Welcome to a new world of Trust: The Promise of Frictionless Exchange
Alternative finance Financial services and commerce depend on establishing trust in the infrastructure of transactions. Current costs of maintaining these rails and ensuring compliance on either side of the transaction (KYC, AML, etc.) is a key barrier to growth, new margins and innovation from new players.
In the last five to ten years, the FinTech industry has been chasing even minor improvements to these processes, which have resulted in significant returns for the entrepreneurs able to deliver them. Let’s be frank, though, these are mainly incremental, though very useful, improvements developed by smart FinTech entrepreneurs, and they are now doing very nicely in their corner of the market.
You won’t have to look far to find some trailblazing British firms that have made important contributions here- TransferWise, GoCardless, MarketInvoice, the list goes on. But these multi-million dollar firms could stand to deliver so much more beyond improving the traditional infrastructure, by using new transformational technology, which decreases costs and inefficiencies, while increasing security and trust. Imagine the ultimate transformation of financial services, which is underway right now, and is experimenting with creating new value to businesses and to the end consumer while delivering increases in transparency, accessibility and usability.
Distributed Ledger Technology (DLT) is already being heralded as a sea-change not only in fintech, but every industry where two or more parties transact or exchange stores of value. It has been called the Internet-of-Money, but it is much more than that; it is the Internet-of-Value-Exchange with potential immutable trust embedded. This ability and this confidence, of transacting without needing to prove trust is what makes DLT so potentially powerful. As I write, companies the world over are testing this technology to breaking point, working out its limits, its weaknesses and how best to harness its strengths within a new “killer” application.
Today, particularly online, no matter what we are trading, selling, or buying, we need to prove the other party’s existence, credibility, and ability to conduct that transaction. Compliance procedures – like KYC and AML - have long been the bane of large corporates, lumbering them with huge inefficiencies in time and cost, which in turn makes growing their market share ever more difficult. The recent failures of our industry also make such processes even more critical to stability and security, with the regulator now implementing further procedures to ensure you know who you are really doing business with. If an organisation gets this wrong, the price is high - not only in fines, but also reputational damage.
The promise of DLT is that in the near future your financial reputation and record will precede you, opening doors to opportunities, while protecting you from untrustworthy parties. Although anonymised, your credit rating will be indelibly encapsulated, giving lenders and vendors the information they need to transact with absolute confidence. With each purchase, every loan, your record will be updated in real-time, creating a rounded, transparent view of your financial history. The exciting thing for the consumer is it can do the same in reverse, and offer true visibility of the trustworthiness of whoever is selling to you, reducing fraud and ensuring greater value for money in all that you buy.
The real question is which companies do you trust with keeping all of this information? Who has the right to permanently record your transactions, and contain the content of your financial future? Blockchain/DLT offers a return to a time when trust in financial firms didn’t need to be earned, and proven again, it was implicit. The challenge for fintech firms now is to become not only trustworthy custodians of data, but to provide a share of value, or a financial return to the consumers willing to provide access to it.
In a future where even your very DNA will have monetary value, the firms able to deliver trust and value beyond the transaction will dwarf those competing to recreate confidence today.