaling Customer Growth

Growth Hack. 4 Million users isn’t cool, you know what’s cool? 400 Million. AirBnB and Uber as challenger brands started with a laser focus on user growth.  What does your mobile suite need to look like to grow at that speed? Simply put make mobile and digital not just an acquisition channel, but THE acquisition channel. Yes, it can be done, and the business depends on it. Do not take no for an answer from compliance or anyone else. You might see a ~1% increase in Fraud, but that is more than worth it for a 1000% user growth in Mobile ARPU (Average Revenue Per User).

To implement Growth Hacking go find the best growth hackers from silicon valley, and put them in golden handcuffs. Support them in their battles with the organisational anti-bodies.

Build or Buy a Challenger Brand: What if banks had a challenger brand, that they owned 49% of, with an option to acquire at a later stage, and it had the ability to growth hack the overall customer base?  This would give the bank a far greater scope for experimenting and bringing what works into the bigger machine.

3) Define the Key Strategic M+A and Product Development Areas

Think about the Alibaba example earlier in this post, they know exactly what they’re going after and why. As CEO do you know who’s the single person responsible for partnering with start-ups and M+A in that space? Or does it vary on geography and business line?

Make it a priority to know who that person is and empower them to think about questions like: How do we partner with P2P lenders? What are the opportunities in blockchain technology? What bets should we be making (Like BBVA with coinbase)? Does every employee know where to send these ideas to?

Group the key areas into themes that have their own tiger team with a handful of developers, strategists and risk people. The areas would be no surprise. Customer Growth, Use of Data, Alternative Payments, User Experience etc.

4) Give a Clear Mandate for Innovation

Give Innovation It’s own Budget and Structure.  Teams focussed on innovation should have their own budget (or ideally sit inside a challenger brand / subsidiary) and a clear mandate to execute when they identify M+A, partnerships or products that meet their criteria. That mandate normally only exists in multiple committees, making getting anything done impossible.

If this group sits inside an existing Group Function, it will be subject to that functions finance processes, HR processes, risk teams etc. Your organisation can’t innovate in it’s current shape, so create a new shape and then think about how the business lines that are there today should interact with it. Feeding in a shopping list of needs, sense checking outputs etc. Innovation will not succeed with 25 different risk areas trying to fight over the eventual user experience and T+Cs.

Staff the Innovation / Strategy Capability with key skill sets. Consider the type of employee that would fit in a new function / challenger brand. Where do they work now? How will you convince them to come work for you? They want autonomy (to be able to deliver and execute) and mastery (to get really good at something). A new interior design won’t cut it. They don’t want to see corporate comms that talk about “how a committee met and agreed 12 principles to strategic alignment for forward planning purposes”. They want an internal video from an impassioned leader who’s getting the best from them and empowering them.

Ensure Innovation is being Reported to you Correctly.  If someone tells you mobile usage is up 200%, the next question is how does that benchmark against PayPal? If someone tells you mobile transactions are up, ask them what the ARPU is (Average Revenue Per User).

  • Ban any KPI that doesn’t come with a benchmark against competitors in banking and in tech
  • Ban “doesn’t need to worry about that” – I’ll decide that!
  • Sense check your directs – do they get it?

Bringing It All Together

Lisa Phillips had a great suggestion “Start with a Summit for the CEO’s direct reports (and 1 -3 others who should be)”, perhaps around the themes above. Aim to leave with a new organisational structure. Heritage (we’re not going to touch it) and Growth (The new org structure for being a Tech Led company). The key with this session will be identifying who’s grasping the importance of this change and who’s paying lip service.

From here think about the reshuffle at the top and new hires needed. If they’re paying lip service, perhaps they fit will keeping the
heritage business going, or somewhere else. If you’re creating a subsidiary or new unit priorities will be finding

  • A Chief compliance officer with amazing relationships but that gets tech and surround him with technologists (e.g. Circle the Bitcoin wallet has hired tremendous experience and surrounded them with Tech talent)
  • Strategists or VCs who are experts in the emerging Fintech space
  • An HR and Finance Exec who could lead a new unit and fundamentally understands the challenges of being a technology company focussed on user growth

Assuming the board understands the need to grow the customer base as being the key to shareprice raising and the story you outline the hard part will come once the change is made. Seeing it through, getting personal daily updates as CEO on Daily Active Users, Cost of Acquisition and ARPU…

Well that’s my £0.02, and if you’re still with me, I’d love to get your thoughts. Do you disagree? What would you do?

