Showing posts with label Aid:Tech. Show all posts
Showing posts with label Aid:Tech. Show all posts

Friday, February 24, 2017

24/2/17: Distributed ledger technology in payments, clearing, & settlement


A new research paper from the U.S. Federal Reserve System, titled “Distributed ledger technology in payments, clearing, and settlement” (see citation below) looks at the rapidly evolving landscape of blockchain (distributed ledger technologies, or DLTs) in the financial services.

The authors note that DLT “is a term that [as of yet]… does not have a single definition”. Thus, the authors “refer to the technology as some combination of components including peer-to-peer networking, distributed data storage, and cryptography that, among other things, can potentially change the way in which the storage, record-keeping, and transfer of a digital asset is done.” While this definition is broader than blockchain definition alone, it is dominated by blockchain (private and public) typologies.


Impetus for research

Per authors, the impetus for this research is that DLT is one core form of financial sector innovation “that has been cited as a means of transforming payment, clearing, and settlement (PCS) processes, including how funds are transferred and how securities, commodities, and derivatives are cleared and settled.” Furthermore, “the driving force behind efforts to develop and deploy DLT in payments, clearing, and settlement is an expectation that the technology could reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets.” This, indeed, is the main positive proposition arising from blockchain solutions, but it is not a unique one. Blockchain systems offer provision of greater security of access and records storage, higher degree of integration of various data sources for the purpose of analytics, greater portability of data. These advantages reach beyond pure efficiency (cost savings) arguments and go to the heart of the idea of financial inclusion - opening up access to financial services for those who are currently unbanked, unserved and undocumented.

In line with this, the Fed study points that the proponents “of the technology have claimed that DLT could help foster a more efficient and safe payments system, and may even have the potential to fundamentally change the way in which PCS [payments, clearance and settlement] activities are conducted and the roles that financial institutions and infrastructures currently play.” The Fed is cautious on the latter promises, stating that “although there is much optimism regarding the promise of DLT, the development of such applications for PCS activities is in very early stages, with many industry participants suggesting that real-world applications are years away from full implementation.”


Per Fed research, “U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.” In simple terms, given average transaction cost of ca 2-2.5 percent, the market for PCS support systems is around USD250-310 billion annually in the U.S. alone, implying global markets size of well in excess of USD750 billion.

DLT Potential 

Fed researchers summarise key (but not all) potential (currently emerging) benefits of DLT systems in PCS services markets:

  • Reduced complexity (especially in multiparty, cross-border transactions)
  • Improved end-to-end processing speed and availability of assets and funds
  • Decreased need for reconciliation across multiple record-keeping infrastructures
  • Increased transparency and immutability in transaction record-keeping
  • Improved network resiliency through distributed data management
  • Reduced operational and financial risks


One of the more challenging, from the general financial services practitioners’ point of view, benefits of DLT is that it is “essentially asset-agnostic, meaning the technology is potentially capable of providing the storage, record-keeping, and transfer of any type of asset. This asset-agnostic nature of DLT has resulted in a range of possible applications currently being explored for uses in post-trade processes.”

The key to the above is that blockchains ledgers are neutral to the assets that are recorded on them, unlike traditional electronic and physical ledgers that commonly require specific structures for individual types of assets. The advantage of the blockchain is not simply in the fact that you can use the ledger to account for transactions involving multiple and diverse assets, but that you can also more seamlessly integrate data relating to different assets into analytics engines.

Due to higher efficiencies (cost, latency and security), blockchain offers huge potential in one core area of financial services: financial inclusion. As noted by the Fed researchers, “financial inclusion is another challenge both domestically and abroad that some are attempting to address with DLT. Some of the potential benefits of DLT for cross-border payments described above might also be able to help address issues involving cross-border remittances as well as challenges in providing end-users with universal access to a wide range of financial services. Access to financial services can be difficult, particularly for low-income households, because of high account fees, prohibitive costs associated with traveling to a bank. Developers contend DLT may assist financial inclusion by potentially allowing technology firms such as mobile phone providers to provide DLT-based financial services directly to end users at a lower cost than can (or would) traditional financial intermediaries; expanding access to customer groups not served by ordinary banks, and ultimately
reducing costs for retail consumers.”

