Bitcoin has been around since 2009, but it really wasn’t until recently that it finally hit the mainstream consciousness of investors and the general public. As of this writing 1 bitcoin is now worth over $ 5,600 USD. And its meteoric rise doesn’t look to be abating any time soon. Its potential to reshape how we understand and use money is real. But the big question is why are banks and governments so steadfastly against it?
Jamie Dimon, CEO of J.P. Morgan Bank, was recently in the news. He brazenly proclaimed that people who buy bitcoin are “stupid” and “governments will crush it one day”.
For those unfamiliar, bitcoin was created in 2008 and released in 2009 as the world’s first decentralized (peer-to-peer) cryptocurrency and digital payment system. But before we can explain why they’re against it you need to understand how they’ve always operated.
Business As Usual
In traditional payment systems a middleman, an intermediary, is required to settle transactions. This middleman is someone that is trusted. That trust is usually bestowed upon banks. Typically, we rely on banks in a monopolistic environment to create all the financial innovations because they have access within the system to clear money. These stewards of trust are required to ensure transactions successfully go through — money/goods exchange hands with no shenanigans. Unfortunately, within a fiat currency world this privilege also carries exorbitant transaction fees.
The 2008 financial crisis — you know, that time when stock markets collapsed and some countries went bankrupt because banks defrauded the system — revealed this trust is always open to abuse because many in such elevated positions have easy access to rob the system with prosecutorial immunity. When banks do something illegal against its nation’s people governments are typically unwilling to seek jail time against these bankers. You see, private banks and public governments are typically bed buddies. That is why people like United States Senator Dick Durbin famously said, “Banks, frankly own this place”.
Banks get greedy and so fraud, by these “trusted” institutions, inevitably happen. And guess what? We, not those banks, are the ones who get punished for it through higher fees, government bailouts (which is taxpayer’s money), and inflation. So what happened in 2008 was not the first time, it was just the most recent retelling of yet another legalized heist. And it will happen again in the near future.
What if one could remove this intermediary and replace it with a digital system that was infallible; one that was not open to corruption nor greed? Sound impossible? It was impossible before bitcoin.
When you deposit your money at a traditional bank you actually no longer own it, the bank does. There’s lots of transactions happening in the background where banks are essentially spending your money to earn more for themselves, and charge you for that “privilege”. Whether it is to pay for a fund manager, or it goes out as collateral to a mortgage, there’s layers and layers of complexity where people don’t realize their money is being spent to benefit those financial institutions alone.
Digital currency had always been open to the risk of being spent twice because it consists of a digital file that can be duplicated or falsified. This is known as the double-spending problem. Physical currency does not have this issue because it can’t be easily replicated and parties can better verify the currency. Middlemen like banks are there to establish trust — to resolve the double-spending problem. So, for example, when I pay for something then someone else keeps track in a ledger on who spends and who is owed what.
However, as mentioned earlier, banks thirstily charge excessive fees — even for just holding your money. Interesting side note, because banks are also centralized they are more uniquely susceptible to hacking efforts, which is what happened to JPMorgan, TD Bank, Citigroup, and even recently with Equifax — twice.
Nonetheless, this double-spending problem had always been one of the biggest hurdles for why truly decentralized digital money had a difficult time in becoming mainstream. But that was then.
A Birth Is Built Not Born
Bitcoin’s white paper was the first to provide an extraordinary solution to this double-spending problem by outlining a clever method so all transactions, without exception, is included in a publicly verifiable transaction log called the blockchain. A blockchain is an immutable ledger of records organized in “blocks” that are linked together by cryptographic validation. It is a digital storage of consensus truth, via peer-to-peer, ensuring that those who spend bitcoins really do own them — thus, solving double-counting and other fraudulent concerns, including hacking.