Banks Can’t Have Innovation Because? False Certainty Kills It

I define the need for false certainty as trying to think through every possible issue before committing a change. It strikes me as being
like trying to predict the weather in 1 years time without any data, just a lot of people who’ve experienced different kinds of weather before.

Large institutions and especially Banks exist in a the 20th century world of false certainty. A bank reacts to things it doesn’t know or understand by setting up committees, and spreading responsibility to various experts who all have to weigh in. As a result nothing gets done without going to 5 different committees and involving hundreds of people. Everyone involved bemoans the bureaucracy, but there is no way around it. This leads to slow decision making and makes innovation look an awful lot like risk.

You Can’t Innovate by Committee

This isn’t unique to banking, regulation or any paper based exercise has the same issue  – Banks just happen to be the worst offenders I’ve seen…

Banks live in a world of complexity: RWAs, cybersecurity, and compliance are all highly specialised subjects that require people who really know their stuff to get right.  Whilst this is very effective for keeping the lights on, it’s killing innovation.

I believe this is because specialists only see a part of the big picture, and the generalists (management) don’t understand the detail enough to know who’s right in a given argument. Innovation as a paper exercise moves forward, usually by compromising the design of the user experience or getting an executive to sign off to some ludicrous sum of money in case a perceived risk becomes reality.

The output of this process is a painfully forged compromise. I imagine it like trying mould clay whilst the left hand is fighting with the right hand. What you finish with is the result of an argument, not what society or your customers want and need.

No Wonder That Delivering Anything is a Victory in a Bank

No matter how terrible it is, this forged compromise is then forced into the world with the might of a great machine. The one click login is gone, and now you’re posting out card readers to every customer. Nobody is using the product, but rather than kill it, the bank plows forward in the belief that once the 100% of functionality is available people will use it. “If we just had marketing”, “It’s rooted Android devices holding back adoption” 3 years and £50 Million later, you have yourself a zombie project and you can thank the need for false certainty. It just won’t die, and it will never deliver. Face it.

(It’s at about this point bank executives will point to impressive mobile app growth figures, but I’ll come to that later…)

VCs Smell Blood

Is it any wonder then, that disruptive innovation is coming to both the finance and legal professions? With finance it’s started to gain real momentum

IMG_78564175290709

The venture capitalists smell blood, and whilst generally I’m not expecting banks to disappear as rapidly as Kodak or Myspace did there is definitely an argument for death by 1000 cuts with two major headwinds hurting banks

  1. The pressure from regulators to increase capital ratios and competition in the market place, meaning that the days of easy profit are over
  2. Alibaba, Amazon, Tencent and Facebook all have banking licences. Alibaba offers lending, credit scoring (link) and insurance products and uses massive scale to do this with an entirely different pricing model.

The parallels are often made with the taxi industry where heavily regulated incumbents were able to keep prices and margins high. I doubt there will be an Amazon of banking, but there may be an Uber (in fact Mark Carney worries banks are facing an Uber moment). I’d define the Uber disruption as a large machine, willing to lobby to win that benefits from the economies of scale offered by technologies such as cloud, crowdfunding and p2p lending.

If large incumbents want to survive and thrive there are good alternatives to innovation by committee.

1. Buy Innovation

IMG_47293624495780

Funds, Incubators and Accelerators are all the rage these days. Every major bank or financial service vendor has something, which tells you at some level they take the threat of innovation seriously.

Buying innovation allows start-ups to innovate outside the organisation then buy them in the product, subjecting the product only to vendor processes or M+A which is far less painful than trying to give birth to something inside a large corporate. By the time a product is being considered for purchase by a corporate, it’s already escaped the death grip of false certainty and design by committee.

