Monthly Archives: August 2016

Change the way we do business

download-1Banks think it could be the future of financial transactions, while diamond miners hope it will help end the trade in conflict diamonds.

And this week the UK’s chief scientific adviser encouraged the British government to adopt the technology.

But what exactly is it and why is it causing such a stir? Technology of Business (tries) to explain.

Does it have anything to do with bicycles?

No. Blockchain is a method of recording data – a digital ledger of transactions, agreements, contracts – anything that needs to be independently recorded and verified as having happened.

The big difference is that this ledger isn’t stored in one place, it’s distributed across several, hundreds or even thousands of computers around the world.

But how does it work exactly?

Digital records are lumped together into “blocks” then bound together cryptographically and chronologically into a “chain” using complex mathematical algorithms.

This encryption process, known as “hashing” is carried out by lots of different computers. If they all agree on the answer, each block receives a unique digital signature.

“You don’t store details of the transaction, just the fact that it happened and the hash of the transaction,” explains Adrian Nish, head of threat intelligence at BAE Systems.

Once updated, the ledger cannot be altered or tampered with, only added to, and it is updated for everyone in the network at the same time.

What’s so clever about that?

Well, the distributed nature of a blockchain database means that it’s harder for hackers to attack it – they would have to get access to every copy of the database simultaneously to be successful.

It also keeps data secure and private because the hash cannot be converted back into the original data – it’s a one-way process.

So if the original document or transaction were subsequently altered, it would produce a different digital signature, alerting the network to the mismatch.

In theory then, the blockchain method makes fraud and error less likely and easier to spot.

Is this a new thing?

The idea has been around for a couple of decades, but came to prominence in 2008 with the invention of Bitcoin, the digital currency.

Bitcoins are created by computers solving complex mathematical puzzles and this requires lots of computing power and electricity. Blockchain is the technology underpinning it.

But there isn’t just one program – lots of companies, from Ethereum to Microsoft, are developing their own blockchain services. Some are open to all (“unpermissioned”, in the jargon), others restrict access to a select group (“permissioned”).

Why are the banks so excited?

“Banks do very similar things to each other, even though they compete,” says Simon Taylor, vice-president of blockchain research and development at Barclays.

“They basically keep our money safe and a big computer keeps track of who has what. But getting these computers to talk to each other is remarkably complex and expensive – the tech is getting a little old,” he says.

If banks started sharing data using a tailor-made version of blockchain it could remove the need for middlemen, a lot of manual processing, and speed up transactions, says Mr Taylor, thereby reducing costs.

Banks Technology

downloadThat was the key message emerging last week from FinTech City London, a series of events for financial services technology professionals organised by the CEO Agenda and Icon Corporate Finance.

Fintech, as financial services technology is modishly called, is enabling nimbler, hi-tech companies to re-engineer most financial activities, from payments processing to personal loan applications, and cut out the middleman.

It’s what Clayton Christensen, professor of business administration at Harvard Business School, calls “disruptive innovation“.

While the things we do with money – save, borrow, invest, spend – have not changed much over the centuries, the way we interact with financial institutions is “drastically changing”, said Alex Scandurra, director of innovation strategy and business development at Barclays.

‘The micro multinational’

And that’s largely to do with mobile, open-source databases and cloud computing. About three-quarters of the UK population owns a smartphone, and there are more than five billion mobile phones globally.

“As a result of the proliferation of technology, digital, and now mobile with it, the barriers to entry have significantly decreased,” said Mr Scandurra. “Now we’re seeing that teams of 10 to 15 people can actually take on the large incumbents all around the world.”

Whereas big financial institutions have to cater for a mass market and try to please everybody, small fintech companies can focus on niche markets, globally spread. They can form what futurist and writer Alvin Toffler called “the micro multinational”.

One such company is Funding Circle, the peer-to-peer (P2P) lending service launched in 2010, which aims to provide businesses with access to loan funding while providing investors with a decent return on their money. Its 65,000-plus investors have lent over £208m to UK businesses so far.

In March 2013, the UK government began lending £20m to British businesses through Funding Circle as part of its Business Finance Partnership scheme.

Co-founder and chief executive Samir Desai said that while his company had certainly benefited from the 2008-13 banking crisis and the consequent collapse of trust in High Street banks, it is new open-source technologies and databases that have enabled P2P lending companies to grow.

“Every loan that goes through Funding Circle is funded on average by 700 different people,” he said “Those loans can then be bought and sold by other investors through a secondary market. So we have as many mini-loans going through our system as any bank, and thousands of secondary market transactions going through each day.

“We couldn’t have done that without these new open-source technologies.”

New credit scoring system?

Open-source databases that anyone can access and adapt, such as Hadoop and Cassandra, can process and structure vast amounts of data from a wide and growing range of sources, including social media, helping P2P lenders and other financial companies assess creditworthiness to much higher degrees of accuracy than before.

“Banks haven’t started to embrace these new types of technology,” said Mr Desai. “So we can lend to businesses they wouldn’t even consider.”

So now even your Twitter comments could affect whether or not you’re granted a loan, and companies like Facebook could end up displacing old-fashioned credit reference agencies.