Bitcoin’s emergence in 2009 was no coincidence. Growing rumblings during that time period, which eventually coalesced into what eventually became Occupy Wall Street, accused big banks of rigging the system, duping clients, misusing borrower’s money, and unabashedly charging unjustified (and in some cases, illegal) fees. As such, bitcoin’s pioneers wanted to put the buyer/seller in charge, eliminate the middleman, cancel interest, and make transactions transparent. In other words, to hack corruption and cut fees.
The result was a decentralized system where you could control your funds and know what was going on. If I transfer bitcoins from my phone to yours there is no intermediary in that process. It’s just my money to you. We own it. We spend it.
A Paradigm Shift
Banks no longer worry about other banks being competitors. What banks do worry about now is the “Bank of One” — the next generation of a banking network that’s decentralized and resident on a phone. A digital asset that’s not issued by a bank or a government or anyone else.
On its surface bitcoin’s potential can create all these different opportunities, not necessarily benefiting traditional enterprises and governments, but instead, helps unlock societies. Because smartphones can be had for under $ 5 in the near future, most people living in poverty will finally have access and be connected to a network.
When you have digital wallets on these phones and you have the ability to trade cryptocurrencies fundamental questions emerge, such as “What happens when everyone has money?” or “What happens when no one no longer depends on a bank or a government to handle a transaction?”. That, in and of itself, is revolutionary. Nothing scares the financial sector and governments more than something it can’t control.
The financial services industry is like a Rube Goldberg machine; it incessantly yearns to make something more complicated than it needs to be. You process a transaction, it goes through various convoluted (and unnecessary) system machines, and in 3 business days a settlement occurs. The more elaborate and esoteric this framework becomes the bigger their opportunity to profit from it unchallenged.
In contrast, the system is dramatically simplified when dealing with cryptocurrencies — the payment and settlement is the same process. It’s just a change in the ledger — an addition to the blockchain.
As such, banks underlying fear of bitcoin boils down to this irrefutable truth: They fear they can be replaced. Bitcoin can potentially make central banks obsolete.
A Devil’s Choice?
When bitcoin was introduced governments and banks simply ignored it. In the following years they laughed and derided it: “A fool and his money are soon parted”. We’re now at that stage where they’re fighting it.
Remember, from their current perspective it’s best to eliminate bitcoin. However, they can’t kill it because it’s decentralized. This is why you’re starting to hear them, in collaboration with their respective governments, talk about regulating it. But because bitcoin is also inherently anonymous, regulating it is also difficult. But that doesn’t matter. Their goal is to just prevent mass adoption by the general public. To maintain business as usual. To maintain control.
And so this is really a story about the fear of change. But let’s surmise that maybe this isn’t merely a choice between kill or be killed; that bitcoin must die for banks to live, irrespective of how egregiously unrestrained for hundreds of more years that may entail.
Instead, maybe banks should focus their energy on fully understanding the underlying blockchain technology which fuels bitcoin, and how its impact could positively reshape their existing services to improve customer experiences.
Ironically, if bitcoin is allowed to grow to its fullest potential, without slander nor interference, banks could have access to new markets on an unparallelled scale.
Ethereum, another decentralized blockchain-based platform that goes beyond being a tradeable cryptocurrency, holds even more promise by expanding bitcoin’s foundation, allowing service providers to embed uniquely executable distributed apps within the blockchain.
Stock brokerages, another arm of the financial sector, are now slowly showing signs of interest in cryptocurrency, as discussed in this Questrade review.
And so, unless these banks learn to embrace, instead of fighting, this technology it’s only a matter of time before their customers wake up and realize these institutions have long been irrelevant.
Bank of America and contactless payment platform provider FitPay have agreed to extend wearables payment services to the bank’s customers.
The collaboration between Bank of America and FitPay will enable the bank’s credit and debit cardholders to make contactless payments directly from wearable devices at NFC-enabled point of sale (POS) locations and more than 9,000 Bank of America ATMs.
Under the agreement, Bank of America will participate in FitPay’s Digital Wallet Program, which enables manufacturers of Internet of Things (IoT) and wearable devices to add contactless payment capabilities to their product.
