Financial institutions are under enormous pressure today: the needs of new, digitally savvy, generations of customers are changing, compliance with business rules requires more and more expense, and innovative fintech projects are targeting a significant piece of the pie. Financial institutions understand that they must change. That being said, the changes may affect not only product offerings, but may also lead to a significant change in the roles of organisations themselves. We cannot look behind the scenes of the research and development departments of financial institutions, because this is a trade secret. But based on various indirect signs, we can draw conclusions about where these structures see themselves in five-ten years. When it comes to digital transformation, we can generally assume several scenarios: you can come up with an innovative solution yourself; you can buy it on the market; or you can buy a company with all its innovations and best practices. Taking into account these three scenarios, we analysed the work with blockchain technology in the world’s largest financial institutions. In this study, we discuss what such attempts by financial institutions to “reinvent” themselves might lead to: what new roles they might play, what markets might appear, and how the balance of power in the financial industry might change.
Managing Partner, MINDSMITH
Blockchain as a technological phenomenon is actively embraced by many organisations that have moved over the last couple of years from a position of scepticism about the technology to a position of searching for its advantages and opportunities for its practical implementation in business or everyday life. Despite the fact that the legal regulation of blockchain- based products and services lags behind the pace of development of the technology itself, such regulation already exists, in one form or another, in many developed legal systems. The widespread use of blockchain and its application value in the digitalisation of the modern world is quite obvious, although the degree of its practical implementation depends on many factors, including the applicable regulatory requirements that must be met. In this regard, it is very important to have at least a general idea of the potential legal problems which the developer may face and which, with professional legal assistance, can be resolved successfully.
Partner, Head of the Russian Tech Group, Clifford Chance Moscow
Head of the FinTech Competence Centre of the Astana International Financial Centre
If, in the past, blockchain was perceived as a “toy in the hand of enthusiasts”, now it is rightfully considered to be a commercially efficient solution capable of making all business processes much cheaper, faster, and much more transparent.
CEO, QIWI Blockchain Technologies
Financial technologies may well change the landscape and role of traditional financial centres, especially if they become widespread, and the greater the number of business processes involved, the greater the influence.
Head of Development of Distributed Ledger Technology, FinTech Association
I do expect so fast growth of this market that it will rather face a gap in resources than rising competition for earning a place in the sun.
Director of Business Development, S7 TechLab
Financial institutions continue to invest in the technology and the majority of blockchain teams did not stop their development activities. If, in the past, blockchain projects were given wide coverage at the first opportunity, nowadays Financial Institutions are primarily confronted with the task of showing operable solutions with measurable performance.
Director of the Centre for Research on Financial Technologies and Digital Economy, Skolkovo-NES
The fact that Financial Institutions have come to understand the scope of blockchain application and started to create working prototypes and to patent blockchain inventions means that technology experts have been heard and the market is maturing.
The interest of Financial Institutions in blockchain is not fading, but the format of interaction with the technology is changing
The intensity of interaction with the technology is growing every year. While from 2017 to 2019 the main priority was to study blockchain in practice, in 2019 there was a shift in focus on patenting inventions.
Thus, the “blockchain revolution” continues and moves to a qualitatively new level, despite the decrease in the number of public blockchain projects. The world’s largest Financial Institutions continue to actively work with this technology, investing both time and money in it.
Various groups of Financial Institutions are being formed with their own preferences regarding the formats of interaction with blockchain
Among them, there are the Scientists (they focus on patenting inventions), the Practitioners (they prefer to invest and apply blockchain in practice), the Flagships (they have chosen a cross-blockchain approach and actively interact with the technology in all possible formats), as well as the Followers (they have not yet chosen the main format of interaction for themselves). The question remains as to which format of interaction with the blockchain technology will be most effective.
We can expect increased competition between US and Chinese financial institutions in the use of blockchain technology
Among the four Flagships was a Chinese bank. This is the expected result of the explosive growth of interest in blockchain in China and the inclusion of blockchain as one of the main components of the country’s technological infrastructure of interest to the Chinese Communist Party.
The USA is the centre of the “blockchain revolution”
By 2020, the main hotbeds of the “blockchain revolution” in the world’s largest Financial Institutions are the United States, China, Japan, France and Canada.
Countries known for widespread support for the use of blockchain and cryptocurrencies were not among the leaders
For example, Switzerland, Estonia, Australia, and South Korea are not among the leaders.
Technological changes can have an impact on international financial centres
Not all traditional financial centres are among the technology leaders. For example, Switzerland and the United Kingdom are lagging behind the hotbeds of the “blockchain revolution” in the study of blockchain.
Different countries have their own approach to studying and implementing blockchain
While Financial Institutions in China and Canada prefer internal research and patenting of blockchain inventions, Japanese and French Financial Institutions have chosen to invest in blockchain companies.
Investing in blockchain companies is a way to jump on the outgoing train
After a decrease in the number of public blockchain projects in 2017-2019, a number of countries saw a surge in investment in blockchain companies. Apparently, for countries such as Japan, Spain and the United Kingdom, direct investment in blockchain startups is becoming a way to jump on the outgoing train of the “blockchain revolution” of Financial Institutions and ensure that they are not relegated to the sidelines. Such a scenario may become a reference point for other countries and Financial Institutions.
Future monopolists are being formed at the country level
Sberbank in Russia, the State Bank of India and ING Group in the Netherlands are examples of companies that single-handedly put their countries among the leaders in the use and study of blockchain. Such Financial Institutions may eventually become fintech monopolists in their countries and begin to capitalise on their position and local market knowledge.
Competition will intensify and the boundaries between financial institutions will continue to blur
The world’s largest banks have clearly demonstrated that they do not plan to stay clear of the “blockchain revolution” and, if necessary, are ready to innovate and «reinvent» themselves. However, these efforts by the banks do not guarantee them technological and blockchain leadership: other Financial Institutions are breathing down their necks.
The information security market may undergo significant changes
In connection with investments in their own solutions, Financial Institutions may gradually abandon a number of third-party services in the field of information security. We may see attempts by banks to enter this market independently as vendors of such solutions. Financial Institutions have significantly more expertise in the field of finance and, together with internal expertise and their own information security solutions, this threatens external providers with the loss of market share and the emergence of new competitors.
Financial institutions will start competing with technology companies in their field
The prospect for major payment systems and fintech service providers to become vendors of infrastructure blockchain platforms raises the question about the future position of blockchain platform providers such as Microsoft, IBM and SAP. Mastercard may not be the new Microsoft in the market for cross-blockchain infrastructure platforms, but traditional IT players will certainly have to make room.
Insurance companies may become drivers of technology adoption in various industries
Companies in almost every industry use insurance and reinsurance services. If insurance companies become drivers of mass adoption of boxed blockchain solutions, the «blockchain revolution» will quickly spread to related industries, such as medicine and logistics. This, in turn, may open up new market opportunities for blockchain vendors and traditional system integrators.
Managing Partner, MINDSMITH
Partner, Head of the Russian Tech Group, Clifford Chance Moscow
Counsel, Tech Group, Clifford Chance Moscow
Senior Associate, Tech Group, Clifford Chance Moscow
Development Director, MINDSMITH