Screen Scraping’s SODA Framework Explained

SODA

Recently, Yodlee, Quovo and Morningstar announced that they were launching a joint initiative “…to enable secure, open data access for consumers in regard to their financial data.”  They’ve created the Secure Open Data Access (SODA) framework, a set of consumer-centric principles for data access and financial data security to promote transparency, traceability, and accountability in the financial services ecosystem.

We’ve done a lot of talking lately about open data and why it’s so important for consumers and businesses. This ranges from allowing for increased innovation to the importance of APIsLet’s dissect what this announcement doesn’t say:

SODA Broken Down

“To ensure that the aggregator bread-and-butter business isn’t scuttled completely, or at the very least taxed into oblivion by the banks, aggregators are stealing a march by positioning themselves as consumer advocates.” – Drew Sievers, CEO of Trizic Inc.

1) Mention of Financial Institutions

How can you protect data or open it up without partnering with the very people who provide the customer info in the first place? What we do know about this deal is that there’s no clarity on where the data goes, no clarity on how to control users’ access from the FI side via these three companies and no comparison to PSD2. The bank’s data is what the aggregators are mishandling, either intentionally or unintentionally.

2) APIs Not Included

The three SODA aggregators don’t say that they will no longer screen scrape. They have positioned themselves to appear on the side of the consumer while stopping short of adopting more secure methods of data sharing like APIs. They also criticize the government for a lack of clarity but suspiciously stop short of advocating for new legislation that would most likely restrict their operations. “The move is partly a response to other industry proposals that the SODA framework developers see as too restrictive.”

3) Data Resale

The framework benefits a data aggregator company that makes money on selling the technology. Yodlee has taken heat on reselling anonymized data to investors and others. But they say the framework is designed to put the consumers’ needs first.

The sale of this data is one of the big areas of interest among hedge funds. Many are interested in non-traditional data sets, and consumer portfolios/activity is one of those data sets that’s viewed as interesting data to hedge funds. With all the money available for data, it’s hard to believe they are going to leave those chips on the table and walk away.

4) Plaid and Finicity

The two missing players are smaller than the others but also used widely and screen scrape the same universe of financial institutions. “SODA’s purpose is to consolidate Yodlee et al.’s position and ward off the threat of large banks stepping in and regulating the market themselves, since it is more often than not banks’ data that’s used,” says Sievers. If this is true, why not include all the aggregators? Are Plaid and Finicity being excluded for being too small? They do the same thing and use data the same way. So why were they left out? Plaid has declined to comment on this announcement citing a lack of expertise regarding Yodlee, but it does make you wonder.

Where’s the beef?

Essentially, there’s not much here. There’s no clear benefit to the investor and the protection of their data and there’s no clear benefit in terms of security.

APIs are the big missing piece in all of this and what’s really needed above and beyond these “made up” frameworks. APIs give everyone more control, allowing FIs to benefit the users and truly keep their information secure and protected.

In Europe, the Europeans believe they own their own data, but that’s not true in the US. This is the mind shift that needs to happen to give people more control of their data and in turn, their privacy. No acronyms needed.

Acct Opening – Big Spend, Little Innovation

I’m on Top of the…Sales Funnel?!

FIs spend most of their marketing dollars on account acquisition. In fact, in 2017, the US financial services industry will have spent $10.1 billion on digital advertising, a 13.1% gain from 2016, according to eMarketer. But for all this spend there’s been almost no innovation in this space. And that lack of innovation is losing customers and costing FIs millions. It’s time that FI’s begin to ask:

  • Is there a better model?
  • How can the account opening process be improved upon for an easier flow for the end user?  

In a previous post, TradeIt conducted time trials to open a new brokerage account on mobile. Completion of those applications ranged from 6 to a staggering 12 minutes. So what were the pain points and causes of abandonment?

  • Too complex
  • Too many steps
  • Took too long
  • Required information not readily available

The biggest challenge in a mobile age is that none of the account opening processes are “native to iOS” (or Android) and all require users to go to a responsive web application that’s driven from the 20-year old Affiliate link model that was designed for desktop. So, with each additional minute and extra field to complete, or with clunky mobile interfaces, the number of completed applications falls significantly. There goes your sales funnel…and your profits.

