Blockchain technology
will change the role of credit card issuers
Master Thesis - Harold van der Laan (11151021) Supervisors: Martin Heijnsbroek, Marc Salomon Amsterdam Business School
Executive Summary
Technological innovation will disrupt the current payment cycle. Fueled by changing demand by new generations and developments in the mobile phone business, peer to peer transactions take already place on a large scale. But an even larger innovation may shake up the the whole payments system: blockchain technology. The scale and the extent of the yet unknown possibilities of this phenomenon might swipe issuers and other intermediaries in the payments sector completely out of business. Therefore, issuers need to reconsider their activities and prepare for potentially major disruptions in the payment value chain.
Blockchain technology is still in its infancy. However, a lot of financial and non-financial applications have already been developed. For example, cryptocurrencies, international transactions and peer to peer transactions are already running on blockchain technology. What is especially unique about this technology is that a trusted third party is not necessary anymore in the payment cycle. All main players in this field start to realize that once this technology will be mainstream it will save time, cut costs, reduce errors and limit risk, because current inefficiencies in the payment process can be removed. Once authentication of senders and receivers, validation of transactions and keeping records of transactions run on blockchain, the value added from many intermediaries (like for example correspondent banks, the Swift network or issuers) will dissapear.
As credit cards may as well disappear in the future, all main players in this sector have started to take initiatives in the past couple of years. UnionPay, VISA, MasterCard and American Express have started to collaborate in worldwide ecosystems with technology partners, consulting firms, fintech startup funds and governmental bodies to prepare for this revolution. They have already invested billions of dollars in this technology. Also on a national level the same pattern can be observed. Large national financial services firms collaborate with other partners in local ecosystems to explore the full range of possibilities.
Although the real disruption still has to begin, industry leaders are all convinced that this will happen but nobody seems to know when. It is likely that within 5-10 years the speed of adoption will
increase substantially. But it may take decades before this technology will be fully exploited. The main issues that have caused the relative slow growth of blockchain technology adoption, despite its huge potential, are related to scalability and yet limited bandwith, partly due to legacy of exisiting IT systems and unforeseen investments when data storage will grow exponentially if growth accellerates. Other challenges lie in the field of safety and privacy, as both the government and consumers need to be confident about the security of this system.
But changes in demand may put pressure on the speed of development as the generation of millennials is very receptive to new technologies and already show that they embrace mobile payment solutions and do not consider established banks as their first choice for making payments anymore.
And once the technology providers start to build similar experiences and build standardized platforms that get interconnected, the adoption rate of blockchain technology may accelerate. This will ultimately lead to either consolidation or fragmentation in the payments market. Credit cards may even disappear. Given the observation of all main players investing billions within an ecosystem, including funding startups it is very likely that consolidation of main players in the payment system will occur. And this will imply, that payment schemes will collaborate with merchants and new entrants like mobile phone operators and IT firms.
In conclusion, there is not time to waste for issuers, given the value at stake for them and the potential speed of this disruption. Issuers need to have an answer, for a potentially life threatening technology trend and associated industry disruption. There are only few scenarios to follow: Defend the position, Diversify into other activities, or lead the disruption.
In the short run these strategies can run together, in the long run diversifying into other activities seems the most logical strategy.
Given that there is still time to play a profitable role in the current position, there is time to
simultaneously focus on innovation and explore new yet unknown growth opportunities. Looking for collaboration to explore and develop new solutions is therefore a recommendable strategy.
A defend strategy, although negatively associated with negative growth, could buy significant time, influence, and options for future offensive plays. If issuers loose their position In the payment field at once, it is hard to see how they will come back with a block-chain based offensive strategy. If, however, issuers can build up a significant lock-in of their position in the industry, they have a position from which they can counter-attack. We will explore logical lock-in strategies, including leveraging the unique access to payment data issuers have.
