06.22.2015
By Terry Flanagan

Second Wave of Fintech Innovation At Hand

A second wave of financial innovation is being built around disruptive technologies, such as distributed ledgers, according to a report issued by Santander InnoVentures, Oliver Wyman and Anthemis Group.

The report, called The Fintech 2.0 Paper: rebooting financial services, recognizes the disruptive impact of the first wave of fintech businesses. These primarily focused on improvements in customer experience and payments. The paper now calls for closer collaboration to realize fundamental changes in a new, more radical, phase of fintech evolution.

Whereas the first generation of fintech pioneers worked outside, or on the fringes of the industry, fintech businesses now need to collaborate with banks in order to benefit from immediate access to product distribution at scale, established relationships of trust with customers, and extensive compliance and regulation capabilities.

Emmet Rennick, head of innovation at Oliver Wyman, said in a release: “The research underpinning the paper has identified several markets with huge potential. In these areas banks can realize efficiencies, customers benefit from better services and a new generation of fintechs can grow their businesses. We’ll be sharing more of this opportunity mapping research with those banks and fintechs who express an interest in collaborating further.”

In contrast to today’s transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions, according to the report. Transactions can be made to be irrevocable, and clearing and settlement can be programmed to be near-instantaneous, allowing distributed ledger operators to increase the accuracy of trade data and reduce settlement risk.

The post-trade, settlement process can be expensive and slow, commonly taking two days, and sometimes longer, to process through a number of intermediaries. Distributed ledger technology has the potential to overcome frictions in current post-trade processes, providing an alternative technology for clearing and settlement. Life cycle

In time, distributed ledgers will support “smart contracts” – computer protocols that verify or enforce contracts. This will lead to a wide variety of potential uses in securities, syndicated lending, trade finance, swaps, derivatives or wherever counterparty risk arises. For example, smart contracts could automate pay-outs by the counterparties to swap contracts.

Commercial banks, central banks, stock exchanges and major technology providers, such as IBM and Samsung, are all exploring the potential uses of distributed ledgers, according to the report. Fintechs, such as Ripple, Ethereum, Eris Industries and HyperLedger, are also developing new ways to exchange data and assets enabled by the technology. It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions.

Featured image via iStock

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