As part of our Fintech theme, we interviewed some of the Blockchain start-ups that are part of the disruptive movement taking hold in finance. We wanted to separate the trends from the hype and find out more about the successes and thoughts for the future for Fintech.
The first thing that becomes apparent from talking to the various FinTechs is their discipline and focus on their core business. They know their target market and they work hard, whether that’s to secure their next customer or their next round of funding. This flies firmly in the face of an industry dominated by hipsters.
The second striking thing is that as the hype subsides (particularly around blockchain), the funding, start-up and blockchain markets are all maturing, where funding is becoming reassuringly difficult to secure.
Meet the disruptors: The Consultancy Peter Bidewell, CMO, Applied Blockchain
What does Applied Blockchain do?
Applied Blockchain builds blockchain applications and solutions. We build the top layers of the actual user interface for blockchain solutions. We’ve also developed a proprietary framework stack, called the Applied Blockchain Mantle, which includes several different enterprise grade components and sits on top of any underlying platform, such as Ethereum, Hyperledger or Corda. The Mantle ensures that we are future-proofing our solutions to work with the most mature platform available, that our solutions are built to work seamlessly with other non-blockchain systems and enables us to build solutions very, very quickly. We’ve also included several different modules that take the stack to an enterprise-ready level. We’ve got modules which cover security, data privacy, key management, performance and Enterprise integrations. These all ‘plug and play’ into the wider solution that a client may want. We always work with the most mature and suitable technology for our client solutions. For us right now, that’s Ethereum. We’ve looked at Hyperledger, we’ve looked at Eris (Monax), and all the different kinds of underlying platforms, and have worked with each of them as well. But for us, Ethereum is the best, especially the latest release, Parity, which is about 100 times faster than the previous version. Ethereum, and a few others, are being built by techies who love the tech. They’re not business people, so their mentality in terms of what they’re looking to build isn’t going to try and solve specific business problems or use cases. Instead, they are trying to work out the maximum the technology can achieve from a technology perspective, which on the face of it is not particularly useful for commercialisation. On the other side of it, you have platforms such as Hyperledger, which is built purely for commercial use cases. One of the issues we’ve found with Hyperledger, and why we aren’t using it currently, is that it hasn’t yet been used in a live setting, but rather only tested in a safer lab environment. Ethereum, by comparison, has been battle-tested in the public domain for two years now, and the core protocol has never been successfully compromised.
What’s been the biggest lesson you’ve learnt over the course of the blockchain and start-up journey?
For me it’s the power of collaboration. Every blockchain is a shared ledger of information between many disparate parties; the foundation of the entire technology itself is about being open source and being collaborative. We realised there would be a move towards a universal standard of blockchain quite early on, but we saw there were issues trying to pick a winner in a new market, and there are always a small number of winners and a huge number of losers. Therefore, we have built our Mantle - to enable our clients to easily switch to the best technology available at any given time. However, when it comes to consortia, we also realised that there is a disincentive for firms that are looking to achieve profit to work collaboratively together with their competitors, co-create blockchain platforms and share confidential information. So inevitably, there is going to be a grouping in the beginning, but then a reduction in the number of members of these different consortia as and when they deem they’re ready to then they do it on their own. We’re already seeing this trend with a few of the major banks leaving the R3 consortium, for example. Ultimately, however, blockchain is a technology built on trust, so for its true power to be realised there needs to be many different companies collaborating on the same network and sharing data.
How has the blockchain ecosystem changed in recent years?