Diversification strategies, will drive future options for new business, but are not expected to compensate for the loss in themselves. Therefor the real long term question remains how issuers can co-shape a blockchain driven payment system in the future, through leveraging their current position while learning from first diversication initiatives.
Table of Contents
1 The changing payments landscape – Key roles in the payment cycle will become obsolete 5 1.1 Main trends in payments - Blockchain disruption urges players to prepare for the big bang 7 1.1.1 Worldwide Payments market - Despite market growth, traditional banks’ profits decrease 7 1.1.2 Political/Regulatory variables - Competitive advantage of financial data will decrease 8 1.1.3 Economical variables - Worldwide digital transactions are increasing 8 1.1.4 Social variables - Millennials are already processing billions of dollars through mobile apps 9 1.1.5 Technological variables - Blockchain will disrupt banking and fintechs act faster than banks 9 1.1.6 Evaluation of trends in Payments – Issuers need to reconsider their position 11
2 Blockchain Technology - Cutting out all the middlemen in any transaction process 14
2.1 Blockchain Technology 14
2.2 Applications of blockchain technology 16
2.3 Limitations of blockchain technology 18
3 Disruptive power and speed of Blockchain Technology - Slowly but steadily catching on 19
3.1 Example of an issuer 19
3.2 Current impact of Blockchain Technology on the credit card business 23
3.3 How disruptive is blockchain technology? 25
3.3.1 Factors that may delay speed of adoption 27
3.3.2 Factors that may increase speed of adoption 28
3.3.3 Estimate how this will develop in time 30
4 Assesment of strategic options - Collaboration and exploration provides new ideas 32 4.1 Defend position and play a role as issuer as long as possible 34
4.2 Follow current path 35
4.3 Wait and see 36
4.4 Build different capabilities and move away from the core business 36
4.5 In conclusion: Choose the right strategic option 39
Appendix 1: Process of a Blockchain transaction 41
1 The changing payments landscape - Key roles in the payment cycle will become obsolete
In 2015, the World Economic Forum has identified 11 innovation clusters (see Figure 1) based on how they impact the core functions of financial services in the near future.
Figure 1 – Clusters of Innovation in Financial Services
The focus of this master thesis is on how blockchain developments have impact on the Payments process. Two clusters that have impact on financial institutions can therefore be identified:
Emerging Payments Rolls Due to more integrated payment solutions, financials have less grip on
(crypto currency, P2P FX, their clients’ transaction experience. It will therefore be key for them to
mobile money) become the default payment option for clients. The winners in these
new payments field will have a competitive advantage due to better customer insights, based on larger client portfolios.
Cashless World The importance of traditional intermediaries as a trusted party may
(integrated billing, mobile payments, decrease. Payment suppliers face new risks (reputation, security) and
streamlined payments) regulatory challenges. Technology applications can develop beyond
money transfer and may change entire financial infrastructures. These trends will inevitably have impact on the actors in the payment process (see Figure 2). Figure 2 – The impact of trends in the payment process
❶Enhance, to increase access
In its report “The Future of Financial Services”, the World Economic Forum describes that disruptive payment innovations in the global payments market may lead to three possible scenarios:
• Consolidation of the Payments market
New payment innovations like for example the way Uber bills its clients will lead customers to use a single default card, leading to higher share of wallet per customer. Card brands and designs will become less important.
• Fragmentation of the Payments market
Increased use of digital wallets will reduce need for physical cards. Many merchants may issue their own wallets leading to lower share of wallet per customer.
• Displacement of credit cards
Credit card usage will decrease as users may choose payment solutions that directly link to their bank accounts.
For credit card issuers it is therefore important to monitor these developments closely. Their role may become different, the services they provides may become less relevant, especially if the scenario that credit cards will be displaced becomes reality. Therefore issuers should anticipate on developments in the Cashless World cluster, and within this cluster on the Streamlined payments, and act upon changes in the way to pay and at the point of sale.