Bye, Bye, Bye

According to Forrester, 54% of people filling out financial application forms abandon prior to completion, and on top of this, a recent study by SaleCycle saw financial abandonments reach an average of 79.3%. This is a huge, wasted opportunity considering that customers who attempt to complete an application are expressing a genuine interest in your products and services. In other words, if your process is quick and easy, they will complete their sign up quickly and easily. If it’s not, then you’ve lost a customer and revenue.  

As you can see below, Acorns’ account opening flow is super streamlined, moving the user from beginning to end in an easy progression of screens with limited questions.  

Acorns Flow.png

Dollars are moving to mobile, but no one is fixing mobile  

By 2019, advertisers will spend more on mobile than all traditional media, except television, put together. Why? Because that’s where the eyeballs are. And your customers. According to Zenith, mobile ad spending for 2017 grew 34%, to $107 billion.

FIs that respond to this need and continue to ramp up their already heavy investment in both the online and mobile channels will be better positioned to drive incremental sales, build customer loyalty, and provide an outstanding customer experience.

Innovate to Acquire

Meeting long-term customer acquisition goals for an FI requires identifying and capturing market opportunities while staying ahead of the competition. In a world of specialized products for highly segmented target audiences, being able to launch a new bank customer acquisition program faster than the competition means getting the largest part of the market share. For every month of delay, some of your customer base moves to another product with a competitor. That lost revenue over time accumulates and creates a revenue gap that will never be filled.

At the Benzinga Global FinTech Awards last week, the big brokers spoke about the need for innovation. TD Ameritrade cited:

  • 40% of their trading is happening on mobile  
  • They are doing 250,000 trades/day

The brokers on the panel—which included TD Ameritrade, Schwab, Interactive Brokers and TradeStation—agreed that constant innovation was a necessity in an age when retail brokers interfaces are being compared to Amazon and Google for being clean, easy and intuitive. As we highlighted in a post last year, 72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. The mobile experience is key to this and easy interfaces are what will get them to visit and stick around.

Quick and Easy

What Robinhood, Acorns, and Stash get right with their native/mobile-enabled tools is to allow users to open an account in under 5 minutes. Why? Because those tools were built from the ground up with mobile—and the end user—in mind. They know what’s important when looking at customer acquisition and creating that experience:

  • Hone: Get the message right
  • Streamline the process: avoid pitfalls that will cause potential clients to abandon the flow
  • Focus: Only include the must-have know-your-customer components
  • Make it native: If you do one thing and one thing only, make it native

Friction Isn’t Fiction

Everyone working in fintech should know that reducing friction at key transactional points in your user journey is critical for adoption, conversion and repeat long-term use. Just remember that your users don’t necessarily understand the ins and outs of why the financial industry has to do some of the things it does. So while they expect it to be complex and difficult, those who can make it easy and fast will surely win the acquisition game in the long run.  

 

Screen-Scraping and the Halo Effect

Don’t Believe Everything You See

“Trust is a key strategic asset which creates growth opportunities and defends against competition. It allows deeper customer engagement across products and services.” – Nobel Prize winner, Robert C. Merton

We’re going to talk about screen-scraping again. Because we think it’s so important to be aware of what this means for both consumers and FI’s. You can get more background on the process of screen-scraping and what it means for the future of banking as well as the importance of API’s and innovation in our previous posts here, here and here.

One of the ways screen-scrapers are getting access to customer data is through a halo effect.

This is the foundation of the modern concept of brands. Essentially it means that when we develop a favorable impression of a brand when interacting with one partner at a firm we tend to view the whole firm in a favorable light. Our impression of that firm’s brand is strengthened. Thus creating a halo around that entire firm that is associating with the other brand.  

Screen-scrapers are using logos to build trust and credibility and then turning around and selling the data they’ve so trustfully obtained. By using the logos and trademarks from financial institutions, it engenders trust among the end users who associate the brand of Broker X with their money and the security that their financial institution provides. However, most FIs have not in fact granted permission or rights to the screen-scraper for them to use the logos in the first place. The trust of the logo makes an association for the end user, but this is an abuse of the institution’s mark and negatively impacts the end user and the institution itself.

