GTR talks to Chris Skinner, author, fintech commentator and chair of European networking forum the Financial Services Club, about his latest book Value Web: How fintech firms are using bitcoin blockchain and mobile technologies to create the Internet of value.
GTR: What made you write this book so shortly after your previous one, Digital Bank?
Skinner: They are about two years apart. Digital Bank was mainly about how to launch a digital bank or become one if you are an incumbent. It also dealt very much with the business model of financial services, which needs to change because it’s broken, because it was designed for the physical distribution of paper in a localised network and now we have a digital distribution of data in a globalised network focused on software and services. The new book is more about why we have to change quickly and it is all about open sourcing in the financial services. There are three major things happening: banks evolving their traditional structures to digital structures, new digital structures being created with new business models for new markets, and then you’ve got a radical new way of thinking about value transfers that has never been thought of before in countries that had never been served before, and all three are fascinating.
GTR: The blockchain technology has enjoyed a lot of hype in the past year. How much of it is justified?
Skinner: I put blockchain in the same category as big data and the cloud: a lot of hype, a lot of discussion, you see it mentioned everywhere and yet, you don’t see any benefits coming out of it so people start getting disillusioned and negative. I can already feel this negativity around blockchain. But when you talk about what you can do with blockchain it becomes very interesting. In financial services I can see five distinctive areas of application: supply chain automation – in particular asset-based tracking and trade finance – digital ID, post-trading clearing and settlement, payments with the Hyperledger project, and smart contracts.
GTR: A major point of conflict in the book is the “bitcoin bad, blockchain good” discussion. You stray away from taking a side, but where do you stand on this issue?
Skinner: I try to be balanced. Brock Pierce, chairman of the Bitcoin Foundation, who’s interviewed in the book, says that a bitcoin-based cryptocurrency would be appropriate particularly for financial inclusion, so emerging economies could use a bitcoin-based exchange transfer mechanism as a very cheap way of transacting. The problem is that it is not cheap. The average bitcoin transaction, taking into account all the power, electricity and mining cost is US$6 per transaction, and it takes more than 10 minutes to process right now on the bitcoin blockchain because of the limitations of scalability. I can’t really see it as a large-scale currency – I may be wrong, but my personal opinion is that it won’t survive. There will be a bitcoin 2.0, called something else.
GTR: All fingers point to a growing fintech bubble. Is there one, and when will it burst?
Skinner: Between Accenture and KPMG, there is a number of reports and the numbers are fairly consistent – US$1bn dollars invested in fintech in 2012, US$4bn in 2013, US$12.1bn in 2014, US$19.5bn in 2015. This year already, there’s been US$12bn invested in Q1 according to some stats that I’ve seen. As soon as you read those numbers you think there is a bubble. It is a bubble and it will burst. It is the same as the internet bubble of the late 90s: it occurred because everything got overhyped, and we have an overhype of fintech right now. Whenever a bubble occurs is purely because everyone knows there is some revolution happening and the revolution of financial services is taking place right now. You are going to have failures, you don’t have a revolution without failure. The thing about fintech start-ups is that they continuously need funding and if they don’t get the funding they go bankrupt. The bubble will burst with blockchain and with fintech when several of these companies go bankrupt, which they inevitably will because they do not all have viable ideas.
GTR: Why is the adoption of digital instruments so low in trade finance?
Skinner: The problem corporates have in treasury, primarily, is that they do not co-ordinate their activities very well. When they try to, I don’t think they get the backing that they need from their actual management team. What you need is a corporate community, a trade finance community version of Swift – not the network, but the standard organisation, and the ability of bringing the community together to put more standards and more capability to have interoperability between corporate structures. What the banks also tell me is that every time they try to innovate in this area, their customers tell them they do not have the ability to take the innovation, because they are not structured to move that quickly, or aren’t co-ordinated to do it that quickly.
GTR: What would you advice to corporates who want to know more about fintech propositions?
Skinner: If I was a corporate and I wanted to know what is going on in the fintech space I’d connect and engage with the community. In London there is Innovate Finance, in Hong Kong there is Fintech Finals, in New York and Washington and Silicon Valley there are regular meetings of the fintech community, going to fintech conferences. Delegate someone from the trade finance team and to go check it out.
GTR: What should bankers do after reading this book, to swim and not sink in the Value Web?
Skinner: A third of the book on the Value Web is about the challenge in leadership to make the changes happen, which is the real core issue for an incumbent financial institution. A study by Accenture says that only 3% of CEOs in banks have any professional technology experience and 7% of banks have leadership teams with someone who is a technologist by background. When you talk about an industry that is based upon the internet in an open-source structure, having people who have no technology background in leadership teams is a bit silly. You have to lead this from the top: culturally, structurally change the bank fundamentally, from being a physical organisation built around risk and compliance, to a digital organisation based around risk and compliance – that’s a leadership challenge.