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‘The biggest challenge is the distraction over disruption’: FIS chief product officer Rob Lee

Fidelity Information Services, one of the world’s largest banking technology companies, provides the back-end software and financial services technologies for 20,000 clients in 130 countries. Headquartered in Jacksonville, Florida, FIS’ main clients are banks. The company runs a Little Rock-based startup accelerator program, which just selected its second class of mentees.

Rob Lee, chief product officer for banking and payments and a mentor for the financial technology accelerator program, spoke to Tearsheet about the biggest issues affecting banking, what motivates the company to support startups through its accelerator program, and the biggest trends affecting the industry. Here are excerpts, edited for clarity.

What’s the biggest issue banks face with the proliferation of startups developing competing lines of business?
The biggest challenge is the distraction of the discussion over disruption. Banks are every day faced with what are they doing with new technologies how are they blocking disruptors or embracing disruptors. I don’t think that our bank clients are being impacted from a transaction perspective with disruptors going into their business.

What’s the biggest bottleneck affecting how banks operate today?
The biggest problem is that the information [about customers] tends to be siloed across the organizations.

Is the purpose of your startup accelerator program to allow others to build software products that can seamlessly interact with bank platforms run by FIS?
We bring 10 new companies that are building things around the financial services world. All those apps need data and customer information to drive their value proposition and our API gateway provides a way to build on top of that.

So you’re really looking for startups that can partner with the banks?
We invest in research and development and innovation and startup companies not in the accelerator — the accelerator is just one way to do that. [The startups] are really pushing the envelope; for example, we have a company called Alpharank, and they’re using the Facebook social graph paradigm and applying that to financial services.

Is there a trend that is overhyped or has lost your attention?
There was a lot of hype about blockchain a year ago when it was seen as a panacea, and we’ve seen that subside somewhat. We’ve seen a lot of public proof of concepts, a lot of consortiums, and not much actually happening to manage real transactions.

What’s the next big thing?
You’ll see massive changes in the use of voice as an input. Today Siri and Alexa are about 95 percent accurate — there is some latency in that but in the next few years, with all the investment, it’s predicted that it will get to 99 percent accuracy with close to zero latency.

 

 

 

 

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5 charts that show that blockchains are too immature for finance

Blockchain technology has come a long way in a short period of time, and in a lot of ways the financial services industry has moved “beyond the hype.”

Nevertheless, the technology and human expertise required to really make it part of the financial system just isn’t there yet. Many had called 2017 the year that the industry begins live implementation of blockchain solutions, if 2016 was the year of proofs of concept. But it looks like 2017 is going to be another year of exploration for banks – not that there’s anything wrong with that — and growing amount of research supports that.

According to a PwC published this month, only 24 percent of the global financial services sector say it’s familiar with the concept.

A February survey by IBM found there are still plenty of reasons banks have been hesitant to move quickly on their blockchain implementations. Regulation, which was cited most by participants, is always a factor, followed by “immature technology.” Also, while blockchains have a lot to offer financial services, they have aways been more about improving efficiency and cutting costs than solving real problems or creating revenue – evidenced by the 52 percent of respondents that said there’s a lack of clear return on investment and the 43 percent that said it makes an insufficient business case.

And despite the industry optimism that it’s moving closer to blockchain implementation, PwC found that only 19 percent of large financial firms are even prioritizing blockchain investment. Even though the technology is growing up, no one in banking really knew anything about it three years ago. By contrast, the industry has had years to prepare for the coming of artificial intelligence, which has become a staple to the financial world as it relies more and more on customer and client data. For example, chatbots like Bank of America’s erica employ AI to do things like make payments, check balances, save money and pay down debt. About 30 percent of large financial firms indicated they plan to invest in AI this year.

Payment companies are also heavily invested in blockchain technology, according to the PwC survey, with 90 percent planning to adopt it and have market ready products by 2020; 77 percent of financial services firm have the same aim for 2020.

Much of banks’ work in blockchains have relied on the technology providers and collaborative working groups, such as Hyperledger and R3 CEV — the latter took a minor PR hit at the end of last year when a few of its bank members dropped out for various reasons. A February Simmons & Simmons survey found while 72 percent see these groups as a vital part of their research and production, 60 percent subscribe to the belief that bigger isn’t better – it’s less productive.

