Sibos 2018: How blockchain makes banks catch up with fintech

Richard Buckle, founder and CEO of Pyalla Technologies, looks at how banks can not only catch up with fintechs but to some extent overwhelm the less mature entities – all thanks to distributed ledger technology (DLT).

Welcome to racing world

An opportunity came up for me recently to drive to Dallas, Texas, to listen to an afternoon presentation by Jimmy Treybig, a Texan venture capitalist, and an advisor at New Enterprise Associates.

Treybig is probably better known to the financial industry not so much as an investor but as a founder of Tandem Computers, the company that brought fault tolerant computers to the marketplace.

In many respects, Treybig has seen fault tolerant computing turn full circle. He left HP in the early 1970s in order to bring his invention to market. In the late 1990s Compaq purchased Tandem Computers, and then shortly there after Compaq merged with HP, resulting in the company Treybig founded now being under the wing of HPE, the enterprise part of the now split HP he has left all these years ago.

His presentation, “The Future of the Enterprise Market, A Venture Capitalist’s View” proved to be full of nostalgic references to the past even as it looked ahead to the speed and diversity of new technology companies coming into the marketplace; “what could your new venture achieve with $1 billion of funding!”.

HPE has discovered two very important and very tangible benefits from owning Tandem Computers, now rebadged as NonStop Systems – a “blue ribbon” customer list that includes many tier one financial institutions and yes, a platform that is the target of its own latest technology initiative.

HPE invested in NonStop following the merger with Compaq and looking at what HPE has accomplished over the past three years, these investments have led to NonStop being ported to the Intel x86 architecture, made its NonStop SQL to be Oracle compatible (driven by HPE’s own needs to move much of their mission critical databases from Oracle to NonStop), leveraged virtualisation as NonStop stepped up to run as virtualised workloads on virtual machines including VMware, and yes, populated a number of private clouds where fault tolerance was a must-have.

For as many years as I have been associated with financial institutions, I have to attest to the fact that change happens slowly there. Recently, at another conference, one IT executive noted that if financial institutions only moved at glacial speeds then that would be an improvement over what has been witnessed for the past couple of decades.

However this isn’t necessarily bad news. We have seen the rapid rise of fintechs even as we are just beginning to see mounting push back from big banks and other financial institutions. There is a growing sense of awareness too that banks aren’t going to be left out of the game just as fintechs, succeeding in winning large customer populations, are taking on the form if not the essence of banks. Not forgetting too that banks are increasingly upping their financial support for some of the better-known fintechs.

In a February 2018, article published in American Banker, “Fintechs see their profile rise, with banks playing a large part” this apparent early-phase morphing of banks and fintechs hasn’t gone unnoticed.

In case you missed reading this article, it references a recent KMPG report “Pulse of Fintech” that was published the week before where, “US fintech investment reached $5.8 billion in the fourth quarter, the third straight quarter that figure increased. While venture capital funding remains significant, the strong uptick in the number of fintech investment deals during 2017 can be attributed to financial institutions prioritising digital innovation,” said Anthony Rjeily, digital and fintech practice leader for KPMG.

However, Rjeily then added: “Right now there’s a high level of interest on both sides when it comes to the marriage of fintech and banks … Both sides bring value propositions that are very complementary: Fintechs bring an innovation culture, new business models and new methodologies that banks struggle with due to legacy infrastructure. On the flip side, banks have the consumer trust and distribution channels that many fintechs lack.”

With so much discussion among financial institutions concerning hybrid IT, reports such as these do throw a slightly different light on the topic of hybrids as it is my expectation that there will be a strong and vital hybrid banking and fintech world about to overtake us all. And that shouldn’t be viewed as a bad thing but rather a natural outcome from the push coming from our end users ever-watchful about their “customer experience,” and a reference to how important this is to everyone else further up the financial food-chain.

It is also in this article at American Banker that you will come across the quote by Luis Valdich, managing director of venture investing at Citi Ventures. “You’re seeing more partnerships,” said Valdich, “because there is more interest on both sides in collaborating, and bringing two different sets of values to the table.”

To date I have posted numerous times to various LinkedIn groups on this topic to mixed receptions. There are the purists in support of fintechs who strongly argue that their approach is a major paradigm shift in thinking whereas banks, even as they pick up the pace and embrace technology at glacial speeds, cannot be viewed as being even on the same playing field. And yet, history tells us that when hybrids form, they are only transitional as we blend the old with the new and what comes out of the process is a completely new entity.

So it is with IT – we are on a path that as it transitions through hybrid IT suggests that at some point, we will have a revitalised IT landscape of dare I say, not too dissimilar to service bureaus and time-sharing organisations. Yes, we have been there before, the only difference being the technology is so much better and more flexible and the cost is way down when compared to previous implementations.

Which begs the question that Treybig posed at this conference in Dallas, when it comes to what any fintech would do with an additional $1 billion of capital? Well, it more than likely would become a bank – or, at the very least, be able to buy a bank!

However, there is another technology disruptor lurking out there that has the potential to let banks not only catch up with fintechs but to some extent, holds the promise of overwhelming the less mature entities. And that is blockchain – not so much cryptocurrency as the underlying DLT.