I look at IBM as being good at this strategy. Their internal R+D has historically given birth to many concepts we now take for granted only to have someone else commercialise them, yet inversely they have proven their ability to buy innovation makes a material difference to their balance sheet, with 8 acquisitions in 2013 alone

2. Acquire / Build Challenger Brands

There are numerous definitions of a Challenger Brand, but the one I like is that a Challenger Brand wins through mindshare rather than market or marketing spend share. Today the challenger brand is the rule rather than the exception. Airbnb, Uber and even the mighty Apple are all considered challenger brands by CMO.com.

The Fintech names on the chart earlier in this blog are all challenger brands, characterised by a strong core message that is backed up with product experience. Banks are hiring the same world class marketing consultants, but aren’t backing up the messaging with real culture and product experience change. You can see this in the net promoter scores with funding circle seeing +89% with banks running in the -10% to -30% region

The large incumbent banks know their core customer base will be around for a few years yet, but they’re simply not winning the next generation of customers. In doing so missing a large opportunity as a whole generation becomes aware of and starts to use challenger brands before needing or relying on a bank for all of their financial needs. Perhaps when buying innovation, banks could think about what external brands they keep alive and the value in separating that from their core brand. Typically products born inside the organisation will come out very on brand, because the brand police sit on one of the many committees…

There are however, some good examples of banks buying a challenger brand (e.g. BBVA Acquiring Simple), and keeping it’s brand alive. Would a Moven, or a Final Card gain traction with strong core capabilities underneath them? Can banks embrace this before they sleepwalk off a cliff?

3. Build an Engineering Culture

Even in 2005  “Agile” was a buzzword, and 10 years on inside large organisations there is still an epidemic of paying very detailed lip service to the idea of Lean / Agile without actually understanding it.  Going on a training course for Agile is doing it wrong. Just imagine replacing that with a 1 day Raspberry Pi hackathon for all your staff, and nobody is allowed to say the world Agile until they got something working.  Seem out of place or weird?  How about for Google, or Airbnb? … 

The real issue here is the lack of an engineering culture. Companies don’t do, they talk. The fear of an engineering culture is that tech must be seen as owning the “technology how” but have no input on the “what”.  The business “owns” the what.

Taking a voice from engineers and spreading it throughout a committee limits empowerment, autonomy and collaboration.   This is especially acute in such a hierarchical organisation that will always look upwards for sign off and permission as a way to resolve any conflicts that arise from the committee structure or between business and tech.

The Silicon Valley magic isn’t that they have better MBAs writing the internal business cases, it’s that their engineers are typically the age and demographic of the customer base they’re going after.

The cultural bias of Generation Y is baked into every line of code.

Amazon’s Jeff Bezos has a concept called Pizza Box teams. The idea being a team working on a product or project should be no bigger than you can feed with one pizza box. This is typically harder to do inside a big bank, because the entire committee structure will want to sit on the team of 7, but wouldn’t it be fun if they tried?

4. Face the Facts

When internal reports read like a press release crated from cherry picked KPIs, it makes you wonder why. It probably has something to do with ego,  bonus culture and a lack of bandwidth for management to be critical of every KPI that is waved under their nose.

If your mobile transactions are up 200%, how does this benchmark against the competition both traditional and new entrant?

I’ve never heard a conversation in an incumbent bank about how “the MAU (Monthly Active Users) trended higher when we took 0.5 seconds off the App Intro screen”, or that “DAU (Daily Active Users) spiked 30% when the interface was refreshed”. These are the things challenger brands obsess over. User engagement isn’t a buzzword, it’s how your customer feels about your product reflected in how they’re using it.  Everyone should be talking about it.

5. Empower Autonomy of Decision Making

If you’re in a rapidly changing marketplace like crypto currencies, how do you empower employees with autonomy to execute? There is a need to “power down” and push decision making to those who demonstrate a solid understanding of the changeable nature of the market. Often these employees will be younger and new to the organisations culture. How do you create safe space for this exploration and how do you ensure the organisation can embrace it? The key is finding the right place to give visibility and having the management talent that can harness the creativity. There is a good chance this exists somewhere in the organisation, the challenge is putting the two together.

Perhaps the Pizza Box teams concept holds the key.

6. Fail More

Definite Failure is vital. Nothing ever fails in a large corporations, typically failures fit into two categories, money bonfires and zombies in the wilderness. Money bonfires have so much political support, false certainty and a lack of data to the contrary that the project keeps stumbling forward. Zombies become marginalised until eventually you just stop worrying about them and they go away. This robs the organisation of the ability to learn from failure and collect data. The very keys to success.

