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I was reading a lot about the blockchain technology and revolution (now days “disruption” is the right word to use it) it may bring in different domains particularly in Banking & Finance. I had idea about Bitcoin (Crypto Currency) but never paid attention to it, since it is without any regulatory framework or without any sovereign support. But in last few days, I have come across few news articles that Goldman Sachs, JP Morgan & few other leading financial institutions filing patents for different solutions with underlying blockchain technology (underlying technology to Bitcoin) and then, I decided to go deeper into it.
I found many articles explaining the blockchain technology or its theoretical use cases in the different areas. Hence, few articles related to working of blockchain technology were too much technical and other were too shallow (Only use cases). As a business consultant taking pride in simplifying the complex concept & presenting it to non-technical business stakeholders, I decided to connect all these dots & present it to reader in such a way that post reading, one should be able to understand the blockchain technology and its ecosystem in holistic manner.
Blockchain in simple terms: It is an emerging way for businesses, industries, and public organisations to almost instantaneously make and verify peer to peer transactions. It’s transparent, secure & fast because from start of the transaction to end of it, all involved authorised parties are verifying all earlier transactions (through complex algorithms) before saving it on their version of file. (It’s called “Distributed Ledger, more explanation is provided in due course). All these recorded transactions are open to public scrutiny, hence few possibilities of manipulation.
Imagine a scenario, where person buying a land or house doesn’t need to register it with “Government land record office”, when particular house is bought or sold, this digital transaction itself is the proof that can be archived in the database – “Distributed Ledger” of concern Government departments, mortgage banks etc. at same time. All these stakeholders will have single source of truth, updated with latest changes in the underlying Asset.
Little difficult – ok, let’s look at a current real life scenario of a fund transfer between two companies located in different countries. We will see changes in this typical “International Payment” process with the introduction of “Blockchain” technology. When we are going through the “Blockchain” based process, I hope many questions will start popping up to reader and I will try to address it in that context itself so that reader can really co-relate it.
Company “A” in USA wants to transfer funds to Company “B” in India. Normal process has two or three scenarios based on different permutation and combination. But to keep it simple, we will consider following one.
If concern banks of company “A” in USA and Company “B” in India who wanted to do transaction is NOT part of same “clearing house”
e.g. in USA its Clearing House Inter-bank Payments System (CHIPS). If “bank AA” and “Bank BB” of “Company A” and “Company B” respectively are not part of CHIPS then process of fund transfer is as follows,
- “Company A” in USA initiate fund transfer request with its “bank AA”.
- “Bank AA” looks for the correspondent “Bank AAA” which is member of clearing house, and then transfers funds through SWIFT to “Bank AAA”.
- Correspondent “Bank AA” will send fund transfer command to clearing house for transferring it to “bank BBB” in Japan which is correspondent bank of “bank BB”. (Of company B).
- Clearing house will make the necessary credit (in BBB record) and debit (in AAA’s record) as both are its member.
- Post receipt, “bank BBB” will transfer funds through SWIFT to “bank BB” and then “bank BB” will deposit it in company B’s account.
Every layer or party in this transaction adds time & commission, and ultimately customer pays for it.
New process with Block chain technology should be with following steps
- “Company A” in USA initiate fund transfer request with its “bank AA”.
- “Bank AA” directly executes fund transfer request to “bank BB” in Japan via the “Blockchain network” (We will be discussing this point in detail but actually this activity takes place automatically with some agreed protocols, algorithm between all participating institutions).
- “Bank BB” in Japan receives the fund and deposits it in the account of “Company B”
Process is simple, but above step-2 throws up many questions,
- How this block chain network works? Where is the centralised ledger managed by clearing house? (Note: People who don’t understand the ledger can consider it as “File” where different entries are made regarding transactions.)
- How “bank AA” can trust “bank BB” without any intermediary (Trusted third party – clearing house)? What are these nodes in the network?
- “Blockchain Network”, Is it Private network or Public network like Internet and who owns it?
Let’s take one by one and connect these dots to understand the complete Ecosystem of Blockchain.
Working of blockchain network:
If we see the normal process which is in practice today (Please check the fig: 1) with intermediary, primary function of intermediary (Clearing House) is bringing trust in the transaction. Centralised ledger lies with clearing house, it has both banks in its network and it’s responsible for settlement.
In case of block chain technology, its “distributed ledger” (Please check fig: 2) maintained by all stakeholders in the transaction. Every authorised party (Node in network) read and writes in their copy of ledger which is validated using some algorithm with other ledgers in the network following same protocol. Only validated transactions are stored in the ledger.In summary, a shared ledger contains the single record of all network transactions, and is replicated across all network members. Hence everyone involved have single source of truth in the form of distributed ledger which is updated with each transaction in the network.
Trust between two banks in absence of trusted third party – clearing house & Nodes in the network:
If we see the process in above Fig: 2, it seems to be very simple but to understand it in detail blockchain network should be explored in context of its different stakeholders.
