Blockchain is the Innovation topic in Banking – but is it relevant for Wealth Management?
Each day we hear about Blockchain and its ability to transform the banking industry. Although most articles focus on Retail Banking and Asset Management, Wealth Managers should carefully follow the development of this breakthrough technology and consider potential benefits and impacts of Blockchain on their business models. Real-time settlement models, smart contracts, single point of truth (“SPOT”) and automated investment vehicles can realistically be applied in Wealth Management. As such, they demonstrate that once Blockchain becomes reality, it will definitely transform the IT infrastructure and service offerings of all financial institutions, and thus will transform Wealth Management in itself.
Hyped as the next great thing in the financial services industry (and beyond), consortiums of large banks, central banks, regulators as well as FinTechs are heavily engaged in the development of Blockchain technology to unlock the full potential of the distributed ledger technology1. Current efforts are concentrating on technology in Retail Banking and Asset Management operations, focusing on the development of innovations in transparency and auditability. However, Blockchain brings along advantages and disadvantages for the Wealth Management industry.
Possible use cases in Wealth Management are as follows:
- Real-time settlement models could transform the execution of financial transactions with positive impacts on transaction costs, counterparty risk and capital availability. This, however, will also threaten transaction fees as one of the main sources of income in traditional Wealth Management.
- Data privacy protection, risk and financial history, including know your client (KYC) and investment profile propositions, could become less costly and much simpler with smart contracts and an encrypted single point of truth (“SPOT”). This would allow for increasing efficiency in terms of exchanging information and thus more reliable client interactions. Conversely, Blockchain would also facilitate faster client on-boarding and provider switching and thus reduce client loyalty and barriers to change Wealth Management service providers.
- As a next generation service offering in Wealth Management, digital investment portfolios based on baskets of crypto currencies could address the importance of asset allocation and the need for diversification whilst offering alternative investment opportunities. In addition, new autonomous financial instruments and automated investment vehicles, built on smart contracts, could replace traditional Wealth Management functions, such as Portfolio Management and Client Advisory, with the benefit of leaner and more efficient processes. Such new technologies will however also threaten additional sources of income.
Taking into consideration the tremendous market interest and investment inflows, Blockchain technologies are developing faster than existing ones, such as the internet. Once becoming mainstream, it has the potential of transforming the IT infrastructure and service offerings of all financial institutions.
Nonetheless, we are still in a phase of experimenting and, similar to the development of the internet twenty years ago, only time will tell to which applications this new technology will add value to. Wealth Managers have taken an observation role and have understood the benefits and the impact of Blockchain on their business model. Yet, decision makers should start looking at existing operating models and shift towards a participatory role over the coming years. This approach, has already been successful with automated investment platforms and is expected to have similar effects with the use of Blockchain.
UBS, for example, is experimenting with a distributed ledger technology-based trade finance system for rationalising import-export transactions at a global level. Moreover, a consortium comprising SIX, Swisscom, Zurich Cantonal Bank and other players, is attempting to redesign the process for settling over-the-counter (OTC) equities with the aid of Blockchain. FinTechs, such as Ethereum, Ripple, Digital Asset Holding and Clearmatics have of course also been very active in the development of Blockchain-based applications.
1 Deloitte (2017): The Blockchain (R)evolution – The Swiss Perspective
Embracing the Business Model Change
The Swiss Perspective