The Anti Trust

Let’s be honest, most Americans aren’t enamored with big banks or financial institutions these days. However, seeing a logo of a familiar name in one of their finance apps will undoubtedly create a feeling of assurance that things are on the up and up; that their information is safe. As an end user, we’re putting our faith and trust in the visual association of the broker or bank brand on a third party site. And in this case, that trust is unfounded.

I Didn’t Sign Up for This

When this logo appears, it signals to the end user a perception of the financial institution’s endorsement of the technology, thus they willingly link their account. As we’ve argued in previous posts, the screen-scraper can then go in and grab their data — any of their data — and use it and sell it. These companies are selling that data many times over, charging their partners per linked user. But where’s the end user’s cut of the profit? And how many places are they selling it to?  

Millions of Customers + 1000s of Companies = Millions of Screens Scraped and Countless Data Points Up for Grabs

Screen Shot 2018-05-04 at 2.52.29 PM.pngAn Ounce of Prevention

Luckily, all is not lost. Companies like Fidelity and Ally are ensuring their information is secure and are increasingly moving towards APIs for third parties to access their clients’ data. In fact, TradeIt’s SDK specifically helps partners integrate our technology, allowing their developers to integrate faster with simple customizations. This ensures the end user that they’re protected and gives them total control over what happens to their data. By partnering with brokers to access their APIs, TradeIt only accesses the information that the broker makes available.

Here’s how it works:

  • Through a broker’s API, we allow the end user to log into their brokerage account securely.
  • We don’t view, access or retain their log-in credentials.
  • After the user consents, the broker provides an encrypted token.
  • This token will expire, and once it does, the connection is severed.
  • In order to continue to view their portfolio and/or send buy or sell orders from their favorite app to their broker, the end user will need to relink their account.

Safety First

How this differs from traditional screen-scraping is simple: we don’t retain log-in credentials and continue to access and scrape the end user’s data however we see fit. Their information is not available to us. Nor should it be. Not only is this safer in the event of a data breach, it provides true trust with the end user. We only show the logos of brokers with their permission.

Many Financial Institutions are requiring aggregators to sign agreements where the aggregator/screen-scraper is liable for the data in the event of a breach. Not surprisingly, many aggregators are pushing back and not signing these agreements (ostensibly because it cuts off their revenue stream).  

But, as we move into more transparency around banking, brokers are embracing this change. TradeIt has consent pages and end-user agreements that explicitly inform the investor that we’re accessing their data on their behalf. It’s more than just a logo, its an agreement between the broker and the third party. This puts the end user at the forefront, not on the backburner. Which is where they should be in the first place. After all, it’s their information.

In the Question of Data Control, APIs are the Answer

Abracadabra, Watch Your Data Disappear

Whoever said ignorance is bliss obviously never unknowingly shared all their data. As we mentioned in a previous post, consumer data is being screen-scraped into the ether and this creates so many issues around control and the assumption of privacy. Once your data is scraped, it’s gone. Neither the bank or institution, nor the end user has any control.

The problem, as ever with the tech industry’s teeny-weeny greyscaled legalise, is that the people it refers to as “users” aren’t genuinely consenting to having their information sucked into the cloud for goodness knows what. Because they haven’t been given a clear picture of what agreeing to share their data will really mean.

Miss Jackson if You’re Nasty

It’s all a question of control. And APIs are the answer. They offer banks and FIs the ability to control what pieces of data and how much are grabbed by a permitted 3rd party. For example, at TradeIt—from some of our brokers’ API—we see only seven days of transaction history, while others might show 30 days. Typically no one provides more than 90 days but the depth of history varies. In addition, for things like an order blotter, some brokers only provide the current days’ orders. These smaller pieces of data ensure less is shared, though what is shared is timely and relevant.

