Blockchain: What It Is and How It Works

Quickly:

  • Many speculate that blockchain could turn out to be one of the most revolutionary technologies ever developed.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

WASHINGTON, DC — J.P. Morgan’s CEO, Jamie Dimon, recently threw some big time shade at bitcoin.  However, as the Wall Street Journal shared this morning, he’s “still enamored with the technology that underpins it and other virtual currencies.”  For those wondering about where and why blockchain might revolutionize the business of banking, take a look at our just-released Q4 issue of Bank Director Magazine.  We dedicated our cover story to “Understanding Blockchain,” and this post teases out some of the key concepts bank executives and board members might focus in on.  Authored by John Engen, the full piece can be found, for free, here.  As you’ll read, the article covers three major points:

What is Blockchain

If you’re on the board of a typical U.S. bank, odds are that you don’t know much about blockchain, or distributed ledgers, except that there’s a heavy buzz around the space—and a lot of big bets being made. As John Engen wrote, being a know-nothing might be fine for now, but going forward could be untenable.

At its most basic, blockchain is a digital-ledger technology that allows market participants, including banks, to transfer assets across the internet quickly and without a centralized third party.

Some describe it as the next, inevitable step in the evolution of the internet; a structure to help confront concerns about security, trust and complexity that have emerged from a technology that has opened the world to sharing information.  To others, it looks more like business-process improvement software—a way to improve transparency, speed up transaction times and eliminate billions of dollars in expenses that markets pay to reconcile things like credit default swaps, corporate syndicated debt and other high-volume assets.

Where are things heading

“Trying to guess how blockchain is going to affect us in the next 20 years is kind of like standing in 1995 and trying to imagine mobile-banking technology,” said Amber Baldet, New York-based JPMorgan Chase & Co.’s blockchain program leader, in an online interview. “I’m sure the ultimate applications are things we can’t even imagine right now.”

For now, the space certainly has the feel of the 1990s internet, with hundreds of startups and billions of investment dollars chasing distributed-ledger initiatives.  Armonk, New York-based IBM Corp., a big blockchain supporter, estimates that 90 percent of “major” banks in the world—mostly those with trading, securities, payments, correspondent banking and trade finance operations—are experimenting with blockchain in some way.

Collaboration is the current buzzword

Most large banks are involved in consortiums with names like Ripple, Hyperledger, R3 and Enterprise Ethereum Alliance.  Smaller banks are taking more of a wait-and-see approach.  For all the promise of speed and efficiency, blockchain’s real power lies in its transparency, which makes data both trackable and immutable.  Ultimately, blockchain could usher in new business models, which require different ways of thinking.

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For members of a bank’s board, we created this “Blockchain 101” video.  In it, I touch on the potential application of blockchain in terms of digital identities, digital banking and cross-border payments.  In addition, the ten minute video surfaces key concepts and business ideas that remain material to many today.

*This video is just one of the offerings found in our Bank Services program designed to help board members and senior executives develop strategies to help their bank grow, while demonstrating excellence in corporate governance that shareholders and customers deserve and today’s regulators demand.

The Paths High Performing Banks Take to Growth and Innovation

Quickly:

  • I’m in Utah at the Montage Deer Valley for the second day of the Association for Financial Technology’s Fall Summit.
  • This afternoon, I shared my thoughts on the pace of change impacting banks as part of AFT’s Fintech Leadership Industry Update.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

PARK CITY — For those that attended Bank Director’s Acquire or Be Acquired conference this January, you may recall slides illustrating the consolidating nature of the banking industry over the past 25 years.  This decrease in the number of banks is the result of several major factors; most notably, changing banking laws, changing technologies, changing economics and changing consumer behaviors.

Given the audience we share information with (e.g. bank CEOs and their leadership teams), I continue to hear talk about steady, albeit slow, loan growth, some margin improvement and a continued emphasis on expense control.  However, it is apparent from the outside looking in that many banks still lack the true flexibility to continually innovate in terms of both products and services — and how they are delivered.

This is downright scary when you consider that Amazon’s Lending Service surpassed $3 billion in loans to small businesses since it was launched in 2011.  As I shared in my remarks, Amazon loaned over $1 billion to small businesses in the past twelve months.  Over 20,000 small businesses have received a loan from Amazon and more than 50% of the businesses Amazon loans to end up taking a second loan.  This is a major threat to the established financial community, because if there is one thing community banks and large banks agree on, it is that the small business market is important.  This will not change any time soon, and for community banks in particular, a greater share of the small business market may be their only path to survival.