Giles Andrews, chief executive and co-founder of Zopa, a more established P2P lender founded in 2005 that has lent more than £455m to individuals and sole traders, agrees that customer data – its efficient collection and analysis – is key to success these days.

“The business is not a bank and I’m not a banker,” he added. “We’re more of a data company.”

This is why Zopa has just hired its first ever chief data scientist, he said, who comes not from a bank, but from Amazon, the online retailer.

Legacy issue

Newer fintech companies are not encumbered by old technology, the so-called legacy systems that traditional banks struggle to integrate with newer software and hardware.

The Lloyds Banking Group IT glitch, which affected debit card and cash machine transactions at the weekend, is the latest in a long line of big bank technology problems.

“It’s an opportunity for the new challengers who don’t have that legacy issue,” said Sue Langley, chief executive of UK Trade & Investment’s Financial Services Organisation, “because it’s much easier with a blank sheet of paper to…. come up with something new.”

“The banks have an increasing need for technology,” said Mark Boleat, chair of the City of London’s policy and resources committee. “Some of that comes from their huge IT departments, but an awful lot of it is coming from new and start-up businesses.”

Alex McCracken, director of ventures groups at Silicon Valley Bank’s UK arm, believes we will see a polarisation in financial services, with global all-you-can-eat banks serving multinationals at one end, and small, technology-driven niche players serving local needs at the other.

“Corporates and small businesses are going to be able to pick and choose their niche service providers,” he said.

The mouse that roared

Mobile payment companies like Square, simpler direct debit providers like GoCardless, and foreign currency specialists like The Currency Cloud, all are offering financial services at lower cost and greater convenience through clever use of the latest technologies.

Are the big banks running scared?

Last week, US banking giant Wells Fargo banned some of its staff from investing in for-profit P2P lending companies, such as Lending Club and Prosper, admitting that they were competitors.

That is the wrong approach, argues Barclays’ Alex Scandurra. His bank is collaborating more with tech entrepreneurs and start-ups, as well as offering non-banking products such as Cloud It, an online data storage service.

He calls the approach “amplification through collaboration”.

Labour leader Ed Miliband may want to increase competition by forcing big UK banks to offload High Street branches, but to many observers, this is a red herring.

Blockchain tech takes off

These are some of the scenarios being mooted by an increasingly excited blockchain community.

The technology that underpins the cryptocurrency Bitcoin is nothing new – it’s been around for decades. It’s just an encrypted database that’s distributed across a computer network.

But what makes it different is it can only be updated when everyone on that network agrees, and once entered the information can’t be overwritten, making it extremely secure and reliable.

And trust, as we know, underpins most business transactions.

“Blockchain, for perhaps the first time, presents a legitimate threat to the status quo,” says Terry Roche, head of financial technology research at financial advisory firm, Tabb Group.

The tech has spawned a new generation of start-ups looking to find new, related applications, from peer-to-peer lending to smart contracts.

No restrictions

For example, OpenBazaar is a way people can sell anything to anyone, anywhere in the world using bitcoins.

Unlike with eBay or Amazon, users don’t visit a website but download a programme that directly connects them with other potential buyers and sellers.

“Our goal is to unbundle the incumbent marketplaces around the world by offering a more private, secure and flexible option that isn’t controlled by any one corporate interest, but rather, by the users themselves,” developer Brian Hoffman tells the BBC.

According to OpenBazaar, cutting out the middleman means there are no fees, no restrictions, no accounts to create, and you only reveal the personal information you feel comfortable sharing.

The software is now in its testing phase and has been downloaded nearly 20,000 times in the last three weeks. Other decentralised marketplace concepts include Syscoin, which is also a digital currency.

Smart contracts

Another major development exciting the industry are smart contracts, programmes that can automatically verify that contract terms have been met, and, once that has been done, authorise payment – all in real time without any need for middlemen.

The results are then indelibly recorded in the blockchain database. Some believe – perhaps fancifully – that such contracts could remove the need for lawyers one day.

Companies like San Francisco-based SmartContract and Hedgy are already building businesses based on the concept, which could have applications in the financial, property and commerce markets.

By incorporating smart contracts with the “internet of things” (IoT) – smart devices hooked up to the internet – blockchain tech could have uses far beyond the financial sector, says Emmanuel Viale, a managing director of Accenture’s Technology Labs.

“You could have a wearable fitness tracker that would send the number of calories or steps taken to the blockchain. The data is encrypted and my identity is anonymised. The same with home medical devices,” he says.

“The Blockchain would create a link with health professionals – whether coaches, doctors or healthcare institutions – and the smart contract could trigger needed services – whether it’s a fitness regime or treatment for a chronic disease.”

In another example, start-up Hellosent thinks smart contracts and IoT devices could be used to monitor deliveries of fine wines.

Sensors would continuously measure the temperature and humidity of the wine in transit, then if either fell below agreed levels as recorded in the smart contract, the purchase would be automatically cancelled.

‘Crypto renaissance’

Some firms are even developing their own version of blockchain. Ethereum, for example, is a blockchain-based decentralised platform that developers can use to create their own applications, cryptocurrencies and virtual organisations.

Co-founder Mihai Alisie says giants such as IBM, Microsoft and Samsung have already started researching its possible uses.