You Get My Data and You Get My Data, Everybody Gets My Data

With screen-scraping, once you provide your ID and password to the 3rd party, their bots do the scraping and can grab anything that’s available, including your transaction history and all of your accounts under that single login. For some banks or brokers—if the broker is part of a larger financial institution that offers a diverse product set—that could be your brokerage account, retirement account, mortgage, even credit card information. Most end users likely don’t realize that once they give the screen-scraper their login, they have it, and they can and will use it until the password is changed. What’s worse most of the screen scrapers don’t have trademark rights to the logos that are on their service integrations, therefore falsely leading the consumer to believe the institution approves it. In the meantime, they’ve still grabbed that data and it’s gone…to who knows where.

APIs Create a Goldilocks Solution, They’re Just Right

In contrast, most APIs are programmed to call for specific account balances since these services and endpoints are more distinct and inherently control more access to just the needed data. This is why the European Banking Federation’s position is that screen-scraping is an outdated, first-generation technology that should be replaced by APIs, which it sees as a more secure way of enabling direct access to customer data for third parties.

Not only do APIs offer a more tailored solution where you essentially get only what you need, they create a huge potential for innovation. As we demonstrated in a previous post about your data being open for business, companies like Fidelity are already showing consumers who has access to their data and allowing them to control whether or not that’s ok with them.

fidelity_access.png

In Tech We Trust

Brokers need to push themselves to invest in APIs. Ever since the invention of the FDIC, FIs have been associated with trust as it relates to consumer’s money. The theory with bank robbery was that they aren’t hurting anyone since the money is insured. Except now with screen-scraping, we are getting hurt…with our privacy…or lack thereof.

As technology evolves and allows for endless possibilities, investing in methods to engender trust and yet that also support the new ways individuals want to interact with their money, track their wealth and/or use tools for better financial decisions, is vital. Brokers and FIs need to enable that, to securely open their data with controls to prevent misuse or even breaches. This is what will create real trust with their users.

Don’t Build a Wall

Firewalls and detours aren’t the answer. It’s not about closing things off, it’s about opening them up. With the new sharing ecosystem, and with millennials having more trust and more interest in tech-driven brands, FIs need to work to remain relevant. In order to do this, you need to be an active member of the ecosystem and invest in technology that supports these behaviors.

Because, while users may be content to share some of their personal info in order to use your service now, it’s only a matter of time before they realize just how much and possibly decide it’s not worth it.

“We have consistently warned our customers about privacy issues, which will become increasingly critical for all industries as consumers realize the severity of the problem.” – Jamie Dimon

Are they really getting what they signed up for, or worse, paid for? You need to provide comfort and control to your user. If you don’t, they won’t tick that agreement box and they’ll move on to someone who can.  

The Evolution of Value Chain and Porter’s 5 Forces

Millions of eager MBAs populate the executive suites and boardrooms of top companies around the globe, and the vast majority were indoctrinated in strategy classes with Michael Porter’s Five Forces and value chain analysis. These value chains have served corporations as they examine vertical integrations, mergers & acquisitions and the strategic fit of business lines since the Industrial Revolution.

Screen Shot 2018-04-11 at 8.59.39 AM.pngExample: Linear value-chain which offers one direction for business flow only.

This traditional model is no longer useful or practical and the technology revolution of the last 30 years is forcing companies to re-evaluate linear value chain analysis in favor of a “constellation” approach to building businesses.
Untitled123.pngExample: Constellation approach using TradeIt to showcase the potential of a living breathing value ecosystem that flows to all entities.

As we see in the TradeIt model, the relationship between buyers and suppliers now features a “big bang” view of the ecosystem—partners that support each other and need each other to grow, branching off in every direction.

So why is this beneficial?

The TradeIt model would not be possible without APIs. APIs allow companies to securely work with each other through technical channels in order to focus, build and scale without the same linear approach as historically conceived. But we’re getting ahead of ourselves. First, a refresher…

Five Forces

First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field. A Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success.

Essentially Porter built a framework for understanding competitive forces in an industry and how those drive economic value among the industry players. Today we’re still trying to understand how to drive value, but what’s clear is that it’s no longer through a linear value chain. Instead, we drive value through a platform model where you have contributors owning different pieces, therefore making the sum of the parts greater.