Everyone realised that it’s not Bitcoin, it’s blockchain. And then people say, “Oh wait, now it’s not blockchain, it’s distributed ledger technology.” And there’s this big shift from one to the other. But what does that mean? They’re buzzwords, there’s not necessarily anything underneath it. What I think we’ve seen is a transition from a purely transactional occurrence, where Bitcoin is something like a calculator, where you have inputs and outputs, the next generation platforms, such as Ethereum, are much more like a smartphone. They’re a platform that you can build anything else on top of - any application. I think what’s interesting is we’re moving away from a transactional blockchain concept towards things like smart contracts, where you can have this Turing complete language, where you can computationally code anything you want into it. And build anything on top of that. This is quite interesting for us, because rather than focusing on the payments space or financial services, we are opening to almost any industry out there. Right now, we’re talking with companies from property, from supply chain management, even the athletics industry. There are a few interesting conversations around that. I think people are starting to realise that it’s not just this kind of “Bitcoin is bad” concept, but there is a greater use case for efficiency gains across many different industries. There’s a very interesting movement in the insurance industry, which is cottoning on to the idea that blockchain could be beneficial. This is particularly true for reinsurers, who don’t have access to the end customer. And suddenly that opens the market to them in a totally different way. An example is BABB, who are one of our clients, for whom we are building the world’s first blockchain based bank. As part of that, we have the entire banking stack integrated with biometric data capture in the customer on-boarding process. Imagine an iris scan or a finger vein scan, to prove that a person is a unique human being. We can capture some biometric information as their means of on-boarding, but also of course as sign in. And so, through that methodology, a new customer can create their account, where all their personal information is stored within a smart contract, securely and encrypted. This means not even the bank can access that person’s information. That individual can then decide, on the same shared network, who they want to share that information with, as and when, and the right amount of information. Straight off the bat, people without an identity now gain a digital identity. Imagine someone in Africa: they don’t have a birth certificate or a passport, but now they have some form of ID to prove who they are. Secondly, of course, it provides them with financial inclusion. Now suddenly the efficiency gains are huge. Rather than the bank being a central point of authority that decides who this individual can receive services from, it becomes a much more open marketplace. The interesting part is that it’s moved very, very far away from the concept of what bitcoin might be or a transaction based solution. Nothing about this involves money or crypto currency or any value of any kind. It’s pure data transfer and the sharing of a shared ledger of information, rather than currency. The last one to mention is SITA, which is the Aviation Authority. We’re working with them to build out a registry for drones. And as part of that, they’re looking to build a platform to combine drone manufacturers and drone operators and basically have this shared ledger of information as to who is flying what drone in the sky at what time. And to have these people held accountable to, for example, flight paths and other things like this. Often, the problem with blockchain is the best use cases require co-operation to maximise the value. It’s both one of the biggest benefits, but also one of the biggest pitfalls - that you need everyone to be working together, but of course the trick here is the incentives. The reason why people work together is because everyone wins and there must be a way that everyone wins for the foreseeable future for blockchain to have real traction.
Meet the disruptors: The closed-source Blockchain Vendor Nick Williamson, CEO, Credits
Tell us about your architecture and your innovation process
Broadly speaking, we have two ‘products’: Credits Core and the Credits platform. Credits Core handles the logic of being a framework that allows you to create blockchain nodes, and that if you match enough nodes together you get a blockchain network. With block chains being distributed systems, you can host them on multiple machines and then they collectively form one circus. Core implements all the logic around the consensus mechanism, around what business logic you’ve enabled for your use case. We were building a Kotlin version and a Python version in parallel, as to the reference implementations for Core itself. It was because of this focus that we decided to stop working on the Kotlin version. Our thinking has changed: we’re looking at ways we can support a broad swathe of languages in the long-term, (12-18 months) more holistically. We also had fewer people on the team that were fluent in Kotlin, and everybody on the team was fluent in Python. We did a pretty major refactoring of the architecture over the course of this year in a way that has resulted in a much more modular and composable system. Before things were a bit more tightly coupled. The abstractions were a little less clean. Now we’ve landed on a set of interfaces that cleanly separate the constituent parts of the system. We’ve managed to remove a lot of the moving parts and a lot of the complexity that has been beneficial for the system and paying down a lot of technical debt. It’s taken a lot of discipline to juggle that and come out with something that looks like it will be general purpose in the future. One of the biggest lessons has been keeping iteration and feedback loops as tight as we can, because we operate under time constraints. You’re racing against the clock in a start-up; either you run out of cash or you hit profitability. You need to test your assumptions constantly, and keep them in contact with the real world. That’s not only true when you’re building a code base in the spirit of an iterative agile approach, but it’s important when you’re trying to build out business opportunities or organisational capabilities as well.
How has your acceptance onto the UK Government G-cloud changed your business?
We made a commercial shift and began to focus on the public sector for a few reasons. First, there aren’t many other companies concentrating on the public sector right now, but there is a lot of latent demand coming out of the woodwork, especially here in the UK. We also think that there will be a shorter time-to-market in certain respects than in financial services. Moreover, once you lay down some of the non-financial use cases, they become very compelling: complementary products to some of the financial services use cases you can think of. For example, with some of the supply chain work that we’re working on, there are obvious ways that you can pair a trade financer supply chain finance product to that offering. We’re also seeing that in some financial use cases: without tie-ins with the same use case in a non-financial sense, you’re often looking at cannibalising an existing revenue stream. Even if it seems like it will be beneficial in the long run, it’s a little harder to convince somebody who has that revenue stream that they should cannibalise themselves. With a lot of the non-financial use cases, you can either improve operational efficiency on their cost basis, or can add a new revenue stream. You can also remove an avenue for fraud on one of their products. We’re seeing incentives just be a little bit better aligned in the short-run. A lot of the commercial opportunities that have come our way are because of our acceptance onto G-cloud. Opportunities that have surfaced look less like the G-Cloud infrastructure itself being important to the projects. But more they surfaced because wewere able to go through that approval and onboarding process in the first place and be awarded that contract. So we’ve been putting together some partnerships that have come together very quickly on the back of it and we probably wouldn't have had the chance to do that without having gone through the process.