So what I shared this afternoon were real-world examples of bank CEOs focused on carrying out a long-term growth strategy in creative, yet highly focused, ways.  For instance, several of the banks I referenced are attempting to re-engineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through partnerships with fintech companies.  For instance, I cited a newer partnership between First Horizon’s First Tennessee bank unit and D3 Banking. In addition, I used examples like US Bancorp, PNC and Fifth Third before highlighting five more institutions that range from $10Bn to $50Bn in asset size.

I did so because we are witnessing an intense struggle on the part of financial services providers to harness technology in order to maintain relevance in the lives of their customers.  The eight banks I cited today have different leadership approaches; all, however, are considered high-performers. For those interested, here is a link to my presentation: Bank Director and FinXTech 2017 AFT Presentation.

The caveat to my presentation, remarks and writing: it might appear easy to create a strategic direction to improve efficiency and bolster growth in the years ahead. But many bank executives and their boards are being cautioned to prepare for false starts, unexpected detours and yes, stretches of inactivity — all of which impacts tech companies like those here in Park City at AFT.  Still, a vision without action is a dream; action without vision, a nightmare.  For these banks, strong leadership have set a clear course for their futures.

3 Disruptive Forces Confronting Banks – and How Zelle Might Help

By Al Dominick, CEO of DirectorCorps (parent co. to Bank Director & FinXTech) | @aldominick

“The volume and pace of what’s emerging is amazing. I’ve never seen it before in our industry.”

These words, spoken about technology driving an unprecedented pace of change across our financial landscape, came from Greg Carmichael, today’s keynote speaker at Bank Director’s annual Bank Audit & Risk Committees Conference.  Greg serves as president and CEO of Fifth Third Bancorp, a diversified financial services company headquartered in Cincinnati, Ohio.  The company has $142 billion in assets, approximately 18,000 employees, operates 1,191 retail-banking centers in 10 states and has a commercial and consumer lending presence throughout the U.S.

Fifth Third Bancorp’s four main businesses are commercial banking, branch banking, consumer lending and wealth and asset management.  Given this focus, Greg’s remarks addressed how, where and why technology continues to impact the way banks like his operate.  Thinking about his perspective on the digitization of the customer experience, I teed up his presentation with my observations on three risks facing bank leadership today.

Risk #1: Earlier this year, the online lending firm SoFi announced that it had acquired Zenbanx, a startup offering banking, debit, payments and money transfer services to users online and through its mobile app.  As TechCrunch shared, “the combination of the two will allow SoFi to move deeper into the financial lives of its customers. While today it focuses on student-loan refinancing, mortgages and personal loans, integrating Zenbanx will allow it to provide an alternative to the traditional checking and deposit services most of SoFi’s customers today get from banks like Bank of America, Citi or Chase.”  Given that many banks are just beginning their digital transformation, combinations like this create new competition for traditional banks to address.  Cause for further concern?  It came to light that SoFi just applied for an industrial loan bank charter in Utah under the name SoFi Bank.

Risk #2: With so much talk of the need for legacy institutions to pair up fintech companies, I made note of a recent MoneyConf event in Madrid, Spain.  There, BBVA chairman Francisco González said that banks need to shed their past and image as ‘incumbents’ and transform into new digital technology companies if they are to prosper in a banking environment dominated by technologically astute competitors. Transforming the bank “is not just a matter of platforms. The big challenge is changing an incumbent into a new digital company.”  Clearly, transforming one’s underlying business model is not for the faint of heart, and the leadership acumen required is quite substantial.

Risk #3: Finally, when it comes to digital companies doing it right, take a look at TheStreet’s recent post about how “Amazon Has Secretly Become a Giant Bank.”  I had no idea that its Amazon Lending service surpassed $3 billion in loans to small businesses since it was launched in 2011.  Indeed, “the eCommerce giant has loaned over $1 billion to small businesses in the past twelve months… Hiking up the sales for third party merchants is a plus for Amazon, as the company gets a piece of the transaction.” What I found particularly note-worthy is the fact that over 20,000 small businesses have received a loan from Amazon and more than 50% of the businesses Amazon loans to end up taking a second loan.

A Potential Solution

Jack Milligan, our Editor-in-Chief, recently wrote, “disruptive forces confronting banks today are systemic and in some cases accelerating.” In his words, the greatest risk facing bank leadership today is “the epochal change occurring in retail distribution as consumers and businesses embrace digital commerce in ever increasing numbers, while aggressive financial technology companies muscle into the financial services market to meet that demand.”

