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.

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.

October 14, 2016October 14, 2016

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.

August 29, 2016August 29, 2016

Can Banks Keep Up?

As the financial industry adapts to various digitization trends, my team continues to field inquiries from bank CEOs and their executive teams specific to emerging technology strategies and opportunities. One way we attempt to benchmark current interests (and concerns): an annual research project. This year, we evaluated industry attitudes toward core providers and fintech firms, including marketplace lenders like Lending Club, in our just-released Bank Director Technology Survey. While a number of findings jumped out at me, three really caught my eye:

Eighty-one percent of bank chief information officers and chief technology officers responding say that their core processor is slow to respond to innovations in the marketplace, making it even more difficult for the banking industry to keep up with shifting consumer expectations regarding technology.

Thirty percent of bank CIOs and CTOs report that their bank has pulled back on plans to integrate a more innovative product, service or delivery channel due to the inability or unwillingness of the bank’s core processor to support that activity.

Banks are highly reliant on core providers for services beyond core processing, which at its most basic contains vital customer data and processes all customer transactions. Ninety-six percent of respondents say their bank uses their core provider for additional services, including mobile banking (71 percent) and bill pay (75 percent).

Our 2016 Technology Survey, sponsored by the technology solutions provider CDW, reflects the opinions of 199 board members and senior executives of U.S. banks surveyed in June and July. The size of institutions polled fell between $250 million and $20 billion in assets. In addition to the points shared above, we found:

Thirty-one percent of respondents have converted their bank’s core technology within the past five years. Forty-two percent converted their core more than 10 years ago. Respondents report that their bank works with a median of five technology firms, including the core provider.

Sixty-one percent of participants see fintech firms as both competitors and partners.
Online marketplace lenders should be more heavily regulated, say 60 percent of respondents. Forty-one percent worry that they’ll lose loans to these lenders, but 18 percent don’t think these lenders have long-term viability.

Opinions are mixed on the impact that blockchain—the underlying technology behind the digital currency bitcoin—will have on the banking industry. Twenty-four percent believe it will impact all banks. However, 57 percent don’t understand blockchain enough to form an opinion, or have never heard of the technology.

Finally, cybersecurity continues to loom large. Having a strong technology infrastructure in place to protect against cyberattacks remains the top technology concern for survey participants, at 72 percent. Seventy percent indicate that their bank could better use data to serve the needs of existing customers, or identify new customers. Seventy percent of respondents believe that technological innovation is a priority for their board, but less than half discuss technology at every board meeting. Thirty-four percent of respondents describe themselves as early adopters of technology.

The full survey results are available online at BankDirector.com, and will be featured in the 4th quarter 2016 issue of Bank Director magazine.

May 18, 2016June 29, 2016

Blockchain 101 – a Primer for a Bank’s CEO and Board

The rapid transformation of the financial services industry — due to technological innovations and shifting customer expectations — is quite remarkable. One of the most revolutionary technologies is blockchain, which might transform not just banking but also the media industry, insurance companies and government agencies (to name but three). Be it digital identities, digital banking or cross-border payments, the potential applications of blockchain are immense. So for those most responsible for being the champions and evangelists for growth within a bank, we produced this “Blockchain 101” video to highlight potential applications of this database for recording transactions.

*This video is a part of Bank Director’s online training series — exclusively available to a bank’s CEO and their officers & directors as part of their annual Bank Services program relationship. I thought it was appropriate to make an exception today and share this particular primer in advance of our upcoming Growing The Bank conference. We will host this program next Monday and Tuesday at the Four Seasons Resort and Club at Las Colinas — and blockchain’s potential will surely be discussed.