A lot of comes down to infighting: “I think a practical point arises as to whether large consortia are the best vehicles for developing innovative technology,” Angus McLean, a Simmons & Simmons partner, wrote in the report. “You need agreement on everything from prioritization of projects for exploration to IP ownership, and the constitution of the consortium can become very unwieldy if there are more than four or five parties involved.”

Hyperledger and R3 have always had the largest member base, and it includes the biggest banks too. But Hyperledger’s fabric is a more general purpose-type technology, hence its larger member base in industries outside financial services where, blockchain probably has more exciting and more important use cases.

“The Hyperledger ecosystem is the most diverse by far, representing a great asset with manageable shortcomings,” analyst Javier Paz said in his Aite report, “Is Blockchain a Good Fit?”. “The Hyperledger Project’s strength comes from the mix of non-financial firms, chaintech firms and financial firms working together toward a common goal of technology agreement that could lower adoption costs for all.” 

R3, on the other side of the consortia spectrum, has been building for financial services from the start. Banks account for 76 percent of its members compared to just eight percent of Hyperledger’s.

“There is power in numbers for R3… This unity of financial institutions may translate down the road to collective power to push for common chaintech standards in which financial institutions are involved,” Paz said.

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WTF is an initial coin offering?

There’s been a lot of talk lately about initial coin offerings, known as ICOs. Enthusiasts tout ICOs as the future of venture investing in the blockchain world.

“The precedent we’re about to establish will be the future of the entire sector. VC as an asset class has delivered good returns historically, but they’re locked up for five or 10 years and people aren’t happy with that level of illiquidity.” said Brock Pierce, chairman of the Bitcoin Foundation and managing partner of Blockchain Capital.

Despite that, the idea has its skeptics. We break it down.

Wait, so what is it?
It’s basically a source of funding for new blockchain-based business endeavors. When the decentralized network is created, the startup behind it can sell tokens early in the process for an amount based on what it thinks it’s worth at that stage, all in order to raise money for the continued development of that network or application.

ICOs are similar to any other investment and often likened to IPOs in that the investors hope to make good returns on their investments and in that the startups behind the ICOs are trying to raise money to grow their endeavor. It’s becoming more typical for startups to produce some sort of documentation that describes their background and plan for their initiative, according to Angela Walch, associate professor at St. Mary’s University School of Law and research fellow at the Centre for Blockchain Technologies at University College London.

A new investment vehicle? Big deal.
Revolution by democratization of course. ICOs allow entrepreneurs to raise money from retail investors – so any Joe Schmoe that wants that want exposure to the early stage ecosystem can diversify his investment portfolio. (Okay, not just any interested investor, but more on that in a sec.)

Also, the tokens are liquid assets. You can convert them to cash or other cryptocurrencies quickly instead of having your money tied up for a number of years.

“The problem most startups have is a general lack of liquidity and all the market ecosystem participants are negatively impacted by that lack of liquidity,” Pierce said. “If you’re an early founder, the likelihood of being able to sell any of that stock prior to the business becoming very successful or very large is low.”

Sounds kinda sketchy…
There’s been a lot of debate about whether the tokens sold in an ICO legally constitute securities. There are different ways you can structure them to make them look more like a security, or less. The Securities and Exchange Commission hasn’t issued any formal guidance on crypto-tokens as securities. Regulators don’t typically jump in to regulate new business concepts and technologies when they haven’t had significant traction done any “real” harm, said Carol Van Cleef, a partner at law firm Baker & Hostetler LLP.

“In such circumstances it becomes increasingly difficult for policy makers not to pay attention to how current laws may apply and consider what steps, if any, they need to take,” Van Cleef said.

There are many unknowns: are the people buying these tokens considered investors under the securities laws? That would depend on whether the token is determined to be a security. Is there someone that can be identified as the one organizing and executing the ICO?  Who is responsible for the ICO?

“Those organizing ICOs over the years have been increasingly mindful of U.S. laws and the uncertainty as to whether they apply,” she said. “They have taken steps to make sure they don’t run afoul of those statutes in the event ICOs are determined to involve the offering of securities. A primary technique for doing that is offering securities outside the U.S. to non-U.S. residents.”

Is someone actually doing this?
Blockchain Capital is aiming to be the first in the world to do it “the correct way,” in compliance with regulation, Pierce said. That means it’s acknowledging the tokens as securities and investors will hand over all the Know Your Customer information required to show they’re accredited investors – that mostly matters in the U.S.

