Banks have been seduced by blockchain technology when they should be addressing their problems with platform innovations that could be achieved today - the sort of thing done most effectively by the likes of Alibaba.
Banks should change their processes but have become obsessed with product, believes Haydn Shaunghnessy, an expert on disruptive technology and the author of SHIFT: A User's Guide to the New Economy.
By product he means theoretical blockchain designs that will not be scalable for at least a decade, and fintech startups that banks will struggle to integrate into their existing management structure. This is as much a people problem as a technology problem.
Shaunghnessy has compiled a report which, among other things, features a list of what he considers to be the 25 most innovative financial services companies in operation today. Alibaba is top of that list. Shaughnessy is giving a Skype presentation at SIBOS this week where he will unleash the report's findings.
He told IBTimes UK: "Blockchain technology is going to be a long time coming and is not going to address the challenges of today. If you were taking a technology agnostic view of your back office problem, wouldn't you just use a database? Why wait 15 years?
"If you look at Alibaba, it processes at peak traffic, 80,000 sales transactions per second. It has the kind of record keeping that you need to have and it has an integrated process and it does it with web technology."
Like many successful enterprises in the global economy, Alibaba is busily integrating services. This extends beyond the e-commerce platform to enable sales, to include integrated escrow, all manner of payments, wealth management, small business loans, logistics and so on.
"So the question for banks should be, not if the blockchain is going to solve these problems for me – theoretically it will within the next 10-15 years," said Shaunghnessy. "The issue is how do I solve them by the end of this year, early next year? There are companies that are in the financial technology space that have solved those problems, but they did it with web technology; they are doing it with today's technology."
Shaunghnessy cited predictions issued by the World Economic Forum which said about 10% of the post-trade settlement market might be converted to a blockchain by 2027.
"So within 12 years you may get 10% of the market using it. I think that's very optimistic really if look at what it takes to properly fasten those technologies and you look at the fact that the banks are being fined for their systems going down, you will not be using this system properly for a decade and you will not scale it for 15 years," he said.
Banks have sworn a collective oath to eschew a proof of work consensus model like Bitcoin, where you don't know the identity of nodes that form the network.
To be permitted to operate within a private blockchain would involve entering into a legal agreement. It is unclear why banks feel the need to remove a trusted third party in this case, noted Shaunghnessy.
"I think what you have in the blockchain is theoretically a good answer to the problem but it's only theoretically a good answer. The only way it is really proven is through bitcoin which requires the currency. So if your remove the currency you really are talking about a distributed database. You can call that database a ledger, but it's a distributed database.
"There is a second problem which is the blockchain is actually not distributed computing, it's replicated computing. Any of these systems have to be replicated across all the banks, which is even more expensive. So what you want to have really is true distributed computing with some kind of custodial oversight of the record's veracity. But in trying to preclude a custodian role banks are contorting everything that they need to do.
"My answer would be look at what Alibaba does to create its system of record and figure out how you would introduce a custodian into that, and you have solved most of your problems. There is one area of Alibaba's records where they have databases that have over a billion records in one table. The problems of scale have been cracked."
Shaunghnessy said the whole issue boils down to very obtuse kinds of problems like permissionless and consensus building and those things, which have traditionally been solved by a custodian, a trusted third party.
"There's no reason why, if you are talking inter-bank activity, a third party custodian should not continue to play a role. They are trying to programme that role out for no reason whatsoever really. And maybe in 15 years they will have cracked it but in the meantime, they can do what they need to do very quickly I think."
But banks seem committed to defending and reinforcing a blockchain beachhead - this important work is pushing the very boundaries of computer science after all. It seems highly unlikely so many smart people could be wrong about it.
Shaunghnessy said it's worth remembering Second Life in this regard: "A lot of smart people piled into Second Life in 2005, 2006, 2007 – IBM spent $100m on it. It does happen. The fact is, the blockchain is a very specific solution to a very specific problem. It's a very anti-bank solution and that's what it's about."
He reiterated that banks are blighted by legacy problems that are both technical and people orientated: their business processes must be addressed.
"When you look at blockchain and say it's a great technology, it's tempting to believe you don't have to do those other things. That's the seduction at the moment. Because if you are a bank that doesn't go for blockchain, that doesn't go for fintech - you have to say, well I have 50 to 100 senior managers who can't work together. And that's just the normal conflict you have inside organisations that have IT infrastructures as a powerful, compelling and restraining force," he said.
Shaunghnessy's top 25 financial institutions by innovation capability:
- Westpac Banking Corporation
- Bank of New York Mellon
- American Express
- Ten cent
- Fidor Bank
- Citigroup Inc.
- Capital One
- DBS (Singapore)
- Bank of America
- La Caixa
- JP Morgan
- Rabobank (Netherlands)
- Silicon Valley Bank
- US Bank
- Commonwealth Bank of Australia