Evolution of the Value Chain

“The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.” Nowhere does it say the chain has to be linear.

Enter the API

APIs are revolutionizing traditional business alliances and partnerships through scalability, flexibility, and fluidity.1

When companies share APIs, the world expands. Uber relies on Braintree for payments, Google integrates Uber into its map feature, and the list of interdependent API-driven technology businesses becomes more and more apparent.

Similar to the relationships between Uber, Google and Braintree—which are all focused on delivering a service to an end user—in finance, Cross River Bank allows companies like Affirm, TransferWise, and others to be free to build client-facing tools and services without having to do the core banking functions that often slow large incumbents. The ‘big bang’ approach to an ecosystem allows innovative service providers to enter a space with one “killer app” or a new tactic to solve a pain point.

Power in Partnerships

Large incumbents, where all the technology and related services are all under one roof, may not be able to move as quickly due to silos, legacy systems and/or risk and compliance requirements. The keys to this new value chain approach and the ecosystem are the partnerships and the ability to work together in new and innovative ways to meet the end user’s needs.

The visual below shows how TradeIt acts as a hub between supply and demand (brokers vs publishers) and how other partners come into the equation with ancillary and related services.

Screen Shot 2018-04-11 at 9.03.19 AM.png

This type of model not only offers much more flexibility for other players, it also opens the door for additional revenue streams and increased profitability. By creating value at every touchpoint, from broker to publisher and supplier to distributor, the ecosystem will only continue to expand and grow…to the benefit of everyone.   


1Bala Iyer and Mohan Subramaniam, “Corporate Alliances Matter Less Thanks to APIs,” Harvard Business Review, June 8, 2015.

How Open Banking Can Result in More Innovation

Playing Safety Catch-Up

As we outlined in our last post about the practice of screen scraping, in order to protect user’s data, it’s extremely important that financial institutions start moving towards APIs. With the PSD2 initiative, officially the Revised Payment Security Directive, Europe is ahead of US in terms of best financial institution security and consumer privacy practices. And if the recent Facebook/Cambridge Analytica scandal is any indication, it’s more likely that the US will see a data protection movement similar to what we’re seeing in Europe.

The question isn’t if PSD2 will be adapted in the US, but rather when? Before we try to answer this question let’s take a closer look at what PSD2 actually includes.

What is PSD2?

At its core, PSD2 or Open Banking is about protecting consumers. It enables bank customers to use third-party providers to manage their finances. Banks are obligated to provide third-party providers access to their customers’ accounts through open APIs enabling them to build financial services on top of banks’ data and infrastructure. This places an emphasis on consent via security, innovation, and market competition.

Third-party providers can be either Account Information Service Providers (AISP’s) or Payment Initiation Service Providers (PISP’s).

  • AISP’s provide users with aggregated information about their payment accounts in a single location, such as transaction history, account balances, direct debits etc.
  • PISP’s facilitate the use of payments via online banking with regards to online fund transfers, direct debits, credit cards transactions, etc. This is a game-changer when it comes to avoiding credit card fees and other transaction costs.

By enabling fintechs, large technology firms, other banks, and even certain retail organizations to go head-to-head with banks as PSPs, PSD2 aims to provide lower costs and higher security for consumers and to afford merchants greater flexibility to differentiate customer experiences, including payments.

APIs give the financial institutions the ability to manage security and control compliance risks while at the same time giving users access, control and visibility into how their data is being used—a win/win.

Control Begets Innovation

Giving consumers control of their data and who has access to it opens the door for new innovation and new partnerships where security and compliance are givens. PSD2 creates opportunities for banks to compete as technology innovators, wielding powerful analytical tools to extract valuable insights from their vast stores of proprietary data. And market dynamics and customer attitudes may favor banks that can capture opportunities quickly and effectively. In fact, 35% of banker’s surveyed said in the payments arena, FinTechs were the most likely to benefit from the implementation of PSD2.