“Instead of creating these convoluted structures to circumvent securities law, why not just face the regulation head on?” Pierce said.

So it’s incorporating its $10 million ICO in Singapore. The sale begins April 10 and there are 99 seats. U.S. users will have tokens locked up for one year; international users will have their tokens locked up for 40 days.

Who cares and why should I?
Developers, mostly, unless you’re a crypto enthusiast eager to invest.

Historically, open source software projects succeeded in people’s own time because no one paid developers to build – and that model of innovation has been celebrated. Bitcoin changed that thinking when it entered the scene, Walch said, and now ICOs are a way developers can demand compensation for what they do.

“Bitcoin as an open source software project is high stakes in that it is transferring and managing things that have real value,” Walch said. “Bitcoin had the luxury to grow up before a lot of people noticed it. Now blockchain is accepted as a value transfer system and anyone building one now is doing it for that reason. The ICO model isn’t anything revolutionary, it’s people trying to do something in a loosey goosey way for a high stakes endeavor.”

And as the ecosystem grows it gets harder to ignore how much developers of these public blockchains function like fidicuiaries, she added.

“You’re putting a lot of trust in [developers] to make sure it keeps operating, essentially to do things right and not cheat you,” she said. “It’s the same situation with these ICOs: you can’t escape accountability for doing something high stakes with other people’s money. But that’s what’s happening with ICOs and regulators won’t overlook it for very long.”

C’mon. Is this really a thing?
Who knows. Marco Santori, a partner at law firm Cooley LLP., said in the last two months, 60 percent of inbound interest in his lawyering services has been related to token sales.

“It could be a whole new way to raise money,” Santori said. “The last new way of fundraising we saw was Kickstarter; this could be Kickstarter for decentralized networks. It is a significant development in the course of private finance and frankly public finance for that matter.”

This may sound like the earlier days of bitcoin Ponzi schemes and pump-and-dumps (when the “real world” corporations realized bitcoin had a PR problem they moved the conversation away from crptyo-anything to “real world” applications) but blockchains in the broadest sense of the word have come a long way in just three years. So when you take into account how many people are actually building, investing in and using these decentralized networks, it’s probably a bigger number than it seems.

But not all business models are amenable to the token sale approach, he said. For some business models there’s really no way to avoid the securities laws.

“For a lot of business models you really have to go and raise venture capital,” he said. “You can’t just bolt on a token to your business model and try to raise money by selling it and trying to avoid securities laws.”

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Why blockchains won’t revolutionize finance

Blockchains are capable of a lot.

They’re good for tracking pork chops. They can help put a stop to the spread of conflict diamonds. With blockchains, doctors can better track patient data, freeing them up to actually see their patients instead of fiddling with all that paperwork. Refugees who don’t have access to basic health and financial services because they don’t have paper proof of existence may be able to get “official” digital identities, thanks to blockchains.

But financial services doesn’t have any such imperatives forcing it to dedicate millions of dollars in research, talent and venture investments in blockchain technology. For this industry it’s really just advanced database technology. It may help it save money – but it’s not a revolution.

“Really [blockchain companies are] building a feature, and I think this is what people have got to understand,” said Jamie Burke, CEO of Outlier Ventures, a research group for blockchain use cases. “The best outcome is it’s bought by an incumbent and it’s just going to become a feature of that incumbent, and that’s fine. I don’t think you’re going to be building the next SAP – as much as everyone thinks that’s going to happen I just don’t see that happening.”

Incidentally, SAP, the software and IT firm, has just partnered with Everledger, a blockchain company that tracks the provenance of diamonds, to build blockchain capabilities into its business network. It also joined the Hyperledger blockchain community.

Let’s start from the beginning
Broadly speaking, a blockchain is a shared ledger that’s maintained and verified by the participants of its network – two different financial institutions, for example – and doesn’t rely on any one party to manage it. It is updated almost immediately when new information – like details of a financial transaction – is added. It’s different from other database technology in that the ledger is completely immutable; the information on it can’t be tampered with or edited. (For the purposes of this article, “blockchain” is shorthand for “distributed ledger technology.” This is not an argument about semantics.)

When using the R word it’s important to remember that it is incredibly difficult to “disrupt” industries as highly scrutinized as financial services. New technology needs to integrate with old systems and interfaces – those don’t get replaced overnight. It’s also the kind of technology that’s most effective when there’s a network effect and currently, most organizations are still exploring why they actually “need” blockchains and which iteration of the technology is going to work best for them.