The current situation is that mobile devices are increasingly being used to make peer to peer payments, linking them directly to bank accounts, and more machine to machine payments will be made, which will replace cash and card payments more and more. Established ways to pay, and existing payment scheme brands may become obsolete. And new brands are emerging.
As the range of payment solutions as well as providers may increase, it may lead to a decreased share of wallet per provider, as well as a less concentrated market with many suppliers.
Outline
The key focus of this report will therefore be to research how an increasing cashless world with streamlined payments will impact issuers.
The main question to be answered is: What should issuers do to stay relevant in the future?
A broader and deeper look at the trends in the payments industry first will provide a more complete picture to understand the landscape in which issuers are active. It will become clear that especially blockchain technology will have a yet unknown impact on the world of payments, because it will make trusted third parties in the payment system irrelevant, and therefore all intermediaries in the payment cycle should worry about their future.
Subsequently blockchain technology, with the potential to shake up the entire payment system and shake out incumbents, will be evaluated, followed by an assessment on how big and fast it will change the traditional payment cycle. The key takeaway is that the main players in financial services anticipate on this trend by collaborating with technology partners, telecom providers, consulting firms, fintech startups and governmental bodies in ecosystems to develop new applications that run on blockchain technology, and that it will take 5-10 years before growth will accelerate and decades before it will be mainstream technology.
The conclusion will be to assess which scenario will most likely become reality and what this will imply for the middlemen whose position is under threath, and especially what issuers should do to anticipate on this. A synthesis of market dynamics reveals that given that main players collaborate in ecosystems it is likely that such forms of collaboration may lead to a more consolidated market. Issuers should therefore prepare for intensified collaboration as well. In the meantime they can defend their positions, but only temporarily as in the long run the entire payment cycle will be reshaped to become, cheaper, faster, less erroneous and more secure, without many middlemen.
1.1 Main trends in payments – Blockchain disruption urges players to prepare for the big bang The payments industry is ripe for disruption. All trends indicate that this is coming. Up to now it has only impacted just 1% of traditional banking business of North American banks (see also section 1.1.6). However investments in fintech startups accelerate and the speed of their development urges traditional players to anticipate on this quickly. It will impact Payment revenues $60 bn (Figure 10). Especially the uncontrolled growth, the world wide scale, as well as the wide variety of the yet unknown range of applications of Blockchain technology is considered to be the most disruptive trend as it meets all characteristics that characterizes disruptive trends (Downes (2013)). Given the fact that the industry realizes that disruption is about to begin and will be mainstream in 5-10 years, it implies growth will likely accelerate. There are according to Downes three options to choose from:
prepare for an escape, by leading the disruption
slowing the innovation
try new kinds of diversification.
Any of these options ask traditional players to move out of their comfort zone, as quickly and determined as possible, as in the next 5 years the winners will divide the market among each other. 1.1.1 Worldwide Payments market - Despite market growth, traditional banks’ profits decrease According to McKinsey&Company, global payments are expected to grow by 8 percent annually from 2013 until 2018 (see Figure 3). The share of payment revenues in total banking revenues will also increase to 43% in 2018. One of the main drivers of this growth is the transaction related (revenue from payment transactions) revenue. This in turn is driven by increased competition and increased demand for digital payments. Transaction related revenue is expected to grow at a rate of 7% per year from $220 billion in 2011 to $340 billion in 2018.
This increased competition does not only drive growth, it also has a downward pressure on profits. Mobile phone payment solutions from new entrants who directly connect with merchants affect profits, interchange fees are under fire, and other fee income is eroded due to peer to peer and business to business payments. The impact of the downward pressure on profits is shown in Figure 4. Figure 3 – Growth of worldwide payments revenues Figure 4: Attackers impact on bank revenues
Let’s have a closer look to the growth drivers (increased competition and demand for digital payments) and explore other drivers that contribute in shaping the future payment landscape. Several leading consulting firms have provided their view on the payments market in outlook reports about the industry. The following reports have been used to identify the trends:
The PEST Analysis framework may help structuring these trends briefly.
