The first to adopt blockchain technology were banks, governments, and other financial institutions – and they’re the fasting-growing blockchain users, too. The powerful tools that are being built to manage and move money will reshape our world in new and unexpected ways, so it makes sense that financial technology (fintech) would jump on board. This chapter gives you the inside scoop on what governments are currently doing with blockchain technology and how it will affect you. Fintech touches your life every day, whether you’re aware of it or not.
In this chapter, I introduce you to future banking trends, new regulations, and the new tools that can help you move money faster and cheaper. I also explain new types of investment vehicles and other blockchain innovations. Finally, I warn you about the potential risks of investments involving virtual currency and new blockchain-technology-enabled financial products.
Hauling Out Your Crystal Ball:
Future Banking Trends
Banking was the first industry to recognize the threat of Bitcoin and then the potential of blockchain to transform the industry. The banking sector is highly regulated, and the fees to organize and operate as a bank are expensive. These heavy regulations have been an insulating and protective shield for the whole industry, as well as a burden. The application of fast, efficient, digital money that doesn’t carry the cost of handling cash and that is traceable as it moves through the financial system was an intoxicating and threatening proposal. The idea that value can be held outside the control of central authorities also piqued the interest of financial institutions and governments that back currencies.
Initially, these financial institutions and governments tried to squelch blockchain with regulation. Today, they’re embracing blockchain through investment across the board.
In 2013 and 2014, the US Securities and Exchange Commission (SEC) issues a warning to investors about the potential risks of investments involving virtual currency. The warning was that investors might be enticed with the promise of high returns and would not be skeptical enough of the new investment space that was so novel and cutting-edge. According to the SEC, digital currency was one of the top ten threats to investors. Today, the SEC stands ready to engage with companies and investors as cryptocurrency gains traction within all industries.
Not even two years later, countries around the world including the UK, Canada, Australia, and China – began investigating how they could create their own digital currencies, seizing cryptocurrency for themselves and put money on the blockchain. The turning point was when they began to the benefits the benefits started outweighing the risks. Bitcoin had been able to stand up to hackers for several years, even when many government systems were compromised, making it an appealing system to try. Innovations in blockchain technology promised to be able to handle the billions of transactions need to support economies, making a cryptocurrency feasible at scale.
The blockchain is in themselves permanent and unalterable records of every transaction. Putting a country’s money supply on a blockchain controlled by a central bank would be utterly transformative because there would be a permanent record of every financial transaction, existing at some level their blockchain record, even if they weren’t viewable to the public. Blockchain technology and digital currencies would reduce risks and fraud and give them ultimate control in executing monetary policy and taxation. It would not be anonymous like Bitcoin was at first. In fact, quite the opposite: It would allow them a full and auditable trail of every digital transaction made by individuals and companies. It might even allow central banks to replace commercial banks’ role in circulating money.
The question of what the future for banking will look like can be scary and exciting. Consumers can now pay friends through their phones almost instantly in almost any type of currency or cryptocurrency. More and more retail stores have begun utilizing cryptocurrency as a way to pay for goods and accept payment from customers. In Kenya, using cryptocurrency is more normal than not. But this is still not the mainstream option for most of the world. Western markets are still in the early adoption phase.
Given that most individuals have their wealth locked into legal tender issued by governments or locked into assets that are within existing government systems, Fintech innovations must merge with these existing systems before we see the mainstream utility of blockchain or digital currencies. I find ways to tax and register accounts, mass adoption of customer-facing wallets with digitized tokens is two or three years down the road.
The business-to-business market will start utilizing blockchain much quicker. A production- hardened system with the associated policies and operations are less than two years away. Ripple and R3 among others have been hard at work of making this possible. These systems will first focus on the institutional creation of digitized representations of deposits. These are IOUs between internal organizational departments and between trusted partners, like vendors. Regulators, central banks, and monetary authorities are all investing heavily in making this possible. Canada and Singapore have been moving very quickly.
Know your customer (KYC) and anti-money-laundering (AML) regulations require banks to know who they’re doing business with and ensure that they’re not participating in money laundering or terrorism. Banks issuing still have significant challenges to overcome first. In order to stay compliant with KYC and AML regulations, they need to know the identity of all the individuals utilizing their currency. In many cases, people’s bank accounts are already debit and credit service of transactions, like distributed ledgers in blockchains, except for centralized. The first candidates in this area are going to be regions where regulators, banks, and central banks work together. Singapore and Dubai are good candidates that already have blockchain initiatives.
