F for Financial Markets

Financial markets are ripe for innovation. While other sectors have ‘gone digital’, B2B financial markets are still highly complex and inefficient. Blockchain technology presents an innovative solution to many of today’s problems in the market and brings a new era of trust and transparency.

Today’s challenges

Financial markets encompass many different areas, ranging from asset management and trade finance to consumer and business banking, servicing institutional and individual clients. It is endless in variety and complexity.

This complexity was built one layer at a time over centuries: institutions were focused on developing services individually, adding on innovation only when necessary to specific areas. Services are siloed and departments often unable to operate or communicate with other parts of the business – miles away from the single view of the customer.

This causes several challenges: data and processes are often duplicated, prone to human error and costly to manage via various third parties and applications. Systems are frequently antiquated and siloed, having been updated only through bolt-on functions, while leaving a majority of processes with inefficiencies. This is why we see transactions taking days to clear and settle whilst a trade is conducted in nanoseconds. These intermediaries between counterparties add cost, time, and complexity; often with little perceived benefit.

The B2C side looks a little more forward-thinking. Neobanks, such as Revolut, Monzo and Starling, have challenged traditional players to focus more on the value for the end consumer and the user experience. However, in B2B markets the underlying infrastructure is still largely based on the same old systems, burdening particularly the post-trade space with inefficiencies.

One thing is certain: if financial markets were built from scratch today they would not look the same as they do today.

Innovation theatre

The good news is that financial institutions are not completely oblivious to the hurdles they are facing. Many players actively invest in research, innovation and digital transformation. However, we’re still waiting to see fundamental changes to the market infrastructure.

The problem with truly innovative technologies is that they also come with higher perceived risk. Decision-makers are often hesitant to commit to transformative projects without certainty of success. Misconceptions about the technology, vested interests and uncertainty around regulation also hinder innovation.

Nevertheless, most institutions don’t want to be left behind and establish innovation hubs to test new technologies in pilot projects and proof of concepts. If they deem to be successful the team gets the opportunity to find a department within the financial institution to roll out the solution.

However, this is often where the process stops. Departments can be reluctant to provide the funds, expertise or manpower to follow through on crossing the chasm into production. Often, once you have thoroughly derisked your approach to a new technology, it can hardly still be called ‘new’.

Blockchain in finance today

Despite some parties remaining sceptical, many financial market players have been looking at the possibilities of applying blockchain to their business for several years now. Research has been propelled by international networks which aim to redesign transaction models between organisations.

For example, the Interbank Information Network, led by JP Morgan, boosts an impressive collective of 320 banks, including Deutsche Bank and Santander. However, it is unclear how much progress banks or intra-bank organisations have made. While we can see many pilot programmes announced, there are few tangible results.

It is important to note that innovation with blockchain is no easy feat. The technology could effectively redesign transaction flows, which would mean that entire organisations could be transformed and processes changed. Innovation needs to be compliant with regulatory frameworks, or else trigger changes in legislation. There is a high cost associated with replacing existing technology. That is one reason emerging markets often leapfrog others. Lastly, many use cases require many participants to join a network in order to obtain the full advantages of a blockchain, requiring ‘mass adoption’.

How to innovate with blockchain

At Qadre, we work with both governments and financial institutions to explore the potential use cases of blockchain to streamline processes, lower costs and find new revenue streams. We see progress happening in the industry. The new generation of leaders in public and private spheres are open to change and innovation. As with the internet or social networks, we expect growth in adoption to pick up and become exponential once a repeatable blueprint is found for providing predictable value by exploiting blockchain as at technology.

There are two pieces of advice we can give to those looking into innovating with blockchain. First of all, commit to tangible research and development. Don’t look at innovation as a tick box exercise. Pick a specific problem you would like to solve in your organisation, and thoroughly evaluate each possible solution. Do not necessarily look at which technology you would like to use. Have an open mind and aim to solve a well-defined issue.

Secondly, get several key people involved from different departments. Get experts of different areas in the room together. Involving everyone will ensure that your solution is scrutinised from various angles.

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