united kingdomen
How will blockchain impact the financial industry?

How will blockchain impact the financial industry?

20-05-2016 | Research

Distributed ledger technology, such as blockchain, has been gaining a lot of attention as the underlying infrastructure of Bitcoin. Thanks to the open architecture of blockchain’s programming code, many alternative use cases are rapidly being developed. How will this impact the financial industry?

  • Jeroen van Oerle
    Jeroen
    van Oerle
    Portfolio Manager
  • Patrick  Lemmens
    Patrick
    Lemmens
    Portfolio Manager

Speed read

  • Distributed ledger technology is hyped but here to stay 
  • Adoption will be evolutionary rather than disruptive because of regulation 
  • Companies involved in labor intensive, costly and lengthy processes are most at risk

A distributed ledger is a database that keeps track of who owns a specific asset. This asset can be physical or electronic. Examples are diamonds, real estate and currencies. An essential feature of the new technology is that it is distributed. Every participant can keep a copy of the ledger, which is updated automatically when new transactions occur. The best known example of such a distributed ledger technology is blockchain. Block chain is the underlying ledger technology behind Bitcoin, a cryptocurrency. All Bitcoin transactions are processed and recorded on the Block chain. Literally every Bitcoin transaction ever made is recorded and can be traced. Not necessarily traced to people, but traced to accounts.

Hyped, but here to stay

We think the technology is currently being hyped, as witnessed by the large investment flows from private investors. At the same time, we are convinced that this technology is here to stay in the long run. It is currently in its infancy stage and there are several challenges to overcome before mass adoption is possible. Regulatory and technical issues are most decisive. In addition, there is a need for standardization to overcome hurdles, which we believe is best accomplished through the creation of consortia that include all relevant stakeholders. 

In the financial sector most resources are invested by banks, which have formed a consortium in R3CEV. For banks, this ‘administration 3.0’ technology will enable efficiency gains. Although disruptive use cases are theoretically possible, blockchain is most likely to be an evolutionary sustaining innovation. As with other technology, pre-conditions for incumbents to survive are technological competence and a proactive attitude.

Evolutionary, not revolutionary

We think blockchain technology will have a large impact on the financial sector. Still, we believe the rollout will be evolutionary rather than disruptive given the high level of regulation in the financial sector. We think this allows incumbents to react to the new technology and find ways to incorporate it into their current IT systems. We don’t think there will be only one version of blockchain, which allows for customization within specific industries. 

It is too early to identify clear winners. A comparison can be made to the music industry where Napster was the first company to enable large-scale online distribution of music, but Spotify emerged as leader. The same can happen with blockchain. A lot of startups are private, which implies we either have to wait until they become public, or we have to look for investible venture capitalists with a focus on blockchain. 

Although we cannot yet identify clear winners, we do see challenged business models. In the financial sector, there is an increasing influence of technology. Good examples of companies that are providing services for the financial sector are IBM, Accenture and Cognizant. Their main products and services focus on transforming legacy IT infrastructure. It can be questioned if there will still be demand for these services in a blockchain eco-system.

Challenged business plans with inefficient value chains

In our opinion, companies involved in the ‘quick win’ areas (costly, labor intensive and lengthy processes) are most at risk if they do not react to this new technology. The ‘middle man’ who is not able to provide value for his customers is expected to be disintermediated by distributed ledger technology. Key incumbents are likely to be investing in the technology in order to transition their current business model.

Leave your details and download the report.

Disclaimer:

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree