As the world returns to work after the Coronavirus crisis, nobody will be interested in aspirational pitches about “innovation” or want to hear about “blockchain” for the sake of blockchain. Instead, they will want to know precisely what problems a fintech firm exists to solve and how a product can help their company survive and thrive. In many cases, this will be reliant on better connectivity and efficiency across an entire industry, writes R3’s Charley Cooper.
During this crisis we have learned that the world is capable of going digital quickly in an emergency. The sudden and dramatic pace of change can be seen across the world. As of today, countries are accepting “alternative arrangements” for original paper export certificates, New York is allowing notary services by video, and global banks are accepting “original” documents and acceptances by email.
As we emerge from the pandemic, we will see this digital transformation extend from individual use cases and firm-level deployment to entire industries. This new market reality is a timely reminder that software developers should, as always, start with the needs of their client base and aspire to solve problems at an industry level.
While unquestionably an improvement over reliance on manual processes, regular “digital transformation” as implemented by a single firm has limited benefits. These typically include greater automation of business processes, acceleration in adoption of electronic channels, elimination of manual processes, standardisation of non-value-adding business practices and a focus on driving up data quality and speed of information flows.
Now consider achieving digital transformation at the level of a market, rather than on a firm-by-firm basis. Whilst a digital transformation project for a single firm might automate a business process between a front and back office of a bank, a digital industry transformation project might optimise the trading and settlement of the asset between buyer and seller and their custodians too.
Whilst a digital transformation project for a single firm might create a consolidated treasury management system for a multinational firm, a digital industry transformation project might link the firm’s receivables financing system with its bank and enable automated real-time settlement of obligations with suppliers across a global supply chain.
Of course, such things have been attempted before. But there have been many failures and the successes are notable by how they have resulted in new dominant centralised providers – for example for market data, messaging or settlement. The advent of blockchain architectures showed us there was a new way to tackle the problem, one that worked with the grain of existing markets.
Done right, the prize is a huge “productivity dividend” as entire markets are unshackled from their analogue histories – and these benefits can be realised in both the private and public sectors.
Tackling interbank reconciliation at the industry level
The Italian financial services industry provides a pertinent private sector use case of digital industry transformation. 32 banks in Italy recently went live with one of the first real-world deployments of enterprise blockchain technology in interbank financial markets, with further institutions scheduled to go live in the coming months. Built by the Italian Banking Association, ABI, the Spunta Banca DLT app on R3’s Corda Enterprise platform tackles the market-wide issue of interbank reconciliation.
The traditional reconciliation process for interbank transactions in Italy—formerly governed by the “spunta” process— is notoriously complex. Resolving mismatches in transactions is a labour-intensive process, hampered by a lack of standardisation, fragmented communication and no “single version of the truth.” The Spunta Banca DLT app automates the reconciliation process and enables banks to pinpoint mismatches in interbank transactions quickly by sharing common data in a secure way.
Connecting such a large and diverse group of banks in a live environment to tackle a shared problem is a major milestone for digital transformation in the finance sector, providing a glimpse into a brighter, more efficient and interconnected future for all financial markets.
The current crisis has accelerated the launch of digital technology for many use cases across a diverse range of sectors, but those that stand the test of time will be developed with an industry-level mindset, not firm-level, and will meet the high regulatory benchmarks required by bodies such as NIST.
Against this backdrop, it is clear that the age of inter-firm optimisation is over – the path forward from this crisis will be paved by software that focuses on adding real value for entire markets, connecting peers to overcome the biggest challenges they share as an industry.
Charley Cooper is Managing Director at R3.