Blockchain: Beware the Hype

Blockchain: Beware the Hype

At Celent, we just published a new research report with the same title as this blog – Blockchain: Beware the Hype. Why such a title? Isn't blockchain the coolest technology out there at the moment?

It is. At Celent, we firmly believe that blockchains and other shared ledger platforms will be a powerful catalyst for change in financial services and other industries for many years to come. There are some very promising use cases, particularly in cross-border payments, corporate banking, and capital markets, and even outside of financial services, in identity management, trade logistics, healthcare, and many other sectors. Even if “blockchain” ends up being a small component of the ultimate solutions, it facilitates new thinking that forces organisations to reimagine how they work, both internally and externally. And that can only be a good thing.

However, we do caution against succumbing to the hype, which is inevitable for any new exciting technologies. Blockchain hype is particularly acute, given the complexities of the underlying technologies. Nobody wants to be left behind when proclaiming the benefits of blockchain, but not everybody truly understands how those benefits can be achieved.

Luckily, the investment going into shared ledger technologies is resulting in a growing number of individuals and organisations lending their collective resources to explore deeply how financial services can benefit from these technologies. Their efforts are directed at exploring practical use cases (e.g. Everledger, Ripple, Shocard), developing new technology and tools (e.g. Ethereum, Intel, Multichain) and building out infrastructure for blockchain initiatives (e.g. IBM, Microsoft), with a number of firms engaged across the board. And the collaborative efforts such as the Hyperledger project or R3 are also bearing fruit – for example, R3 recently announced Corda, a new distributed ledger platform specifically designed for financial services.

We do think that is the way forward: thinking carefully about suitability of technology for the business problem at hand, and deconstructing blockchain technology to its fundamental components only to assemble the most attractive features in a way that makes sense for financial services. That is what will ultimately help us all move beyond the hype.

Celent research clients can access the full report here.

Top trends in corporate banking webinar

Top trends in corporate banking webinar

Please join me on Thursday, April 21st at noon EST for an overview of the 2016 edition of our Top Trends in Corporate Banking report, which was published in March.

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Corporate banks continue to place an enormous focus on investing in digital channels to meet the ever-increasing demands of clients for enhanced tools while boosting security and fraud prevention. Despite this investment, corporate banking has lagged in terms of adoption of innovative technologies. To improve that performance, corporate banking lines of business are undertaking a broad set of initiatives to overcome the inertia that has left clients behind in terms of innovation. Among the top trends, we will examine the opportunities in trade finance and customer onboarding for improving efficiency and enhancing client satisfaction.  Other top trends include fintech partnerships, distributed ledger technology and open APIs and adapting liquidity management strategies.  I look forward to having you join us on Thursday! 

Click here to register

 

 

 

Congratulations to Celent Model Bank 2016 Winners!

Congratulations to Celent Model Bank 2016 Winners!

Last week many of us at Celent were in New York attending our Innovation and Insight Day on April 13th. It is Celent's flagship event during which we announce Model Bank and Model Insurer winners and celebrate their achievements. In addition, the program includes keynote speeches from industry leaders and Celent analysts, plenty of opportunities to network with peers, and even to experience some of the latest technologies first hand, courtesy of our sponsors.

The theme of this year's event was "Financial Services Reborn", and the Museum of American Finance on Wall Street provided an inspiring setting to celebrate innovation in financial services. Craig Weber, Celent CEO, kicked off the proceedings drawing insightful parallels between the battle of Alamo and the future of financial services. It must have been the first time in Craig's career that he had to come up on stage to the soundtrack of hip hop music, an extract from the Broadway musical "Hamilton", but it set the tone for the rest of the day – to expect the unexpected and to be open to new ideas.

Both of our guest speakers – Nadeem Shaikh, Co-Founder and CEO of Anthemis Group, and Leanne Kemp, Founder and CEO of Everledger – thrilled the audience and opened everyone's eyes to the opportunities presented by Fintech and Blockchain respectively, while our colleague Will Trout spoke eloquently about consumer-led convergence. A big 'thank you' to all the speakers, as well as the sponsors supporting the event!

