Mark Bredell, Head of Transfer Agency, takes a look at the prospects for blockchain in transfer agency and concludes that – between the hype and the resistance – industry players are best off preparing themselves for disruption by striking a middle path.
Few people in the fund administration industry will not have read the now infamous article that foretells the demise of transfer agency through blockchain technology.
In Funds Europe January 2018, the article titled “Fund manager’s blockchain experiment removes transfer agent role”, describes how a France-based record-keeping platform has provided a platform for a few French asset managers to use blockchain technology, enabling market participants to move cash and asset directly between each other, maintaining a “permissioned distributed ledger” of ownership and transaction records.
This news was followed by another announcement, in May 2018, that a business processing vendor had partnered with a software provider to create a “self-service” option for investors. (Funds Europe, September 2018).
So is the extinction threat for real?
The alarmist headlines have prompted a reaction from others – the workers’ voice as it were. Gartner’s 2018 CIO survey states:
“Despite blockchain’s potential, only one percent of CIOs are adopting the technology, and only eight percent are in short-term planning or active experimentation.”
“77 percent of CIOs surveyed said their organisation has no interest in the technology and/or no action planned to investigate or develop it.”
Yet, despite blockchain having yet to go mainstream in the enterprise, Gartner’s survey concludes that may well change as the technology’s reputation for trusted transactions continues to grow among IT leaders.
Deloitte, in a recent Luxembourg white paper, paints a sober picture of how tech disruption could impact the Luxembourg fund administration sector. Deloitte believes we are likely to see a transition phase towards blockchain being adopted and – crucially – makes the point that “involvement from users is not only a necessity, but also an essential input for an effective transition.”
This to my mind is the crux of the issue – collaboration.
Symbiotic collaboration is needed
In order for blockchain to become a more pervasive technology in financial services, multiple entities need to come together in a symbiotic relationship and agree on common principles, an operating model and governance.
Many organisations continue to explore blockchain as an intrinsic opportunity by focusing on themselves – “what’s in it for me?” and “how much competitive advantage is going to be lost by working together?”.
Questions like this, in a silo type thinking, can no longer exist if blockchain initiatives are going to be successful. This is argued succinctly by IBM in a recent blog.
The fact of the matter is that for the blockchain ecosystem to take hold, this will require the vision and leadership of a single organisation to convene the ecosystem in a common blockchain-based network.
Meanwhile, what should industry players be doing? I would suggest the following:
Examine the business case – The business case is not necessarily a given. The costs of blockchain solutions are not insignificant and there remain valid concerns about performance and overall cost benefit.
Disruption – Companies need to assess the relevance of blockchain to their organisation and carefully consider the broader benefit of the industry community. For distributor ledger solutions to work, companies need to lower their barriers and collaborate, and engage in consortiums with the objective of solving industry issues for the benefit of the participants.
Practical application – Companies need to filter out the exuberance and hype and target practical applications of the technology. In the transfer agency industry there is significant effort going into KYC and AML and Identity verification services. These are good examples of where firms face challenges, high costs and no meaningful benefit of going alone. Mobile and app technology innovations have enabled improved end-user experiences. KYC requirements are now easily captured through a smartphone, and APIs delivered from Home Affairs and other institutions allow for almost instantaneous verification. This provides high quality data with consistent standards that could be used in a blockchain solution.
Data, data, data – The success of blockchain is driven by data quality and adherence to data standards, so that verification between blockchain participants is able to be applied to actual validation of information and not checking data quality.
Industry readiness – Companies should be engaged with industry consortiums and industry leaders and influencers in staying current and engaged in progress. All business plans should include aspects of developing blockchain readiness, including programmes to ensure data quality and data remediation projects – as I mentioned above, poor data quality makes any blockchain solution unworkable. Applications should be developed and upgraded to be blockchain ready. Blockchain ecosystems rely heavily on system APIs and on organisations openly and securely sharing information through these data exchange mechanisms.
The disruption of technologies like Blockchain can only work if there is community buy-in and participation and there is still a long way to go in this regard. Maitland is actively engaged with industry consortiums; we are initiating data remediation programmes and ensuring that all applications have an upgrade path that includes blockchain readiness.
As more and more start to realise the benefits of these solutions, we hope to see more participants gearing up for a future that is proving to be inevitable.
Maitland Group South Africa Limited is an Authorised Financial Services Provider. Company no. 1981/009543/06.