This blog is based on my recent presentation at the 51th annual meeting of FCI in Ho Chi Minh City. It is a story about the blockchain-siren temptation trap.
Especially in the financial sector, blockchain (wikipedia link) is a big thing. Go to any conference or exhibition and you can’t avoid it. In trade finance, the industry FCI is active in, three large blockchain consortia remain after Batavia closed shop: Marco Polo, We.Trade and Voltron. Voltron and Marco Polo both use the R3/Corda platform and We.Trade the blockchain platform from IBM.
The large players in trade finance have no choice but to invest in what potentially is the next Big Thing. The strategic risk of the ‘do nothing’ scenario is too high and they have financial resources to spare. Some players don’t take any chances and invest in multiple platforms like ING, BNP Paribas and Bangkok Bank participating in Voltron and Marco Polo, and HSBC participating in Voltron and We.Trade.
According to IDC the financial sector invested $552 million in blockchain and the same firm forecasts worldwide investment in blockchain solutions reaching $11.7 billion in 2022.
So what about blockchain and FCI?
Factors Chain International (FCI) is a global association for the open account receivables finance industry, promoting frictionless cross-border factoring: “a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.” (source: Wikipedia). It is a 3 trillion business dominated by Europe (1,7 trillion in 2018), followed by the Asia Pacific region.
FCI has close to 400 members in 90 countries, some of which are very large and wealthy, but most are medium to small. In a mature market like Europe, consolidation has dramatically reduced the number of these so called factors. However, in an upcoming market like China some 9,000 factors are active, but an FCI member from China told me he expects this number to go down to 1,000 in the coming years.
But even these 1,000 will not nearly have the seize and budget of HSBC, ING, BNP Paribas, and Bangkok Bank. For many FCI members, $10,000 is still a lot of money. Their IT budgets are closer to $150.000 – $170,000 than the $15-$17 billion HSBC in planning to invest in new technology. And blockchain and a $10,000 budget don’t have a match yet, if ever.
However, the available budget is not the most important reason whether or not to adopt blockchain technology.
The central question should always be: what is the most effective (doing the right things –> desired results) and efficient (doing things right –> least resources) way to fulfill a business demand? Technology is a resource, like expertise or budget. It is of secondary importance.
At the same time, I understand the difficulty faced by business managers to avoid the siren temptation trap. All the big financial institutions are pouring money into blockchain initiatives, and the vendors promoting blockchain promise the earth, moon and preferably also the sun. And nobody wants to be part of the ‘uncool kids’. It is therefore easy to understand the business managers’ struggle with the question whether to jump on the bandwagon.
The same applies to the vendors, the tech companies which invested millions in these new technologies and seek a return on their investment. I understand that they need to score deals to stay in business.
So what advice do I have for the business managers?
First and foremost, stay focussed on the business objective, opportunity or challenge instead of technology. The latter should always be a means to an end. Secondly, stimulate the IT guys to formulate different solutions, forcing them to be creative and get off the beaten track. One can commute to work by cycle, bus, train or car, each with their pro’s, con’s and budget implications. Thirdly, get your information from multiple sources and dig deeper when something is heralded as the best since sliced bread. Fourth, technologies go through a lifecycle, getting less risky and cheaper with every passing year. Depending on upside of the business opportunity, your risk appetite, access to relevant expertise and the available budget, decide whether and when to invest.
The situation described is of course not unique for blockchain, but common to most emerging technologies and as old as time itself. In the Middle Ages we had alchemists traveling from castle to castle promising kings the ability to ‘transmutate’ lead into gold; after a moderate donation of course. Today we have an endless stream of conferences and exhibitions where todays alchemists promise to turn your $1 into $10. After making a small donation…