1.1.2 Political/Regulatory variables – Competitive advantage of financial data will decrease Worldwide many payment regulations will be implemented in the next years. It goes beyond the scope of this research to explain all regulations in detail. For the record the key regulations are summed up here:
Risk Reduction regulation:
o Anti-Money Laundering Regulations o Intraday Liquidity Norms and Reporting o Liquidity Coverage Ratio (LCR) under Basel III o Financial Transaction Tax
o Mobile Payments Security in Europe
Standardization Regulation:
o Large Value Payments Systems Upgrade o SEPA Initiatives
o Thailand National E-Payments System
Innovation Regulation:
o PSD2 (Access to Accounts)
o Global Payments Innovation Initiative by SWIFT o Australia Payments Plan
As the focus of this research is on innovations, the most important regulation is the Effectuation of Payment Services (PSD2) - Directive (EU) 2015/2366 in the European Union to increase competition by removing entry barriers for new entrants in the payments industry.
https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en 1.1.3 Economical variables – Worldwide digital transactions are increasing
From the world payments report from Capgemini it becomes clear that non-cash transactions are growing in every continent (See Figure 5) and that the share of transactions through some sort of card program is increasing. In the Netherlands the number of non-cash transactions per capita is among the highest in the world (See Figure 6). So it appears that cash payments are loosing space more and more.
Worldwide macro economical developments are difficult to predict. However they play a main role in supply and demand for liquidity. So revenues originated from liquidity (linked to outstanding
transaction-account balances) are heavily dependent on these trends. Figure 5 – Worldwide development of non-cash transactions
Figure 6 – Cash in circulation versus number of non-cash transacations per capita
1.1.4 Social variables – Millennials are already processing billions of dollars through mobile apps Customers get way more used to digital solutions in many other industries like for example retail. Subsequently they will use more digital solutions for their banking needs and require higher standards for their digital banking solutions as well.
From the Millennial Disruption Index (Viacom (2013)) it follows that Banking is the sector with the highest risk of disruption, because the preferences of millennials are indicating that:
- 53% think that their banks do not offer anything different than other banks do. - 1 in 3 are open to switching in the next couple of months
- 4 main banking brands in the US are among the least loved brands by millennials - 70% say that the way we pay for things will be totally different
- 73% is more excited about new financial services offerings from Google, Apple, Amazon, or Paypal than from their own banks.
When the new generation will switch to other ways of banking, banks may be left with quickly shrinking client bases. Shifting demand patterns in already disrupted industries have swiped away many once established companies before. See for example figure 7a
(http://businessadvantageinternational.com/331-2/ Credit: Alison Clark, IBM IX) and 7b. Figure 7: Examples of victims of digital disruption worldwide (7a) and in the Netherlands (7b)
7a 7b
And to showcase that it is not just research but also reality in the Banking sector, the case of Venmo illustrates how todays millennials are using their mobile phones to pay each other.
The mobile app Venmo, owned by Paypal, is a digital payment service, which is paperless and cashless. It is already replacing cash, checks, or cards, as friends who know each other and people who closely live together are paying each other through this platform. In Q4 2016, payments worth USD 5.6 billion were processed through this app, a 126% year over year increase.
(http://www.investopedia.com/articles/personal-finance/010715/venmo-its-business-model-and-competition.asp)
way more dispruptive than Red Ocean strategies. Examples of current Red Ocean based drivers of technological innovations are:
Data management (big data as a source of competitive advantage) o Increased storage of, access to and interpretation of data
Security (increased requirements to reduce fraud) o Biometric security solutions
o Fraud signaling, generated by algorythms, and sent to smartphones
Move to modular IT (scaling up is possible by investing in IT) o Cloud-based solutions
o API applications
o High degree of adoption of technology by Fintech startups
But the number one Blue Ocean driver of disruption that may have the largest impact on the payment cycle in the next decades is blockchain technology. A search on the internet reveals that leading universities, as well as newspapers, research institutes and consulting firms all agree on this. The links below refer to these insights.
