Chatbots and AI in Banking

(Below is a republication of Traction Technology Partners’ Traction report newsletter. Want to get insights into emerging tech on a more regular basis? Sign up for the Traction Report newsletter here)

When bitcoin emerged in 2008, banks were noticeably unenthused. And for good reason: Bitcoin from the start was an effort to establish peer-to-peer transactions of electronic cash — without the involvement of financial institutions. Seriously, from a banker’s perspective, what’s to like?

Plenty, it turns out. The underlying technology that enables bitcoin, the blockchain, is a digitally synced database of transactions — a shared ledger, essentially — secured by cryptography to prevent alteration of data anywhere in the chain of recorded transactions. The point of the blockchain is to ensure that all parties in a transaction automatically have the same records, thus avoiding disputes and the costs of periodic reconciliation while also making the process more efficient.

Financial institutions have become increasingly aware of the value offered by blockchaintechnology, and a number of start-ups are using various approaches to make the blockchain an invaluable tool for secure transactions in the digital economy.

During one of TTP’s recent Digital Banking Leadership Council sessions, American Banker Editor-in-chief Marc Hochstein gave members an overview of how the blockchainhas developed since the early bitcoin days and how banks and other financial institutions are exploring ways to use the technology.

The original bitcoin blockchain, Hochstein said, is extraordinarily accessible and transparent. Anyone can download the original bitcoin software, it is open, permissionless, entirely viewable to the public, and operates under the basis of distributed consensus, so there is no central “authority.”

These attributes of blockchain technology provide numerous benefits to bitcoin users: It prevents double-spending of the currency, it is censorship-resistant, trust-minimizing (it requires no third party), and uses anonymous public keys.

“You see everything that’s going on in the network, you can see all the transactions in the blockchain, but you don’t know who’s who,” Hochstein said. “So it’s transparent in that every transaction is recorded, but it’s opaque in the sense that identities are not volunteered.”

Now, though, the next phase of blockchain — what Hochstein calls “Blockchain 2.0” — is under way as potential use cases have begun to extend beyond bitcoin to financial institutions and healthcare. Rather than being fully public and transparent, he said, new models of the blockchain are more like “shared ledgers” that are designed for enterprises and are either private or accessible only through permissions.

  • The aim of these new blockchain models is to:Increase the resiliency of a financial network by eliminating single points of failure
  • Improve efficiency by doing away with the need for manual reconciliation
  • Provide a “shared source of truth” that is transparent and auditable

Those are useful features for enterprises in heavily regulated industries such as financial services. Indeed, Hochstein said, use cases already are being explored that would leverage “shared ledger” blockchain models for digital payments in fiat currency, database and records management, insurance, securities, identity management, trade finance, property deeds, diamonds, and self-executing “smart contracts” that run on “if this, then that” code.

“There’s been a real explosion of ideas about how to apply this technology in financial services,” Hochstein said. “A lot of these are in the pilot stages.”

Breaking blockchain’s constraints

Before financial services providers can confidently embrace the blockchain, however, the technology must address enterprise-level issues such as redundant data storage, scaling, privacy, and security. A consortium of more than 70 of the world’s largest financial institutions is developing technology designed to overcome these challenges.

R3 brings together financial industry veterans and technologists with experience in electronic financial markets, cryptography and digital currencies. Todd McDonald, co-founder and chief operating officer of R3, told the Digital Banking Leadership Council that the consortium’s mission is to “redefine the foundations of finance by harnessing the power of collaborative networks to deliver the next generation of financial infrastructure based on distributed ledger technology (DLT).”

Financial services enterprises are burdened with “structurally high costs” that don’t go down even when revenue declines, McDonald said. Financial services enterprises spend $2.6 trillion annually on operating costs, of which 15% to 20% comes from IT operations and ongoing support for legacy infrastructures, he told the Digital Banking Leadership Council.

DLT, McDonald said, is built to help financial services enterprises dramatically, rather than incrementally, reduce operating costs by providing a unified, shared ledger that reduces risk, simplifies reconciliation, offers near real-time validation, and improved regulatory reporting.

McDonald noted that R3’s “shared ledger” technology, called Corda, isn’t based on the bitcoin blockchain. Rather, it’s “blockchain-inspired,” taking ideas from bitcoin and other cybercurrencies. It’s also built for enterprise-scale use, ensures only relevant nodes can access transaction information, and provides regulatory/supervisor observer nodes and smart contracts.

‘The Internet of Blockchains’

Start-up Tendermint is taking a different approach, according to co-founder and chief technology officer Ethan Buchman (another speaker during this session), by creating software that 1) ensures transactions are recorded on every machine in the same order, and 2) allows developers to write transaction applications that can be processed in any language.

  • The advantages of Tendermint, Buchman told the Digital Banking Leadership Council, are:The ability to process thousands of transactions per second distributed across multiple data centers around the globe
  • Scalability through interoperability between numerous blockchains
  • Flexibility of building apps using any programming language
  • Security through fault tolerance with accountability

Tendermint soon will unveil a new public network built on Tendermint called Cosmos, which Buchman said the company refers to as “The Internet of Blockchains.”

“Cosmos takes all the advantages of Tendermint — the speed, scalability, flexibility, and security — and puts it together into a public network where we have many different independent blockchains that are all able to interoperate with one another using the Cosmos protocols which are derived from the underlying Tendermint consensus algorithm,” he said.

Buchman said Tendermint hopes to launch the Cosmos public network with at least five blockchains by the end of 2017.

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Blockchain In the News

Promising prototype

Two major European banks have announced a successful live oil trade using a jointly developed blockchain prototype. Dutch financial services provider ING and French banking firm Société Générale said the prototype reduced the time and cost of processing a commodities trade. As CoinDesk notes, “While the experiment was for an oil transaction, the steps involved in trades of other commodities are not very different, which will allow the platform to easily scale.”

Coming soon

Financial services research firm Corporate Insight has released a report on the current state of blockchain in financial services and the technology’s potential impact on the industry. Titled “Blockchain Solutions and the Future of Finance,” the report predicts that nine out of the 14 blockchain vendors profiled in the study “are set to bring blockchainsolutions into production between now and early 2018.”

Hype to reality

A global survey by Infosys Finacle and Let’s Talk Payments concludes that 69 percent of banks around the world “are experimenting with permissioned blockchains.” The report also reveals the top five use cases expected to go to production: cross border payments, digital identity management, clearing and settlement, letter of credit process and syndication of loans.

Decentralization and disruption

Trading blog Finance Magnates (FM) argues that the “decentralized system” of blockchaincould help banks centralize their technology to better meet the needs of mobile customers. “Experts believe that blockchain has disruptive powers that could transform any process from a simple documentation to a complex cross-country settlement to be automated with just few clicks,” FM writes.

The next Digital Banking Leadership Council virtual meeting will be on April 6. The topic will be Digitizing the Customer Experience with AR and VR. Learn more.

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