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For Banks, A Lesson On Blockchain From The Age Of Internet Startups

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The whispers have grown to loud chatter when it comes to blockchain technology and the impact it might have on the financial services sector. What once may not have been taken seriously — cryptocurrencies and futuristic payments — is today exploding as the innovation financial institutions are targeting for investments, largely hoping to get a jump on the blockchain before disruption takes a bite out of their traditional business.

For some, it may echo the rise of the Internet. At first, banks may have scoffed at the thought of an intangible technology overhauling the way the world works, and yet, here we are.

The latest research from PwC found that banks are no longer taking blockchain technology as an easily ignored fad.

“FinTech is changing the FS industry from the outside,” stated PwC EMEA FinTech Leader Steve Davies in an announcement revealing the research earlier this month. “PwC estimates within the next three to five years, cumulative investment in FinTech globally could well exceed $150 billion, and financial institutions and tech companies are stepping over one another for a chance to get into the game.”

For FIs, it’s better to be friend instead of foe with the disruptor. Researchers at PwC found that, for the banks surveyed, they believe that 23 percent of their operations could take a hit as a result of FinTech innovation like blockchain. Traditional banking and payments are most at risk for this shakeup, the respondents added.

In just the next five years, payments players said they fear these disruptors will take up to 28 percent of their business; bankers anticipate losing up to 24 percent.

FinTech’s ability to meet modern customer needs and take advantage of data analytics are seen as two of the biggest factors behind why banks are so vulnerable to this industry.

“The free lunch is over,” PwC concluded. “FS must leverage the FinTech ecosystem.”

Banks have put this call to action through various joint ventures that have popped up in only the last few months. One of the largest is the R3 Consortium, a collaboration that includes the biggest names in banking, like Bank of America, Citi, Goldman Sachs, RBS and several others.

The R3 effort aims to explore how these financial institutions can work with the R3 startup group. One of the members is UniCredit, an Italy-based bank that recently published a whitepaper exploring the potential use cases for blockchain technology within the financial services industry.

“Shifting focus from cryptocurrency to the technology underneath, it is possible to understand the real potential of blockchains in financial services,” the report noted.

“Post-bitcoin phase has opened new opportunities; indeed, financial institutions have already started to study and experiment with blockchains, and a large number of related startups have been funded.”

The bank compared early venture capital investments in blockchain to the funding patterns seen in Internet startups in the 1990s. In 1995, Internet startups secured $250 million in venture capital; the equivalent to the early age of blockchain, 2014, has already seen $362 million.

This year, blockchain startups are expected to see $607 million in funding, a similar spike in funding as seen in early Internet companies in 1996.

In its report, UniCredit outlines the possibility for banks to grasp blockchain technology for payments, interbank transactions, compliance and Know Your Customer regulations, trade finance and more.

With hypotheticals exploring both the disruptive outcomes of using blockchain to change these spaces, as well as more conservative approaches to how these processes can evolve, UniCredit concluded that banks can benefit from the innovation, despite the potential for FinTech startups to take away market share from traditional FIs.

“A large participation into blockchain applications will maximize financial industry advantages,” the report said. “Furthermore, a relationship with FinTech environment, based not only on competition but also on collaboration, will bring great advantages to both financial institutions and FinTech startups.”

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