http://knowledge.wharton.upenn.edu/article/blockchain-technology-will-disrupt-financial-services-firms/ https://hbr.org/2017/03/how-blockchain-is-changing-finance https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services https://internationalbanker.com/finance/blockchain-disrupting-finance-industry/ https://www.ft.com/content/1b82a0e6-4f67-11e6-8172-e39ecd3b86fc https://www.forbes.com/sites/ciocentral/2017/02/24/is-the-financial-services-industry-ripe-for-disruption/#2645a57f78af https://bitcoinmagazine.com/articles/pwc-report-while-fintech-disrupts-banks-the-blockchain-disrupts-fintech-1458148582/ http://www.gartner.com/smarterwithgartner/blockchain-goes-beyond-financial-services/ https://www.capgemini.com/resources/infographic-the-disruption-of-blockchain-on-the-financial-services-industry https://www2.deloitte.com/content/dam/Deloitte/ie/Documents/FinancialServices/IE_Cons_Blockchain_1015.pdf http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world https://www.rolandberger.com/en/press/Blockchain-holds-huge-potential-to-disrupt-the-financial-services-sector-–-Broad.html
The importance of such technological innovations in financial services can be illustrated by the growth of investments in Fintech startups (See Figure 8) and the speed with which they are outperforming traditional banks, as described by Denecker et al. (2014). (See figure 9): Figure 8 – Global Investment in Fintech
1.1.6 Evaluation of trends in Payments – Issuers need to reconsider their position
According to Citigroup, all these technological developments and investments in fintech have only led to just 1% of revenues of North American consumer banking revenues being shifted to such new digital models. This is mainly due to the scale of main national banks. But Citigroup expects this to change soon due to the transformative power of technology and also given the fact that a big shift has already taken place in China, where big internet firms have replaced some main banks. Therefore Citigroup expects that “...the downsizing of the bank workforce is about to accelerate as more technology takes over jobs humans used to do.” and that “...another 30% of bank jobs could be lost between 2015 and 2025, mainly due to retail banking automation”.
So by 2023 about 17% of North American banking revenue could be impacted by such digital
disruptions. (http://money.cnn.com/2016/04/04/investing/bank-jobs-dying-automation-citigroup/) The increased demand for non-cash transactions, fueled by innovative payment solutions, with downward pressure on profits, that have led to changes in demand for different ways to pay have already led to the following visible trends and innovations in the Financial sector:
Consumer and Retail Payments
Mobile wallets
P2P Mobile Payments
Foreign Exchange and Remittances
Realtime Payments
Digital Currency Solutions Wholesale and Corporate Payments
Harmonization of standards and markets
Bank Payment hubs
Supply Chain Finance
Non-traditional lending
Digital currency based solutions
A shift to cryptocurrencies
Disruptive competitors entering the market
Regulations like PSD2 as well as Blockchain technology will substantially change the way financial services firms do business and will change the way they compete, and therefore the whole competitive landscape in Payments will start to look different in the next decades.
According to the McKinsey report ‘Blockchain Technology in the Insurance Sector’, blockchain technology will impact Financial Institutions for a total amount of USD 80-110 billion. And more than half of this impact is coming from Payments. (See Figure 10)
B2B payments will be impacted for a total amount of USD 50-60 billion, given the lower cost and increased speed when blockchain will be applied, as current intermediaries are processing payments slowly. The P2P paymnets will be impacted for a total amount of USD 3-5 billion, because the current lack of competiton has led to high fees for intermediaries.
Another USD 4-8 bn will be impacted due to authentication and anti money laundering processes thar are currently requiring double entry and verification processes.
Figure 10: Revenue impact of Blockchain Technology on Financial Institutions
https://www.treasury.gov/initiatives/fio/Documents/McKinsey_FACI_Blockchain_in_Insurance.pdf
The Harvard Business Review Article “Big-Bang Disruption” (2013) summarizes how to recognize disruptive trends and how to deal with it. Disruptive trends can be recognized as the following takes place:
Unencumbered development
Unconstrained growth
Undisciplined strategy of disruptors
Blockchain Technology meets all these three criteria.
The possible ways to deal with disruption if an industry is under disruption are:
See it coming
Slow the disruptive innovation long enough to better it.
Get closer to the exits, and be ready for a fast escape.
Try a new kind of diversification
So all players in the payments cycle that see that their position may be endangered by such
disruptive trends need to act to survive. And because issuers play a role as intermediaries between customers and payment providers they really need to reconsider their position, as when
disintermediation takes place they are out of business. So they need to diversify and consolidate! A real life example may illustrate how a non-financial services provider (see the M-Pesa case in Box 1) will provide solutions that offer an entire new way of making payments almost bypassing the whole payments system, while creating a new one. Issuers are therefore required to address this and respond to it. They need to modernize and update their payment systems to prepare for and facilitate new ways to pay in order to remain competitive. Otherwise they can better get closer to the exits and be ready for a fast escape.
Box 1 The M-Pesa case M-Pesa, launched by Vodafone, is a money transfer service for people who have access to a mobile phone but no or limited access to a bank account to send and receive money and pay bills.
Customers can register at a local retailer, submit cash in exchange for electronic money and can then make peer to peer payments, without using the banking network. Transactions are finalized with a PIN code and confirmed with an sms. By the end of 2016 M-Pesa was launched in 10 (mainly African) countries and had 29.5 million active customers who made 6 billion transactions in 2016.
2 Blockchain Technology - Cutting out all the middlemen in any transaction process
Blockchain Technology solves one of the key drawbacks of internet transactions: two parties doing a transaction need to rely almost exclusively on financial institutions who serve as trusted third parties to process the electronic payments. This makes such transactions costly in terms of time and money. With blockchain technology a trusted third party is not necessary anymore. With this technology it is possible to develop an electronic payment system, based on cryptographic proof instead of trust, in order to facilitate transactions between two parties who are willing to transact directly with each other without a trusted third party.
So basically all intermediaries between 2 people/organizations who interact with each other will now become redundant. This is where blockchain technology will ultimately lead to. It may therefore have the potential to change the entire ecosystem of payments. And given the wider range of applications its potential will go beyond payments and will expand to many other industries and even
governments. Industry leaders have no idea how fast these developments will go, in which directions it will develop first, if/when growth will accellerate, and how seriously it will affect their businesses. The principle was first explained in the first ever published document on blockchain technology: “Bitcoin: A Peer-to-Peer Electronic Cash System”. The author, Satoshi Nakamoto (2008), is an unknown person. Up to now nobody has managed to reveal his identity (see also
https://en.wikipedia.org/wiki/Satoshi_Nakamoto). This person wanted to find a way to reduce the power of trusted third party institutions who played an up to then necessary role in internet commerce transactions. To solve this he developed a system that enables peers to act directly with each other in a safe and undisputable way, making transactions cheap, fast, error-free and secure. 2.1 Blockchain Technology
Blockchain technology cannot be explained without knowledge about cryptograhy. Witte (2016) describes the concepts of cryptography, which is based on the use of private and public keys. If person A wants to do an encrypted transaction with person B, person B shares its public key with person A (step 1), the private key of person B is only known to person B and kept secret. Now person A encrypts his encrypted transaction with the public key of person B (step 2). Person B is now the only person who can decrypt the transaction with its private key (step 3). This process looks like:
Step 1 Person A sends public key Person B
Step 2 Person A encrypts transaction with public key of B Person B Step 3 decryption of transaction with private key of B by Person B
A hash key (a key that needs to be encrypted (=hashed)) is a unique string with numbers and letters of a certain length representing a given input. The lengths of hashed inputs differ in length and are reduced to a fixed length. Modern hash keys have such lengths that it is nearly impossible that two different inputs have the same hash key. However in 2017 Google together with the University of Amsterdam managed to do this (see also section 4.1). So hash keys need to be become even more complicated. It is extremely difficult if you have the hash key to find out which input it represents, though. Hash key generators can be found online and are for free (look for example at
http://www.miraclesalad.com/webtools/md5.php).
With this knowledge it is possible to explain the blockchain concept. The Sutardja Center for
Entrepreneurship and Technology from the University of Berkeley defines Blockchain Technology as following: “A Blockchain is essentially a distributed database of records or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made.”, (Crosby et al. 2015).
How blockchain works is described in many papers. Nofer et al. (2017) provide a straightforward description. This description contains certain terms which are typical for blockchain transactions. These words are written in italic and explained further with the help of a detailed step-by-step approach of a bitcoin transaction, using blockchain technology.
A block is a dataset and a blockchain is a chain of these datasets. A block consists of many
transactions (TX1 ... TXn). New blocks can be added and together they form the entire ledger of the transaction history. Each block has a timestamp, the unique hashcode of the previous block and a random number, the so-called nonce, to verify the hashcode. See Figure 11.
Figure 11 Example of a blockchain, (Zheng et al. 2016)
This is needed so blocks can be validated based on cryptography by the network. Because all blocks are connected, all transaction can be traced back until the first block, which is called the Genesis block. As hash values are unique, a simple change in a block in the chain will immediately lead to a different hashvalue, which prevents fraud. If the majority of all the nodes (participants) in the
network agrees (by using a set of predefined procedures) that the block is valid it will be added to the chain. Before being added, the data is temporarily stored in a block, which may take minutes of time. Once added to the chain, the data cannot be changed anymore.
The most wellknown application of blockchain technology is bitcoin. This is based on the following infrastructure, developed by Satoshi Nakamoto. It all starts with a distributed network of
partcicipants (nodes). They all individually install a copy of the entire blockchain on their systems. Each node also has an individual bitcoin wallet representing ownership of any received bitcoin payment. Every bitcoin transaction is actually the public key of a pair of public and private keys. The private keys of the transaction are in the wallets. This is conceptualized in figure 12.
Figure 12: Distributed network
Node B
Node A
Node C
Node D
If node A claims to node B it has x bitcoins, node B can check and confirm this by asking encrypted questions using the public key of A, which can only be replied by node A when in possession of the private key, belonging to the key-pair.
bitcoin amount and create a new hash key, which both encodes the last previous hash key and the information of the new transaction. This one node should not be known to the one who wants to make the transaction, to prevent manipulating the blockchain. To actually choose a random node the newly generated hash key should have a particular structure, like for example a fixed number of zeros at the beginning or at the end of the hashcode. All nodes in the network are therefore allowed to add a personally chosen component, called the nonce, to the key and then hash it. The
confirmation of the transaction is accepted if one of the nodes in the network is able to suggest a nonce that leads to the required format of the hash key. This process, it’s a competition, between the nodes, to find the nonce that will provide the hash key with the right format is called mining. This process takes computing time, and therefore the hash key can be chosen to limit the time to find it. For bitcoin transactions it is limited to about 10 minutes. If a certain node has found the hash key it sends this key, as well as the transaction information to all other nodes in the network. All
distributed ledgers will then be updated with this confirmed transaction.