Outlier, which serves as a startup incubator and accelerator, has met 1,220 blockchain startups in the last four years (that’s almost one per day). AngelList alone lists 543 blockchain startups and 739 blockchain investors. Venture Scanner is tracking 882 bitcoin and blockchain companies across 73 countries. Digital Currency Group is invested in at least 80 blockchain companies.

According to Burke, 99 percent of them are overhyped.

“If 90 percent of everyday startups fail in their first three years, 99 percent in blockchain may very well be close to actuality,” he wrote this week. “If you apply the math to the 1,220 startups in our tracker that’s 12 that will ‘succeed’ in line with my definition of sustainable.”

How did we get here?
Industry participants like to point to the evolution of blockchain from the tech underpinning bitcoin to something that would revolutionize finance.

In 2014 bitcoin dominated the headlines with its various associations with hackers and money laundering. Banks scoffed at it. In 2015 they learned about the technology, in 2016 they all ran proofs of concept using blockchain technology for various financial applications. Their minds changed so quickly and momentum has been strong. This year is often touted as the year banks will begin actually using blockchain technology, which IBM’s predicted in September (IBM actually launched its commercial blockchain Fabric last Monday).

IBM has been working with Hyperledger building a general purpose blockchain, where all details of a trade are shared with all members of the network. It has one of the largest networks of major bank partners but has many more outside of the banking industry.

R3 CEV, Hyperledger’s competitor, is using the technology to build something completely different: a platform called Corda mean specifically to record and manage financial agreements between regulated financial institutions.

“We identified that the technology is highly relevant to a huge bunch of problems in finance,” Richard Gendal Brown, R3’s head of technology and a former IBM veteran of more than 20 years, said of Corda. “It doesn’t follow that the technology that created this wave of hype can be used directly and unchanged – that the technology which was designed to solve problems not in finance is the solution to these problems we’ve identified in finance.”

What’s truly revolutionary about the technology is kind of mundane, Brown said. For the first time, parties who don’t fully trust each other can share information on a system that allows each of them to know they’re in consensus with each other. However, it doesn’t matter for financial services if people don’t have appropriate ways to apply it there.

“They’re the two problems you have to address – what, if anything is new here, and can we define its relevance to financial institutions?” he said. “That stands in contrast to an approach that would say, ‘blockchains are cool, let’s go find opportunities to apply them.’ In that way lies madness.”

Technology is maturing, but has not reached maturity
Late last year R3 suffered one of its minor PR blows when two of its founding member, Goldman Sachs and Santander, dropped out of the consortium. Goldman has not commented on that decision although rumors say it opposed R3’s investment framework, which initially would have allowed it to retain a 10 percent stake with the investors splitting the remaining 90 percent. When R3 said it would cut that to 60 percent for bank members, Goldman pulled. Santander said it decided to take its blockchain focus in a different direction, one more geared at cross border payments and smart contracts, instead of trade processing.

Julio Faura, head of R&D for innovation initiatives at Santander, still maintains that blockchain technology has the potential to revolutionize payments but admits it’s not clear when or how.

“The past year has been a great improvement but [blockchain] still needs to mature even more before we can really think about doing real-production ready applications with blockchain,” he said. “I do think it has the potential to have a revolution. It will take time, we have to be quite pragmatic and driven here.”

Santander is involved in Utility Settlement Coin, a blockchain project co-launched with three other banks to create a blockchain-based clearing and settlement system; the Global Payments Steering Group, a standards-setting group formed with five other banks for the use Ripple’s technology (in which Santander is also an investor).

Everything comes back to data, and maybe AI
For Faura, the proliferation of mobile devices presented an opportunity to change payments based on new sources of data. Overhauling old technology systems is just as much, if not more, about organization and personnel management as it is about the actual technology, he said.

“There’s an opportunity for us and for any other company to use that data widely to get to know our customers better and give them better services at competitive prices,” Faura said. “[Blockchain] is a technological breakthrough but… you need people to embrace the use of data analytics to complement their knowledge and experience, so they make better and more informed decisions.”

Burke called blockchain the “trojan horse” that’s incentivizing financial services to standardize its data in such a way that it might be able to apply artificial intelligence to it to make the market more effective and efficient.