- Nodes in the network & it’s functionality
- These nodes are responsible for the maintenance of the ledger and verification of transaction.
- Every node in the block chain network is maintaining its own copy of distributed ledger where entries are made for the credit and debit. Entries are maintained with correct order by following few algorithms which decides on the consensus mechanism & few other things.(These are technical details, but it’s necessary for security and validation of “Distributed Ledger”. It’s to avoid scenario where people are misusing the network by double spending. e.g. Mr. A has only 1 million Euro to spend but he is creating two transactions at fast pace and transferring more money to multiple parties than his actual account balance).
- Network participants representing the “Nodes in Network”
- These nodes can be different stakeholders in transactions e.g. participating banks, Government Agencies, manufacturing firms, securities firms etc.
- If the blockchain network is private then company who owns or defines this network can decide which parties can become these nodes. Based on the requirement of the underlying asset e.g. Money, Shares or Piece of Land, involved parties can agree on the smart contracts and responsibilities of different nodes. Also all stakeholder companies can decide about the remuneration of nodes. If blockchain network is part of big organisation & developed for its internal transactions then these nodes are more doing the role of maintaining the distributed ledger.
- If the blockchain network is public like underlying network of “Bitcoin” then technically any computer (owned by anyone) can be connected with required hardware & software to perform above mentioned duties of node. Generally these are called bitcoin miners in that ecosystem. (Bitcoin startups). In public blockchain network these nodes will be paid for their contribution and this is equivalent of processing fee in any transaction.
- Blockchain service suits and platform providers: These are also emerging as very important stakeholder in blockchain technology and these companies are offering Blockchain technology as service. Hence many corporations who don’t want to develop their own network or invest in technology can use these suits. Few leading providers are,
The important point which I would like to make about “Distributed Ledger and Blockchain” is they are NOT “one-size-fits-all” solution. Based on the requirements, approach should be decided regarding type of blockchain network, different stakeholders & their role, protocol to be followed etc.
It all started with “Bitcoin”(crypto currency – no physical existence but piece of data in block chain), but it’s underlying technology – “Blockchain” found applications in multiple domain and now large financials companies wants to cash on it. Blockchain is going to reduce the cost and complexity of cross-enterprise business processes. Its distributed ledger makes it easier to create cost-efficient business networks, where virtually anything of value (any Asset like Currency, Document & Financial securities etc.) can be tracked and traded, without a centralised point of control. Blockchain is already showing great promise across a broad range of business applications. E.g.
- International Payment: It can help in addressing current problem of the correspondent banking system by allowing peer to peer transactions.
- International Trade Finance: In areas of “Asset Tracking”, “Smart Contracts” etc. where the challenges are manifold particularly trust factor and solvency of the trading partner.
- Over the Counter (OTC) market infrastructure: OTC trading is major business area of investment banking departments and involves the trade of all kind of financial products. E.g. Blockchain networks allow securities trades to be settled in minutes, rather than days.
There is no doubt that blockchain will usher in huge benefits to banks and financial institution, but apart from technological requirements there are certain points which are still to be resolved for commercially rolling out these use cases. Like, Lack of Legal framework for the insolvency of the block chain participants, liability for enforcing anti-money laundering (AML) standards & managing overlapping jurisdictions.
No doubt we are on cusp of disruption in banking & finance processes but we still have some time to catch up before ship leaves the shore.
Over the Top (OTT) players, Threat or opportunity to reinvent & transform traditional business models of Telecom and Banking companies?
The secular shift in technology, mobility, social computing and analytics have led to changing consumer behaviour. Some companies have understood it, acted on it and in due course created huge value for their shareholders. Most important point is when these companies are creating values for their shareholders; they are disrupting the existing traditional business models.
Beauty of their business models are being “Asset Light”, they have not invested in the Telecom Network, Banking System. They don’t have pressure of capital expenditure on Network; Non-Performing Assets (NPA’s) and to some extent about government regulations and still on riding over the top (OTT) of these underlying businesses they have come up with unique products and services with highly personalized customer experience at very attractive price points.
Long time, I have been thinking of writing my views on the impact of over the top (OTT) player’s entry and their impact on traditional business models. I have chosen two domains in my circle of competence for the initial analysis, one is obviously my favourite “Telecom” and other is banking. Apart from their relevance to economy, there are many similarities between these domains in terms of operations (B2B – Wholesale, B2C – Retail), their convergence for end users in day today life (e-commerce), CRM, Campaigns etc. and particularly both domains are impacted by the OTT. They are facing similar challenges posed by new breeds of OTT players on their business models.
Instead of writing my views at length, I will try to put it in terms of question and answers so that it would be easy to contextualize & keeping focus on discussion points. Also later in next posts, I can take up any particular point for further detailing. Overall theme would be around OTT players, their impact on the Banking and Telecom and high level options to counter these threats.
What are the over the top (OTT) players and what kinds of challenges they are posing to Banking and Telecom Companies?
