Our previous blog post took a broad overview of business models, blockchain and trust. Today we take a look at business models and talk about LakeBanker. While they focus more on consumer financial services, many consumers are actually micro businesses, or “consumer+”. We see some interesting parallels to our work and we are delighted to be advising them.
It already appears that governments are more interested in experimenting with digital ID, while the private sector is looking more at tracking physical assets. It is also becoming increasingly widely understood that blockchain is not a magic bullet for complex real-world problems. For example, “If the problem is getting accurate information into the blockchain in the first place, the blockchain can’t solve that problem. If there’s a massive power imbalance, the blockchain can’t automatically solve that.”1
Bearing in mind such limitations, we now look at how these technologies can benefit users.
Shapes of new financial networks
In a speech in May this year, entitled “Will FinTech create shared values?”, Nobuchika Mori, Commissioner of Japan’s Financial Services Agency, made use of this clear diagram for potential ways in which financial activities in the economy will be organised:
We think that there will be different networks for different uses, even within the financial sector. For example,
- The EU’s second Payment Services Directive is encouraging a new breed of ‘interface entity’ business models to help handle the banking relationships of consumers and small businesses.
- Other financial sector regulations are resulting in more exchanges and hub-and-spoke models, for example increasing the number of central counterparty clearing houses.
Interestingly, DTCC has investigated blockchain to improve post-trade processes within its existing business model as a central industry utility. Similar tightly member-focused consortia might be well-suited to solving problems of tightly integrated industry groups2. They have been relatively well-resourced and gained initial success by starting with the large corporate buyers.
On the other hand, they have struggled to reach smaller entities. SMEs are not a simple, homogeneous mass and they face the problems noted in our previous blog post. As a result, the SME sector is relatively underserved3.
Despite the heterogeneity, the SME sector is too large to ignore and organisations that make solutions accessible to SMEs stand to make the biggest difference. The challenge lies at least as much in adopting suitable business models as it does with deft application of technology.
Shared value with LakeBanker
The LakeBanker team is developing a new business model in consumer banking. The project goes beyond the peer-to-peer finance model, which is over 10 years old now.
Their ‘crowd banking’ model could be seen as having elements of exchange centred and distributed networks. What comes across even more is how their business model echoes the main topic of Commissioner Mori’s talk: shared value created with FinTech. This is how he describes it:
“Michael Porter and Mark Kramer argued in their 2011 paper titled “Creating Shared Value” that companies can find new markets and establish competitive advantages by creating shared value with their customers, community and society, instead of pursuing business performance and social responsibility separately. By providing better products and services corresponding to the needs of their customers, companies can contribute to their customers’ growth, which in turn supports stable business for the company and leads to enhancing their corporate value. I believe that this applies to financial business as well.”4
Here are some of the ways that we think LakeBanker could create shared value:
- Better assessments of counterparties
They are planning to train people – nodes on the network – to engage in certain key activities. These could include gathering of KYC information and documentation, but also enabling better ongoing monitoring of users of the network. It presents an opportunity to both improve risk management and provide better tailored services.
- Serving wider range of customers
By working with existing social networks, not only can they utilise better, richer sources of information as above. They could also reach places – geographically and in terms of customer segments – that traditional banking models struggle to get to.
- Reducing overall costs and providing some services for free
Firstly, better risk management above could reduce costs of default and fraud, and the crowd-based model can save overhead costs in general. Secondly, as users of the network benefit from it and are engaged in it, it could foster a sense of community. These dynamics may present savings of transaction costs that can be high between strangers, without reverting to the hierarchies and implicit contracting systems present inside companies. These will lower transaction costs further.5
Challenges to overcome
Network effects and market niches
With shared value, each person’s reward reflects their engagement with the network. But also network effects become an even more important factor.
Newer payment systems such as attempts at digital cash in the internet age (including PayPal), have not supplanted systems like payment card networks. The money in a prepaid card, for example, is only good where the card is accepted. Yet the card networks have achieved the scale necessary for the benefits to outweigh their limitations6.
The card networks have found a niche in the payments ecosystem and operate in parallel to banks and other financial services. PayPal also succeeded only after finding its initial niche of power users. While the upside potential of the LakeBanker system is high, the starting user group is extremely important.
A maturing ecosystem
Funding for blockchain projects has been extremely heated recently. The activities have attracted regulatory attention, for example:
- Japan’s JFSA and legislature approved two new acts/amendments7.
- There have been various developments in the US regulatory environment, see this succinct report by White & Case for an introduction.
- Singapore MAS has issued a clarification on digital token offerings.
As regulators provide more steer, we are hopeful that participants are also maturing and will do more work early on to understand and comply with regulations. Regulators may also begin to draw distinctions between different parts of the industry.
This could take time, as regulators will want to see the performance of different companies and systems. New technology does not fundamentally change the equation. Important factors will still include those that are common to many new businesses. For example, they will need to demonstrate good systems and controls, the ability to scale the technology, apply good risk management and governance, perform good regulatory reporting and monitoring for countering money laundering, etc.
For new business models like the ones using blockchain, it is fair to expect that regulations and licenses will take time to develop. But it is not the first time this is happening, a good example is P2P finance regulation in UK, which has taken some years to reach its current status 8.
The way forward
Consumers and SMEs will continue to need financial services that work for them, for example fraud prevention systems and the ability to provide consumer protections where relevant. We are continuing to look at how blockchain can benefit SMEs and we look forward to the continued developments at LakeBanker.
- Kevin Werbach, Wharton professor of legal studies and business ethics, Knowledge@Wharton http://knowledge.wharton.upenn.edu/article/using-blockchain-clean-niger-delta/. ↩
- See also for example R3 / Corda, or supply chain finance initiatives inside and outside blockchain. ↩
- See for example this World Bank page ↩
- Mori, ibid. See also figure 2 in the same speech ↩
- For more on this, see this recent article by Tim Harford in the Financial Times discussing ‘Silicon Valley’s favourite economist, Ronald Coase’. ↩
- See this interview of Jack Dorsey (of Twitter and payments company Square) by the Verge at the Computer History Museum. ↩
- Japan: Bitcoin to Be Regulated, Library of Congress’ Global Legal Monitor, 4 Nov 2016 http://www.loc.gov/law/foreign-news/article/japan-bitcoin-to-be-regulated/ ↩
- https://www.fca.org.uk/news/statements/statement-peer-peer-applications-full-authorisation ↩