The rest of the day was all about celebrating the achievements of Model Bank and Model Insurance award winners. As many of this blog's readers know, the vision for Celent’s Model Bank research, now in its ninth year, is to spotlight effective uses of technology in banking. This year we received a record number of submissions – well over 100 – that came from all over the world; the nominations were spread equally between North America, EMEA and APAC. The award winners come from four continents and nine countries and range from credit unions and microfinance institutions to the world's largest banks.

Celent Model Bank 2016 winners are:

  Model Bank 2016 Categories

  Award Winners

  1. Digital Banking Transformation

  Citizens Bank, US

  DenizBank, Turkey

  Garanti Bank, Turkey

  Santander, US

  2. Omnichannel Banking

  BECU, US

  Beyond Bank, Australia

  Standard Chartered Bank, Korea

  3. Digital Payments and Cards

  Bank of America Merrill Lynch, US

  RBC, Canada

  4. Corporate Payments and Infrastructure Modernization

  Bank of China, China

  CBW Bank, US

  5. Cash Management and Trade Finance

  CIBC, Canada

  HBL (Habib Bank), Pakistan

  6. Security, Fraud, and Risk Management

  Alfa-Bank, Russia

  USAA, US

  7. Legacy Transformation

  Sberbank, Russia

  Umpqua Bank, US

  Vietnam Bank For Social Policies, Vietnam

  Model Bank of the Year

  Eastern Bank, US

As always, we published a series of reports with detailed case studies of all winning initiatives. Celent research subscription clients can access the Model Bank of the Year and individual category reports via our website.

This year we also introduced a new award, Model Bank Vendor. We wanted to acknowledge the vendor role in helping multiple clients achieve technology or implementation excellence, one of our judging criteria, and to extend our appreciation to the entire vendor community, which is instrumental in the ongoing success of the Model Bank program. Celent recognized two companies as Model Bank Vendors for 2016:

  • EdgeVerve Systems
  • Nucleus Software

Congratulations to all our award winners! We are grateful to have been exposed to so many extraordinary initiatives and the talented individuals responsible for their success. We look forward to continuing with the Model Bank program next year to identify and award the most impressive banking technology initiatives from around the world, and will begin accepting nominations again in September – stay tuned!

 

Cardless ATMs and disappointing mobile wallet adoption

Cardless ATMs and disappointing mobile wallet adoption
While I’m an outspoken advocate of financial services technology, I have been a bit of a curmudgeon when it comes to mobile wallets. My skeptical attitude reached an apex when I dropped my smartphone in a glass of merlot several years ago and hasn’t recovered. Had my smartphone been my mobile wallet, embarrassment would have been the least of my problems. Said simply, I just don’t see a compelling use-case for most consumers. Until they arise, I expect industry press to continue to publish stories of lackluster adoption. There have been many. One in particular caught my eye. A recent article in Digital Transactions makes my point in its opening statement, “The introduction of cardless ATMs, which rely on a financial institution’s mobile wallet instead of a debit card to make an ATM withdrawal, could help further the adoption of mobile wallets and mobile payments.” Said another way, if the industry offers consumers enough reasons to configure and use a mobile wallet, adoption may eventually result. This doesn’t sound remotely compelling to me. I can hear the rebuttals now. In defense of Bank of America, BMO Harris, Chase, Peoples Bank and other institutions that have invested in cardless ATM access, physical debit card usage at the ATM could pose an annoyance to mobile wallet adopters, few that they are. With ATM usage roughly twice the customer penetration of mobile banking (below), the last thing banks need is a reason for customers to be dissatisfied with their ATM experience. In my opinion, that’s a more compelling rational for investment than some vein attempt to bolster mobile wallet adoption.

