Digital transformation is critical for financial services
The problems that digital transformation solved for individual banks and other financial services firms 10 to 20 years ago could help entire markets today.
There’s a dirty secret at the heart of the enterprise software industry: we never finished what we started. We digitised and transformed the operations of the world’s largest firms. But outside industry-level achievements such as SWIFT and CLS, the markets in which today’s firms operate look the same today as they did fifty years ago. Digitising entire markets is the new opportunity and enterprise blockchain is the key to delivering on this.
The emergence of ‘middleware’ back in the late 90s and early 2000s offers a perfect example of this. Middleware grew in popularity as institutions came to the realisation that they had a growing issue: they’d built or installed dozens or even hundreds of applications on which they ran their businesses, yet none of these systems talked to each other properly.
Enterprise IT systems within businesses were completely out of sync, requiring armies of people to re-key information left, right and centre. The resulting mess came at a colossal expense to banks and other financial services institutions across the globe.
The solution to this problem began modestly, with the introduction of software that literally sat in the middle of applications and connected them to each other. If a relevant action happened in one application, it would be forwarded to the other one. These early products were essentially 'email for machines' and spawned the birth of a new industry: ‘enterprise middleware’.
Over time, these products evolved so that firms were able to identify all the routine processes that took place across their business and automate them as much as possible, ensuring data flowed where it should and when it should.
While the term ‘middleware’ is sometimes used disparagingly today, the arc of progress from systems that could barely talk to each other to systems that were orchestrated to achieve an optimised business outcome is astounding as we look back on the accumulated achievements that were delivered. Ultimately, however, this evolution was happening only at the level of the individual firm.
Few companies back then even thought about optimising the markets in which they operated. How could they have? Little of the software was designed to do anything other than join together systems deployed in the same IT estate.
Fast forward to today, however, and financial services firms are at the end of their middleware-focused optimisation journeys and are embarking on the next, as they migrate operations to the cloud. But the question of inefficiencies between firms remains open. Take the most trivial example in payments:
“I just wired you the funds, did you get them?”
“No, I can’t see them. Which account did you send them to? Which reference did you use? Can you ask your bank to chase?”
How can we be almost a fifth of the way through the 21st century and still accept lost payments as a daily occurrence? How is it possible that if one party agrees with another that it owes it money, such a mess can be created when they try to pay each other?
The intra-firm problems that led to the emergence of middleware two decades ago are precisely the ones that are still making inter-firm business so inefficient.
The journey individual firms went on, from messaging to integration, orchestration and process optimisation, is now a journey that entire financial markets can go on. The problems that couldn’t be solved back then without changing the structure of the market through the introduction of a new central player are now ones we are fully capable of solving
But what has changed? The simplistic answer is “enterprise blockchain.” While accurate on the surface, this answer is lazy because not all enterprise blockchains have been designed for the same purpose, and the enabling technology and environment is not all-new – for example the maturation of crypto techniques, consensus algorithms and the emergence of industry consortia.
But the explosion of interest in blockchain technology was a catalyst that made the financial services industry – and the technology firms serving it – realise that maybe it could move to common data processing and not just data sharing at the level of markets and, in so doing, utterly transform them for the better.
Moving from a world where everybody builds and runs their own distinct applications, which are endlessly out of sync, to one where everybody is using a shared market-level digital application, dramatically drives down deviations and errors.
And this can be achieved by applying the key insights from the blockchain revolution to ensure the facts that both parties to a transaction care about – such as who can update which records, when and in what ways – are documented in deterministically executed code in a way that eliminates critical sources of error or opportunities for inconsistency.
By identifying and ruthlessly eliminating all the places where disagreements, ambiguity and doubt can enter the process, it allows the rest of the process to be executed like a train on rail tracks. And just like trains, if two of them start in the same place and follow the same track, they’ll end up in the same place at the end. While this may seem trivial, it can radically transform processes that financial institutions rely on, from payments to trade finance, syndicated lending, identity management and much more.