“You’ll see more truly innovative stuff happening with blockchain technologies in emerging or developing markets because there is no infrastructure there,” Burke said. “This stuff will become that infrastructure much in the same way mobile banking leapfrogged conventional banking in Africa or India, where they didn’t even bother building websites, they just started building things with mobile technology. The reality is that where the technology is, people can’t build it at scale or build it securely.”

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Canadian banks are building a digital identity tool

Several major Canadian banks are building a solution to the digital identity dilemma: Legally accepted physical IDs and passports supposedly show that we are who we say we are in the physical world, but don’t do the same in the digital world.

Bank of Montreal, CIBC, Royal Bank of Canada, Scotiabank, TD Bank and credit union network Desjardins are working with SecureKey, an authentication provider in which they collectively invested $27 million in October, and Hyperledger’s blockchain fabric, built with IBM, to create a way for consumers to verify their personally identifiable information for services like new bank accounts, driver’s licenses or other utilities.

When signing up for a new service or utility, customers will receive an alert through a mobile app they’ll soon be able to download. The alert will notify them that the utility provider — a cell phone network, for example — needs to verify certain information like the customer’s name, address, date of birth and social security number and will access it through their bank. The customer would approve by biometrical authenticating on his or her phone and the bank would transfer that data to allow the customer to open the account.

“What’s different about this is it’s very, very private,” said Chuck Hounsell, a senior vice president in payments at TD Bank . “We’re leveraging banks’ trusted relationship and authentication process. It’s not just the bank providing credentials, it’s enabling a system where credentials that can help you get things done in your life are going to be enabled for the benefit of the customer and just speed up commerce in general.”

IBM announced the project Monday, saying it is still in test phase and will become available later in 2017.

Digital identity poses a big problem because what the government and highly regulated financial institutions like banks can legally accept as identification isn’t really in keeping with how people actually identify or what their digital footprints say about them – billing addresses may not match an old address on a government issued ID card, someone’s current salary and spending patterns may clash with his or her credit score. Identity is different every person, and every digital interaction becomes a data point that says more about who someone is than a piece of paper with a headshot.

In financial services, however, there are Know Your Customer and anti money laundering rules that dictate what a bank can accept as identification.

“Financial transactions are not permitted to have multiple identities — that’s normally seen as fraud,” said Steven Murdoch, innovation security architect at data security company VASCO. “In other modes of life other identities are perfectly applicable, that’s why LinkedIn and Facebook exist: people have a work identity and a personal identity.”

The self-identifying process would always be free to the consumer, said SecureKey CEO Greg Wolfond. Each of the organizations on the network has a number of different data sharing contracts with various companies, and none would ever request more of the customer than what they need – if you’re trying to rent an apartment, for example, you should only have to authorize your name, address, credit score and background check.

“We’re creating a frictionless, you-are-you experience that also doesn’t let the parties where the data resides know where you’re sharing it,” Wolfond said. “You can prove who you are to a clinic but not let the provider of the data know who you are.”

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Ask a VC: Why Andrew Parker thinks blockchain is past its prime

Blockchain is going to revolutionize financial services. Unless it won’t.

Too often, blockchain solutions for financial services are square pegs trying to fit in round holes, according to Andrew Parker, a partner at Spark Capital. While bitcoin and its underlying blockchain technology are interesting and maybe even revolutionary inventions, they don’t have a significant place in the industry.

Spark has placed some pretty good bets in fintech, having invested in some of the most successful startups across different sections of the ecosystem, including financial API provider Plaid, marketplace lender Orchard, installment payments company Affirm and robo-adviser Wealthfront.

Parker, who has been with Spark, spoke to us about where his attention is in fintech and why it’s important to focus on innovating for the customers’ sake and not for the sake of technological innovation.

Investors know not every idea out there will survive. What makes you want to invest in the next big fad versus the next big thing?
I strive to invest in enduring companies with big ideas that will thrive for many years to come. A common feature I see in fads is that, in hindsight, they look like technology for technology’s sake, as opposed to solving a pressing customer need. So, in evaluating an investment opportunity, I focus on the customer need first and then analyze technology solutions to address that need. I hope that approach keeps my focus on the next big thing.