There are countless other services FinTech companies could provide if they had access to customer transaction information. Currently, most banks cooperate with data requests, but they can be slow to respond or sometimes block them entirely. PSD2 will make it compulsory to both share the data and build systems capable of making this trade real-time. A massive win for consumers and businesses.

So When Will PSD2 Come to the US?

There’s no timeline right now, but there are several factors that could compel this directive to happen in the US sooner than later: requirement of screen scraping companies, FinTechs and FIs to release known data breaches; a regulatory push; another Equifax breach; a consumer-driven movement; or even FIs finally having good personal finance management capabilities.

Smart companies will start preparing so the minute we have our own Open Banking, they’re ready. Or better yet, start acting like PSD2 is already here. That means:

  • Building and opening up APIs to allow your customers to have control
  • Thinking about how you can innovate once restrictions are lifted
  • Understanding the control APIs provide for consumers and why this is a benefit
  • Learning how Open Banking can save you and your customers both time and money   

Creating more transparency and providing consumers with more control over who can access their data is a great thing for investors and an even better opportunity for innovation. How will you capitalize?  

 


1 McKinsey Global Payments Practice PSD2 Survey 2017

Your Data: Open for Business

Giving Control

Despite all the talk about big brother-like tactics, Twitter, LinkedIn, and Facebook (the Cambridge Analytica scandal, notwithstanding—but we’ll get to that in a bit) actually provide their users with a significant amount of control. Users can set their privacy and access settings for data downloads, block people, enable and disable logins, as well as receive alerts when they log in from other devices.

Taking Control

Considering how much personal consumer information they have, financial institutions have nothing comparable. In fact, they’re being screen-scraped by everyone from Mint to their own credit card marketing teams. And what’s worse, users may or may not know this. There’s no warning message or communication from the banks to their customers and if there is something, it’s probably buried in the Terms of Service of the scraper itself. Banks have no visibility into the data sharing practices or downstream uses and they have zero ability to turn-off these authentications on the banks’ site.

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So while you can choose to block a high school sweetheart or de-link your Facebook account from Tinder, once you set up an auto-payment with Stash to Bank of America, BofA has no control on where the data is going, how the data is used or when the data is accessed. It’s a lose-lose for the banks and consumers.

Open Banking

APIs are the only way to address the issue. The US is already behind Europe’s PSD2 (Second Payment Services Directive) Initiative which creates Open Banking, allowing brokers to open up data via API, providing a secure and compliant means for data transfer. This change provides greater control and limits the potential misuse of screen-scraped data. That’s why the emphasis on control and compliant access is a foundational principle of TradeIt’s platform, providing connectivity to brokers and financial institutions.

After what recently came out with regards to Facebook and Cambridge Analytica, 50 million people just got a big wake-up call when it comes to how their information is being used and disseminated. It’s likely only a matter of time before Open Banking comes to our friendly shores and once it does, everyone’s going to have to play nice in the banking sandbox.

Where’s Jamie Dimon when we need him?

Before this happens, the smart US financial institutions will need to build the APIs and control centers and start educating consumers on the risks associated with scraping and gaining control of their data. In fact, some, like Fidelity, are already doing that. Their new Fidelity AccessSM product allows consumers to see which third parties the consumer has permitted to access their data. Consumers can even go one step further to disable a token that’s in place, thereby removing the connectivity and the third party’s access to the investor’s data.

fidelity_access.png

Under Lock and Key

Privacy and controlled access are a mantra for Financial Institutions and people expect security, especially with the increasing numbers of hacks and data breaches. Now more than ever, providing users with control over who has access to their data is vital. Financial Institutions need to jump on the bandwagon with features that control their customers’ data. And FinTechs who partner with them need to push for APIs with secure and compliant access that allows customers to control that data. Open Banking should spur innovation, not deter it, but it needs to be done with security and compliance at the forefront. After all, they are the tenets of our industry.  

Blockchain’s Impact on the Finance Industry, Part 3

This is part 3 of our multi-part series on the blockchain. In parts 1 and 2 we talked about the specific effects of blockchain and cryptocurrency on the finance industry as well as how it will impact asset management and investing. Today we are diving into payments and banking.

