In June Santander InnoVentures , the $100 million fintech venture capital fund of Santander Group, Oliver Wyman and Anthemis Group, published a paper titled "The Fintech 2.0 Paper: rebooting financial services ."
The paper, presented as "a call to action to banks, financial institutions and financial technology (fintech) businesses to work together to undertake a fundamental 'reboot' of the core processes, systems and infrastructure of the banking industry," played an important role in the ongoing convergence of blockchain technology of distributed ledgers and mainstream fintech.
In contrast to today's transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions. Distributed ledgers can be open, verifying anonymous actors in the network, or they can be closed and require actors in the network to be already identified - which seems to be the approach currently favored by most banks and mainstream financial institutions.
Closed "permissioned" blockchains, supported by Accenture and Digital Asset Holdings CEO Blythe Masters , and under development by giant Swiss bank UBS , Bitcoin exchange itBit and others, would offer the advantages of digital currencies - fast and cheap transactions permanently recorded in a shared distributed ledger - without the troublesome openness of the Bitcoin network where anyone can be a node on the network anonymously. Instead of anonymous miners, only banks and vetted financial operators would be allowed to validate transactions in permissioned blockchains.
The Fintech 2.0 paper acknowledges that Bitcoin represents the best existing example of a distributed ledger, and goes on to identify important advantages of distributed ledgers: near-real-time and irrevocable settlements, robust P2P (peer-to-peer) transactions verified by tamper-proof networks without central management cost overheads, and permanent records of all transactions that can be monitored and audited by all participants.
According to the paper, it's only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions.
The paper notes that international payments remain slow and expensive, and significant savings can be made by banks and end-users bypassing existing international payment networks, and suggests that distributed ledger technology could reduce banks' infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15 billion and $20 billion per annum by 2022.
This figure is derived by Oliver Wyman's analysis of remittance data from the World Bank, World Federation of Exchanges, Oxera and Financial Times, is too impressive to ignore, and now the major banks are "hopping on the blockchain bandwagon" as reported in November by Nasdaq.
"The research underpinning the paper has identified several markets with huge potential," said Emmet Rennick, head of innovation at Oliver Wyman. "In these areas banks can realize efficiencies, customers benefit from better services and [fintech startups] can grow their businesses."
According to Andrew Veitch, Director of Anthemis Group, "the greatest opportunity in the industry lies at the meeting point of large financial institutions and young, ambitious startups."
According to the paper, fintech 2.0 will offer substantial opportunities, such as streamlining the processes surrounding the creation of $25 trillion of new mortgages issued annually across the globe. Elsewhere, an estimated $4 billion is lost through inefficiency in global collateral management within the asset-leasing sector.
These are two of several opportunities identified in the paper, which also outlines opportunities for banking innovation based on the "Internet of Things" (IoT), smart data, distributed ledgers and frictionless processes beyond payments and consumer credit.
A problem identified by the paper is that financial technology developers and startups (fintechs) are still operating only at the edges of banking. To help engineer more fundamental improvements to the banking industry, they must now be invited inside, to contribute to reinventing core infrastructure and processes in the financial system.
According to the paper, such reinvention can only be brought forward by a collaborative endeavor of banks and fintechs working together as partners.
"Funds alone are not enough," said Mariano Belinky, managing principal of Santander InnoVentures. "To move to the next phase of evolution in financial services, banks need to invite fintechs to work within our industry, even inside our own businesses. Santander is committed to achieving innovation by partnering with fintech startups. That means investing in funding, but also giving access to our expertise, as well as utilizing our client base and our own innovation initiatives."
The message to banks and to fintechs is the same, concludes the paper. "If you can't beat them, you should join them to achieve Fintech 2.0."
Following the analysis and recommendations outlined in the paper, in November Santander InnoVentures, in collaboration with Onevest, a leader in the startup ecosystem, launched a Distributed Ledger Challenge to encourage and support early stage startups using distributed ledger technologies in the financial services industry.
The competition will take place in New York City at the end of January 2016.