What consumer-facing fintech trend is most exciting to you right now?
My favorite trend is the continued rise of the robo-advisers. It’s not new (in fact, it’s a decade old), but the evidence is overwhelmingly strong that retail investors are best off focusing on indexing, and I think robo-advisers offer an excellent product to help retail investors into the ideal indexing balance to meet their needs. The benefits that robo-advisers offer in automated rebalancing and tax-loss harvesting provide surplus gains that exceed the fees that they charge, and they save consumers the cognitive load of trying to pick the best index funds from the deluge of options Wall Street has created.

Is there one that’s particularly overhyped to you or has lost your attention?
I find the blockchain to be one of the most interesting inventions of the past few decades. It’s an incredibly elegant way for a group of counterparties who inherently do not trust each other to be able to collaborate and agree on a commonly accepted ledger of transactions together. And, Satoshi Nakamoto’s original bitcoin whitepaper that outlines the blockchain is delightfully readable and wonderful in its simplicity. But the trend that I find overhyped is using the blockchain to solve problems that don’t fit this general use case of a group of untrusting counterparties. The trend that has passed its prime is using the blockchain to solve problems that are more easily and efficiently solved using boring old open-source database software (often run and owned by a single party).

How has activity in the fintech ecosystem changed over the couple years, and how has that affected your work as an investor?
The past couple years have been pretty even in demand for investment in new fintech companies in my experience. Some subsets of the broader fintech market have had more highs and lows. For example, the scandals that led to the firing of LendingClub’s CEO last spring had ripple effects in the funding market for online alternative lending companies for a few months. But for the most part, I’d categorize the market over the past couple years as active, and investors are showing continued healthy interest in new fintech startups.

What’s the greatest lesson you’ve learned from a failed venture?
The greatest lesson I have learned, which has now affected my behavior as an investor going forward, is a need to hire proactively ahead of issues in the senior leadership team. I never have had the experience of saying, “Wow, I think we hired that finance or engineering lead too early.” But, I’ve found myself on the opposite end of that spectrum too many times. This lesson has led me to encourage senior hiring earlier than were previously my instincts.

What is the biggest mistake entrepreneurs make when pitching you?
The biggest mistake is failing to convey a really ambitious vision for the future. No company is ever perfect at the outset; they all have significant issues that must be overcome to become valuable. The big ambitious vision is how investors fall in love with a company in order to embrace the significant issues, overcome their doubts, and get on the train. The big ambitious vision is also the opportunity for a founder to show their passion for their mission, which can be very persuasive when done well.

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Inside blockchain’s simmering war of semantics

Blockchain has a branding problem, and a recent skirmish involving R3 has shed new light on it.

The company, perhaps the most high profile and well funded of blockchain technology companies, had to put out a small fire last week after a presentation in which it said it doesn’t need to use a blockchain.

In the Tuesday afternoon presentation about Corda, its recently released open source technology for financial agreements, it specified that one of Corda’s “pertinent features” does not involve a blockchain ‘because they don’t need one.” An audience member tweeted the slide, social media users reacted and today, headlines about the company ditching a multi-million dollar research effort circulated.

This is not as big of a deal as it’s made out to be, Charley Cooper, managing director at R3 said Friday in a statement. “We’ve said from the beginning that while Corda is a distributed ledger platform, it is not a traditional blockchain platform and was never designed to be one,” he said.

Blockchains are decentralized, shared ledgers that are updated in near real time, maintained and verifiable by the participants of the network with access to the ledger, and whose information can’t be changed or edited. Blockchains and their positive features, however, came to light through the notoriety of the digital currency bitcoin, which is an open, public network. They’re different from distributed ledgers, which are better suited to major financial institutions like the ones working with R3.

On one hand, the semantics of this don’t matter very much. Until now, industry participants and observers alike have been comfortable throwing around the word blockchain in the broad sense; it’s generally understood people are discussing blockchain the technology, not bitcoin the digital currency. On the other hand, R3 has been particular about keeping “blockchain” out of its official language because the difference between what its building and a first-generation blockchain is so distinct.

While R3 has never objected to being described as a “blockchain” company it has also almost never self-identified using the terminology. The three-year-old company usually just describes itself as a technology company that builds distributed ledger fabric for financial institutions and incorporates all the specifications of the finance industry, which prioritizes data privacy and confidentiality.

“Blockchain is more of a construct or architecture and is equalitarian. DLT is more selective in terms of who gets distributed what,” said Javier Paz, a a senior analyst at consulting firm Aite. “When we think of blockchains we think of bitcoin, ethereum and public, open networks. Distributed ledgers are something more for banks and entities that have to preserve confidentiality.”