Against this backdrop, Fifth Third Bank just announced it will be one of more than 30 major financial institutions to roll out Zelle, a new peer-to-peer (P2P) payments service operated by Early Warning.  As Greg shared during his remarks, this will initially be offered through the banks’ mobile banking apps, and positions the bank to better compete with PayPal’s Venmo.

This is big news.  Indeed, Business Insider noted in today’s morning payments brief that the growing crowd of providers will fight over a mobile P2P market set to increase ninefold over the next five years, reaching $336 billion by 2021.  In addition to working directly with financial institutions, let me also note that Early Warning has established strategic partnerships with some of the leading payment processors –– think FIS, Fiserv, and Jack Henry.  These relationships will allow millions more to experience Zelle through community banks and credit unions.

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Here in Chicago, we have 298 bank officers and directors with us today and tomorrow — and our Bank Audit and Risk Committees Conference itself totals 366 in attendance.  In terms of bank representation, we are proud to host audit committee members, audit committee chairs, CEOs, presidents, risk committee members, risk committee chairs, corporate secretaries, internal auditors, CFOs, CROs and other senior manager who works closely with the audit and/or risk committee.  Curious to see what’s being shared socially? I encourage you to follow @bankdirector and @fin_x_tech and check out #BDAudit17.

Banks Vs. Fintechs

By Al Dominick, CEO of DirectorCorps (parent co. to Bank Director & FinXTech) | @aldominick

Quickly:

  • I’m in from Dallas at the Consumer Bankers’ Association “CBA Live!”
  • Thanks to Richard Hunt, the CEO of the CBA, for inviting me to participate.  Richard spoke at our Acquire or Be Acquired conference in January + I hope to live up to his great speaking standards when I’m given a mic tomorrow.
  • The rapid pace of change in the financial sector took center stage during yesterday’s opening session.

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Since arriving in Big D on Sunday evening, I’ve met quite a few interesting men & women from great financial institutions at this annual event for the retail banking industry.  This year, more than 1,300 are at the Gaylord Texan (with some 550 being senior-level bankers) to talk shop.  Personally, I’m looking forward to presenting on “Economic States of America” with Amy Crews Cutts (Chief Economist, Equifax), Robert Dye (Chief Economist) of Comerica Bank and Cathy Nash, the CEO of Woodforest National Bank tomorrow morning.  From credit trends to banking consolidation, if you’re in Dallas, I invite you to join us for this Super Session as we explore the economic state of our union.

Before then, I thought to share a few interesting takeaways from a “FinTech vs. Bank” general session that pit SoFi and Kabbage “against” PNC and BBVA.  As part of the panel discussion, CBA posed a number of interesting questions to the audience; most notably, “do you believe fintechs are built to last.”  Given our upcoming FinXTech Summit in NYC, I thought the answer (which reflects the thoughts of many of the biggest banks in the U.S.) was interesting, but not surprising.

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Further, I found the results of this question pretty telling (given we asked a similar question at this year’s Acquire or Be Acquired conference and received a similar response from an audience of CEOs, CFOs, and members of a bank’s board).

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Finally, I think the results of this question best represent the types of conversations I’ve found myself in when I explain what I do + who I meet with.

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As I’ve shared in recent posts, an increasing number of financial institutions are using partnerships with technology companies to improve operations and better meet customer needs.  Given the input on these questions from various heads of retail, product lines and product development + compliance, risk and internal audit, I feel these three pictures are worth noting — and sharing.  Agree or disagree?  Feel free to leave a comment…

 

We Are On To FinTech Week

#AOBA17 conference intel (Friday)
By Al Dominick, CEO of Bank Director | @aldominick

Quickly

  • The “bank of the future” is not about technology, it is all about customers.
  • For many financial institutions, the time may be right to retire legacy systems for cloud-based platforms.
  • Numerous financial technology companies are developing new strategies, practices and products that will dramatically influence the future of banking..

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The intersection of technological innovation with strong depository franchises may lead to more efficient banking processes, reductions in fraud and a win/win/win for banks, financial technology firms (fintechs) and consumers.  Globally, nearly $23 billion of venture capital and growth equity has been deployed to fintechs over the past five years, and this number is growing quickly. Still, the nature and extent of impact that fintechs have on the industry remains unclear.

Throughout this week’s Acquire or Be Acquired conference, bank CEOs talked about the continually changing nature of financial services — with fintech often front and center.  For many, collaboration between traditional institutions and emerging technology firms bodes well for their future.  Here, Bank Director’s FinXTech provides authoritative, relevant and trusted content to a hugely influential audience, specifically:

  • Fintechs who view banks as potentially valuable channels or distribution partners;
  • Banks looking to grow and/or innovate with fintech companies’ help and support; and
  • Institutional investors, venture capitalists, state & federal regulators, government officials and academicians helping to shape the future of banking.

