by Joe Toole and Erin Gartner
What if you could purchase a car from the comfort of your couch and not have to deal with all the financial red tape typically included in the car-buying process? What if all the information the car dealer needed to complete the sale existed in one single, verified, secure, incorruptible, easily accessible database? The car-buying transaction would be faster, cheaper…and more trustworthy. With “blockchain” it’s possible and, if you ask us, it sounds amazing!
First, let us provide a little background. In 2008, a brilliant software developer named Satoshi Nakamoto wanted to free people from the shackles of governments and banking systems. With this goal in mind, he created the Bitcoin, now the world’s largest digital currency. Fast forward to 2017 and the blockchain technology that drives Bitcoin is now being widely adopted by the very financial systems its inventor sought to bypass.
In the past several years, nearly every major player in the financial industry has begun investing significant resources in this new frontier in financial technology (or “FinTech” for short). In fact, since 2014, more than 70 of the world’s largest financial institutions joined R3, a consortium whose aim is to ensure blockchain is deployed globally in a way that ensures compatibility between all network participants. Leveraging Burke’s social media platform, we analyzed the conversation around the topic of “Fintech.” Between July 1-September 20, 2016, there were more than 1.2 million social media posts related to “Fintech,” and roughly 25% of those FinTech posts mentioned blockchain in some form. (1)
Blockchain may sound like an arcane method of record keeping, but this revolutionary way of distributing information is quickly changing the rules of the financial world. Blockchain enables faster, more secure movement of money with lower transaction costs, greater transparency, and greater productivity. This is why big banks are paying close attention and trying to understand what it means for their traditional business models.
So – what exactly is blockchain?
Blockchain is an encrypted digital record of individual transactions (“blocks”) which together form a lengthy trail of information (a “chain”).
In contrast to traditional banking transactions, no central clearinghouse is needed. The record is continuously updated in real-time across many different digital locations (a “distributed ledger”). Because it is widely shared in real-time, no changes to the record can be made without all other parties immediately knowing, thereby adding to security. Whenever a new transaction occurs, that information is added to the record, creating a permanent digital “paper trail.” While blockchain technology is applicable across many industries, its potential for use in banking is enormous. The graphic below helps visualize the difference between traditional banking transactions and blockchain.
Now back to our car-buying example. Picture all the information you need for a traditional car purchase: ID, income, insurance, credit history, etc. A complex set of behind-the-scenes information exchanges and verifications must occur between all parties involved (dealers, manufacturers, credit agencies, governments, lenders, etc.) before ownership changes hands and the car is actually yours. These information exchanges flow back and forth in a highly complex interaction of organizations, databases, and people. While modern telephones, computers, and the Internet enable all this to happen reasonably smoothly, the entire system is extremely cumbersome and continues to grow increasingly more complicated.
With blockchain, everything the dealer needs to know exists in one secure, easy-to-access location. The dealer and the buyer can trust it to be verified and incorruptible. The cost of sales could drop for car dealers, meaning more and more sellers could enter the market giving consumers more and more car-buying choices. Those stressful hours spent at the dealer buying a car could become a quick digital transaction completed anywhere.
Blockchain is a gamechanger. It is the type of high-powered change banks are currently facing, and it is fueled by a leapfrog technology that enables immediate transfer of currency with lower transaction costs, higher productivity, tighter security, and ultimately more choices for consumers. While blockchain opens a world of opportunity for banks, it also drastically lowers barriers for new entrants, making the technology both a significant opportunity and a significant threat. Every day more and more FinTech firms enter the market, creating new organizations that are more agile, cheaper, and much faster than traditionally slow-moving and bureaucratic banks. Everyone will win—except those that fail to adjust soon enough.
It is likely your current bank is in the process of figuring out how to leverage this technology for the future. In the meantime, banks are looking to build strong relationships with consumers so that, when there are all these new choices and options, consumers will be more likely to choose their bank as their go-to financial provider. Blockchain is, after all, only a better way to conduct transactions, and your banker will still be a key source for coordinating payments, extending personal and business loans, and presenting you with new investment ideas. You will still need them, and they certainly will still need you.
We believe the banks that embrace this new technology will be the big winners and those that do not may see their everyday banking game taken over by new, more nimble players. Recent history has numerous examples of businesses that were too slow to adapt to technological change and discovered new entrants were more than willing to step in and cut their market share. For example, cable and satellite services are feeling the pressure from digital services, such as Netflix and Hulu. Travel agencies have seen travel websites, like Expedia and Travelocity, cut into their market share, and brick-and-mortar bookstores have become scarce as Amazon’s online distribution grows ever larger. Uber, Airbnb…the list is long and will continue to grow.
Blockchain is not the answer to everything in banking, but it has huge potential to change the way financial transactions occur. Banks unable to adapt may find themselves fighting over a smaller and smaller piece of the financial pie while new players carve out increasingly larger slices. And, your kids may never know how easy they have it when they buy their first car.
As Vice President, Client Services, Joe Toole assists client organizations in understanding how to gain and maintain a competitive advantage within their industry.
As a Senior Analyst within the Decision Sciences team at Burke, Inc., Erin Gartner works with clients across an array of industries to ensure that they receive data-driven, actionable results. She has a particular interest in blending primary research with other sources, such social media data, to provide clients with the meaningful insights.
- Social media data sourced using Burke’s partner social media platform from July 1, 2016 – September 30, 2016.