Banks are expected to lose up to $11 billion in profits to non-banks according to a March study by Goldman Sachs. The situation may deteriorate further as the pace of bank disintermedation and unbundling of their services continues. This seems to confirm the fear of J.P. Morgan chief, Jamie Dimon, in his well publicized shareholder letter where he alerted that “Sillicon Valley is coming” when discussing the fresh encroachment threat of fintech startups into traditional banking turf. To deal with this threat, Dimon suggest a two-thronged approach: compete and collaborate.
Some of these collaborative spirit has been seen for example in the marketplace lending space, not only from J.P. Morgan but also Bank of America and Citigroup. In the blockchain space we see similar moves such as Nasdaq collaboration with Chain and various banks with Ripple. All these activities indicate that banks do seem to get that they need to cooperate with startups. What is less clear is if they get that banks also need to collaborate with each other to avoid being disrupted.
This need to cooperate is more evident in the distributed ledger (DL) value proposition where the benefits increase as the scope es expanded beyond individual firms, reaching maximum benefits at the industry level where not only redundant cost can be reduced, but also dependence on 3rd party services can be diminished as well as potentially reduce regulatory compliance burden as regulators could be granted ‘read’ access in this global ledger. The benefits of mutualization of infrastructure cost have been presented in Richard Brown’s piece: Towards a unified model for replicated, shared ledgers.
A challenge facing a collaborative effort to adopt a common industry level ledger is the mushrooming of platforms to choose from, bankinnovation alone is tracking 11 in its Fintech 1000. There is at least another dozen platforms at different stages in developments. Faced with multiple choices with wider variety of trade-offs, incumbents may be tempted to reduce these to manageable handful. Some of the criteria to filter down the platform offerings could be:
Ease of development
IT budgets and resources are limited, if the platform will require a team of expert cryptographers it may mean additional justifications for external hires. Developers will gravitate towards standardize interfaces and commonly used frameworks. Tooling support to aid development can help accelerate the experimentation phase.
Open source not only allows for introspection into a platform for adopters to gain trust but also acts as insulator from the platform provider’s future e.g private acquisition or startup failure.
With the blockchain space in continuous evolution and no clear dominant player(s). Providing flexibility gives adopter a hedge against picking the ‘wrong’ blockchain and ability to reuse some invested effort.
Complexity needs to be abstracted out, if IT departments can clearly understand the platform, it’s use and purpose it makes it easier to pass on feedback to higher level decision makers who may not understand when it makes sense to have a shared ledger and when a plain-old database would do.
Optional cryptocurrency constrain:
The mandatory constrain on utilizing a cryptocurrency e.g Bitcoin, Ether, XRP etc, introduces friction to adoption and opens up controversial points making the job of finding consensus in the group more challenging. This requirement does not apply to natively introduced tokens which can be useful to a consortium of firms to adopt for internal bookkeeping.
The attention from banks, that DL are enjoying should not be taken for granted or assumed to be long-lasting. Eventually decisions will need to be made. Today, various banks have their own internal groups tinkering with the technology, if they do decide to collaborate on a unified ledger but the menu of options continues to be paralyzing large, such a consortium may well opt to disregard them all and build their own. DL startups need also to be mindful that they are not the only play in town, nearly $14 billion have been poured into fintech last year according to the Economist. Banks may still find solutions from non-blockchain fintechs.
The successful DL platform may not be the one with the most bells and whistles but the one able to appeal to a larger group of incumbents where the technology, while not perfect for any individual member, it manages to provide an acceptable solutions for all. After all, the good-enough-solution, might just be good enough.