The really odd thing is that at a personal level most executives will admit their biggest failures made them who they are. Yet media training and culture prevents organisations from allowing this level of honesty and frankness internally. It’s very difficult to tell the truth without hurting someone’s feelings, but I’d argue it’s more dangerous to avoid the truth to save someone’s feelings when the regulator and innovators are breathing down your neck.

The Moment of Truth

Is there a bank account there with the bravery to really embrace these ideas? Becoming genuine internally is the key to being authentic externally and winning a whole new generation of customers, and it will show in the products and services. Are bank employees empowered to make this change? Time will tell…

What is Preventing Mainstream Bitcoin Adoption?

Arguably Mid 2014 was peak Bitcoin in both the major news outlets as well as in the price.  Since then the price has fallen, competitors have emerged and the hype as dipped.

Despite Microsoft and others are “adopting” Bitcoin and actual transaction volume increasing, this is not at nearly the exponential rate required to upset incumbent payments players.

Therefore something is either holding back Bitcoin or this is a temporary bump in the road.  I believe this is evidenced by the two narratives dominating  discussion in the industry:

  1. The price fall is temporary and it’s a matter of time before it comes back and goes past 10,000 USD vs
  2. The technology is interesting not the currency.

Chart  shows Searches for “Buy Bitcoin” (Blue) vs “Blockchain” (Red) (credit  for chart to @Pierre_Rochard)

buy vs blockchain

The chart above shows that interest in the technology is outstripping interest to buy bitcoins.

What’s really going on here? This post explores a number of ideas and attempt to establish what is actually happening.

Why did the Price Spike?

There are a number of theories on this, my own opinion is the following were key factors

  • A belief (championed by Marc Andreessen) that the technology will eat institutions and open up the trillion dollar financial services industry to competition from start-ups.
  • A virtuous circle of press releases about “Merchant X” now accepts Bitcoin (at least til mid July) and link with price
  • A dollop of Tulip mania as the main stream took notice
  • Technology enthusiasts and those who generally had an issue with banks investing to try and “beat the banks” out of existence

Why has the price dropped?

Rationally the price should be going up because the price drop reduced reward for miners and has led to less mining hardware being added to the network.  In turn reducing the supply of coins in the market.   Less supply + sustained demand (as shown by the flat blue line in the chart above) = increased price right? Not exactly, there are two issues, which are related outlined below:

Issue #1 – Bitcoin isn’t particularly liquid, with the vast majority being hoarded or held on to. (70% of Bitcoins have not moved for 6 months or more)

7-hoarding-chart

Issue #2 – Perhaps controversially – regulators and existing banks have been effective in preventing bitcoin from becoming mainstream due to a lack of identity and consumer protection capabilities. The cause of #1 may in fact be #2.   Bitcoin needs to be widely adopted for it’s price to continue increasing.  So this point bears exploring.

If Bitcoin Forcefully Disrupts Banks the Price WIll Rise

I believe this is highly unlikely.  There’s a school of thought that says banks will be forcefully disrupted. Consumers can use bitcoin by simply managing their own PGP keys without the need for the slow, painful and poor service provided by banks. Why wouldn’t consumers and corporates want this yesterday?

Whilst I think this pays a huge compliment to the majority of humanity it also misunderstands it. The vast majority of humans  want services that are super simple to use and require almost no responsibility to manage.  This is why we historically centralised trust, to make complex things someone elses problem.

Banks and Regulators play a Useful Role – Understand and Protect the Consumer

To the credit of the bitcoin and start-up ecosystem, I think bitcoin is focussing more on the rails and leaving the consumer experience to others. There also start-ups such as Circle, coinbase and Xapo providing strong consumer experiences. Whilst this is imperfect from a bitcoin libertarian perspective, it is pragmatic from a human context perspective.