When R3 and its technology vendor peers emerged with visions of cherry-picking the best of blockchain technology for financial services, bitcoin puritans flailed and wailed that it couldn’t be done — or if it could, it wouldn’t truly be blockchain technology. That’s a stance the industry seems to have accepted and moved away from now.

In financial services, there’s been an indifference around using the term “blockchain.” People often understand that the blockchain-inspired technology being built for financial services is different from that used to power bitcoin, but have deferred to the term for the sake of simplicity – something R3 admitted to doing itself in a Friday afternoon blog post responding to the frenzy.

“Humans are creatures of habit. As time went on, the term blockchain came to be associated with any type of distributed ledger, even as the technology matured and evolved to meet the needs of different groups of users,” said David Rutter, R3’s founder and managing partner. “This isn’t an issue unique to our space. The marketing team at Canon must have spent countless hours working out how to stop people referring to all copy machines as Xeroxs.”

Many people haven’t fully realized yet that “blockchains” no longer suit everyone or everything, Paz said. Its initial construct no longer suits the ideas that many financial services users of DLT demand – privacy and confidentiality – but essentially R3’s platform can be configured to behave like a blockchain, that’s just not part of the company’s business proposition.

So while a change of terminology might have been met with indifference previously, perhaps the technology and the subset of financial services that are invested in it might be at an evolutionary point that warrants it.

“I prefer the word ‘chaintech,’ which captures the evolution of chain architecture we’ve seen over the last half year,” Paz said. “We started with the first-generation concept of blockchain — where there are nodes and information that gets distributed — but this is where a change of terminology is helpful and necessary to help the evolution.”

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Hi 5! The top five fintech stories we’re following today

top 5 weekly fintech stories

Ecommerce moves from products to subscriptions
When you peel back the covers to take a look into some of the world’s top product companies like GM, it’s likely that they’re thinking about their future businesses entirely differently. New data shows that subscription-based companies are growing nine times faster than those in the S&P 500.

Zuora enables firms to transition their businesses to subscription services, away from products. Companies like NCR and Informatica work with the tech company to do way more than just process recurring payments.

  • Read more: Subscriptions could be part of Daimler’s strategy — it just acquired a bitcoin payment company and plans to launch Mercedes Pay

Improve healthcare payments, improve healthcare
Healthcare payments aren’t healthy but there are cures being worked on. One such solution, by fintech firm, Simplee, and used by 1000 healthcare providers, designs a more enjoyable payment experience for patients. Patients get more choices and flexibility in how and when they pay, boosting revenues.

  • Read more: Not all opportunities in insurtech have to do with health insurance. Some experts believe there’s a trillion dollar opportunity in…solar insurance?

The future of fintech
Reading the fintech tea leaves isn’t easy but experts in the field attempt to figure out where finance and technology are headed. This week saw a few of those types of analysis:

  • Wells Fargo Digital Lab offers a front-row seat to the future of banking (Finextra)
  • Where a leading VC still sees fintech opportunities (TechCrunch)
  • Deutsche Bourse turns to fintech partners to build ‘Exchange 4.0’ (Fintextra)
  • Online student lender CommonBond’s CEO offers 5 fintech predictions for 2017 (TechCrunch)

Bitcoin and blockchain grow up (well, sorta)
Blockchain technology could help the world’s largest investment banks cut their infrastructure costs by between $8 to $12 billion a year by 2025, according to a report by Accenture.

Not so fast, though. Technology and policy holes still enable opportunities to be exploited, like Chinese high speed traders are doing with Bitcoin. “It’s the golden age to be in the bitcoin market, because it’s imperfect,” said Zhou Shuoji, a former IBM technology consultant whose firm, Fintech Blockchain Group, runs a bitcoin hedge fund and venture capital fund.

Banks, heal thyselves (before your competitors do)

customer loyalty in banking
Banks are losing the battle to get more business from existing customers. Bank customers clearly display a lack of loyalty to their primary bank. In the U.S., less than half the time do they new financial products from their primary bank.

The U.S. head of Bain’s banking practice joins Tradestreaming to discuss what banks can do to counter hidden defections.

