When I designed and setup a venture programme in 2008/09 at State Street, FinTech wasn’t a word that was in existence.
It has since evolved drastically and regulators are an additional positive facilitator. Especially over the last year, regulators across the globe have been stepping up and embracing FinTech to see what it can do.
A number of regulators that we have spoken to, such as the FCA in the UK, have been very vocal about their plans to collaborate with FinTech firms. We have also seen many others setting up sandboxes to understand and progress the development of FinTech.
Regulators are naturally keen to create environments that make them internationally competitive.
What was the catalyst for these rapid FinTech developments?
If you look at the banking sector since the crisis, the entire banking model has been challenged. The cost of doing business has increased and revenues have been affected due to low interest rates, creating a very different environment.
As incumbents, banks are having to address these challenges. At the same time we are seeing more nimble start-ups, who are working on disruptive solutions. As a result, we have seen banks become more open to the idea of working with emerging FinTech start-ups.
What is the secret to FinTechs and banks successfully collaborating?
I think one cannot be the other. You have to find the appropriate bridge that connects the two. Banks are established organisations embedded in regulatory frameworks that everyone feels comfortable with. On the other hand, FinTechs have the flexibility.
Larger organisations have to be more reserved in how they talk to regulators and take a more conservative approach because they have more to lose.
Compare this to FinTechs who have nothing to lose. There is no revenue to lose, there is no large business to lose.
On the one hand you have the steady ships which provide quality services whereas start-ups are more about innovation.
As these are two different worlds, a bridge between innovation of FinTechs and the resilience and trustworthiness of banks is needed whereby both can benefit from each other. How important is incorporating legacy systems in the development of FinTech?
For us it is critical to integrate with legacy systems, and there are two ways to do that: firstly, connecting DLT with existing upstream systems at incumbent organisations in front and back office, and interoperability of assets between existing environments and blockchain environments.
You cannot expect to replace legacy systems with FinTech solutions and in the long run I am not sure it is even possible. Financial institutions also need to justify the implementation costs to satisfy boards and shareholders.
You must also consider opportunities in the short- and long-term and banks have to satisfy board and shareholders who may be more focused on short-term rather than long-term horizons.
A key element in this context is also management of cash to achieve full settlement finality.
Further down the line, interoperability between different DLT technologies needs to be addressed, but we don't see that as a technical challenge.
Has blockchain technology moved on from its initial hype?
In 2014 and before were marked by bitcoin, 2015 was about blockchain and scalability, while this year the discussion has moved to issues around confidentiality and permissioning in the use of blockchain.
We are also moving away from blockchain’s original technical design, built initially for bitcoin, which is not fully compatible with our industry.
While I do not believe we have move past the initial hype, there has been a lot of experimentation and work to understand the technology, with more firms having carried out proof of concepts. There is a better understanding of what is and what is not possible with the technology and what it really takes to move something into production.
What developments can we expect to see next year and further into the future?
As with every innovation, we will have first movers and fast adopters. Some will be leading the pack and bringing something into the productive environment faster than others. However, it is a journey. It is a fast changing environment and we will see more solutions coming into production in 2017.
I am not sure if there is any real solution for blockchain in a productive environment.
What we will also never see is a universal silver bullet, a blockchain fit for all purposes.
There are a number of blockchain solutions providers, including ourselves, who are working to bring targeted solutions into actual use, such as platforms to issue, settle and record ownership of assets in an efficient way over time.