The FitPay platform uses tokenization, a payment security technology that replaces cardholders’ account information with a unique digital identifier (a ‘token’) on the device, to transact highly secure contactless payments.
The collaboration includes ensuring that all devices meet the bank’s technical usage, security, branding and consumer experience requirements. Product announcements from device manufacturers are expected later this year and during 2018.
“As digital payments evolve, our goal is to give Bank of America customers access to payment options that are easy to use and highly secure,” said Mark Monaco, head of enterprise payments at Bank of America. “Working with FitPay will allow our customers to use a range of new contactless payment devices to improve the payment experience, provide a high level of security, and fit seamlessly into any lifestyle.”
Michael Orlando, COO of parent company NXT-ID and president of FitPay, said that broad adoption of digital payments requires fundamentally changing the payment experience and making new methods widely available. “Our work with device manufacturers and Bank of America is driving both of these goals,” he said.
The wearables market grew 18 percent in the first quarter of 2017, according to a recent IDC report, with Xiaomi and Apple taking first and second place, respectively, in terms of market share, and nudging one-time market leader Fitbit into third place. Next came Samsung, followed by Garmin.
A TRIMAX Speaker Spotlight from Tony Baily, SVP Umpqua Bank
I’m Tony Bailey, Senior Vice President of Real Estate, Facilities, Design, Construction, TPO, Physical Security teams at Umpqua Bank, where I also serve as the Corporate Procurement Officer. In the past two years, I have developed the road map to help Umpqua Bank overcome the challenges posed by changes to the global lease accounting standards, and, put an ambitious IoT plan in place to help achieve the bank’s optimization and efficiency objectives. As a first time presenter at TRIMax, the combined TRIRIGA and Maximo User Group conference, I am excited to be able to meet with other companies that are at various stages in their path towards transforming both their facilities and their employee experiences using IBM TRIRIGA and Internet of Things (IoT) capabilities.
Building a transformation road map with IWMS and IoT
As a leader at Umpqua I am focused on driving value from our physical assets, sharing and learning from others presents critical opportunities to grow our strategy. At Umpqua we developed a road map for transformation over the last two years. Initially, we focused on overcoming the challenges posed by changes to the global lease accounting standards – Umpqua manages leases for over 500 properties as part of our capital financing business. Although it was lease accounting that drove the immediate need for finding a solution, we very quickly realized that an integrated workplace management system (IWMS) would create value far beyond this initial requirement for our business.
We looked at multiple vendors, narrowed it down to four leaders, and ultimately partnered with IBM to help deploy the solution. We had already been using the solution to drive the analysis of our lease holdings in order to capitalize on the opportunities and mitigate the risks from these changes. As we continue to expand our business, we will also leverage this knowledge as we deploy the Capital Planning capabilities in TRIRIGA. The lease administration capabilities are helping to streamline our operations around construction, procurement. For example, we are working on deploying a new e-invoicing capability that will automate many of time-intensive processes that consumed a lot of valuable resource from our business.
Join me with a robust user group community at TRIMAX in November
At TRIMAX in November, I will be sharing more details about Umpqua Bank’s project road map and lessons learned. I will be speaking about how we are incorporating IoT technologies to support our “branch of the future” vision – discussing in depth our plans to develop a dynamic floorplan – complete with traffic sensors and asset management to optimize our model – in an effort to drive just-in-time maintenance to help control costs.
I hope you are considering attending TRIMAX this November – and look forward to meeting you there to continue sharing best practices about our facilities management strategy.
Tony Bailey manages Umpqua Bank’s Real Estate, Facilities, Design, Construction, TPO, Physical Security teams and serves as the Corporate Procurement Officer. He brings a wealth of international experience in procurement, supply chain, organizational vendor risk management, along with construction project management as an officer in the USAF. Tony developed project cost accounting while integrating organizational procurement enhancements that provided scalable electronic invoicing interface with the general ledger system. Over the past two years, Tony has led his teams in achieving over $ 18MM in corporate savings.