There are too many details available on internet about the OTT companies; hence I would like to highlight their product, services in context of our topic.
Over the top are the companies who have not created & invested in core operations of banking or telecom industry but they are riding “over the top” of the banking or telecom system. Customers, the payment platform is of banks (in case of banking) & wire-line, wireless Network is of communication service providers (In case of Telecom). All these OTT players have created is application using these network and information to provide convenience to end customer at attractive price point. These unique solutions address particular challenge & offer convenience to customer in their day today life.
Few OTT companies in banking are,
- Apple pay – provide convenient payment on e-commerce
- Ali pay, Paypal – Mobile to Mobile payments substituting cash
Few OTT companies in Telecom are,
- WhatsApp, Skype & many other VOIP (Voice over Internet protocol) messaging companies – Voice calls & messaging over IP (using data services)
Others are not specifically Telecom OTT’s but their services impact the telecom companies in terms of revenue.
- Netflix, YouTube etc. – Video content providers
- Facebook – Social site
- Tweeter – Micro blogging site
Challenges posed by these OTT players in Telecom & Banking
- VOIP services are potential threat to mobile operator’s voice and text messaging revenue. (I will not go in details of losses, approx. figures etc. as those estimates are easily available on internet).
- Netflix and other content providers cannibalizing telecom operator’s revenue from IPTV/Cable Service.
- These bandwidth hungry applications (video content providers), putting pressure on the Capex (Capital Expenditure) requirement of Telecom companies in terms of more investment in network capacity.
- OTT players challenge banks dominant position in “Retail payment business” area. Payment technologies are evolving at an unprecedented speed, contact less cards, on-line payments, mobile payment are all becoming more prevalent.
In my view, for Banking and Telecom, currently challenge is not about surviving; it is rather about thriving and maintaining the profit margins. but if not addressed now with correct strategy then it will become future challenge.
At-least in telecom, I partially agree that heavy consumers of video content can put a strain on the operator’s P&L statement since network resources can be disproportionally consumed by video streaming without a tangible revenue offset. So, unless mobile operators embrace and monetize OTT mobile video, it will remain a threat to their current business models. However, mobile video & IP chat services are few most compelling reasons for users to adopt smartphones and upgrade to high-performance service networks like 3G or 4G (LTE). So it’s also true that services and products offered by OTT providers are creating demand for Internet.
It remains to analyse the costing of data to telecom operator (Capex – rolling out new network infrastructure, buying spectrum etc. & Opex – Network operations, spectrum fee to government, IT operations etc.) required to provide high bandwidth to broadband / mobile internet customer holistically. In my view, no telecom providers would go in loss and provide data services to its customers. Hence, the point here is telecom operators trying to get additional high margin revenue which is currently enjoyed by the OTT. OTT’s are profiting with their unique services riding on telecom network without investing in network, spectrum (Capex) & associated headache of operations.
Getting into OTT business model is not that easy for telecom companies, and needs complete new strategy and may be DNA change of traditional organization. This discussion/answer leads to second question,
What are the options to Telecom service providers and banks to counter the OTT?
Without any specific business strategy, following crowd will not yield required results. All service providers’ needs to analyze their own strengths, weakness in context of their own organization and also in the market they operate. Broadly, I can think of three options for Telecom companies,
- Utility player: become utility player by providing the voice & internet services to their customers – Low margin business.
- Utility player with differentiation: Invest in network and become the telecom operator with best in class network service – with better network quality, operator can demand premium from end customer & (in future) OTT player also.
- Full-fledged communication service provider with presence across value chain: Invest in complete ecosystem (Content, Apps – value added services & Network) and being differentiator. (Investment in Big data, Analytics and DNA change of organization is required here).
Second option provides the opportunity to monetize the network (M2M services) and provide few value added services without being presence in complete eco-system.
All these three options can become my next topic of discussions 🙂
In my view, solution for banks technically would be easy but execution needs changing the culture of the banking organization and it’s little more difficult as compare to telecom companies where employees are traditionally more adaptive to new technologies.
Currently banks have competition from OTT in payment solutions area and immediate impact is on that business line. Share of payment solution is small compare to other non-interest income & interest income, but its importance in terms convenience, future growth (e-commerce) is huge. Also applying cost benefits of technology in other areas will change the cost of doing business for banks & real benefit lies in applying it to other areas.
Required ingredients to have this digital shift is already with leading banks like,
- Advanced technology in the form of data warehouse and
- Analytics leading to a better understanding of retail consumer behaviour.
All that is required is to create “Apps” to stitch together the sales, credit and operating processes thereby creating a better customer experience. If cultural shift within organization is little slow then options should be explored to collaborate with leading OTT players, Payment solution companies or telecom companies, but ultimately all banks would need “Digital Strategy” & Execution of it.
Over the top (OTT), Telecom or Banking, The future seems to be very interesting for all of these companies. I’m very curious to see how it unfolds.