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The Role of Collaboration and Consortia for the Future of Financial Services

It is often said that the financial services industry is in a constant state of flux, an observation clearly supported by the current digital revolution, increasing regulatory requirements, new customer expectations and the increased uptake of exponential technologies including Blockchain, Artificial Intelligence, Machine Learning, and Robotics.

Authors

Authors

David Dalton - Partner - Consulting Global Blockchain Co-Lead and Head of the EMEA Blockchain Lab - Deloitte

Cillian Leonowicz - Director - Consulting Head of Business Development for the EMEA Blockchain Lab - Deloitte

Damien Scanlon - Senior Consultant Consulting EMEA Blockchain Lab - Deloitte

Michael Burke - Consultant Consulting EMEA Blockchain Lab - Deloitte

Published on 26 February 2019

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It is often said that the financial services industry is in a constant state of flux, an observation clearly supported by the current digital revolution, increasing regulatory requirements, new customer expectations and the increased uptake of exponential technologies including Blockchain, Artificial Intelligence, Machine Learning, and Robotics.


The result has been increased requirements for financial services institutions to provide greater transparency, improved services, and enhanced operational capability to maintain competitiveness, ensure compliance, and create shareholder value.


The challenge for institutions is delivering these capabilities in an operating and technology paradigm beset by rigid legacy systems, poor data management and highly siloed products, and where the cost of new entrants/FinTech is decreasing and becoming more common.

Industry Evolution

Executive and operational leaders realize the impact of these challenges and now face the arduous, yet liberating, task of building new platform infrastructure to meet the needs of the 21st century. Traditionally, such decisions to enhance capability would have been a relatively simple process with vendor demos, requests for information, requests for proposals and procurement guidelines and procedures to select the most suitable in-house candidate for the task in hand. Opportunities now lie in collaboration across industry participants, or even across country borders. With this we are witnessing a new modus operandi where industry participants seek to collectively create new industry infrastructure—in particular for commoditized processes—which delivers the scale, network, and connectivity for success. As a result, the terms “consortium” and “consortia” have proliferated, in particular with regard to adoption of platform technologies such as Blockchain or Distributed Ledger Technology.

This article explores collaboration among industry players in Blockchain consortia, different consortium models and approaches, and ingredients for success, and offers insights into the resulting future market infrastructure.

The consortium concept & models for collaboration

Consortia have become a popular mechanism for enterprises to work together to explore areas of mutual benefit or industry wide challenges, identify immediate and future industry requirements, and develop new capabilities. In the Blockchain domain, more than 60 consortia have formed globally, some of which have attracted significant investment, in particular from Tier 1 financial services firms such as Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs, and JP Morgan i. From our analysis and global experience we have identified three types of Blockchain consortia: business focused, technology focused, and hybrids.

Business-focused consortia

Business-focused consortia aim to build and operate Blockchain-based business platforms to solve specific business pain points or problems. They work to reimagine how to deliver or scale established products by creating a new business venture that is often bank-led but used to create a better or more scalable proposition for customers. Examples include We.Trade (trade finance) and VAKT (commodities trading), both of which have been proactively developed by their respective industry incumbents. ii

Technology focused consortia

These consortia are based primarily on the development and delivery of a core technology infrastructure. The infrastructure is akin to an operating system and is designed to serve as the mechanism upon which future applications will sit. An example is the development of Hyperledger Fabric by the Linux Foundation. iii

Hybrid consortia

Hybrids combine business and technology skills to build capability for a specific industry. The first of such consortium was R3. This was originally a collection of banks with the purpose of learning and understanding the role and capability of distributed ledger technology for financial services institutions. Over time R3 has expanded to develop the “Corda” platform which was engineered primarily for financial services and is now scaling to other industries with similar commoditised process challenges such as Know Your Customer (KYC). In addition we have seen industry leaders collaborating to form alliances with Blockchain start-ups to develop new capabilities. One example is SETL who have worked with a collection of French Asset Managers and Asset Servicers to create iZnes, which aims to improve client access to mutual funds and overall operational workflow iv. Perhaps of more interest are the consortia combining technology, business and regulatory capability. These ensure the development of new value chains, on newly developed and deployed technology, which fit within an existing, or enhanced, regulatory context. The most publicised example of such an endeavour is the Trade Finance Blockchain “eTradeConnect” championed by the Hong Kong Monetary Authority in collaboration with twelve major banks. v

Despite these trends, the Blockchain ecosystem, like the technology itself, is quickly evolving and we are witnessing the development of new platforms, applications, consortia, and partnerships on a near-daily basis. Indeed, results from GitHub, a global software collaboration platform, show that the Ethereum Blockchain hosted 9,970 projects in mid-2017, compared with 1,439 projects in 2015 and starting from three projects in 2013.vi Meanwhile, analysis completed by Market Research Future finds that the global technology market is projected to grow at a compounded annual growth rate (CAGR) of 62.1 percent over the next 10 years to reach approximately US$16.3 billion by 2025.vii Gartner has identified that Blockchain will have significant business impact over the next decade; “the business value-add of Blockchain will grow to slightly more than US$176 billion by 2025 and then it will exceed US$3.1 trillion by 2030.”viii From our experience, it is clear that such value cannot be created without effective collaboration and a willingness of firms and their network of service and technology providers to embrace new models of work and ecosystem engagement. The good news is that this message is not lost on industry participants. Results from Deloitte’s Breaking Blockchain Open Survey showed that the vast majority of respondents (74 percent) said that they either are already participating in or will likely join a Blockchain consortium. ix

Which of the following best describes your organization’s position on participating in a blockchain consortium with competitors?