Yet experience alone isn’t enough, start-ups like bitstamp are learning the hard way that as much as people hate banks, they are generally quite good at the basics like not getting hacked for individuals or corporates own funds (and where they are, mechanisms exist to rectify it quickly).  Start-ups that focus on this will create a well protected consumer experience, but there still needs to be a compelling reason for consumers to adopt their products vs using a bank account.  “Not being a bank” isn’t a good enough reason.  The protections and the functionality of banking need to exist in full.

This would suggest for Bitcoin to gain adoption it might be optimal for banks to adopt the Bitcoin rails.

If Banks Adopt Bitcoin the Price WIll Rise

This has potential, but is unlikely until a number of problems are solved (discussed in “Future Foundations” below). Banks and regulators are reflecting consumer and corporate demand by taking responsibility for protecting money under an understood regulatory and legal framework.

Yet banks and regulators have proven ineffective at driving out cost or improving customer experience in the same way a start-up would (or Bitcoin could).  I believe this is because

  1. Banking has limited shared infrastructure – it is a mesh of proprietary technology trying to interoperate
  2. The shared infrastructure it does have requires a lot of change at member banks (e.g. SWIFT)
  3. This change is typically very slow because many banks have to change, and the way change is implemented involves lots of paper and committees.

Paper and committees are very 20th Century solutions,  and not conducive to change at pace. Imagine if a blockchain (like bitcoin) could bake into it’s protocol some of the regulation for example.

The concept of a decentralised payments rail could be very advantageous for banks, but to meet the needs of consumers (taking responsibility for their money) there are three main things that need to happen to increase adoption.

Future Foundations for Increased Adoption

1) Solve for Identity and KYC

Silk road a, Mt Gox and other headlines created the perception that the technology “cannot do KYC or protect money” has created a perception that Bitcoin (the brand) is “poison”.  Yet banks and institutions can see benefit in moving to shared clearing and settlement system for money.

The major barrier for banks and regulators alike is how do you prevent, detect and report on Money Laundering, and who has responsibility for doing so?

There are solutions out there from the likes of www.matrixvision.eu and others, and many exchanges have examplary KYC (Know Your Customer) processes to eliviate these issues. The gap is in creating consensus about who needs to do what, and who’s responsible for what in a decentralised system. In bitoin it’s perfectly possible for a bank customer to send money to a bitcoin wallet. Who’s responsible if money laundering occurs at the wallet or beyond?

2) Build Regulatory consensus
Regulators like the CFTC, EBA and central banks such of the Bank of England have been surprisingly open to discussion on how to adopt the technology, and equally underwhelmed by solutions coming from the digital currency businesses. It is entirely possible to be regulated within existing frameworks. The onus isn’t on the regulators to create new regulation, it’s on the industry (start-ups and incumbent banks) to figure out how to implement existing regulation… and that’s really hard, dull and slow.

3) Build industry consensus
The banks are coming off a decade of having their balance sheet hit by the regulators, leading to an ever decreasing appetite for risk from the compliance departments. Nothing is more risky than an unknown quantity, that has a very bad reputation. In the banking fraternity, perception is everything, regardless of reality. The banks themselves are hugely motivated to reduce their cost base, if they can figure out how to collaborate in this space and create the global highways of tomorrow they may be able to do just that.

There Appears to be Limited Desire to “Fix” KYC for Bitcoin

Current regulation fits the the architecture banks have today making banks responsible for being the police of money, whilst money is on their system.

No equivalent exists for Bitcoin. Whilst banks are looking for ways to reduce cost as an alternative to the current banking model
bitcoin remains incompatible without a solution to this problem.

Perhaps though, that isn’t the fault of bitcoin but it’s current implementation. I’ve been using the metaphor lately, it’s like blaming the inventors of the car for not creating traffic lights. The types of people who would create a traffic light (regulators and silver haired bankers) are typically not technologists and see many of the consumer protection issues the technologists do not.

Perhaps Bitcoin itself shouldn’t solve for identity, but the users of it (banks, regulators and start-ups) need to be more proactive in doing so.

What has any of this got to do with the Price of Bitcoin?

If bitcoin (or it’s competitors) had the foundational backing outlined above the price in mid 2014 will look cheap. This may be why whilst
Bitcoin has dropped in price, over the same time period Ripple (XRP) is up 16x. Perhaps the Future Foundations I point out above are unpalatable to Bitcoin purists, and in all honestly, I don’t think it’s up to Bitcoin the protocol to solve alone. I would encourage it’s developers and enthusiasts to reflect on how they might meet those challenges, especially given the traction the alternatives are getting with institutions by doing so.