What are the opportunities and challenges of being a blockchain start-up?
When you are working on the buzz-wordiest buzz word of the century, everybody wants to talk to you. It’s very hard to have a first pass filter for who is going to be valuable and who’s just going to want to talk your ear off. You must be constantly pruning that at the top of the funnel. Everybody should be disciplined. Everybody in a small team needs to manage themselves, one a day-to-day basis at least. In a start-up, every title is aspirational. Everybody that joins a start-up grows into a role, and their roles grow around them as well. The role of the VP of Engineering is very different in a five-person company than it is in a fifty-person company, and this is true for all roles. Everybody should be doing everything they can to make sure that they both keep their head above the water in the craziness of the day-to-day, but is also laying the groundwork for being ready for that next stage, if we do manage to walk that tightrope and expand. [The industry] has shifted away from a cryptocurrency focus to blockchain being a better ledger for all use cases that could utilise a ledger, and thereby being a much more general-purpose software. My view’s always been that we’re going to start off with one or two things and those are going to be the low-hanging fruit where it’s obvious this makes sense, but like with most technology as we start using it for that low-hanging fruit, we’ll figure out better what its actual properties are, what it’s good at. Recently we’ve replaced a lot of the breathless hype with actual potential with people who understand that domain. One of the projects that I think was initially overlooked, but that we’re now seeing quite a bit of demand for, is the provision of an auditable document store. Having a trail where even a small company can give a strong assurance about that data, and rather than needing the big company reputation of, “We employ thousands of people and have a big footprint so that’s why you can trust us.” Instead you can trust the small player because we can verify mathematically that they’re not changing the data on us. I don't think blockchain will necessarily eat the banks’ lunch. I think it’ll further the un-bundling of the various parts of the financial system, which is nothing new in Fintech overall. I think it has the potential to change how business models work, but I think that’s merely because of the unbundling that it can enable, rather than any intrinsic properties of the blockchain itself. The problem with predictions is that you always overestimate the long-term and underestimate the short-term. Five years is in the middle, so it gets even hazier. Now that I’ve appropriately hedged my answer that it means I’ll be wrong! But in five years’ time I think we’ll see Blockchain being used behind the scenes in identity and banking, at least in places where it can leapfrog. Whether it’s Asia, Africa, or South America, I think we’ll see it much more in consumer-facing instances. In The Innovator’s Dilemma, they talk about disruptive technologies versus sustaining technologies, where disruptive technologies unseats legacy and cannibalises legacy from the bottom up. Where sustaining technologies add to the operational efficiency or revenue streams or what have you, for existing players. It’s difficult to tell whether an emerging technology is going to be sustaining or disruptive. If I had to put a line in the sand and if I was still gambling for a living, I would say it’s more likely to be a disruptive technology on the consumer side in less-served jurisdictions and more likely to be a sustaining technology on the b2b side, sort of in the more developed world. Now, that’s in five years’ time. Past that, it’s hard to tell.