Established Blockchain Consortia

Blockchain by its very nature is a platform and network-enabled technology. Use cases within individual organizations are limited (save for inter-firm capabilities for large group enterprises). This move towards both platform and network is driving consortium engagement across industries as highlighted below:

Financial Services

- Trade finance

- KYC

- Certification & qualification management

- Anti Fraud

Mobility

- Data platforms from self-driving vehicules

- Multi-model mobility transactions

- Payments

- Reg reporting

Energy

- Commodity trading

- P2P power sharing

- Contract mgmt.

- Finance mgmt.

- Contractor / vendor mgmt.

Logistics & Supply Chain

- Supply chain track and trace

- Proof of provenance

- KYC / KYS

- Pay-per-use and outcome based

Telco

- User and machine identity (e.g. IoT Device)

- Roaming settlement

- Fraud prevention

Public Services

- Digital identity

- Personal records (e.g. health records)

- Land registry

- Social security

Indeed, it has been reported that there are now in excess of 50 global Blockchain-focused consortia.x Evidence and analysis also suggests that these are each at different stages of their journey. We have developed the below map of consortia evolution stages based on publicly available information:

Blockchain Journey

Consortium ingredients for success

Despite the proliferation of consortia, industry evidence suggests that the reality of managing disparate stakeholders from competing organizations to deliver new capabilities is proving extremely difficult. The cultural shift required to act in a new collaborative model with traditional competitors is not to be underestimated. It is often quoted in our engagements that “technology is only 20 percent of the challenge; the other 80 percent is process and data standardization, change management, and governance”. From our global pool of consortia experience, we have taken valuable lessons and offer the following as ingredients for success:

Vision

The consortium should have a clearly articulated vision that is based on a fundamental rethinking of a value chain. This vision should be aligned to clearly defined goals, milestones, and the articulation of value in the form of a measurable and quantifiable return on investment.

Value Chain Focus

Success is dependent on the re-imagination of a value chain and should not be limited to a process within the value chain. For example, in the mortgages space there is little value in creating capability between a group of retail banks. Instead, a re-imagination effort should look at the value chain participants and extend to a seller, purchaser, land registry, legal firms, surveyors, and financiers. In addition we must design with industry context in mind. While blue-sky thinking is welcome, one can suggest that we develop and deliver “a feasible dream” where regulatory obligations and compliance requirements are met, albeit in a more efficient and effective digital manner.

Governance

In order for key decisions to be made within a consortium, it is imperative to have clearly defined operating and governance models in place. The more formal the working arrangement, the more aligned the goals will need to be; moreover, once the Blockchain is created, this governance can be digitized by way of a consensus mechanism and smart contracts. With a comprehensive governance structure in place, issues or concerns amongst members will be solved in a more structured and democratic manner. Adopting best practices that promote co-operation and alignment amongst members will result in a successful and sustainable consortium. The governance structure should include a Leadership Steering Group or Board at its apex. This should be drawn from key stakeholder sponsors ideally with a C-suite role and the power to effect decisions and change within their own organization.xiii

Leadership & Structure

The consortium will need a clearly defined and empowered leadership structure underpinned by an appropriate governance framework. Moreover, we are starting to see consortia move from a vague amalgamation of project teams drawn from large institutions to properly defined legal structures: entities in their own right. We know that some of the more advanced consortia are moving to a separate legal structure and entity with a clear strategy and structure that are effectively “on the hook” to deliver value and capability to their shareholders.xi

Standards

Participants should work within the consortium to define the standards for the effective operation of their new value chain. Standards should extend to procedures, processes, and data. Whilst it is clear that participants will come from different backgrounds with different technology architectures, new groups must work to make new platform adoption as streamlined and simple as possible.xii

Scale

Achieving scale is often at the forefront of the consortium member’s agenda. While benefits can be achieved with a smaller number of participants, the greater the number of participants involved the greater the benefit and impact there will be for the wider ecosystem. Scalability of consortia is challenging, however, governance structures that comply with common standards all need to be considered as previously detailed. When evaluating the possibility to scale, a balance is needed to achieve sufficient diversity and representation without diluting the overarching goal of creating a new ecosystem for a value chain.

Looking Ahead

When evaluating the opportunity to join or establish a consortium, companies must consider whether it aligns with their strategic business goals. As previously mentioned, joining a Blockchain consortium allows companies to stay up to date on technology trends and competitor activity, future-proof against potential new threats, and learn how to implement and integrate Blockchain. A company should also determine whether collaboration is purely for educational purposes or if it is to become a leader in innovation to create new business models for revenue generation. The latter may be an arduous route to take, but the rewards will be significant if the effort pays off. To expedite a return on investment, we suggest that an initial focus be on three core areas for the creation of new capability:

Minimum Viable Ecosystem

Define the nodes or actors required for a network to be successful and create value.

