The Five D’s of Fintech: Decentralization

The recent rout in the cryptocurrency markets has not been positive for crypto enthusiasts, but has hardly put the damper on its underlying technology, the Blockchain.  Blockchain is moving out of the labs into real world applications for capital markets and securities firms. Over the past four years, global banks have successfully piloted Blockchain, and are now planning to scale those pilots into production. Government jurisdictions and regulators have been critical of cryptocurrencies, but are embracing Blockchain, which is a type of distributed ledger technology, as a way to streamline the financial markets. Infrastructure service providers such as exchanges and data vendors have teamed up with startups and banks to develop consortia based solutions. Various other parts of financial services are beginning to look at Blockchain.  Decentralization is the topic of this post, the third installment in the fintech series (see The Five D’s of Fintech: Introduction), in which we will look at where and how Blockchain is transforming financial services, in particular the retirement industry.

Modern developed financial markets are an intricate patchwork of intermediaries connecting transacting parties: middlemen that connect entities, assist in drawing up contracts, and provide monitoring and verification of transactions (centralized clearing and settlement agencies are examples of such intermediaries).  While this arrangement has worked well so far, it suffers from various issues: an example is information disclosure that the intermediary requires of the transacting parties, which opens up potential for conflicts of interest and privacy risk.   Distributed ledger technology such as Blockchain, which reduces the cost of networking and cost of transaction verification, has the potential to fundamentally alter this intermediary based structure of modern financial markets.

Why Blockchain in Financial Services

At the heart of financial markets operations is how data is used to exchange information, store records of ownership and obligation, and manage transfer of assets.  Complexity of products and markets, a legacy of old IT infrastructures, and organizational factors making managing such data a hugely complex undertaking.  This is evident by the number of typical reconciliations that happen in a given transaction across the value chain, the time it takes to settle transactions, and the preponderance of security breaks.  Financial institutions spend a large amount of resources on managing such data, and yet take on significant operational and regulatory risk.  Blockchain can help alleviate these operational issues, provide transparency and enhance security.

Blockchain is a type of distributed ledger technology: a shared, immutable database that is the system of record for all transactions, current and historic.  Based on advanced cryptography, Blockchain provides a set of foundational capabilities.


Blockchain has big applicability in financial services precisely because it can address the industry challenges mentioned above all at once. Blockchain provides data efficiency: the immutable ledger provides golden source historical information access, decentralized nature provides availability of data, and shared access provides accurate data provenance and enrichment.  The decentralized peer to peer model allows trustless parties to engage in secure streamlined transactions obviating the need for centralized processing.  Blockchain’s smart contract functionality enables a network of value for managing the transfer of assets e.g., currency, securities.

Retirement: An Industry in Transformation 

At $28.2 trillion, the US retirement industry, comprised of advisors, asset managers and retirement providers, is a large part of the financial services ecosystem. Closely associated with asset and wealth management, retirement is becoming increasingly important due to broader trends in financial markets.  In the aftermath of the financial crisis,  asset management has taken on new market significance, and given the evolving dynamics, it will take on a leadership role in setting the technology agenda and driving change.  The retirement industry is encountering additional pressures.  There is an excess supply of retirement providers in the market leading to consolidation.  Participants are expecting full financial well-being solutions.  There is emerging competition from “wealthtech” firms now squarely focusing on retirement solutions.  The retirement industry is facing the triple challenge of improving cost efficiency, providing transparency, and improving services to drive engagement.

Efforts undertaken by asset managers and retirement providers to drive cost efficiency and improve transparency may not be enough, given consumer expectations, regulatory evolution and strengthening competition.  Barriers to realizing fundamental cost efficiencies and improving services result from a lack of a trusted shared data environment that facilitates the creation and management of the retirement plan, essentially a contract guiding the investment and distribution of retirement assets. A big chunk of the industry cost structure results from having to make do without such an environment.  A lack of a true marketplace where sponsors and participants can choose advisors and provider services limits innovation, choice, and scale.  Further, regulators lack true on-demand granular transparency, and data access to understand true systemic risk, which can limit efficacy of regulatory enforcement and policy making.  Beyond driving local optimizations, the retirement industry has an opportunity to fundamentally remake itself.

How Blockchain Can Revolutionize Retirement

The retirement industry needs to acknowledge the Blockchain movement not just because the operational backbone of financial services will one day move to Blockchain, but because Blockchain can help the industry tackle its issues here and now.  It can help drive cost efficiency by streamlining operational processes and reducing manual work effort; it can improve transparency by enabling all stakeholders to securely view and report on data; it can drive innovation and engagement by enabling new products, improving processes, and empowering users.

