by Edwin Toh, Management Consultant at Pink Elephant
As Darwin’s Law of Evolution explains, “…all species of organisms arise and develop through the natural selection of small, inherited variations that increase the individual’s ability to compete, survive, and reproduce.” Such a theory is rightfully applicable to the modern world of finance and banking, that is undergoing rapid changes and transformations to ensure the survival of the traditional institutions that we have come to know so well, and that they must either adapt to the digital revolution or face the threat of extinction.
With the dawn of Industry 4.0 and digital technologies, blockchain, and new pricing models based on actual consumption levels, many new technological solutions and services are transforming the way people and organizations conduct payments across the world. Like a scene out of a sci-fi movie, one can now wave a smartwatch to pay for a Coca-Cola from a vending machine or for groceries in a checkout line. Some vacation resorts and cruises provide a wearable that functions as an all-in-one room key, credit card and more. But these are device or localized payment innovations.
The emerging Internet of Value, as some would call it, is the ability for value to be exchanged as easily as information. Just as speed and access to information on the Internet have expanded our knowledge, so will an Internet of Value bring down the cost of financial services, speed up money transfer, and deliver access to the farthest reaches of the world. This Internet of Value will effectively democratize finance to allow for more competition and products to (co-)exist, and perhaps even replace some of the financial exchanges today that could take weeks for fully settled funds to arrive.
No single organization can build the Internet of Value alone, and must build the collaborations and partnerships needed between many entities. One such company taking on this challenge is Ripple, who recently tied up with local Malaysian bank CIMB Group to enable instant cross border payments across ASEAN, adding to the growing payment network called RippleNet’s list of over 100+ financial institutions including the Japanese Government.
What’s the magic? How does Ripple do it? Answer: By using blockchain technology!
Created by a mysterious hacker known as Satoshi Nakamoto, the blockchain – the distributed ledger technology that created the Bitcoin virtual currency – has great potential to revolutionize many industries ranging from finance to tourism to food and entertainment. The blockchain distributes the validation and storage of transactions over many computers in a secure and public way, eliminating the need for a middleman. In doing so, it drastically reduces the time and cost to process a transaction to close to zero.
Consider stock trading. In a market where competitive advantage is measured in nanoseconds, trades can still take up to three days to settle. Blockchain-based systems could cut that to seconds or minutes. That’s especially attractive for complex trades such as derivatives, where market conditions can change before a trade is settled, creating substantial counterparty risk. “Through this initial application of blockchain technology, we begin a process that could revolutionize the core of capital markets infrastructure systems,” said Nasdaq CEO Bob Greifeld. “The implications for settlement and outdated administrative functions are profound.”
Another financial market ripe for disruption is foreign exchange and cross border remittance. Nearly $500 billion a year is transferred between countries, often by people working abroad that send money home to relatives. That process is slow and cumbersome, with high fees that take a painful bite out of hard-earned savings. A startup called Abra has created a mobile app that uses the blockchain to streamline the remittance process, allowing individuals to transfer money from one continent and currency to another instantaneously and without hefty fees.
Blockchain technology is still new and there are issues to be worked out – such as whether blockchain ledgers will scale without being overwhelmed. Until the fundamental issues and risks are better managed and understood, it is no wonder that The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is taking a more wait-and-see position, even after completing a proof-of-concept with 22 banks using the Hyperledger Fabric blockchain. Undeniably, blockchains and cryptocurrencies seems destined to be a part of our discussions moving forward and definitely something worth keeping a watchful eye on as we advance towards a new era of banking.