Lower costs are key to achieving financial inclusion because serving lower income (currently unbanked and unserved) customers in diverse geographical, regulatory and institutional settings requires trading on much lower margins than in traditional financial services, usually delivered to higher income clients. Reducing costs is the key to improving margins, making them sustainable enough for financial services providers to enter lower income segments of the markets.

Incidentally, in addition to lower costs, improving financial inclusion also requires higher security and improved identification of customers. These are necessary to achieve significant gains in efficiencies in collection and distribution of payments (e.g. in micro-insurance or micro-finance). Once again, DLT systems hold huge promise here, including in the areas of creating Digital IDs for lower income clients and for undocumented customers, and in creating verifiable and portable financial fingerprints for such clients.

The Fed paper partially touches this when addressing the gains in information sharing arising from DLT platforms. “According to interviews, the ability of DLT to maintain tamper-resistant records can provide new ways to share information across entities such as independent auditors and supervisors.” Note: this reaches well beyond the scope of supervision and audits, and goes directly to the heart of the existent bottlenecks in information sharing and transmission present in the legacy financial systems, although the Fed study omits this consideration.

“As an example, DLT arrangements could be designed to allow auditors or supervisors “read-only access” to certain parts of the common ledger. This could help service providers in a DLT arrangement and end users meet regulatory reporting requirements more efficiently. Developers contend that being given visibility to a unified, shared ledger could give supervisors confidence in knowing the origins of the asset and the history of transactions across participants. Having a connection as a node in the network, a supervisor would receive transaction data as soon as it is broadcast to the network, which could help streamline regulatory compliance procedures and reduce costs…”

Once again, the Fed research does not see beyond the immediate issues of auditing and supervision. In reality, “read-only” access or “targeted access” can facilitate much easier and less costly underwriting of risks and structuring of contracts, aiding financial inclusion.


Key takeaways

Overall, the Fed paper “has examined how DLT can be used in the area of payments, clearing and settlement and identifies both the opportunities and challenges facing its long-term implementation and adoption.” This clearly specifies a relatively narrow reach of the study that excludes more business-focused aspects of DLTs potential in facilitating product structuring, asset management, data analytics, product underwriting, contracts structuring and other functionalities of huge importance to the financial services.

Per Fed, “in the [narrower] context of payments, DLT has the potential to provide new ways to transfer and record the ownership of digital assets; immutably and securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants, and cryptography. Potential use cases in payments, clearing, and settlement include cross-border payments and the post-trade clearing and settlement of securities. These use cases could address operational and financial frictions around existing services.”

As the study notes, “…the industry’s understanding and application of this technology is still in its infancy, and stakeholders are taking a variety of approaches toward its development.” Thus, “…a number of challenges to development and adoption remain, including in how issues around business cases, technological hurdles, legal considerations, and risk management considerations are addressed.” All of which shows two things:

  • Firstly, the true potential of DLTs in transforming the financial services is currently impossible to map out due to both the early stages of technological development and the broad range of potential applications. The Fed research mostly focuses on the set of back office applications of DLT, without touching upon the front office applications, and without considering the potentially greater gains from integration of back and front office applications through DLT platforms; and
  • Secondly, the key obstacles to the DLT deployment are the legacy services providers and systems - an issue that also worth exploring in more details.


In both, the former and the latter terms, it is heartening to see U.S. regulatory bodies shifting their supervisory and regulatory approaches toward greater openness toward DLT platforms, when contrasted against the legacy financial services platforms.


Mills, David, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquardt, Clinton Chen, Anton Badev, Timothy Brezinski, Linda Fahy, Kimberley Liao, Vanessa Kargenian, Max Ellithorpe, Wendy Ng, and Maria Baird (2016). “Distributed ledger technology in payments, clearing, and settlement,” Finance and Economics Discussion Series 2016-095. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2016.095. 

Friday, September 23, 2016

23/9/16: Two Major Partnerships for AID:Tech


AID:Tech CEO, Joseph Thompson presented at the Techstars Demo Day earlier this week.

