In ‘Blockchain Babel,’ a warning for banks and FinTechs

If there’s one theory at the heart of Igor Pejic’s new book, “Blockchain Babel: The Crypto Craze and the Challenge to Business,” it is that when it comes to using blockchain technology to remake the banking business, neither the financial institutions looking to maintain their dominance nor the FinTech firms trying to topple them understand each other, or how much they need each other.

The head of marketing for BNP Paribas Personal Banking, Pejic approaches the cryptocurrency and blockchain business with a banker’s perspective, but he also believes blockchain will become a truly disruptive technology.

His book, which was named a Financial Times business book of the month in March, takes its title from the biblical Tower of Babel. While it’s heavily focused on the blockchain and cryptocurrency market, it is written for people who are not experts, and much of the first half of the book is taken up by explanations of the technology. It is, however, a very readable book, and clear in its arguments.

“There was a confusion of tongues, everybody was speaking in a different language and nobody understood each other,” Pejic said. “And I believe this is also what’s happening at the moment around blockchain. There are so many concepts around, especially in the more general media, and it’s all interpreted differently by different people.”

Because of that, he said, there are a number of big myths going around that are having a big impact on the decision makers.

One of these, he added, is that cryptocurrencies, and Bitcoin in particular, can be separated from blockchain, at least in the general public’s mind. In the banking sector, this is changing, he maintains. “We’ve come a long way from cryptocurrencies to blockchain and DLT,” he said, referring to the distributed ledger technology blockchain is a part of.

For the general public, though, “if you want to explain blockchain to somebody, you have to talk about Bitcoin, otherwise they won’t get it,” he said.

As for the original Bitcoin ethos, with its goal of creating a system of money so decentralized that not only banks but government-sponsored fiat currency is unnecessary, it will not go mainstream, Pejic said. What he calls the anarchical libertarian “will stay in a small group,” he added.

But, it was important in bringing the underlying blockchain technology the mainstream attention it needs to change the way the world does business, Pejic said.

That decentralization ideal is at the core of another myth, he said, which is that “we do not need any trusted institutions anymore in a blockchain world.”

While blockchain can cut out a lot of the third-party intermediaries that drive up costs and drive down speed, some trusted institutions will always be necessary, he argued, pointing to debacles like the nearly $500 million Mt. Gox hack and the Quadriga exchange, which claims to have lost close to $150 million in depositor funds when its CEO took the passwords to its cold wallets to the grave.

The security issue is the reason that banks like JPMorgan—and other giant blockchain developers like IBM—are using permissioned blockchains, Pejic said, reiterating the importance of trust.

“I believe that people trust banks, at the end of the day, and they don’t really care about the back-end processes,” he said. “You need somebody who’s managing the process, unless you want to have complex alphanumeric codes in your pocket. At the end point of the transaction you will still need a bank. So, the blockchain will not necessarily mean that just because we can have an alternative financial system, we will see incumbents lose power.”

Choose your partner

Which isn’t to say that the FinTechs won’t gain power. “A third myth that ties into this position of startups and incumbents, of FinTechs and banks, is this too-simple, black-and-white scenario that is being presented to us,” Pejic said. “It’s not so much a challenge between FinTechs and banks, it’s more cooperation.”

This myth is exacerbated, he said, by the fact that when it comes to business, the FinTech evangelists and the bankers don’t speak the same language.

“There’s a Silicon Valley mentality of move fast and break things that I think will not work with banking,” Pejic said. “Uber did it very well, and for them it worked perfectly, even though they have regulatory challenges, but they managed to move so fast they have some weight. But banking is different. You have to have regulation. You have to have compliance. FinTechs are really underestimating it.”

One part of this is sheer scale: the four largest U.S. banks—JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—have a combined $8.8 trillion in assets under management, Forbes reported in January. That is, he argued, too high a wall for FinTechs to climb on their own.

In fact, the real decision facing FinTechs is whether to partner with a single financial institution or try and become the white-label technology provider for a consortium, Pejic said. “I think these are very core decisions every FinTech has to make.”

The use case is ready, the technology isn’t

Of course, the big financial institutions also have to make core decisions about changing the way they have always done business.

This is not something they have always proven adept at, Pejic noted, pointing to the example of Citibank’s pioneering introduction of the ATM.

“In the beginning, nobody knew what the use case was, and even after they spent 10 years inventing and then improving the technology, parts of the management said it’s not effective, it’s better to have human tellers than automatic tellers,” Pejic said. “I think this is what we’re seeing with banking in the blockchain at the moment. We have countless pilots, but we don’t see, now, implementation of the blockchain. But what we do see are real-life, blockchain-inspired initiatives.”

That’s why, when asked about comments made by top leaders of Bank of America, Mastercard and Wells Fargo in the final week of March, that they have not seen the killer use case of blockchain in finance yet, Pejic questioned whether their impatience was really justified.

“I think with banking we have pinpointed the right use cases,” he said. “We still do not have the necessary technological maturity. It will take a couple more years until we see the efficiency of blockchain solutions further back in the banking system.”

Among other issues, regulations have to catch up, he said, pointing specifically to the securities and asset management lines of business.

Speed is clearly one of those use cases, Pejic argued, noting the various pilot projects already completed involving moving money between payments and clearance and settlement.

“Then you have trade finance,” he said. “I believe trade finance can be one of the most significant ones, because we have 80% to 90% of global trade going through trade finance. It’s a massive volume. And believe it or not, we still have physical pieces of paper—bills of lading, letters of credits—still mailed with physical mail and fax. It usually takes about 10 days to get financing, and costs quite a lot. We’ve had pilots bringing this down to about four hours, and these are seven-figure transactions.”

Tech giants may be the real disruptors

Pejic said he thinks the threat to banks and other institutions that are part of the current financial system may be bigger than they think. But that threat does not come directly from the FinTech startups.

The history of innovation broadly shows the need to bring different qualities and competencies to a field, he said, pointing to Apple’s role in the decline of Nokia in the mobile phone market.

“When Nokia lost its dominance, it was not because there was a new startup, but because Apple had taken it,” Pejic said. “Apple came with the iPhone, and they had the infrastructure, they had the IT knowledge from the computer industry.”

With blockchain, banking is moving into the digital realm, and the “data behemoths” like Apple, Amazon, and Google, have the experience, he said. “They have also had enough time to gain scale,” he added. “I think the same thing [that happened to Nokia] could happen here now with blockchain. They all have huge data centers, they have a big global brand, and they’re quite frankly pushing into payment Internet financial services.”

Pointing to services like Google Pay and Apple Pay, Pejic said, “once the data giants get into finance via payments, they are a significant risk for banks, because payments are the major interface I have, as a customer,” with my bank. “We’re talking about a massive industry here, and we have seen them quite explicitly targeting blockchain strategies.”

A debit or credit card is something most people use every day, he pointed out. “Once I start using Apple or Google, and I think of them as the company that’s fulfilling my payment, then why not think of them as a whole finance provider,” he asked. “I’m really afraid for the banks from [that] perspective. If they let the data giants get a foot in the door by using payments, then suddenly it’s not long until they have very powerful competitors.”

And FinTechs have potentially powerful allies, with a history of managing disruption, to partner with.