Meet the disruptors: The Application Kush Patel, CEO, Tallysticks
Tell us about Tallysticks
Tallysticks does two things using distributed ledger technology: One, it focuses on invoicing, and number two, it focuses on invoice financing. Right now, we operate in Europe, but the goal is to eventually operate throughout the world. Currently there’s a $2tn funding gap globally. This exists not because banks don’t want to lend, but because they don’t have the right tools to lend to SMEs. The funding gap doesn’t exist because SMEs aren’t unable to manage their resources properly; it’s largely because large corporates leverage their balance sheets. What do I mean by this? Basically, major corporates pay on 60- and 90-day payment cycles, and SMEs generally must pay their bills in 30 days or less. When you look at the natural incomings and outgoings of an SME, there’s a large gap between 30 and 60, and sometimes a larger gap between the DSO [day sales outstanding] and the DPOs [day payables outstanding]. What we’ve done is use distributed ledger technology to re-work the invoice financing process. We know that there are only three ways that any SME can get a raise or borrow money. One is just the personal creditworthiness of the entrepreneur or the owner. In some cases, you may be able to get some loan against the company itself, if the company’s financials are good. The first option, it either tends not to happen or the entrepreneur or the business owner doesn’t want to do that. The second option is asset finance, so a loan against a property or equipment. A problem with the modern-day economy is that we are moving away from an industrial economy towards a service-based economy, and so there aren’t too many physical assets that an SME can finance against. Usually, if they can finance something, they can finance it right at source, which leaves SMEs with a third option, and that’s financing against receivables. But receivables financing isn’t as widely used for SME financing, particularly outside of developed countries, largely because it’s a very manual, time-consuming, high-overhead business. It can be quite lucrative, but there’s usually a sweet spot for banks and other lenders. Now, when alternate lenders get involved, they charge high interest rates. When the banks get involved, they have affordable interest rates, but again, there’s a sweet spot. So, they will only chase after a company that’s larger. We want to provide a solution that allows any corporation to get invoice financing against any other corporation that pays on extended payment terms.
What’s been the hardest challenges you’ve faced since inception?
We use Ethereum, hosted on Microsoft Azure. The biggest challenge we faced was stabilising the system. Every time we added another functional component that would de-stabilise the system. So, to get a fully-functioning Blockchain solution up and running and stabilised to the point where it could transact on a steady basis took a lot of effort and a lot of engineering. It’s pretty much all R&D that made that happen. There’s no precedence out there for a solution like this, right? The second challenge, which has now been alleviated, was scalability. For a long time, the previous version of Ethereum could only do X number of transactions once we added things like data privacy, additional nodes, etc. With some very sophisticated code work. Now, with the new Parity system on Ethereum, we can do hundreds of transactions per second. From the business side, we came in right at the top of the hype cycle, so getting into the Tech Stars Accelerator platform after only being in business for about 4 months was both a challenge and an achievement
How is the business/fintech/start-up landscape changing?
What you’re seeing now is the wheat being separated from the chaff. We’re seeing several companies raise astronomical amounts of money from almost nothing. But we’re also seeing companies who have had a lot of hype finding it difficult to raise another round of funding. Furthermore, there are some firms which raised a lot of money who are now finding it difficult to implement their product in the corporate environment. Thus, the bar has been set much higher for companies like us who are now raising money. So, that’s how it’s changed, and that’s from a financing side. Then, there’s the commercial side of it, which I think originally, if you look at Blockchain, it was all about Bitcoin, and cryptocurrencies, and exchanges, and things related to that, but now it’s very much about DLT and Blockchain. I think [fintech is] going to continue to reshape the way the banking industry looks. There you have a few different dynamics happening in the finance industry. Number one, you have this move towards the completely online bank. The millennial generation doesn’t care about going into a branch and doing all their banking there. They just want to handle their finances online, and don’t need to see that logo on the high street. If you can market to them effectively, and bring your storefront to them, then they’re probably going to use your services. If the service has a reputation, then they’ll sign up for that service. So, from that perspective, those banks, those online banks are going to have to provide services. Those services are going to be different things: new lending platforms, like funding circle or invoice financing solutions, perhaps like us or someone else, like Market Invoice. They should offer these different services, and as an entrepreneur, and as a new business or a start-up business, you must recognise that that’s where the market is going. That’s what’s happening in terms of the shift towards online banking. You still should offer [those traditional services], and so the model that allows the bank to do that and can also market towards the online bank, that’s the one that’s going to win, ultimately. So, I don’t think it’s something whereby they’re going to eat the lunch, but the banks will eventually come to some of these platforms and say, “You know what, we’ll market your service on a white label basis.” The banks will buy some solutions and bring them in-house. That will be an opportunity for new people to replicate that business model in maybe a slightly different manner for the next bank to buy out, right? So, it might be technologies that are bundled together, kind of like Amazon. Amazon offers all these different services, but there’s one unified storefront, which is Amazon.com something like that. If I think about it, 5 years down the road, you’re not going to see that, but 10, 15 years down the road… You might not see it fully, but 10 years down the road, I think you’ll see it visibly, and 50 years down the road, I’m almost guaranteeing it. Between now and then, it’s a long road, though, for any start-up to be involved with that journey that is coming about. So, FinTechs will be around for some time.