One thing is for certain, there is no lack of belief in the potential for the technology, there are just a number of very real problems before you can do so.

If you solve these, you’ll increase adoption and liquidity, which in turn will increase price.

What are your thoughts?

The Bank to Developer (B2D) SDK and Business Model

There are several trends converging to make FinTech and Banks being disrupted very sexy news indeed.

  1. Post Financial Crisis Bank Hatred
  2. Shiny Startups Like Square, Stripe and the hard to pin down Bitcoin
  3. Interest from GAFA (Google, Apple, Facebook, Amazon)
  4. Interest from VCs

This trend is typified by certain Tech (crunchy) press lately about Bitcoin, Transferwise and Banking Disruption:

I sense there is an assumption that because the logic of what a bank does is actually frighteningly simple, it would be really easy to disrupt them if someone could just get the jigsaw puzzle right.

An Alternative Perspective

I disagree with the mainstream narrative, and at the risk of being contrarian…  I propose that a new business model will emerge and has already started to do so.   Transferwise, Azimo and others already rely heavily on banking infrastructure.  Whilst the hype may suggest they are changing the face of  banking, the short term reality is that they are just adding cost (or profiting less), and perhaps a nice UI to the equation for the end user.  Banks have caught on to this trend and… I feel a bold prediction coming on:

In the next 18 months banks will actively participate in inviting disruption into the market, and profit from it because they see the opportunity.

Finance is Difficult to Disrupt

The CEO of Moni Technologies said something very interesting at the recent TechStars / Barclays Accelerator launch.  He was surprised just how tough the basic regulation you need to get a money transfer business of the ground is.   Not just the paperwork but the costs  and the sheer amount of over head you take on by keeping up with (for example PCI-DSS).

This is where I think banks can actually help FinTech ‘disruptors’ bring new products and services to market.  Banks are actually good at keeping up with regulation, which is costly and makes innovation very difficult…

Banks Need a Change of Mindset about HOW they Invest in Innovation

 Because Bank 1.0 has a war on two fronts.

  1.  The drive to being ever more secure, stable and robust in core systems
  2. The drive for ever more nimble, agile and beautiful customer experience
 This tension has escalated in recent years with the investment in mobile, digital competing for budget with ageing core systems.
Banks fear a core system failure like RBS had, or fraud events like the Target hack… The business dilemma had two main points

1) Focusing on Core Systems Could Lead to Losing Market Share
If a bank did nothing but invest in quality, stability and security it risks is losing ground to competitors who would bring the shiny new mobile app to market and win market share.

2) Focusing on Innovation Could Lead to Losing Market Share
If a bank did nothing but invest in features, the core systems could become less robust. The cost of failure is immeasurably high with the potential for fines, bad press and lost business.

But I put it to you that trying to do both is Even Worse!
No bank would actively make a choice to lose market share. So they have been fighting a war on both fronts. Push the innovation agenda, and drive towards ever more stable and secure systems. To quote Winston Churchill “It’s like standing in a bucket and trying to lift yourself out by the handle”.

The mandatory and regulatory spend will continue to eat at least ~70% of IT Spend. Roughly ~20% supports client driven change, leaving just 10% for “innovation” which often takes the shape of “me too” app development.

An Historic Lesson on Business Model Change for Survival

At the turn of the millennium, BT were facing a break up from the regulator Ofcomm as the monopoly player in the UK telco sector. What they did was actually smarter than it first appeared, they got out in front of the regulation and split their business into “Wholesale” (AKA Openreach) and “Retail”.

The Wholesale business had to focus investment on what would allow them to serve many “Retailers” including BT Retail, as well as all the other Telcos (Talk Talk, Virgin Media, Sky etc). The benefit of investing in the tools and capability to “unbundle” the local loop was that this protected the scale if the wholesale business.  I’d argue BT got the business model right and survived the transition from “owning the pipes” to “re-selling the pipes” quite well.  Below, is an outline for how Banks might improve on their current situation:

Changing the Business Model 

It will take an incredibly brave executive to be the first to offer “wholesale” services to competitive brands, retailers and start-ups looking to disrupt the traditional business model.  Yet, surely it is better to be well positioned for the future, than a victim of it.  The message is a compelling one to the board.  Adapt or die watch as the RoE continues to erode over the coming decade as it has over the 5 years.