There are value propositions for all players in the retirement marketplace.  For participants, it can provide a comprehensive view of assets, analytics and advisory; for plan sponsors, it can reduce overhead and provide transparency into fees and performance; for providers, it can bring operational efficiency and enable value-added solutions; and for regulators, it can enable easier enforcement of regulations and access to data for future policy making.  Blockchain can enable all this because it facilitates the creation of an open data environment for industry players on which additional services and innovation can be enabled.

Forward thinking retirement industry players have started experimenting with Blockchain already.  Asset managers such as Vanguard, BlackRock and Fidelity have Blockchain based research projects, pilots and product roadmaps for data sourcing, custody operations and crypto investment products.  Insurance outfits such as Prudential and John Hancock are partnering with Blockchain startups to run POCs for trading and recordkeeping  platforms.  Even payroll providers such as ADP and Kronos are actively evaluating Blockchain for their payroll solutions and services.

A Strategic Imperative

A typical retirement provider has operational pain points and challenges in each part of the functional value chain.   Being a general purpose technology, Blockchain has application areas across all retirement provider functions. User identity and fraud management is a key area for Blockchain: Blockchain based solution for digital identities, KYC/AML, and fraud detection is a proven use case.  Further, empowering users with control of their data will increasingly become critical due to regulation and customer expectations, which Blockchain can help address.


Since Blockchain is a rapidly evolving technology, providers should take a long-term view to adoption, going through stages of adoption to learn the technology and prove business value.  Organizations should start out by testing basic Blockchain based data sharing, gradually moving transactions and whole processes to the new platform. There are various use cases which the industry can focus on in the immediate term on a proofing/piloting basis. Such uses cases can help providers evaluate “ways to play” and develop institutional expertise with the technology.


Blockchain is Here To Stay

Blockchain is taking the financial services world by storm. Financial services is spending about $1.7 billion annually on Blockchain with a 67% annual increase in 2017, and one in 10 financial institutions is now reporting Blockchain budgets in excess of $10 MM. Now well beyond initial experimentation, Blockchain-related interest within financial services has reached critical significance. 14% of the banks and other companies in a recent survey claim to have successfully deployed a production Blockchain solution. Headcount dedicated to Blockchain initiatives doubled in 2017, and a typical top tier bank now has 18 employees dedicated to Blockchain development. Financial institutions are coming together in Blockchain-based industry utilities and mutualizing commercial interests by working with Blockchain startups.

While initial applications have focused on cross-border payments and trade finance, it is capital markets where Blockchain has the most disruptive potential, promising to revamp the industry’s operational backbone. Not surprisingly, capital markets infrastructure providers are at the forefront of Blockchain innovation, closely followed by commercial and investment banks, with asset management a distant third. As infrastructure providers, banks, and broker-dealers prove out use cases, uptake is expected to increase in asset management.

All financial services organizations should be paying close attention to Blockchain due to its transformative potential. Since Blockchain reduces the need for financial intermediation, traditional intermediaries such as banks, counter parties and distributors will need to develop new value propositions. Blockchain is the enabling technology behind all cryptocurrencies and emerging crypto finance markets that are now emerging to challenge the traditional ones. Furthermore, Blockchain enables creation of new digital assets and services, which will unleash a wave of financial innovation and a corresponding support ecosystem.

Time for Action

With a game changing technology such as Blockchain, the temptation for most industry players will be to adopt a wait-and-watch attitude. However, such a stance may come at a price: innovative incumbents or new fintech players may prove hard to beat, or a Blockchain infrastructure solution may simply be unavoidable due to broad industry adoption. More fundamentally however is the prospect of other industry players setting the agenda for the future Blockchain architecture, which may prove to be strategically disadvantageous for the laggards. The retirement industry should get ahead of the game with a proactive stance toward innovating with Blockchain.

Providers need to develop a sense of urgency and action, creating a case for change and highlighting the opportunity costs of doing nothing. Providers should take the following actionable steps:

  • Define How To Innovate: Identify the scale and scope of adoption, understand capabilities required, and define the roadmap
  • Build The Foundation: Undertake “no regret” preparation e.g., technology modernization, data quality and governance, API/cloud architecture
  • Test The Waters: Test Blockchain applications and evaluate “ways to play” in the future through partnerships and M&A opportunities
  • Be A Part Of The Movement: Participate in industry forums, consortiums, and innovation efforts on Blockchain and develop institutional expertise

The industry is expected to go through the growing pains of Blockchain adoption: new economic opportunities will emerge, regulatory overhaul and industry participation will need to happen, and rules of play and governance will need to be defined. For retirement, as for many in the financial services world, it is not a question of “if” but “when” for Blockchain, and providers should start preparing for the eventual transition today.