On a dark night I was sitting in my office staring at the ocean for inspiration for our go-to-market strategy for the Metrics Academy. The rain on my window blurred the streetlights making the habour look electric. To the right, the new Johnson Street Bridge is coming to life, marking the start of a modern look to Victoria’s infrastructure – a project that was protested by historical society sympathetics with our city council for years. I began to contemplate the conflict between the old and new, and how that tension is a constant in our growing societies. My mind wandered, as it usually does, to technology and how much is it changing financial services.
Bay Street, Wall Street, and the Square Mile have become increasingly aware of the threat imposed by financial technology (fintech) innovators. Global investment in fintech in 2015 was US$19.1 billion. The intersection of the Internet of Things (IoT) with the Internet of Value (IoV) has profound effects on payments, markets, and marketplaces. Blockchain is poised to fundamentally change the transfer of value and thusly we are experiencing the start of the next major technology revolution.
The Internet of Things refers to an era in which all devices are smart, and everyone has a device on which they can connect to the internet. McKinsey Global Institute estimates that the IoT has a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025. IoT is destined to change commercial and social interactions once all smart devices are connected to the internet.
Analysts predict anywhere from 20 billion – 50 billion connected things will be in use worldwide in 2020. Gartner reports that in 2016 approximately 5.5 million new things get connected everyday.
We are living in the start of that era now. It feels like soon every device you own, and most objects you can imagine will soon be connected to the internet. We have smartphones, smartwatches, tablets, laptops, and home monitoring systems. In our lives, cars will order their own fuel and replacement parts, and our fridges will self-order groceries. We are connected.
The connectivity of individuals to things is increasing rapidly and with it comes major concerns around digital identity, security and authority which our society is just beginning to grapple with. (If you are interested in this topic click here for a link to Chris Skinner’s articles on BankNXT.) All this connectivity becomes really interesting from a fintech perspective as IoT collides with the Internet of Value.
The IoV is an era in which value (money, payments, property registries) moves in the same way information moves today. This is a big idea because it represents a huge shift: Today, if I want to get cash to my friend in China, I participate in Correspondent Banking, a horribly antiquated system for the exchange of value that involves great costs and delays (taking two to five days to move value around the world). Imagine instead that we allow the transfer of value to take place over the internet: I now transfer cash to my friend in China through a social messaging platform and with one text the cash is sent, and he receives it the next instant, with no fees.
Consider for a moment the massive effects to financial markets and marketplaces when the Internet of Value collides with the Internet of Things – the connected devices are now economic players that can hold, spend and transfer value. It represents billions of additional economic players now unleashed on the world which will signify incredible change. Consider the financial inclusion of 2.5 billion unbanked individuals and the social change that may come from their inclusion. It becomes much easier to gain capital for your startup:think Crowdfunding. Imagine the power of the sharing economy as people are given the authority to transfer money and assets (or use of assets) over the internet ( AirBnB, Uber).
You may wonder how this transfer of value through things work? Why is this so different than our current interaction with the internet? The answer is: blockchain..
Blockchain is a distributed ledger technology; a decentralized network that maintains unalterable records of transactions between parties stored in ‘blocks’. Many blocks of information together create the blockchain. Here is how it works: each time a new piece of information is entered into the ledger it is distributed to each different node in the network.
When information is requested from the network, all nodes are queried and show the requestor the ‘consensus’ answer. Since the blockchain is controlled by its nodes rather than a select group of users, it is much less susceptible to fraud and systematic corruption than centralized systems. Users of the blockchain also do not require external mediation or a conventional trust-based relationship as the independent nodes protect from illegitimate transactions being approved by consensus.
Blockchain technology is touted as revolutionary, and predicts major change in the legitimacy of transactions and asset-ownership. This infographic shows many potential areas blockchain can improve:
The World Economic Forum predicts that new financial services infrastructure will transform and challenge traditional orthodoxies in today’s business models.
Distributed ledger technology has seen more than $1.4 billion invested in three years and 2,500 patent filings. It is predicted that 80% of banks will initiate projects by next year.
Of course challenges remain. The regulatory environment is uncertain. Standards are only starting to develop and Legal frameworks don’t yet exist. Let’s not forget the hackers and related security concerns. Blockchain represents great power, and with great power comes great responsibility. We’ve got a lot of work to do.
Estimated reading time: 4 minutes
“The Pulse of Fintech – Q2 2016.” KPMG International. N.p., n.d. Web. 13 Nov. 2016.
Evans, Dave. The Internet of Things. Geneva: International Telecommunication Union, 2005. CISCO. Web. https://www.gartner.com/doc/2625419/forecast-internet-things-worldwide-
“Gartner Says 6.4 Billion Connected.” “Things” Will Be in Use in 2016, Up 30 Percent From 2015. N.p., n.d. Web. 13 Nov. 2016.
“The Future of Financial Infrastructure: An Ambitious Look at How Blockchain Can Reshape Financial Services.” World Economic Forum. N.p., n.d. Web. 13 Nov. 2016. http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-internet-of-things-the-value-of-digitizing-the-physical-world