You can learn more about Umpqua Bank’s transformation story at TRIMax 2017. TRIMax is a combined TRIRIGA and Maximo user group conference that takes place just outside of Washington, DC. Please visit the conference website for details; www.trimaxusergroup.com.
With deadlines looming for the transition to new lease accounting standards from FASB and IASB, organizations are devoting time, effort and budget to succeed in meeting new compliance requirements. Watch the webcast, Automating Compliance to Lease Accounting Changes with IBM IoT, to get an in-depth view into how Watson IoT, analytics and TRIRIGA can help.
Ginni introduced Bruce Ross, Group Head of Operations at the Royal Bank of Canada mentioning that both he and the organisation are pioneers. Bruce is the head of both technology and operations at the no. 1 bank in Canada.
Legacy is a massive strength
GR: How has banking changed?
BR: Clients are looking for more – a digital experience. Their money, where ever they are, however they want to see it. It’s a completely new business. Not just a digital view of yourself – it’s a new you. For Financial Services, people want a lifestyle experience not just a product experience. Is it a mortgage or a home? It’s the place you live, the schools, the surroundings. For a Financial Services company to be relevant going forward – you have to look at it that way. Legacy is a massive strength you can exploit to create this new experience. Our job is taking that experience to our clients – to share ‘what people like me do?’
An IT company with a bank sign on the front door
With cognitive learning you can do many things. Yesterday, we marketed to a zip code, now we can market to one. We have 12m clients, in 30 countries – how do we market to someone to give them a lifestyle improvement. We think of ourselves as “An IT company with a bank sign on the front door”
GR: How do you change the culture of development?
BR: You don’t need to be an engineer to be an engineering cult:
are we thinking about everything with a business outcome?
take the leap to use the new tech and be the early adopters. Agile, data, analytics, cognitive APIs’ – we’ll be a SAAS provider to our customers. We have to innovate for the future and think what’s likely to happen, dedicate resources and make it happen. IoT, blockchain – they’re all hyper critical to us.
Not just born in the cloud – it is the cloud
GR: What have you done for your developers, and how has IBM helped?
BR: IBM Cloud and BlueMix have helped us here at RBC. We have around 30 BlueMix applications in production. 12m customers using on-line banking. They’re mission critical applications in production for us. We poured 20 years of data in the last 6 months into the RBC data lake. Not just born in the cloud – it is the cloud.
GR: Tell me about BlueMix Garage at RBC
BR: BlueMix Garage is a capability providing BlueMix and all the tools to our developers anywhere – where they don’t have to worry about the configuration and setup, they can just start working using the mirco-services and patterns and start building. They can build a financial services application in the time we’re talking on the stage, which previously took months. We had to change how we worked. We’ve had to look horizontally – not in our IT verticals.
GR: What advice would you give to other organisations on making the transformation?
BR: The size of your bet and commitment is defined by two things. The amount of money and the amount of people. At RBC we took one of our strongest leaders and put her in charge. We committed the funds. And we trained and recruited the skills. Second is the importance of communication. Training is not enough. We have 500 developers trained on BlueMix. We created a certification program to create a profession. Technicians could see how they could develop and grow. Not all will make it, but we put the best support in place to make sure that the most possible, do.
Massively more productive in an order of magnitude
GR: How would the business describe the business outcomes of this journey?
BR: We talk about the speed we can get applications out to our clients. We’re beating the competition in getting apps like Siri Pay out the door. We look at the mobile adoption rates. It’s growing so fast it’ll beat online in the next 6-8 months. We look at speed of releases. We previously did one release a year, we now do them every couple of months. Our development teams today are massively more productive in an order of magnitude.
You change the way work is done to get the speed
GR: My key take away is not just doing the old way faster. Agile is about doing work differently – you change the way work is done to get the speed.