Technology of the Week – Blockchain: Disrupting Financial Services (GROUP 7)
Link to video:
In 2008, just a few days after the collapse of the Lehmann Brothers and the following meltdown of the financial industry, a new concept of currency entered the stage aiming to significantly transform our perception of money and trust. An anonymous person, alias Satoshi Nakamoto, developed the idea of an electronic cash system and introduced a digital currency: the bitcoin. In a first white paper that quickly went viral among hackers and cypherpunks, he explained his vision of a purely peer-to-peer version of electronic cash which would have the power to create a financial system outside the control of governments and banks. But the question then was how to establish trust between unknown parties who aim to forge agreements or make transactions with each other.
Here, blockchain technology enters the stage. The blockchain is a decentralized ledger system that records, verifies and approves all transactions taking place between market participants. In fact, the blockchain aimed to render financial intermediaries such as banks or rating agencies obsolete as the “network revolution” shifted power away from central authorities towards a decentralized P2P network. For the first time in human history, people can complete transactions with each other without being dependent on a third party to establish trust between them.
To conclude, blockchain’s disruptive capacity stems from its ability
• to fundamentally change today’s distribution of power in the financial services industry (i.e. new industry dynamics)
• to give rise to the emergence of new ways to create and capture value in the financial services sector (i.e. new business models)
We expect these forces (1) to redefine the rules of the game and (2) to challenge incumbents to find new ways to play in the new era of digital competition.
Cross-border payment providers could be the first players within the financial services industry to see their business models disrupted by blockchain and bitcoin. Today, cross-border payments are a highly inefficient process with many intermediaries pocketing transaction fees along the way. A migrant worker using a company like Western Union to send money back home to her family may end up paying 10-20% transaction fees. Why can these companies command such high commission fees? In fact, today the providers of cross-border payment services have a high bargaining power – mainly because the level of competition is low. However, through the blockchain and the use of a global currency such as bitcoin, barriers to entry in the cross-border payments industry will be substantially reduced leading to more intense competition which will translate into lower transaction fees. In addition, it is not only the higher level of competition that drives down fees but also the disruptive power of blockchain to cut unnecessary intermediaries out of the equation. Please refer to our video for a full discussion of the impact of blockchain on industry dynamics in the cross-border payments industry.
Certainly, no discussion of a new technology is complete without shedding some light on its limitations and risks. Currently, the blockchain can only handle a limited amount of transactions per second which might become a bottleneck and limit its scalability going forward. Moreover, incumbents want to see their business model protected and hence pressure governments to enforce regulations that limit the development of blockchain applications (such as the bitcoin).
However, we strongly believe that the bitcoin is here to stay and that it will be a game changer in the financial services industry.
