Jennifer Zeng: Blockchain in Financial Markets―How to Gain an Edge

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JENNIFER ZENG: Blockchain is gaining a lot of momentum. However, many firms are not sure how to deal with it. Bain recent research shows that 80% of financial services executives believe that distributed ledger technology will have a significant impact on the financial markets. However, at the same time, 40% of them said they've adopted a wait-and-see approach.

So what's holding them back? Well, Bain research shows there are two major reasons: one, the pressure to receive immediate returns on the investment and on the technology; second, unwillingness to invest in a technology whose success depends on the adoption by others. As one of the financial services executives mentioned, nobody wants to be first, but nobody wants to be last, either.

So in such an [uncertain] time, how should financial services prepare themself and develop a robust strategy and roadmap to be DLT ready? We strongly believe that financial services needs to take a top down and bottom up approach, systematically develop the roadmap. Specifically, there are three things they should do.

First, they should invest time to understand the markets and the impact of the DLT on their markets and how they can impact their roles in this market. For example, we believe that DLT will have a significant impact in a market that's more integrated—or example, Australian or Brazil. In terms of the value chain activities, DLT will have most impact in post-trade activities, including clearing and settlement.

In terms of the financial impacts, Bain research [estimates] the total cost savings of operating cost and capital cost will be about one to three basis points of total global as assets under management. That is about 15 to 35 billion US dollars, so the impact is significant. So secondly, after the firm understands the impact of DLT on their market, they should think about ways to mutualize the cost of migration. And there are specific ways that they can do that. For example, they can join others to form industrywide utilities, or they can work with other IT firms, BPOs or fintechs.

Thirdly, financial services companies need to take steps now to do something as they think about the future impact of DLT. Financial services need to upgrade the legacy IT system and processes to be DLT ready. In conclusion, we believe that blockchain and DLT is coming. Winners will be those who actually embrace the change and accelerate the change rather than resist it.

Read the Bain Brief: Blockchain in Financial Markets―How to Gain an Edge