Bank to Developer means:

  • Offering a suite of APIs that are easy to use, self serve and well documented
  • Offering tools to manage APIs, access to accounts, data and billing so that an API user can manage and sell on these services downstream
  • Developing a Tech Architecture that delivers Internal and External API access that the whole company is behind.  No exceptions.

Laser Focused Investment 

It’s 2014, and it’s surprising how often IT departments still re-invent the wheel and suffer from NIH (Not Invented Here) syndrome.  Leveraging tools like Apigee, DevOps and the sheer tidal wive of desire for vendors to sell “platform” tools into corporates is the first step.

Then IT and Business Execs need to use lead bullets not silver bullets.  Kill anything that is not yet in flight, that doesn’t adhere to the new strategy.  You can only make the leap if you’re willing to jump.

SDK

Benefits of a B2D (Bank to Developer) business model
If you believe like I do that
  • Small developers will always out innovate large organisations
  • Large organisations are good at “compliance”
  • There is no “SDK” for banking or payments

Then the first bank to get this right is incredibly well placed to take advantage of the huge level of VC, Start up and media interest in FinTech.  To Quote Steve Jobs:

“Innovation is about the people you have, how you’re led and how much you get it

Why Bitcoin Scares the Crap Out of Governments and Banks

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Depending on who you speak to, Bitcoin is either the most perfect example of a speculative bubble or it’s an attempt by software to eat the banking industry.

Unless you’ve been living under a rock, everyone is talking about it.  It has become a mainstay in the mainstream media outlets such as BBC News, Time, Wall St Journal and the Tech Press.

It’s also incredibly misunderstood.

What’s got the geeks so excited?

Sillicon Valley’s super VC Marc Andersen put it best

“I would not encourage your grandmother to put her life savings in [Bitcoin],” he said. “[But] every single smart computer science person I’ve had look into it has reached the same conclusion — it’s a fundamental breakthrough in technology

To understand why Bitcoin is such a breakthrough, it helps to understand why we have organised ourselves with Governments, Banks and Religion for the last several thousand years…

The Byzantine Generals Problem

So imagine you’re surrounding an enemy fort, you want to tell the other four Generals surrounding the fort that now is an opportune time to attack.  But beware! The Byzantine Messengers and Generals were known for treachery so any communication is risky without one very trusted source of information or a hierarchy of trust.

So we organised ourselves into hierarchies to keep order and control.  The bigger the bank or government the more stable it was, the safer your money was and the more you could trust it.

The Ivory Tower is Crumbling

Trust in Governments, Banks and any form of control is at an all time low because:

  • News breaks at the speed of a tweet
  • The financial crisis made “bigger” seem worse not better
  • Broadcast is being replaced by “Share”

The result?  Arab Spring, #Occupy and Bitcoin are just the opening salvo in a paradigm shift (in the truest sense).

But I don’t think it’s just the “nasty man in charge” that’s the problem.  The problem is systemic.

Scale is Becoming a Disadvantage.

A Global Corporation simply cannot address your concerns on the personal level because it’s driven to increase profits, lower cost and keep the machine moving.  Corporate’s are trying to adapt and humanise their business but over time the ones that survive will be much leaner, more automated and present a human face to the world .

Peak Jobs – Like Peak Oil but Worse?

In the relentless drive for scale, efficiency and automation “The middle class is steadily eroding.” According to a recent New York Times Article “Last year, the richest 10% received more than half of all income, the largest share since such record-keeping began in 1917.”

The reason some Governments and Banks are equally intrigued and terrified of Bitcoin is because it has the potential to reverse the trend.