We designed FinXTech as a peer-to-peer resource that connects this hugely influential audience around shared areas of interest and innovation.  As a host of FinTech Week in New York City this April 24 – 28 (along with Empire Startups), we bring together senior executives from banks, technology companies and investment firms from across the U.S. to shine a light on what is really generating top line growth and bottom line profits through partnerships, collaboration and investments.

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Given the changing nature of banking today, this week-long event in New York City looks at the various issues impacting banks, non-banks and technology companies alike.  So as we move towards FinTech Week in New York City, I invite you to follow me on Twitter via @AlDominick, FinXTech’s President, Kelsey Weaver @KelseyWeaverFXT@BankDirector and our @Fin_X_Tech platform and/or check out the FinTech Week New York website for more.

Whether They Want To or Not, Banks Need to Open Up

Apart from interest rates, the two biggest issues that bank executives seem to wrestle with are regulatory and compliance costs.  I sense another emerging challenge coming to shore; specifically, how to “open up” one’s business structure in terms of developing partnerships and permitting others to leverage their customer data and/or capabilities.

For bankers, this challenge comes with significant reputation and customer risk.

Now, it is hard to truly disrupt the concept of banking — and I shared this opinion from the stage at Bank Director’s annual Bank Executive & Board Compensation Conference this morning.  However, I did adjust some of my welcoming remarks based on the Consumer Finance Protection Bureau’s position that consumers can control their own financial data, including to let third parties help them manage their finances.  As I learned from Jo Ann Barefoot’s Fireside Chat with CFPB Director Richard Cordray at Money 2020, the CFPB “is not content to sit passively by as mere spectators watching these technologies develop.”  According to his prepared remarks:

Many exciting products we see… depend on consumers permitting companies to access their financial data from financial providers with whom the consumer does business. We recognize that such access can raise various issues, but we are gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure.

Since reading the CFPB’s position, Ms. Barefoot’s recap and the Wall Street Journal’s synopsis, I decided to talk with various bank executives and board members that are here with us at the Ritz-Carlton in Amelia Island about this stance.  As I note in this video, I sense both an ongoing struggle — and a sincere interest — to truly understand the role of technology.  For those I talked with, this is as much about “becoming sticky” to their customers as it is about embracing or defending themselves against “the new.”

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For more about this year’s conference, I invite you to take a look at BankDirector.com.  Also, a virtual high-five to the team here for a great first day.  You all rock!

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The Promise of 8 Blockchain Companies

Yesterday, I spent the majority of my day at the Economist Conference’s “Finance Disrupted” in New York City.  As an early hook to their first panel discussion entitled ‘Building the blockchain: The promise and perils’, we learned that venture capitalists invested nearly $500 million in blockchain business last year — up from $2 million just three years ago.  While I’ve shared my perspectives on the potential applications for blockchain in previous posts (Blockchain 101 – a Primer for a Bank’s CEO and Board), panels like these underscore the immense potential of this technology.

“Blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole.”

– Bob Greifeld, Chief Executive of NASDAQ

Like many, I see potential for blockchain technology to revolutionize many areas of the financial industry — think securities trading, payments, fraud prevention and regulatory compliance.  Moreover, a new report from Deloitte explores how blockchain could be used in loyalty rewards programs.  Still, as our industry transforms, there is real uncertainty around what the future of the banking industry will look like.

This is why I take note of comments like those from BNY Mellon’s CEO, Gerald Hassell. On his Q1 earnings call, he opined “we think blockchain can be transformative.  We’re spending a lot of time and energy on it, but I think it’s going to take some time to see it play out in a full, meaningful way. We actually see ourselves as one of the major participants in using the technology to improve the efficiency of our operations and the resiliency of our operations.”

While additional big-time players — such as Goldman Sachs, Visa and NASDAQ — garner headlines for their investments in crypto-currencies & blockchain technology, I spent last night and this morning looking at eight blockchain companies that might help you to form your own opinions on the potential of this technology:

For more about these companies — and their funding sources — I encourage you to check out this piece on Lets Talk Payments.  Not familiar with LTP?  It is a fast-growing global destination for news, insights & data-driven research in emerging financial services.  Much like the information shared by both FinXTech and Bank Director, LTP’s content is fiercely independent, thought provoking and always up-to-date, in a way that continues to inform, engage and inspire.