Hats off to Santander for setting out its innovation stall at MoneyConf Belfast and actually talking to people about where it is going with distributed ledger technology, for example – a topic most banks are either too cagey to broach or simply have nothing to say about.
Julio Faura, head of R&D and innovation in Santander's Innovation Division, told IBTimes UK the bank's lab, which is looking at block chain-type scenarios, is "not huge but growing".
"We have five or six people doing proof of contracts. We are still setting it up. A bunch of programmers and also people from the different parts of the business, like payments specialists, and compliance."
Faura said it is pooling talent internally through the innovation division to join the team. "It's gonna be more like go-to persons rather than full time," he said.
Santander is a large commercial retail operation, so the most obvious first case it is going to focus on is international payments. "They are ripe for disruption, ripe for doing a better job than we are doing," Faura said.
He revealed the innovation division was also looking at smart contracts "to do more stuff in the settlement of securities, syndicated loans, trade finance, that sort of thing, because that is again very manual".
Many banks are allocating resources to this: Barclays is active in this space; Commonwealth Bank of Australia; DBS, the Singaporean bank. But not all are willing to field questions about it.
Woodstock moment was the 'tipping point'
In Faura's opinion, banks and financial institutions experienced a Woodstock moment in respect of ledger-based possibilities at Sibos in Boston in October 2014. That was the "tipping point", he said.
"I go to a lot of conferences, you heard a lot of start-ups talking about how they were going to eliminate the banks, how they were going to re-found the financial system and redefine money and all that - and all the banks were ignoring it," Faura said.
"At that time I was trying to do stuff and the communications people from my bank were coming to me and saying 'we don't want to be associated with it in any way'. There was a lot of reputational risk and so on.
"Then last year Sibos got the banks to go there and you saw the start-ups there try to help the banks."
The mainstay of banks have long viewed their compliance departments as onerous, costly, necessary evils. It is perhaps ironic that a means to do away with enormous swathes of regulation, supervision, risk capital and audits has suddenly come banks' way – only not how they planned it.
"A system like bitcoin would remove the role of banks as custodians. I'm guessing the banks would not be so happy about that. It is a part of their revenue," noted Faura.
"The bank is a single point of truth. The amount of money you have in your account is a memory position in a system. It's the bank's word against yours. Now when this thing is distributed and everyone takes care of it, you don't need to trust anyone."
Faura said he thinks the removal of some of that responsibility will be turn out to be efficient. He flagged up some revenue streams which will likely be altered by disruptive technology but not fundamentally re-ordered, such as advisory.
"I don't think that's really under threat – people will need advice anyway to understand what to invest in or what to do with their money.
"It will be transformed but I don't think it's a role that's at stake – it will be affected in terms of how people will trust the banks, but I don't think it's fundamentally at stake.
Collaboration is key
Assessing a person's credit-worthiness will again be streamlined, he said, but will still exist in some capacity as it has – probably with more in the way of algorithms.
However, transactions will no longer require third-party agents and in terms of revenue will be changed fundamentally.
He highlighted the fact that returning value to this equation cannot be done unilaterally. Faura said: "If this thing is going to be valuable, it will only be valuable if all the banks work together. And if we work together with the start-ups. We need to collaborate – the tipping point is all about transforming rather than disrupting."
Faura's vision is one part of Santander's innovation programme, which is seeded by the bank's venture capital fund focused on fintech, Santander Innoventures; both are based in Madrid where the group is head-quartered.
Mariano Belinky, managing partner of Santander InnoVentures, told IBTimes UK: "The fund is independent from the bank but at the same time it is fully owned by the bank, it's funded by $100m out of the bank's balance sheet and it focuses on early stage companies that we can invest in and partner with to bring stronger value proposition to our clients."
The fund has a global reach but it mainly covers Santander's geography: Latin America, US, UK and continental Europe.
"We don't do Asia, we don't do Africa, but pretty much every other place we will do," said Belinky.
Types of companies the fund considers falls into five segments: payments, alternative lending programmes, big client data and analytics, investment advisory and what it calls digital channels.
Belinky said: "This is technology that changes the way we connect with our clients. So things like API-based banking, distributed ledger, cyber security – we are not just focused on blockchain, we are looking at all the other flavours or different types of protocol that are out there.
"We see the technology as a very disruptive technology for a good chunk of our back-end processes for things like international payments, syndicated lending, trade finance, letters of credit.
"We are looking generally at companies looking at building the blocks, the pipes of how to do international payments in a seamless way, how to connect our treasuries – we have 10 major treasuries in 10 major cities around the world, how do we connect them all together."
Belinky said the venture was not interested in any sort of plain wallets, exchanges or anything to do with trading crypotocurrency. He added: "We are much more focused on the pipes and tubes."