To understand why Bitcoin is so disruptive, let’s explore how it works… 

Understanding Bitcoin: The Concept

To summarise this 10 page article (which blew my little mind) when Satoshi Nakamoto invented Bitcoin he intended to build three things, but actually only delivered two

  1. A new secure way to transact online, securely, anonymously and instantly – Half of Bitcoin
  2. A currency with real world value – Half of Bitcoin
  3. A scripting language to allow software engineers to write code to make Bitcoins do very clever things  – Not part of Bitcoin

This is important, we’ll come back to it

Understanding Bitcoin: A New Way to Transact

When I make a transaction today for say £50, it’s held in a bank’s ledger.  The ledger is essentially a big list of who’s paid who.  It’s very secure, and it’s only shared with other banks to protect it.

With Bitcoin, every single Bitcoin user has a copy of the ledger, which would be like everyone you’ve ever met having a history of every transaction you and everyone else ever made.  On the face of it sounds really dangerous, but in reality it’s incredibly powerful.

So because every transaction ever made in history is held by everyone on the network…

The network itself is the ledger.   The Bitcoin geeks call this is the “blockchain”.  The blockchain has every transaction ever made and it doesn’t require a central “Bank” or “Government” to prove a transaction happened.  It trusts the x Million people on the network more than one powerful organisation.  In this network, you can gain or lose new people daily, but because everyone has a copy nothing ever gets lost.  No more relying on the bank to keep things secure?

Understanding Bitcoin: A Currency with Real World Value

Bitcoins themselves have a value in real world currency, a Bitcoin is worth about $400 at the time of writing.  Unlike a paper currency there is no central bank printing money to deflate a currency but a computer algorithm.  The maths in the algorithm limits the network to producing one new Bitcoin every 10 minutes.

Bitcoins are discovered through a process called mining which will be familiar to any of you who ran SETI@Home back in the day.  Essentially a program on your computer does incredibly hard maths to “find” a Block (like finding a very long prime number) and this Block is added to the “blockchain” and will validate transactions (For example between Simon and his Dad for £100).  By adding a block to the block chain – everyone in the network now knows Simon paid his Dad £100 – and doesn’t need to check with a bank

There’s also a reward of finding a “block” which is 25BTC (which at the time of writing is just short of £5,000) Whilst money for “nothing” sounds good Miners are actually doing the community a service by providing “blocks” to validate transactions on the “blockchain”.

You can think of the reward as a way to incentivse people to leave their computers turned on all day to generate blocks.  The only problem is, as more people join the difficulty is artificially inflated to keep the block creation steady.

Herein lays Bitcoin’s flaw, so many people are trying to mine that adding to the blockchain is out of reach for most mere mortals, but it needn’t be if the currency hadn’t been intrinsically linked to the blockchain…

Understanding Bitcoin: Smarter Bitcoins and Scripting Languages

Ok, so Bitcoin doesn’t have a scripting language but if we take the first two concepts of a blockchain and real world value exchange and throw a script into the mix, things get quite interesting.

Initially this could be used to sign documents, store data securely, keep your money secure, buy property and much more (services like Mastercoin are doing this today).  All of this would happen without a central “agent”.  Imagine getting rid of the “estate agent” or insurance “broker”.  The sales job isn’t replaced, but the secure contract no longer needs a middle man…

Satoshi didn’t include a language in Bitcoin because you can really mess things up but as the guys at Ethereum point out, it could also do some amazing things if you got it right because of a concept called…

Distributed Autonomous Organisations

With a scripting language that can manage contracts you can write code that will replace an entire company, political party or even religion.  When your car is able to buy energy from the “gas” station using your Bitcoin wallet whilst you’re in the bathroom… that’s when software is able to communicate between blockchains in a secure distributed way.

There is opportunity here for the companies that get this right, but what are the odds the companies that do, are the big lumbering giants of today?

Are Hierarchies Truly a Dying Breed??

Probably not any time soon, but consider:

  • I believe we’ve reached the tipping point where scale is now a disadvantage for business because they cannot react to customers or change fast enough…
  • I believe the small, tech driven start-ups like Square, ZenPayroll, Transferwise and others could take advantage of the Blockchain concept very quickly…

Imagine if ZenPayroll added a feature to allow a small company to pay it’s employees in Bitcoins, directly into their Bitcoin wallet.  This future isn’t that far away or crazy.   You could soon be paid in Bitcoins, but not as we know them today.

That’s my crazy thought for the day… What do YOU think?