There is an ongoing trend of gradually increasing the number of services product manufacturers offer. This is often referred to as servitization. Compared to products, services are considered to have longer life cycles and larger margins and to be more resistant to the business cycle. From a marketing perspective, services can be used to differentiate and increase value to the customer. Furthermore, services can also be a means of strengthening customer relations as they inrail interacting with and understanding the customer. It is, however, often troublesome for product-oriented companies to handle services, partly due to lack of methods and tools. In this chapter, we present a narrative design-based method, CTN (Context Through Narratives) that captures users’ current practice, experiences, situations, contexts, and expectations and integrates these in-service innovations.
Servitization has been described as a multistage change process. Common to different servitization models is that a supplier starts with offering services supporting its existing products in order to improve accessibility, for example, providing spare parts and maintenance. At the other end of the servitization, the spectrum is support for (at least part of) the customer’s operations, providing total solutions. Slightly simplified, servitization can be synthesized into three steps (table 1.1: (1) services supporting the product; (2) services supporting product usage; (3) services supporting the customer’s operations (processes). Servitization thus demands an increased understanding of the end user and/or the customer’s operations. Providing spare parts and maintenance requires little understanding of the customer’s operation.
Table 1.1 Steps of Servitization:
|1||Services supporting the product||Spare parts provision, product maintenance|
|2||Services supporting product usage||Optimizing and customizing the robot by means of, for instance, customization, training, and programming|
|3||Services supporting the customer’s operations (processes)|
In the last step, the supplier offers services that can also be independent of the physical robot, where the aim is to support the customer’s operations by offering a total solution. For instance, it the customer is using a robot to spray-paint a specific component, the supplier can offer to design the whole process and assume overall responsibility for painting, that is the service: “painting a component” according to customer requirements. The robot is the only meaning of performing the services. There is a demarcation line between step 2 and 3, where the supplier needs to gain a thorough understanding of the customer’s processes, that is, what the product is used for, and also the customer’s applications and context. This can thus define the borderline to become a solution provider. The further a supplier goes through the servitization steps, the stronger the need for new methods and tools that innovate and develop the services since fresh knowledge regarding the use-side needs to be obtained by the producer.
Successful innovation requires two types of knowledge and use knowledge. Technology knowledge concerns aspects related to implementing an innovation, including knowledge of the mechanics of materials, chemistry, thermodynamics, and so on. Technology also includes non-product-specific technology, such as service-supporting technology, and organizational routines. Accordingly, technology includes all the enabling organizational resources necessary to make products and services. However, moving beyond providing only products but also solutions to customer problems implies the need to have “useful knowledge” also referred to as user experience or application domain knowledge. Use Knowledge involves understanding the use of an innovation/technology from a user/customer perspective. In other words, what the technology should do for its intended users, requiring a deeper knowledge of the customer’s processes and needs, often called taking a customer, or service, perspective. The important thing no longer what a company’s products are, but what they do for the customer. Products are perceived as a means of creating value when used by the customer.
Use knowledge is more abstract than technical knowledge and is normally disconnected from innovation activities, at least as regards physical products. The nature of services is, however, quite different from that of physical products. Services are intangible and can be described as a series of activities where the customer is a co-producer. The active interaction of users during services and the fact that these often take place in a context foreign to the supplier puts greater demands on the supplier to understand the use side. Accordingly, use knowledge is much more important for services than for products, but can also be expected to lack when product manufacturers aiming to provide services.
|Hi-Technology knowledge||Product Provider||Solution Provider|
|Low Technology Knowledge||Out of Business||Problem identifier|
|Low use Knowledge||Hi use Knowledge|
Table 1.2: Two types of knowledge and company positions
A product-oriented company has, by definition, a lot of technical knowledge, but not the necessary use of knowledge depicted as a “Product Provider” in figure 1.2. The added skills necessary to become a solution provider – and thus move to the next step of servitization – thus include use knowledge. Seeing use knowledge as a resource vital to competitiveness has implications for the company’s innovation process. Gaining a deeper understanding of the use side is a necessity for providing more advanced services in the sense that these support not only the suppliers’ products but also their processes and businesses.
The design has a long tradition of studying users in terms of understanding, interpreting, and translating their needs/problems into satisfying solutions – in other words, understanding the use side’s problems and how proposing solutions can solve these. More recently, Service Design has emerged whereby the specific interest lies in designing solutions in terms of services.