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Hi 5! The top five fintech stories we’re following today

top 5 weekly fintech stories

ATMs as the distributed bank of the future

A recent study showed that for the first time, there were more ATMs located away from bank branches than located onsite. That’s an interesting outtake as banks shrink their physical branch footprints.

The nature of the ATM-as-banking-node is changing, too. In 2001, Gene Pranger was hard at work on uGenius, a pioneer of the Interactive Teller Machine. Now, with BankOn, he’s on to something arguably even bigger: mobile video banking.

Facebank

Anyone interested in seeing Facebook’s intentions when it comes to finance should take a look at the social network’s new European payment license. That’s in addition to the firm’s recent hire of David Marcus, PayPal’s former president, to run Facebook Messenger.

Facilitating global payments is a large opportunity that gets even bigger if you can figure it out for B2B payments. Payoneer recently acquired escrow-as-a-service firm, Armor Payments, and is serious about bridging the trust gap in global B2B payments.

What’s going on with demand for banking apps?

Mobile apps are growing, even if that growth is slowing down. Historical numbers of people are using mobile banking apps. The growth has been led by a younger demographic, which makes sense. Getting the rest of banking customers to use their phones for banking service is the next challenge. There’s still a lot of opportunity for banks to migrate older customers to other channels.

Finance bots

I wish I had an on-demand financial planner running my financial life. Now available on Facebook Messenger, Digit bot has helped people save $250 million.

Facebook has been encouraging financial institutions to use its messaging app as a bot platform. B2B communication platform Slack is also competing to become a financial bot platform and is actively investing in a variety of finance bots, including in startup Sway Finance.

Blockchain hype

Blockchain hype still outstrips real world activity. To see what’s going on in the real world, Tradestreaming spoke to a blockchain expert at SAP.

Can blockchain make life better for the world’s poorest people? On the business side, DTCC, Wall Street’s clearinghouse, thinks it can help and wants to adopt blockchain technology.

For its sake, Bitcoin may never be a currency. It’s something way weirder.

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SAP’s Kris Hansen on blockchain: ‘Put the trust into the algorithm’

In our coverage of bitcoin and supporting blockchain technologies, it’s clear that the hype way overshoots what’s actually happening on the ground. So, to better understand how companies are actually interacting with distributed ledger tech, we went to Kris Hansen.

Kris is a senior principal at SAP, focused on financial services at the global software player. In his role on the value engineering team, he works to identify ways that digital approaches can be used to find interesting opportunities to create disruptive business value. A self proclaimed “recovering” chief architect of a bank, he brings an interesting perspective on changing business models and technology platforms in financial services.

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Below are highlights, edited for clarity, from the episode.

The challenging transformation of today’s banks

I often refer to myself as a recovering chief architect from a bank. It can be a tricky job. You have all this technology complexity and legacy investment. And then you have the business showing up and saying it wants to do something completely different. You’ve got to somehow get this massive legacy shaped and formed in the right direction to go forward. Occasionally, you get an opportunity to transform and rethink the legacy. But that becomes a challenge in managing scope and finding a solution that’s really going to make a difference. You’re on the hook for feasibility (the stuff has to work) and the business outcomes (the business has to be happy with what they get). Being a bank architect is a tough job.

Preparation for the coming blockchain movement

Personally, I’m a tacit learner. For me to understand Bitcoin and Ethereum, I set up a node to see it and understand it. Businesses need to start getting hands-on. Understand what cryptocurrencies are and the differences in the platforms. From there, you have to start thinking about what it would take to connect the existing world to this new world. Quantifying that gap and determining what’s involved to change is where organizations should be at this point.

Industry cooperation around distributed ledgers

I’d really like to see us get to industry-wide collaboration. One of the great advantages of the consensus protocol is that we can establish trust where trust doesn’t need to be explicitly built between counterparties. We can put the trust into the algorithm. We can put the trust into cryptography.

I don’t see a lot of that happening with most of the enterprise adoption of these platforms. We aren’t there, yet. There tends to be more of a closed network. Some of it is the challenge of building the network and getting people to the table and agree on how to run these proof of concept projects. It’s hard enough to get multiple divisions in a bank to work together. Multiply that by 40 and you can see the challenge with some of the blockchain consortia. They have a lot of meetings. What we need to see is some of the bureaucracy-breaking concepts built into the platforms. Instead of having meetings, let’s lean on consensus technology to agree on how we’ll form this consortium. So far, the technology hasn’t helped align these groups.