Enterprise blockchain platforms achieve some of their magic because they make seemingly trivial improvements to inter-firm business processes and, in so doing, dramatically drive up levels of automation and consensus. These platforms will sit at the heart of the financial markets of tomorrow, providing the ultimate cross-industry middleware.
If the first fifty years of financial technology were focused on optimising the operations of individual firms, the future will undoubtedly be about digitising entire markets. This is the ultimate promise of enterprise blockchain technology for financial services and beyond.
This article was contributed by Richard Gendal Brown, CTO, R3
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Open Finance: The future of data sharing
Data: What is it good for?
Although most of us probably don’t consider it as such, data could be regarded as one of the most recyclable commodities on Earth. Every day, consumers produce it, companies collect it, extract the value, transform it into actionable insights, and then create new products and services for the market. From here the cycle continues, and the results it’s produced for financial service institutions (FSIs) so far have been favourable.
Data sharing can be best understood as a consent-based agreement by which privacy is waived in a limited capacity for commercial purposes. Customers gain products that have higher relevance to their lives while FSIs reap enhanced marketing and development opportunities. In Deloitte’s article ‘’, the overall FSI benefits of data sharing are summarised into three categories:
- Inbound data-sharing (acquiring data from third parties) = enriched decision-making.
- Outbound data-sharing (sharing owned data with third parties) = enabling companies to draw on capabilities otherwise undeveloped within their own organisation.
- Collaborative data-sharing (inbound and outbound sharing of similar forms of data) = allowing companies to create richer, larger and more comprehensive datasets than siloed efforts could achieve. This is particularly important as forming ‘data lakes’ becomes more popular.
And yet, despite the mutual beneficiality of data sharing, there still exist several potential drawbacks and aversions to overcome. For customers, there is a persistent reluctance to share sensitive data - found that approximately 44.3% of US fintech app users experienced some degree of discomfort, whether related to account balances, loan history or investment information. Worse, a conducted on behalf of IBM found that only 20% of respondents “completely trust” organisations to properly maintain their data. With incidents of compromised security involving major companies like Capital One and Microsoft still making headlines, this is, perhaps, not unsurprising.
For institutions: better decision-making, access to third-party capabilities, greater scale of data
For regulators: support for innovation and competition, enables effective system oversight
For customers: access to higher quality and more efficient products
For institutions: competition hindered by lack of secrecy, could breach privacy regulations, could potentially alienate customers by appearing ‘omniscient’
For regulators: possible breach of customer privacy
For customers: personal data could be mishandled or misused
(Above from World Economic Forum)
Data sharing is also not without risks for FSIs themselves; creating such a forthcoming environment could erode competitivity by handing too much information to rivals, complex and evolving privacy regulations like GDPR and PSD2 could be breached by unforeseen tech developments, or companies could simply alienate clients by appearing too omniscient for comfort.
Among VC firms and investors data sharing is an important decision-making component, particularly during early-stage investment. Michael Conn, Chairman, CEO, and Co-Chief Investment Officer at Zilliqa Capital, explains, “It is important that the target investment team be open and willing to share the data reflecting their performance to date, the market opportunity and any other metrics that would help demonstrate why they are a better investment than another in the same space.” However, at the same time, Conn clarifies that the value of data today can sometimes be overemphasized; for Zilliqa Capital, the quality of a potential investment’s team is often more of a determining factor. “The fact is that most, if not all businesses, will at some point be forced to pivot away from their initial plans - see Amazon. It is just not possible for data analytics, at least as of now, to prove itself superior to gut instinct when evaluating the quality of an investment target’s team.”
If not fully utilisable as a resource for decision-making, then, what’s needed is a re-evaluation of data sharing, both in terms of its place within modern finance and the methods by which its present shortcomings can be overcome. Open Finance and API (application programming interface) technology could represent such an opportunity.