You Get a Currency and You Get a Currency

While many banks are skeptical of bitcoin, none are skeptical of blockchain. But the marriage of the two is where it gets dicey. Because while central banks are looking into issuing digital currency, the biggest banks think the technology isn’t evolved enough to handle the world’s biggest payment systems.

Case in point: while Bank of America won’t allow their customers to trade bitcoin futures, the company itself has received at least 43 patents for Blockchain, the most of any other payment firm. Why? Because the slow processing of cross-border payments is one of the areas most commonly identified as ripe for blockchain-based innovation. And everyone wants to jump on the bandwagon.

“…in a world where you can stream video from the space station, but you can’t move your own money from point A to point B…how do we take advantage of technology available today to dramatically accelerate the nature of how transactions and payments happen?” – Brad Garlinghouse, CEO, Ripple

Right now capital is sitting in pre-funded accounts all around the world. When you decide to work with someone, you transfer your currency and they transfer theirs. But what if you didn’t have to pre-fund those accounts? Ripple wants to disrupt this model with sub second cross-border payments and automated best pricing from its network. Since Ripple payments are nearly instant, their model removes credit and liquidity risk from the process, thus lowering bank (and societal) costs considerably.

Ripple sees an opportunity to make payments faster and cheaper by connecting different ledgers and thereby creating a universal protocol and solving the multi-trillion liquidity problem. And they’re not alone.

Feeling the Need for Speed

Payment providers getting into the blockchain space have the distinct benefit of doing the fund transfers so they can funnel users’ funds into purchases of the underlying currencies or to accounts at exchanges. This allows for significantly lower settlement time and lower costs for both providers, thereby lowering costs for the end user.

Mastercard is testing the technology to facilitate payments between businesses.

But, it’s not just about sending cryptocurrency payments. IBM is looking into platforms that allow blockchain payments of mainstream fiat currencies instantly, cutting down on the time it takes to set up and send wire transfers. And making it cheaper.

And IBM has started numerous pilots in this area. From their collaboration with startup Stellar, which uses blockchain technology to connect flat currencies to enable instant international transfers, to New Zealand-based payments company, KlickEx, they are hard on the heels of several blockchain endeavors.

What’s Next for Blockchain?
As we wrap up this series, one thing is for sure, Blockchain is going to have a huge impact on Fintech and that impact will likely change almost daily as the technology develops and gets more widely adopted. According to Goldman Sachs research, companies that switch to digital could see $57B in net cost savings globally each year. In other words, the financial profit and time-saving applications are enough of a game-changer to make all this fluctuation in the space worth it in the long run.

Blockchain’s Impact on the Finance Industry, Part 2

This is part 2 of our multi-part series on blockchain. Catch up on part 1 here.

A lot of industries and areas are being disrupted by blockchain technology. We took a deeper dive to see how the new technology specifically affects Asset Management & Investing.

Mo’ Money, Mo’ Margins

Blockchain’s effect on asset management and investing firms will be significant in terms of cost reduction and improved margins. According to Accenture, the new technology could save the banks up to $12B every year. This “provides a rare concrete estimate of blockchain’s potential savings.” Because blockchain data is essentially tamper-proof, it simplifies the supply chain process, removing the need for reconciliation and potentially making it easier for auditing. Additionally, by removing the ‘middle-man’, compliance costs could be reduced by up to 50%. Blockchain-based solutions can streamline processes and cut costs by greatly improving upon the traditionally fragmented data quality most bank database systems currently use.

“The technology represents a potentially important breakthrough at a time when leading investment banks are looking at myriad ways to rebuild their returns on equity.” Chris Blain, Partner,  McLagan

Follow the Money

Because there is so much money to potentially be saved in the long-run, investment in blockchain technology is soaring. An estimated $75 million was invested in blockchain efforts specific to capital markets in 2015, up from $30 million in 2014. By 2019, that figure is expected to reach a whopping $400 million.

This list might be endless, but with what we know now, blockchain can be used to generate savings by:

The bottom line for all of this is the huge potential of significant cost savings, faster transactions, and more accurate data and reporting.