US P12M Channel Usage 2014Source: Consumers and Mobile Financial Services 2015, U.S. Federal Reserve, March 2015

In the article, one banker summed up the challenge associated with mobile cash access this way: “We found the biggest struggle is explaining what it is and the benefit it offers.” If the biggest struggle is communicating a compelling value proposition, then maybe the value proposition isn’t compelling. I don’t think it is – at least not yet. Please don’t misunderstand, I think cardless cash ATM access is a reasonable initiative, but not for the reason stated in the article. I applaud efforts to better integrate retail delivery channels, and ATM cash access is a baby step in that direction. Combine cardless ATM access with other capabilities such as broader P2P payment mechanisms, geo-location and a merchant-funded rewards program, and mobile wallets begin to look compelling. Until then, banks have a bevy of higher priority initiatives to deliver in my opinion. But, even if my bank enabled cardless cash access, I still wouldn’t abandon my physical wallet. In the event of another tragic merlot mishap, traditional ATM cash access might be a real life-saver.

The paradox of digital payments

The paradox of digital payments
At Celent we run a couple of Banking research panels – one on Branch transformation and another on Digital – where any US-based bank or credit union can participate in surveys we administer on a regular basis. Last week we published the report with findings of our survey we conducted in November 2015 on Digital Payments. 42 institutions participated and answered our questions on:
  • How important are digital payments in the context of other priorities?
  • What has been the industry’s experience with digital payments?
  • Where is the industry in its EMV migration journey?
The survey results highlighted the paradox of digital payments:
  • Nearly everyone thinks that digital payments are important, but only 13% view it as strategic priority, aim to lead and invest accordingly. 63% aim to be fast followers and another 23% only invest to stay on par with peers.
  • 71% of participants agree that financial institutions (FIs) should offer branded digital payments (e.g. own digital wallet), but they are more likely to participate in third party wallets, such as Apple Pay, Android Pay and others, than to invest into their own HCE wallets – 46% have no plans for HCE.
So, what should the FIs do in digital payments? Accept that “payments are disappearing” and focus on ensuring that their payment credentials are available for customers to use wherever they want them or fight back with their own branded wallets? Does it have to be an “either/ or” choice? Can they/ should they do both? What are your thoughts? P.S. Our panels are open to any FI in the US – Celent clients and non-clients – and we share the results report with all respondents. If you’re a banker and would like to participate in future Digital Panels, please contact info@celent.com.

Banks and Fintech: friends or foes?

Banks and Fintech: friends or foes?
The question in the title of this post has become a rather hot topic lately. Earlier this week, I was kindly invited to join the panel on “what’s hot in Fintech” at Citi’s Digital Money Symposium, and it was one of the central questions we debated as a group. My colleague Stephen Greer has also discussed Bank-Fintech relationships on these very pages, for example, see here and here. The question is not necessarily new. Back in 2011, I wrote a report titled Innovative Payment Startups: Bank Friends or Foes? In the report, I looked at companies presenting at the inaugural FinovateEurope and concluded:
“Banks have little to fear from this particular group of payment innovators. Some solutions actively support the established payment systems, in particular cards. Others are expanding the market by enabling payment transactions in places where they may not have been possible before.”
There is no question that the pace of innovation has increased in the last five years since that quote. However, today we also have many startups and Fintech companies that are actively serving banks with their technology tools (from authentication and fraud management to back- and middle-office systems). Others, such as Apple partner with banks to develop propositions that “wrap around” a card transaction. In the last few months, we have also noticed an increase in stories around collaboration between banks and Fintech. Most payment unicorns (private companies with valuation of over $1bn) achieved their impressive scale and valuations mainly by competing with banks in a specific niche and focusing on being the best in class in that area. Often, it is in merchant services, such as those provided by the likes of Stripe, Adyen, Square, and Klarna, while TransferWise is successfully attacking banks in the international payments market. Yet, even among the unicorns there are those that have chosen to partner with banks, such as iZettle which has partnerships with Nordea, Santander, and other banks in Europe. TransferWise, a unicorn that has long been positioning as an alternative to banks, is now partnering with LHV, an Estonian bank, to offer its service via the bank’s online and mobile channels, and is rumoured to be in discussions with “up to 20 banks” about adopting its API. The Wall Street Journal recently quoted Ben Milne, the CEO of Dwolla, as saying, “Time humbles you. Working with banks is the difference between running a sustainable business and just another venture-funded experiment.” It has become fashionable to pronounce the death of banking. The disruption caused by Fintech is supposed to blow the old-fashioned banks out of the water. Of course, we acknowledge the disruption and recognise that banking is changing. We simply don’t agree that banks will disappear — at least not all of them:
  1. Today’s smartest banks will figure out a way to stay relevant for their customers.
  2. Some of today’s disruptors are becoming banks (e.g. Atom, Mondo, Starling in the UK)
  3. Both Fintech and banks are starting to acknowledge the value they each bring to the relationship and will learn to collaborate effectively.
My colleague Gareth Lodge and I have just published a series of reports on reimagining payments relationships between banks, retailers and Fintech. Commissioned by ACI Worldwide, the reports take a perspective of each party and explore this topic in a lot more detail. Just like a family is locked into a set of relationships, banks, retailers, and FinTech form a payment ecosystem that we believe is more symbiotic than many would want to admit.