Here is the video of his excellent talk about AID:Tech-powered technology promise to the aid and development sector: https://techstars.wistia.com/medias/fi4q9e0zkf delivered in front of some 600 top European technology VCs and business development specialists.

As a part of the Demo Day, AID:Tech also made two new partnerships announcements. Details are here:

As a board member and an adviser to the company, I am proud of what the team led by Joseph have been able to achieve within a span of just few months. The importance of blockchain-based solutions in providing greater efficiencies, better security and higher degree of transparency to payments in the international aid and development area is matched by the blockchain potential to revolutionise  key development sub-sectors of micro-lending and micro-insurance. AID:Tech are clearly positioned to lead fintech innovation in these market niches.

Saturday, September 3, 2016

3/9/16: Fintech, Banking and Dinosaurs with Wings


Here is an interesting study from McKinsey on fintech role in facilitating banking sector adjustments to technological evolution and changes in consumer demand for banking services:
http://www.mckinsey.com/business-functions/risk/our-insights/the-value-in-digitally-transforming-credit-risk-management?cid=other-eml-alt-mip-mck-oth-1608



The key here is that fintech is viewed by McKinsey as a core driver for changes in risk management. And the banks responses to fintech challenge are telling. Per McKinsey: “More recently, banks have begun to capture efficiency gains in the SME and commercial-banking segments by digitizing key steps of credit processes, such as the automation of credit decision engines.”

The potential for rewards from innovation  is substantial: “The automation of credit processes and the digitization of the key steps in the credit value chain can yield cost savings of up to 50 percent. The benefits of digitizing credit risk go well beyond even these improvements. Digitization can also protect bank revenue, potentially reducing leakage by 5 to 10 percent.”

McKinsey reference one example of improved efficiencies: “…by putting in place real-time credit decision making in the front line, banks reduce the risk of losing creditworthy clients to competitors as a result of slow approval processes.”

Blockchain technology offers several pathways to delivering significant gains for banks in the area of risk management:

  • It is real-time transactions tracking mechanism which can be integrated into live systems of data analytics to reduce lags and costs in risk management;
  • It is also the most secure form of data transmission to-date;
  • It offers greater ability to automate individual loans portfolios on the basis of each client (irrespective of the client size); and 
  • It provides potentially seamless integration of various sub-segments of lending portfolios, including loans originated in unsecured peer-to-peer lending venues and loans originated by the banks.




Note the impact matrix above.

Blockchain solutions, such as for example AID:Tech platform for payments facilitation, can offer tangible benefits across all three pillars of digital credit risk management process for a bank:

  • Meeting customer demand for real-time decisions? Check. Self-service demand? Check. Integration with third parties’ platforms? Check. Dynamic risk-adjusted pricing and limits? Check
  • Reduced cost of risk mitigation? Yes, especially in line with real-time analytics engines and monitoring efficiency
  • Reduced operational costs? The entire reason for blockchain is lower transactions costs


What the above matrix is missing is the bullet point of radical innovation, such as, for example, offering not just better solutions, but cardinally new solutions. Example of this: predictive or forecast-based financing (see my earlier post on this http://trueeconomics.blogspot.com/2016/09/2916-forecast-based-financing-and.html).

A recent McKinsey report (http://www.mckinsey.com/industries/financial-services/our-insights/blockchain-in-insurance-opportunity-or-threat) attempted to map the same path for insurance industry, but utterly failed in respect of seeing the insurance model evolution forward beyond traditional insurance structuring (again, for example, FBF is not even mentioned in the report, nor does the report devote any attention to the blockchain capacity to facilitate predictive analytics-based insurance models). Tellingly, the same points are again missed in this month’s McKinsey report on digital innovation in insurance sector: http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/making-digital-strategy-a-reality-in-insurance.

This might be due to the fact that McKinsey database is skewed to just 350 larger (by now legacy) blockchain platforms with little anchoring to current and future innovators in the space. In a world where technology evolves with the speed of blockchain disruption, one can’t be faulted for falling behind the curve by simply referencing already established offers.

Which brings us to the point of what really should we expect from fintech innovation taken beyond d simply tinkering on the margins of big legacy providers?