Open Finance’s value proposition
“Open Finance is all about empowering customers,” explains Jack Wilson, Head of Policy and Regulatory Affairs at TrueLayer. “It gives customers the ability and the right to re-use their financial data in new and innovative ways. It does this by giving a role to third-party providers, who securely retrieve data and put it to work for the customer.” These actors can do so in a variety of ways, such as:
- Consolidating multiple held accounts into a unified view
- Facilitating electronic data transmission that eliminates the need for physical documents when applying for financial products
- Using account data as a form of identity verification
These capabilities are utilised in one of Open Finance’s most widely discussed aspects: Open Banking. Defined by as “a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace,” Open Banking allows for a more direct consumer-bank relationship. The APIs themselves can be of three distinct models: public, partner and internal, each of which has specific functions and benefits. Regarding the latter, these include overall cost reductions, increased operational efficiency, enhanced innovation through collaboration with developer communities, and greater security.
“Consumers are increasingly demanding financial data aggregation services through APIs because it makes personal financial management much easier,” says Thomas J. Curry, Co-Chair of the Banking and Financial Services group at Nutter and former US Comptroller of the Currency. “Banks and fintechs each want to be the primary portal for financial services and they are competing to keep or obtain the customer relationship.”
Public: APIs used by external parties to develop new apps and products. These often facilitate innovative results as a consequence of broader community engagement.
Partner: These APIs create a more integrated connection between business partners, suppliers, etc. They offer better security, lower operating costs, and enable API monetisation opportunities.
Internal: Only used by developers within a single enterprise, internal APIs offer cost reduction, better efficiency and greater security. However, they also lack the potential with regards to integration and innovation.
(Above from McKinsey & Co)
“Open Finance, which broadens out the types of accounts accessed, could offer yet more benefits for both customers and companies,” adds Wilson. He cites the following:
- Aggregated savings and investment data, bringing more holistic financial oversight to consumers.
- Granting access to data that can bring value-added services, such as financial advice, “robo-advice”, better ID verification, and KYC.
- Empowering third parties to carry out fund transfers between customer accounts (savings, ISAs, investments, etc) and initiate account switching.
Security: The elephant in the room
Carried out in its most ideal form, then, Open Finance’s benefits for both customers and companies makes it an attractive proposition. However, there remains what McKinsey calls the topic’s “elephant in the room”, security. Data sharing in any capacity should be a central concern, with each dataset’s value accorded an appropriate level of protection, and customers need to understand how and why some data is used. “[I]nformed consent requires understanding the implications of sharing before approving —no small feat when the reflexive clicking of ‘I Agree’ on an unread set of terms and conditions is standard,” said McKinsey in ‘Data sharing and open banking’. Curry believes that cybersecurity and the protection of data form the major concerns for fintechs and banks regarding APIs’ functionality. “[In the US] Section 1033 of the Dodd Frank Act makes it clear that consumers have a right to their financial information. Some progress has been made in developing voluntary standards for APIs but regulatory clarity is needed. The Biden CFPB (Consumer Financial Protection Bureau) will likely develop a more concrete regulatory framework for APIs.”
Therefore, it seems clear that, in addition to general clarity regarding data sharing policies, what customers really need are examples that demonstrate why APIs are beneficial and what Open Finance can do for them.
A recent between TrueLayer and UK digital bank Monzo provided one such demonstration. With customers using Open Finance as a payment method for online gambling, Monzo needed a solution to protect its at-risk customers by blocking transactions to certain gaming sites. TrueLayer was brought on board to implement an enhanced API capable of notifying the bank whenever a customer with gambling restrictions on their account attempted to pay via Open Finance. TS Anil, Monzo’s CEO, praised the API and stated that it was “simple to build, proven to work, and will help protect hundreds of thousands of people.” The finance industry’s accumulation of such examples will be pivotal in convincing consumers that data sharing can be responsible and useful for safeguarding them.
Data sharing through Open Finance is ultimately a path towards greater convenience, better products and services, and significantly cheaper operations for FSIs. Making sure that customers are aware of these benefits, concludes Wilson, will be the aim of the game. “At the very least, dealing with physical paperwork and documentation in financial transactions will become a thing of the past."