The business of blockchain

by External04 Jul 2016
Most of the major banks are in the midst of actively researching blockchain technologies and the potential impacts blockchain will have on their businesses. They are looking at how blockchain can improve back-office efficiencies, and are monitoring new blockchain ‘Fintech’ startups that could disrupt their business models. 

But for brokers, many are still unsure about what exactly a blockchain is, and whether or not it will affect them and their businesses. 

The lowdown on blockchain
A blockchain keeps records unchanged, transfers value and writes smart contracts, however these are just some of the functions, and the reality is that a trusted provider such as a bank can already do all of these. What the blockchain allows, which is different from what banks provide, is the distribution of these functions between parties that don’t necessarily trust each other. This allows anyone to cooperate on the Blockchain and provide one or many of the functions to the other participants.  

For example, service providers can specialise in creating good smart contracts that participants use or data services, ‘Oracles’ that allow identity verification or verification of asset value.  These services can be separated from funds providers that provide funding, and borrowers and their agents that provide a return on the fund provider’s investment. Blockchain allows the monolithic service provision of the bank to be broken up into micro-services provided by many competing providers. This will make the whole process much more efficient.

What it means for the industry
Blockchain can allow for trust-less collaboration in an open, smart-contract mediated consortium of funders, service providers, customers and their agents. What this means over the long term is that there may no longer be a need for a trusted intermediary, a role traditionally played by banks. Banks may find that their role suddenly changes to one of risk advisor to both wholesale and retail fund providers, or to one of an agent operating on behalf of borrowers.  The banks’ risk management and customer service functions might evolve to be different businesses. 

The potential impact on borrowers is overwhelmingly positive. In a future Blockchain consortium ecosystem, wholesale funders could compete with small retail investors to fund individual loans directly, with each loan competed for on price and conditions. Borrowers will benefit through access to the cheapest possible funds for their particular risk profile. However, borrowers in this world will still have the need for an agent to facilitate the process, including providing a level of verification of their details and an introduction to the Blockchain consortium. 

Blockchain, then, looks set to disrupt part or all of the back-office functions of banks in the medium term, and potentially the whole value chain of providing funding and services to borrowers over the longer term.  This level of industry disruption is going to cause a lot of upheaval.  

How lockchain will help brokers
In a blockchain-penetrated world, the increasing emphasis on customer service coupled with increased efficiency of back office processes will open up opportunities for brokers who can specialise in a role as a trusted advisor. The broker who is flexible, customer-centred, can learn new processes and is adept at creating and maintaining diverse relationships is best placed to thrive in this new world. They will have ample opportunity to be the borrower’s agent, introducing consumers both borrowers and potentially investors to blockchain, collecting the fees associated with providing this service that has replaced the function of the retail bank.  

Challenges we might see emerging, however, include a lower emphasis on product or industry knowledge, rapid shifts in broker relationships with many new and different service providers and funders, and rapid regulatory changes.  

It won’t happen overnight, but it will happen
Blockchain will not create an overnight change to the business model of brokers, however.  Rather, brokers will see is an increasingly competitive market with new products, processes, customer acquisition and retention models emerging. This will happen regardless of blockchain as we see the digitisation of the mortgage process already underway.  With digitisation come increased efficiencies and new service models centred on the mobile, social consumer.  

The blockchain world is a world where brokers have to become masters of customer service in and where customers know as much about products as brokers do, and can reference brokers and rate them before they choose which ones to contact.  Blockchain will only accelerate this process with new funders, services and products being introduced.  The successful broker of the future is the connected, adapting, ‘customer first’ broker who challenges themselves to stay ahead, and stay relevant.