Next stop – the collaboration and integration of FinTech and Tech Giants provisioning of classical banking services to their large user base?
FinTech in its broadest definition stands for technologies used and applied in the financial services sector. Progressively, FinTech has started to represent technologies that disrupts traditional financial services. There is a lot of debate about Fintech diminishing typically based on success criteria coming from incumbent companies. Let’s take an unfamiliar perspective and look at companies from a structural context. All companies can only choose to change in limited dimensions when adapting to the environment or when deciding to shape the future. Ultimately it is the users who decide if such changes are successful or even disruptive when they start to massively consume new services or products in preference over others.
Each company has three core dimensions available to implement change:
The first dimension is skill(s) available to the company. The applied skills, not knowledge, are valued and becomes the decisive factor. Knowledge is increasingly easy to access while skills are hard and time consuming to build up. An example, chess – lots of people have an excellent knowledge about chess and its rules but only a few can play it exceptionally well. Gaining expert level skills requires time and practice. Many things will go wrong on the journey to mastership. The ambition and journey to become a master requires passion, persistence and an environment which allows to practice, fail and learn. These are essential to make progress.
The second dimension is the organization a company has composed. It defines how the individuals work together and apply their specific skills as a team. Many will immediately think about titles, positions and careers in a hierarchical structure. Within each organization there is not just one but three structures:
Unfortunately, there is no choice and it exist in every company. The challenge of each company is to balance them in a clever way to create the maximal value for the clients, shareholders, employees and the society. Most companies focus on the formal structure, the hierarchy of power a paradigm left over from the industrial age. Employees compete in the company to make career and gain position power over other employees while the true competition of the company happens at the boundary where the interaction with the environment takes place. The value creation structure, where the income, but more importantly trust and reputation, built up for the company is not well understood. The highly dynamic informal structure where influence takes place, is often underestimated or even ignored. The company’s culture is a result of the experiences the employees define in these structures.
The third dimension is technology – the available technology was always a decisive factor throughout human history. Now it has become essential, as the technical progress has exponentially increased. Today the need to unlearn outdated practices and learn new ways is challenging the workforce, especially the formal structure. The technology progress demands paradigm changes for things which worked well in the past leads to the opposite effect tomorrow.
The Tech Force
Now let’s revisit the term FinTech. It is an amalgamation of Financial Services and Technology. Financial Services companies have always used technology to improve service efficiency and convenience and will continue to do so. But many incumbents have the problem that they cannot focus on technology as a differentiator. They need to manage a landscape of accumulated technical organizations as they are not used to replacement ng the technology base regularly. The heterogeneous landscape binds a lot of resources and increases complication in an already complex business. FinTech companies typically look at a few well selected value propositions and then seek for solutions using the best available technology. They may not yet feel competitive from a career and salary perspective, but offer fascinating challenges, the possibility to become a master in modern technology and to have impact in the industry. This makes them attractive for talents creating highly skilled teams and high degree of automation using modern infrastructure enabling an efficient and agile work style.
The is a significant difference between incumbents and Fintech companies in technology- the biggest difference being the organizational dimension. Large incumbent organizations with a focus on complex formal and hierarchical structures were ideal for large labor-intensive projects which required the coordination and top-down management of big teams. The complicated landscapes forces incumbents towards centralization aiming for scale effects to achieve efficiency gains. But the future is likely to follow the structure of the internet – it is distributed, technology driven and an interconnected mesh of services. Building and running such services can be done by small teams which efficiently combine the skills to reach a shared vision. A network of smaller loosely coupled but interconnected units, each producing a specific value, fits better in such an environment than big, monolithic and complicated organizations. Such a network of self-contained units is also more flexible to adapt to the environment, to deal with complexity and to survive changes where some of its units may lose value and disappear.
Many of today’s highest valued companies – the so-called tech giants – have assumed an organization which leverages the combined power of the formal, informal and value structure by shifting focus to client value creation and offering space to cultivate the informal structure. These companies may lack the skills of financial services companies now – but they can build on a modern technology base, an extremely high degree of automation and a dynamic and empowered organizational culture. These companies also have immediate access to a vast number of users which may become clients of new service offerings.
The argument, that these companies do not want to become banks, is misleading. These companies have their customer in focus and will do what helps them to achieve their goals. They will not become banks in the classical sense but are integrating and offering financial services. When financial services are required by their customers they have or will apply for a banking license and its services are regulated like an incumbent bank. Their core focus is client value reach and each service are integrated and offerings are immediately widely available. The broad valued offerings and usage results in accumulation of valuable data insights which can be directly using to evolve their business – an example considering a platform company running shops and logistics for clients’ companies. It has deep insights and can grant credits in a much leaner and efficient way. It can choose the most promising client companies and leave the others to the wider market. If the client company grows, it benefits participating in the success of the shop and its logistics.
Financial services incumbents will need to perform a significant step change in more than one dimension to adapt to the new normal. A difficult transformation for status quo environments of those who currently have the power and are the ones who fear to lose most. An alternative to consider is the collaboration and integration of FinTech and Tech Giants provisioning of classical banking services to their large user base. Clients may be used to attaining certain services from companies today – but this can change very fast at any moment.
What is Homomorphic encryption? The ability to perform data exchange and transformations exclusively with encrypted data, only decrypting it when an authorised person needs to see a result. It is a method of performing calculations on encrypted data without decrypting them first. It converts data into encrypted text that can be analysed and worked with as if it were still in its original form. It enables complex operations/processing to be performed on encrypted data without compromising the encryption.
Storing datasets in fully homomorphic repositories removes all chances for unplanned disclosures. Only those entities with a private key can query the database, run analytics on the data and see results. This offers a secure leeway to make use of the distributed ledger technology in an as-is basis. With homomorphic encryption techniques used to store data such as smart contracts, positions, transactions over the blockchain, there won’t be any significant changes in the public distributed ledger (eg blockchain) properties and taking care of privacy concerns associated.
The use of homomorphic encryption technique will not only offer privacy protection, but readily access to encrypted data over public blockchain for auditing and other purposes (eg add-on services). Use cases can be via C2C, B2B, B2C, C2B from 3rd party services such as ride-sharing, digital marketplace, search services, or medical services.
Using the example of electronic payment protocol* for customer merchant (or a non established trusted entity). Current situation requires a trusted (signed) payment description that be sent from the merchant to the customer. Using homomorphic encryption, this is no longer required and the destination “account” number for the payment is solely created on the customer side. It eliminates the need for any encrypted or authenticated communication in the protocol and is secure even if the merchant’s digital infrastructure is compromised. Payment transaction in itself serves as a time stamped receipt for the customer.
Real life applications are not limited to providers, but as well consumers (eg financial institutions, research organisations, education, dat miners) anyone/entity who wants to be able to share data without compromising data security regardless of the environmental or other differences in context.
The impact of homomorphic encryption in the digital ecosystem will increasingly enable co-operation/collaboration between multiple parties possible especially when there is limited to no trust established as it protects and renders it not vulnerable to unauthorised access and full privacy.
* Homomorphic payment addresses and the pay-to-contract protocol
* A Survey on Homomorphic Encryption Schemes: Theory and Implementation
* How to make Fully Homomorphic Encryption “practical and usable”
Evolution, tranformation or beginning revolution – open your mind, think and act!