The Great Fintech Debate: Disruption Versus Evolution
By Igor Khmel -- Co-Founder and CEO at BankEx
The financial system is the core of our global ecosystem and has gained the trust of billions of people worldwide. While many see blockchain as the ultimate competitor of the banking system, both can certainly peacefully co-exist and even complement each other.
At its most basic level, the monetary system is built around the idea of storing and transferring value. Banks are not going to disappear; there are still high-level efficiencies and advantages to having banks aggregate stored value and deploy it at a targeted rate of return. For example, a bank can write thousands of mortgages and then securitize a portion of said mortgages; this is never going to be a process suitable for the crowdfunding model. Blockchain technology creates numerous benefits across industries and applications, especially in regard to value-transfer. Banks can realize extraordinary efficiencies, streamline their back-office functions and reduce risk in the process. Smart contracts introduce the added dynamic of constraints and conditional operations for transferring or storing value only when certain conditions have been met and verified. Blockchain reduces counterparty risk, increases liquidity, and connects people from all over the world. For the financial system, there are several obvious applications that will transform the system dramatically.
Smart Contracts: Operational Efficiency, Risk Mitigation, and Increased Liquidity
Banks have tremendously complex and inconsistent infrastructures for transferring the ownership of assets between entities. Any time humans are involved in verifying balances and moving money operational risk and the risk of fraud are heightened. Smart contracts on a blockchain mitigate operational and fraud risks entirely. Selling an equity security triggers a slow antiquated process of clearing and settling the trade. However, if the equity can be legally represented by a crypto-token on a blockchain the trade can be cleared and settled, legally changing ownership entirely, in a matter of hours with a full audit trail. The process of tokenizing assets also opens up new avenues for liquidity as less liquid assets can be tokenized and traded, used as collateral for loans, and shared among multiple owners.
Universal Global API for Decentralized Banking
Any bank that is more than 10 years old does not have external APIs. New product launch and integration can take months, and sometimes even years. It's expensive and poses a risk to the sustainability of the bank’s internal IT-systems. IT development typically requires formal committees and signatures to be collected and collaboration among different departments with conflicting interests.
That is why innovations that require middle layer or core IT-layer integrations are rare for banks. The current process allows for no more than 5-10 pilots per year with 1-3 of them being successful. Banks are slow and at risk of disruption under the current model. Rather than watch the industry leave them behind, banks can integrate blockchain API and use it to develop bank-as-a-service (“BaaS”) applications. Blockchain API solves the problem of trust and transparency, which often prevents interbank collaboration in the markets. The blockchain API and BaaS also serve to optimize time-to-market for new products and the costs of integration. Banks that have already adopted the BaaS model (such as Ukrainian Privatbank) decreased their time to launch for p2p crowdfunding from 3-6 months to 3-4 weeks. The whole core system was reduced from 200,000 lines of code to 10,000 lines of code with a more manageable and transparent process. These banks became similar to a smartphone operating system where clients can quickly download and start using new products in a safe trusted environment.
Banking for the Unbanked
Approximately 2 billion people globally have no access to banking or financial services, which is approximately 28 percent of the population of the planet. Imagine a woman in Madagascar who has an idea for a business and she needs a loan to buy inventory to be sold online, but she has no access to banking services where she lives. If she has a computer or a mobile phone it is possible for anyone to loan her Bitcoin or another cryptocurrency and there are suppliers who will accept these forms of payment so she can order her inventory. The lender (or crowd of lenders) earns a healthy return in interest, and the woman in the developing world has contributed to the economic development of her country and realized her ambitions. The reverse of this example is also made possible; local investors without access to banking or investment management services can deploy their capital globally investing in anything from start-ups to sovereign bonds administered via smart contract.
Cryptocurrencies Backed by Sovereign Governments
The advent of Bitcoin has driven some to hypothesize of a future with no government-backed currencies; this will never be fully realized. However, why should a government continue to invest in costly paper or coin money that can be counterfeited if they can issue a cryptocurrency? Estonia is already exploring the idea of issuing its own cryptocurrency. This is important because it combines the full-faith backing of a sovereign government and its resources with the technological advantages of blockchain. The financial system is heavily interconnected with and influenced by the governments of sovereign nations and the eventual adoption of cryptocurrencies will drive the direction of the industry.
In the most general sense, blockchain serves as a cryptographically secure, transparent and open record of transactions. So the entire current model for moving funds from one account or owner to another is outdated to the detriment of the banks themselves. The full potential of blockchain has yet to be imagined, and banks need to embrace these emerging technologies or risk losing their client-base to the early adopters. The fastest way for banks to achieve scalable and sustainable competitive advantages is to partner with fintech companies who have the expertise in blockchain and cryptographic applications.
Igor Khmel Co-Founder and CEO at BankEx
Igor Khmel is a fintech entrepreneur, with unparalleled experience in product development, operations and digital strategy implementation in corporate and innovative start-up environments.
Igor holds a number of degrees in physics, economics, and business, including an MBA from Stanford GSB. His professional track-record includes management consulting at McKinsey and Deloitte, and investment & trading at Citadel hedge fund. He has had significant exposure to fintech, building a number of startups in California. Igor founded Sberbank Lab, a fintech laboratory at the largest bank in Eastern Europe, which he left after three years to build his own fintech project ‒ BankEx.