As we stated in Part 1 of this series, there are many unknowns and it’s early days for this evolving technology. As we dig into the asset management use case, we see that the potential cost savings are significant. But, how we get there and what new solutions might drive us there are still unclear. Stay tuned as we share use case scenarios for payments and banking in our next post in this series.

Blockchain’s Impact on the Finance Industry, Part 1

This is part 1 of our multi-part series on Digital Assets and Blockchain, and what these could mean for the finance industry.

It seems like you can’t take one step these days without bumping into someone talking about cryptocurrencies. But for all this talk, the average investor probably doesn’t understand the underlying tech behind it — which is the real value add — the blockchain.

Developed in 2009 as the technology behind cryptocurrency, blockchain is a vast, globally distributed ledger capable of recording anything of value. Assets can be moved and stored privately, securely and from peer to peer. For the first time in human history, two or more parties can forge agreements and make transactions without relying on intermediaries to verify their identities or perform the critical business tasks that are foundational to all forms of commerce.

So let’s ask ourselves, How will blockchain affect the finance industry? There are a lot of unknowns, both potentially negative and positive. Let’s start with the potential positives:

Fees

It’s estimated that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications. By reducing transaction costs and essentially cutting out the middleman, blockchain offers an efficiency that cuts through costly financial ‘red tape’. And with shorter clearance or settlement times, reduced back office and compliance costs, companies could also see similar savings as well as risk reduction.

Streamlined Processes

A large majority of financial securities exist today purely electronically and are managed centrally through trusted third parties, incurring considerable operating costs. Blockchain supports the validation and execution of transactions in near real time. This means it can be used to:

  • Remove friction from the client onboarding process
  • Streamline management of model portfolios
  • Speed the clearing and settlement of trades
  • Ease compliance burdens

Data Integrity of the Audit Trail

Like most forms of technology, blockchain in accounting and audit greatly reduces the potential for errors when reconciling complex and disparate information from multiple sources. One reason is you can’t alter a record once it’s been committed under blockchain, even if you own the record. And because every transaction is recorded and verified, the integrity of the transaction is guaranteed. Plus with the advent of smart contracts, trade is enabled with fewer barriers and protected via the digital wallets on either side of the transaction.

But with any new technology there are always potential negatives or concerns:

Adoption

In June, IBM was selected to build a blockchain-based international trading system for seven of the world’s biggest banks, including Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit. And, Microsoft and Bank of America Merrill Lynch have teamed up on a new project using blockchain in trade finance, aiming to create a framework that could eventually be sold to other businesses. However, just because companies want to start implementing it, doesn’t mean your customers are going to jump on board, especially when it concerns their money.

Regulation

While Blockchain is tantalizing to FinTech, with nearly all blockchain-based proofs of concept developed by banks having been undertaken in conjunction with fintech partners, new territory could mean the wild wild west when it comes to oversight.

“Blockchain and cryptocurrencies aren’t regulated as a technology generally speaking. It depends on the application. So, whatever they’re used for, it’ll fall under the appropriate regulator — and sometimes the inappropriate regulator.” – Marco Santori, Cooley

Scalability

Like any endeavor, how you scale could mean the difference between profit and bankruptcy. Blockchain networks still aren’t capable of handling the high transaction volumes that could rival that of large industries and financial institutions. Without the appropriate scaling solutions, transaction costs would be too high and the wait times too long for viable adoption. For example, Bitcoin blockchains can only achieve 3-4 transactions per second compared to 56,000 for Visa’s VisaNet. Plus, when you add to this the fact that more than half of the world’s big corporations are considering blockchain and 2/3 of them expect the technology to be integrated into their systems by the end of 2018, proper scaling becomes even more vital.

The one thing we can be certain of about blockchain is that we don’t know what impact this technology will have and how many industries it will affect. Even with all the excitement surrounding it and its entrance into the mainstream, it’s still in the early days. Smart investors and tech titans will tread lightly and keep a watchful eye on this continually and quickly evolving space.

Stay tuned for the next post in this series on what blockchain and cryptocurrencies mean specifically for asset management and investing vs. payments and banking.