As conference season rolls on, here’s what I’ll be looking for at Money20/20

As conference season rolls on, here’s what I’ll be looking for at Money20/20
We’re smack in the middle of conference season and the team has been traveling all over the world. We’ve been busy with Sibos and BAI (unfortunately held at exactly the same time), AFP, and next week, Money20/20.  In only its fourth year this new conference had to move to a new venue so that it could avoid running afoul of the fire marshal. Given the excitement around the payments ecosystem, we think it will be an exhausting whirlwind of a week. What will Zil Bareisis and I be looking for? Three main topics top the list:
  • What’s the view on blockchain? There was a lot of discussion at Sibos on the corporate side (we don’t think retail will be leading), but we’d like to find out if there’s heat behind the light.
  • What sort of value added services around the payment are in production or on the drawing board?
  • Is the apparent stall in mobile payments adoption temporary, and what can be done by ecosystem participants to jump-start it?
There will, of course, be many other payments topics covered, and we’re looking forward to plunging in to soak up the zeitgeist. What will you be looking for? If you’ll be in Vegas next week, we look forward to seeing you. If you still haven’t registered, you can get $250 off your ticket by using the code celen250.

P2P lending makes it to main street?

P2P lending makes it to main street?
Can old dogs learn new tricks? What about banks? Banks are trying; not only by making interesting bets around digital but also social. On the social aspect of banking, Banco Colpatria in Colombia offers credit cards to individuals using Lenddo’s social scoring. Lenddo has created and extensively tested an algorithm that analyzes the connections of people in their social networks to determine their character and willingness to pay. Lenddo is leaving behind its start-up origins as a micro-lender and entering into partnerships with financial institutions to take advantage of this scoring which can extend the traditional loan customer base to include new segments with no credit history (college students for example). In this same line, Banco Galicia in Argentina has a very interesting offering – Galicia MOVE – aimed to college students based on a totally digital proposition, underpinned by the use of digital channels and a targeted marketing strategy. Galicia MOVE includes a savings account, a debit card and a credit card. Jumping into social based propositions is just around the corner for them. Clearly, digital and social are terms that go together and could certainly benefit those banks that want to bet on these. Another look at the same issue is that it seems inevitable that banks begin to incorporate business models that otherwise threaten their own business from the periphery. Change or die. Peer to Peer (P2P) lending is one of those situations and banks have started to experiment with it, taking P2P lending to main street. Santander Bank through a lead generation model in partnership with Funding Circle’s and RBS using a 3rd party platform are perhaps the most significant cases right now, but we are aware of more movements in this direction. Banks are certainly not playing hide and seek with P2P lending. In our research, our conversations with key financial industry stakeholders and as collaborators at bringing together banks, fintech start-ups and VCs, P2P lending appeared as an area that banks should explore to attract customers through a different value proposition. P2P lending provides a way for the bank to acquire customers not covered by their traditional offering while making some money in the process and retaining a customer that can eventually move into financial products from traditional banking as their business / financial condition makes them a subject fit for bank credit. Regulation is an important issue for banks to get into P2P lending and depending the country, there may be restrictions. Perhaps the P2P lending company that has best understood and dealt with this issue so far is Afluenta; working with regulators in each country to adapt its model and operate under authorization of the financial regulator. For example in Argentina it was the first P2P lender to operate with the approval of the regulator, under a trust structure where Afluenta administers the trust and the money is out of its estate. Money is owned by lenders (peers), which is in the spirit of the P2P proposition. From my point of view in order for banks not to get trapped between their traditional business model, processes and restrictions imposed by the regulator there are some models that banks can explore before deciding to dive into P2P lending all by themselves: lead generation as Santander, a partnership