Meet the disruptors: The open-source Blockchain Vendor Erik Olofsson, Head of Partnerships, Chain
Tell us about your architecture and any projects you might be able to talk about
Our software is called Chain Core. There is a Developer edition which is open source and available to download on our website. There is an Enterprise edition that has additional features including HSM integration, high availability and high scalability. Chain Core is an implementation of the Chain Protocol that we have authored. With the Chain Protocol, we have borrowed elements from the Bitcoin protocol and Ethereum, and included a large of share of our own thinking. The projects we specialise in are in financial markets with focus on moving value or assets around. Assets could move within a company but most use cases are aimed at moving value between different legal entities. You can issue both fungible and non-fungible or non-exchangeable assets on our technology. Examples of fungible assets are dollars or stock. Non-fungible assets can include securities with a unique set of proprieties that you only issue once. Beyond assets, we have looked at other use cases too; for instance, proxy voting. We are building B2B Connect, which is a network for B2B payments with Visa. It is great to be part of this project, and it a milestone for Visa: they very rarely go to market with a new network (B2B Connect is Visa’s first new network in about 50 years). Another project I would like to highlight: we produced the first enterprise Blockchain network for NASDAQ Private Markets a little more than a year ago. We have done most of our work in capital markets, payments and banking. In capital markets, the focus has been on moving securities around, e.g. buying and selling securities such as at NASDAQ. But we’ve also looked at securities lending, short selling, futures, derivatives and some other use cases, including some outside of the capital markets. In banking we are currently exploring how Chain Core could be used to run a general ledger: core banking applications that will give clients a better and more secure model. It will give users the possibility to distribute control and access in a different way within the company. It also gives you a platform to expand on and to innovate on as you are building initial services and perhaps connecting and sharing ledgers with other banks.
Has open sourcing the platform changed the business?
Yes; there are a couple of good reasons for going open source. First, it has given the developer community something they can prototype on, work on, learn from, and be inspired by. They have an additional tool and an additional technology to what is out there already. Secondly it helps us as a company. Our old business model was this: become a customer of ours and then we can give you access to our technology. We got to a stage where we realised there was a huge demand out there, which put a strain on our resources. Now, everyone who uses our Developer Edition and wants to upgrade to the Enterprise Edition can contact us, even if they haven’t contacted us in the past. It is a model that is going to help us scale more effectively. As with any open source model, our aim is to convert non-paying users into paying users. We want to enable the great masses to use our technology and the ones who are going to make a lot of money and go after a lot of new business opportunities pay for using it. The Enterprise Edition is for anyone that is serious about security and wants to build a highly available and scalable network.
How has having a financial services-based customer base shaped Chain’s journey?
Most of the firms we work with are conservative and don’t make decisions lightly. They don’t go about doing things in a rush - mostly because they are highly regulated and dealing with legacy technology. They’re custodians of trillions of dollars, so they should have a conservative approach. Considering this, and then acknowledging that there is a need to coordinate five of these companies; it can be tough to start off a project like that. That is also the reason why it might make sense to start looking at getting some standalone value and doing it within your company as a first step. Given this background, it can be tough developing and launching a platform that can be at once scalable, confidential and programmatic. You have these tensions, but on the other hand you are keen to build something that is fast and performant. You want to build something where you can achieve certain levels of privacy or confidentiality because of the use cases we are looking at. You also want to be able to introduce complex business logic and these programmatic abilities that I mentioned. I would say the hardest technological challenge has been solving these requirements that our customers have and still shipping our product within a reasonable time frame. I think the major lesson is viewing Blockchain as a strategy as opposed to a technology. Don’t look at incremental use cases, don’t focus on how our customers can serve their existing customers a tiny bit better or how they can increase market share a little bit. Instead, shift the focus and say, “Can we do something more disruptive? Is there a way to not increase our market share, but change the market structure in a way that it is suddenly centred on you?” Is there a way to launch products where you don’t decrease settlement time, transfer time to half of what it is today you take it down to basically zero or instant? You don’t decrease costs by X%; you can move it down to almost no cost or free to do a cross border payment. I think once you stop getting out of the conversations where you go through line item by line item and you say, “These are the incremental improvements that are going to be the effect of us adopting this technology.” You get out of that discussion. Every financial institution today has at least one dedicated person, and more likely a team working on Blockchain at the moment, so the hype has helped immensely to elevate the discussion. You need to be high enough in the organisation of your customer, preferably top of the C-level and point out the direction saying, “You know what we are going to go in, we are going to take this new market here and we are going to do something that has never been done before.” The most important lesson for us I think has been elevating the discussion from a more tactical one to a highly strategic one.