Minimum Viable Process

The newly imagined or re-engineered value chain from which this value will be created.

Minimum Viable Data

The data required for a process to flow smoothly as well as the governance and standards for capturing and managing the same.

It is an organization’s decisions today that lay its foundations for the future and there is no doubt that Blockchain will play a role in the future. Indeed, the International Data Corporation (IDC) expects that global Blockchain technology spend will reach US$2 billion by the end of 2018, more than double the US$945 million spent in 2017xiv. Moreover, IDC has forecasted worldwide Blockchain spend to reach US$11.7 billion in 2022.xv With this, consortia are likely to continue to be an effective mechanism through which Blockchain-interested companies, regulators, and governments collaborate. In this landscape, the strongest consortia could become the de facto arbiters of Blockchain standardization.

Blockchain is still waiting for that “break out” moment; however, with dozens more consortia expected to form over the next few years, they are likely to play a pivotal role in collaboration and commercialization of Blockchain technology and, more fundamentally, the rise of digital platforms in the financial services industry. It is these initial endeavors and their associated standardization, digitization, and interconnectivity that will allow a lot more to be possible in the future. What we can agree today is that Blockchain and consortia will continue to challenge traditional business models and re-invent industry value chains. The financial services industry is not immune!

Footnote

i Digital Asset, Crunchbase, www.crunchbase.com/organization/digital-asset-2#/entity, and R3, Crunchbase, www.crunchbase.com/organization/r3-cev#/entity; both accessed 5/12/2018


ii Alexander Lielacher, “Blockchain consortia are paving the way for adoption in financial services,” BTC Manager, March 15, 2017, https://btcmanager.com/smaller-blockchain-consortia-pave-the-way-for-adoption/


iii Perer Gratzke, David Schatsky, Eric Piscini, Banding together for Blockchain; August 16th, 2017, https://www2.deloitte.com/insights/us/en/focus/signals-for-strategists/emergence-of-blockchain-consortia.html#endnote-sup-8; accessed 10/12/2018


iv https://www.finextra.com/newsarticle/31718/blockchain-based-mututal-funds-network-iznes-welcomes-new-participants; accessed 4/12/2018


v Deloitte, “Deloitte, HKMA and leading trade finance banks in Hong Kong have developed a Distributed Ledger Technology proof of concept for Trade Finance,” March 30, 2017, https://www2.deloitte.com/cn/en/pages/about-deloitte/articles/pr-deloitte-hkma-dlt-proof-of-concept-for-trade-finance.htm.


vi Eric Piscini, Mark Coteleer, Jonathan Holdowky, Blockchain: A technical primer; https://www2.deloitte.com/content/dam/insights/us/articles/4436_Blockchain-primer/DI_Blockchain_Primer.pdf, February 6th, 2018


vii Global Blockchain Technology Market Analysis & Trends – Industry Forecast to 2025, January 2018


viii Worldwide Blockchain 2018–2021 Forecast: Market Opportunity by Use Cases, https://www.idc.com/getdoc.jsp?containerId=US43595718; accessed 6/12/2018


ix Deloitte Global Blockchain Survey 2018; https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-2018-global-blockchain-survey-report.pdf


x Faisal Khan, “The Emergence of Blockchain Consortia,” Data Driven Investor, October 10 2018; https://www.datadriveninvestor.com/2018/10/10/the-emergence-of-blockchain-consortia/; accessed 11/12/2018


xi Perer Gratzke, David Schatsky, Eric Piscini, Banding together for Blockchain; August 16th, 2017, https://www2.deloitte.com/insights/us/en/focus/signals-for-strategists/emergence-of-blockchain-consortia.html#endnote-sup-8; accessed 10/12/2018


xii Deloitte Global Blockchain Survey 2018; https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-2018-global-blockchain-survey-report.pdf


xiii Deloitte interviews with leading consortia


xiv Michael Shirer, Jessica Goepfert, New IDC Spending Guide Sees Worldwide Blockchain Spending Growing to $9.7 Billion, https://www.idc.com/getdoc.jsp?containerId=prUS43526618, 24th January, 2018; accessed 11/12/2018


xv Worldwide Blockchain 2018–2021 Forecast: Market Opportunity by Use Cases, https://www.idc.com/getdoc.jsp?containerId=US43595718; accessed 6/12/2018

Conclusion

Blockchain is still waiting for that “break out” moment; however, with dozens more consortia expected to form over the next few years, they are likely to play a pivotal role in collaboration and commercialisation of Blockchain technology and more fundamentally the rise of digital platforms in the financial services industry. It is these initial endeavours and their associated standardisation; digitisation and interconnectivity that will allow lot more to be possible in the future. What we can agree today is that Blockchain and consortia will continue to challenge traditional business models and re-invent industry value chains. Financial Services is not immune!

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