As those of you who follow my work know, I recently wrote about fintech disruption in the banking sector for the International Banker (see http://trueeconomics.blogspot.com/2016/06/13616-twin-tech-challenge-to.html). The role of fintech in providing back-office solutions in banking services is something that is undoubtedly worth exploring. However, it is also a dimension of innovation where banks are well-positioned to accept and absorb change. The real challenge lies within the areas of core financial services competition presented (for now only marginally) by the fintech. Once, however, the marginal innovation gains speed and breadth, traditional banking models will be severely stretched and the opening for fintech challengers in the sector will expand dramatically. The reason for this is simple: you can’t successfully transform a centuries-old business model to accommodate revolutionary change. You might bolt onto it few blows and whistles of new processes and new solutions. But that is hardly a herald of innovation.

At some point in evolution, dinosaurs with wings die out, and birds fly.


Monday, June 20, 2016

20/6/16: Aid:Tech in Techstars 2016


So it is now official: AID:tech (https://aid.technology/) is one of 11 companies selected for the Techstars 2016 programme: http://www.techstars.com/content/accelerators/announcing-11-companies-summer-2016-techstars-london-class/

AID:tech is the largest blockchain player in the market for providing payments facilitation, data collection and analytics; and assets / supply chain management company for international NGOs and State organisations providing aid and social welfare supports around the world. The company has fully-developed, field-tested suite of solutions allowing it to assist NGOs and governments in:

  • Reducing risk of fraud in international aid and social welfare payments by digitalising their payments processes;
  • Transmit a payment to the end recipient of aid, instantaneously verifying identity of the recipient, receipt of funds, and confirming the use of funds in the case of aid-related purchases
  • Substantially (by a factor of up to 3 times) reduce the cost currently charged by less secure platforms that generally offer lower degree of tractability of transactions.

Today there is a lack of transparency and accountability in the distribution of funds by NGO's and governments.

Of the $360bn transferred each year by NGO's, only $90bn is currently delivered via transparent systems and these systems are extremely expensive to administer. By utilising private blockchain technology, AID:tech enables all international aid to be accounted for, including the distribution of assets such as medicine, food and other essentials. The platform also offers add-ons such as smart contracts and instant micro-insurance, as well as advanced data analytics that help organisations to better plan and execute aid deliveries.

AID:tech is finalist in the Irish Times Innovation Awards (http://www.irishtimes.com/business/irish-times-innovation-awards-finalists-original-thinkers-from-all-sectors-1.2663210 and http://trueeconomics.blogspot.ie/2016/05/30516-aidtech-through-to-irish-times.html) and is shortlisted for the ‘Best Humanitarian Tech Startup’ for The Europas European Tech Startup Awards https://aid.technology/aidtech-shortlisted-for-the-europas-european-tech-startup-award/.


Disclosure: I am very proud of being involved with the company as an adviser and shareholder.

Monday, May 30, 2016

30/5/16: Aid:Tech Through to the Irish Times Innovation Awards Finals


Some really great news for a start up I have been working with for some time now, https://aid.technology/ Aid:Tech has been selected as one of three finalists in the Fintech category of the Irish Times Innovation Awards: http://www.irishtimes.com/business/irish-times-innovation-awards-finalists-original-thinkers-from-all-sectors-1.2663210.

Per Irish Times citation: "Aid:tech is an Irish start-up tech firm using the Blockchain system to help aid agencies and NGOs control and manage the distribution of international aid. Its system already delivered aid to 500 Syrian refugees in Lebanon. The firm’s system significantly overcomes the risk of fraud, a major problem with the distribution of aid funds."

In simple terms, Aid:Tech is the largest blockchain (private blockchain, as opposed to Bitcoin or other e-coins) application for provision of services in international development and aid areas in the world. Aid:Tech platform is now fully developed and ready for engaging with our partners in the global NGO sector. It has been field-tested in a series of trials, including a pilot in Lebanon, mentioned by the Irish Times.

We will be announcing some major forthcoming business and platform news over the next few weeks, so keep an eye out for Aid:Tech.

Last, but not least, all credit for these (and forthcoming) wins is due to our fantastic team!