As part of the Grenoble école de management’s Advanced Master on Digital Business Strategy, one of the seminars, led by Julien Grossiord, was dedicated to Web Technologies.
In the last few years, a certain number of new technologies have actually emerged leading to a radical digital transformation of all kind of businesses. To name a few of them:
- Cloud computing-based solutions (IaaS, SaaS, PaaS),
- internet-of-things (IoT),
- 3D printing,
- Docker-based solutions, an open-source technology using containers for software distribution,
- Cryptocurrencies, bitcoin being the most popular,
- Big Data, which (combined with advanced analytics) is allowing the emergence of smart self-learning devices,
The new web technologies and the financial industry
The financial sector is no stranger to all these evolutions and is adopting some of them at a steady pace[i]. As a matter of fact, traditional financial entities are being challenged by new emerging players: start-ups called FinTechs that combine innovation and technology to gain market share. Every single area is concerned, be it money transfers, mobile payments, project financing through crowdfunding platforms, or even portfolio investment robo-advisory[ii].
Not surprisingly, several firms have already invested heavily in the latest technologies: some by creating in-house labs, some through partnerships with FinTechs companies, and others by purchasing startups downright.
A closer look into cryptocurrencies
In 2015, one of these innovations has been subject to special attention from the mainstream media: cryptocurrencies. A digital decentralized currency that no government or central bank controls but is produced by a community of individuals and businesses, certainly has a “democratic” smell in it which makes it very attractive. Furthermore, the parties involved in a bitcoin transaction are kept anonymous[iii], making it especially appealing to criminal organisations[iv], to such an extent that a forum has been formed to fight against criminal activities using bitcoin and the blockchain features[v].
But despite all the excitement generated about cryptocurrencies, they are not broadly used. Their supporters may say “not yet”. With an average of 200,000 bitcoin transactions worldwide per day in 2015[vi], they are far behind other means of payment such as credit cards which amount to more than 9 billion transactions per year in France [vii] alone (600 million of which correspond to payments online) for a global amount of €420 Bn. In his must-read article “The resolution of the Bitcoin experiment“, Mike Hearn, a Bitcoin developer, highlights all the technical and organisational reasons why the Bitcoin should fail. Thus, its use should remain limited. Traditional currencies issued by Central Banks have a long life ahead of them.
Blockchain, the technology behind Bitcoin
This said, beyond Bitcoin and other cryptocurrencies and their relatively important use for financial transactions, what may (and certainly will) really have a significant impact on the financial industry is the technology behind them. This technology, called Blockchain, is gaining momentum. It consists of a ledger (or registry) of transactional data organised in “blocks”, ordered chronologically, each block including verifiable information from the initial originating transaction (called the “genesis block”) to the most recent one[viii].
The blockchain database is shared by (or distributed through) all participants in the system. For a new information to be added to the chain, a majority of the participants have to validate it. And this, combined with the use of public and private keys ensuring total privacy of the data, is what makes the blockchain technology so appealing: tampering with the information contained in a blockchain is practically impossible, while keeping this information completely anonymous to anyone other than the parties involved in the transaction.
Financial institutions are just beginning to appreciate the variety of applications for this technology: international money transfers, bond issues, collateral management, syndicated lending, etc[ix], while reducing transaction costs and processing delays, as well as improving security. Nasdaq has developed a platform called Linq to record trade settlements[x]; UBS has set up a blockchain research lab; Santander has identified 20+ possible use cases; Goldman Sachs is planning to use it on its trading activities[xi].
A clear sign of the growing interest from legacy financial institutions is the creation of a consortium of 42 of the most important banks worldwide (led by R3, a FinTech company), called “R3 CEV”[xii], aiming to “design and develop commercial products and financial-grade distributed ledger solutions” using the blockchain technology.
In the next few years, experts agree that we’ll see the emergence of financial products and services using distributed ledgers, from mortgage loans to proxy voting, from clearing and settlement to insurance claims… …even if the technology used will still remain unknown to the end consumers as it is the case with current ones.