to use the platform of an existing player or possibly an acquisition of an existing player (as BBVA did with Simple to speed up in the digital race). The end game will have banks incorporating services based on digital and social, leveraged by the use of data. I believe it will have them as main actors, therefor competing directly with the fintech-startups, such as the P2P lending companies. In the meantime, coexistance may be possible. Because I also wanted the view from someone working in the heart of this business I spoke with Alejandro Cosentino, a seasoned financial services executive and founder of Afluenta, who until now remained very skeptical about banks entering into the P2P lending space. Nevertheless he believes in its potential: since launching, Afluenta started to transform personal finances into the greatest and most participating peer-to-peer lending community across Latin America with AR$ 25M, 1300 loans, +90,000 investments transactions and covered +1,000 in social networks, blogs, news and traditional media. Afluenta originates loans at a cost which is 25% of the cost incurred by a bank. In Mexico he believes that loans could have a return of 12% against 3% which is the return for money invested by an individual in a bank. Following some of his impressions, which he gently accepted to share with you and me. P2P lending is first and furthermost a financial business and only then a technological business. Many P2P companies approach it the other way round and that is why they fail. P2P lending has to be played in a (highly) regulated and complex environment where you need to understand what risk management is about. This is why he works on 3 key issues (in order of importance):
  1. Regulation
  2. Credit
  3. Technological
He recognizes having been recently contacted by banks looking to enter the P2P space but in his opinion central banks, regulators and securities commissions will not easily allow banks to enter directly into this market. Authorities are not concerned about the systemic risk; their main concern is banks’ responsibility regarding delinquent or bad credit. In the heart of this issue is who owns the risk? who owns the money? the bank or the peers? Authorities’ view, he says, is that if a bank is in the business it will have to take the risk of delinquency or bad credit because they are trustees of that money. This is the view in Mexico, where P2P lenders have to constitute SOFIPOs (micro-finance institutions), not representing the true spirit of P2P lending because risk is taken by the financial institution and not the peer. With such a framework of legislation it is understandable that banks don’t find P2P lending attractive. The Mexican regulator is expected to review the legislation to provide a better framework to operate P2P lending by August 2015, though he believes it will take some more time than that. The issue of addressing the business without financial expertise, including poor risk management, has some P2P companies working with credit delinquency over 26 % (100 loans over 350 loan portfolio with debt for more than 90 days), making it unbearable . Afluenta instead has less than 3% with a much larger volume of loans. They have analyzed loan portfolios from banks and there have been cases where, based on their P2P lending underwriting, they would have not granted loans (which subsequently became delinquent), showing the level of intelligence and accuracy in risk analysis capable of being used in P2P lending. From his perspective banks are tepid regarding P2P lending. It is not a general trend or something that comes as a strong directive from top management, even though some banks are engaging for the sake of innovation or because they still have doubts about the future of P2P lending but don’t want to just watch the ship sail out of the harbor, in case the journey ends being successful, with them not on board. Alejandro believes that the way to go for banks interested in taking a shot to this market is through a model where they act as an online trading agent, going from lead generation to a more stronger partnership where they can direct their own institutional investments through the P2P platform. An Argentinean insurance company for example has agreed to use his P2P platform as a vehicle to directing investments, having a preferred option to finance the cases submitted by peers. An acquisition by a bank is possible if the P2P entity stays separate from the bank, otherwise it will face the regulation problems he described above. You can believe banks are still tepid about P2P lending as Alejandro does, or that it is already hitting main street, which is what I believe. Whatever you choose to believe, rest assure that banks will not play hide and seek about P2P lending. The time to get this bull from the horns has come.