I know fintechs are already knee-deep in leveraging DLTs for their own use but when banks step in with their customer base, offering services that mitigate any need for intermediaries of any kind, then the game may take another big change in direction. If banks today are looking over their shoulder and watching fintechs, could there be a potential for fintechs having to look over their shoulders at entirely new challenges – maybe I want to become a bank! Perhaps I should return to my own whiteboard and sketch a few lines. Not by myself but in cooperation with some other like-minded individuals where between us, we meet the levels of trust you would expect banks and fintechs to provide!

I seriously doubt that this is going to happen in the short term and there will be many regulatory agencies horrified by the thought! But it is into this market that HPE has elected to drop a deep port of the R3 Corda onto its NonStop systems. Yes, whereas once the cycle began with Tandem Computers supporting the world’s ATM and POS networks, the modern NonStop Systems are revisiting the cycle with an offering to support the world’s blockchain users. Blockchain is being viewed by HPE as that important that they have created a new business unit headed by Raphael Davison. Formally unveiled in November 2017, at HPE Discover in Madrid, news about this programme first surfaced at a NonStop partner event earlier in the year.

According to this announcement by HPE, “Mission Critical Distributed Ledger Technology (MCDLT) is a solution that enables customers to run distributed ledger workloads on the highest availability enterprise platforms. The solution is offered on HPE Integrity NonStop platforms, which process two out of every three credit card transactions in the world. It was developed in partnership with enterprise software firm R3, integrating the company’s DLT with HPE’s mission critical platform”.

HPE then quotes Davison, who said: “Enterprises interested in blockchain are realising that public cloud alone does not always meet their non-functional requirements … As they look to scale, they recognise that, for mission-critical processes, on-premise infrastructure must be part of the mix of traditional IT, private and public cloud that’s needed to meet the requirements of enterprise-grade blockchain workloads.”

My presence in Dallas led me to sit-in on a presentation by OmniPayments VP, Jessica Nieves. While OmniPayments provides payments solutions for multiple financial institutions, including one of the largest banks in the US that routinely processes a billion ATM and POS transactions per month, it has been at the request of a South American financial institution with four million card holders that OmniPayments has taken up the HPE solution for blockchain.

“As we dug deeper into the customer requirements it became clear to us that this was a text-book case for implementing know your customer (KYC) along with anti-money laundering (AML) that begged for an MCDLT solution. As long time partners of HPE and familiar with NonStop Systems it was only natural for OmniPayments to turn to this new product offering to better address the customer needs,” she said.

The response from the audience was telling – suddenly, blockchain jumped from the whiteboard to take centre stage in the discussions that followed.

In addressing the enterprise community, HPE has articulated a vision for its push into blockchain as being beneficial to those enterprises looking to overhaul their supply chain management as well as to those banks looking to tighten their security. When it comes to security, there are many considerations to be made but in this case, the definition of security has been extended to protecting financial institutions from abuse by undocumented parties.

The fallout from failing to properly identify these parties can carry enormous cost and in June 2018 it was made public that the Commonwealth Bank of Australia (CBA) was fined AU$700 million ($518 million) because it had failed to report anonymous usage of machines capable of accepting as much as AU$20,000 ($14,100).

Clearly, whether you are a bank or a fintech, erring in this manner would be hard to recover from and yet, with blockchain, once proof of identity is acknowledged – in this case, via a notary service that is an integral part of the MCDLT implementation – it is there to see for all parties involved in any financial transaction on the peer-to-peer network accessed. No further questions required and no additional processing needed.

At one point in Treybig’s presentation he showed a slide of an old draft horse wearing a party cap under the caption, “Someday I will be a unicorn!” There will be many attempts to bring legacy platforms into the new world of hybrid IT with varying degrees of success. Or otherwise!

HPE’s investment in NonStop following the merger with Compaq gave little indication that in just a few years NonStop systems would be anchoring the Mission Critical Systems group with fault-tolerant, scalable systems that would land the plum technology option to support MCDLT. And yet, that is exactly what has transpired. In a subsequent conversation with Treybig, I mentioned to him that HPE had elected to deliver blockchain on NonStop first and he asked me for a link to the press release, which I duly emailed him. There was no surprise to see the raised eyebrow even as I could detect a twinkle in his eye – forty years after leaving HP, his architecture for fault tolerant computing not only had survived but had been elevated to where it was selected to play a premier role with financial institutions.

Banks and fintechs may become one and the same even as I might become a financial powerhouse with just a few more lines on my whiteboard. Of course, that will not likely happen but the prospect hangs out there even as I type. The real issue is not one versus the other or whether access to a billion dollars can change the playing field. Similarly, hybrid IT will continue to evolve as we embrace combinations of clouds and edge products until they too become one. HPE has given us a glimpse of their hand as it builds out platforms that are already entrenched in most of the world’s biggest financial institutions and with its NonStop platform has given us a glimpse of how to build out applications on disruptive technologies like blockchain / MCDLT.

One final observation that was common to both Treybig’s presentation and Nieves’ one – listen to your customers. We continue to live in a world where it’s our customers who determine the pace of technology innovation and without their input we could be shunted out of the game. And there’s not a financial institution in the world that would want to see this happen when all around it architectures, frameworks and solutions to better position them for the future are so tantalisingly close. Who could possibly wish for anything less and yes, I am out there looking for a bigger whiteboard!

This article is also featured in the Daily News at Sibos 2018 – Day 2 edition.
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