Yli-Huumo et al. (2016) summarize this process as following: Blockchain is a decentralized solution which does not require any third party organization in the middle. The information about every transaction ever completed in Blockchain is shared and available to all nodes. This attribute makes the system more transparent than centralized transactions involving a third party. In addition, the nodes in a Blockchain are all anonymous, which makes it more secure for other nodes to confirm the transactions. The advantage of Blockchain is that the public ledger cannot be modified or deleted after the data has been approved by all nodes. This is why Blockchain is wellknown of its data integrity and security characteristics. See a visualization of a blockchain transaction in Appendix 1. 2.2 Applications of blockchain technology
Blockchain Technology was introduced in 2008. The first and most well-known application of this technology is Bitcoin. There are many other applications that have been developed and used since. Crosby et al. (2015) have provided an overview in which they distinguish between financial and non-financial applications. Nofer et al (2017) have summarized these findings. Moody’s announced in 2016 that among the clients it rates, it could identify about 120 blockchain projects and summarized this into 25 use cases, across different industries (https://www.moodys.com/research/Moodys-Blockchain-can-bring-benefits-to-the-financial-industry-and--PR_352414).
If the applications identified by Moody’s are added to the findings of Nofer et al. (2017), then the following table will provide a good, but most certainly not a complete or exhaustive, overview about the extent of blockchain use cases and its main current applications:
Table 1: Blockchain applications (not exhaustive)
Type Application Description Examples
Financial applications
Crypto-currencies Networks and mediums of exchange using
cryptography to secure transactions
Bitcoin, Litecoin, Ripple, Monero
Securities issuance, trading and settlement
Companies going public issue shares directly and without a bank syndicate. Private, less liquid shares can be traded in a blockchain-based secondary market. First projects try to tackle securities settlement
NASDAQ private equity Medici
Blockstream Coinsetter
Insurance Properties (e.g., real estate, automobiles,
etc.) might be registered using the blockchain technology. Insurers can check the
transaction history
Everledger
International payments Secure, instant, cross-border funds transfers
in any currency for consumers, credit unions, and other banks.
CBW Bank with Ripple protocol
Regulatory, compliance and audit
Automate client auditing Rubix by Deloitte
Anti Money Laundering and Know Your Customer
Verification of identity MiiCard
Peer to Peer Transactions Interact directly with each other without a
traditional third party, for example, lend money without a bank
BitBond, DeBuNe (SME B2B transactions)
Nonfinancial applications
Notary public Central authorization by notary is not
necessary anymore
Stampery Viacoin Ascribe
Music industry Determining music royalties and managing
music rights ownership
Imogen heap Decentralized proof of
existence of documents
Storing and validating the signature and timestamp of a document using blockchain
www.proofofexistence. com
Decentralized storage Sharing documents without the need of a
third party by using a peer-to-peer distributed cloud storage platform
Storj
Decentralized internet of things
The blockchain reliably stores the communication of smart devices within the internet of things
Filament ADEPT (developed by IBM and Samsung)
Anti-counterfeit solutions
Authenticity of products is verified by the blockchain network consisting of all market participants in electronic commerce (producers, merchants, marketplaces)
Blockverify, Everpass
Internet applications Instead of governments and corporations,
Domain Name Servers (DNS) are controlled by every user in a decentralized way
Namecoin
Supply Chain management Tracking shipping transactions IBM - Maersk
Healthcare Decentralized patient records management BitHealth
Energy Managing transactions LO3 Energy, Grid Singularity
As the world is changing fast this may not be a finite table. It is a good illustration of the widespread already applied uses of blockchain technology across many industries, including governments. A quoted blog by Gatteschi et al (2017) tries to capture all possible solutions by asking people to contribute to their Mega-Master Blockchain list of as much as possible blockchain solutions. This list can be found on http://ledracapital.com/blog/2014/3/11/bitcoin-series-24-the-mega-master-blockchain-list
The applications are widespread across industries. For the payments sector some very specific applications can be identified. In the table, international payments as well as peer to peer
transactions were mentioned again. They refer to the ‘What’ it will provide. Zuberi (2017) refers to the ‘How’ and has mentioned how blockchain technology can have its impact on the way people and banks settle their transactions:
Settlements can be organized in a more efficient way by using smart contracts.
Smart contracts lead to accurate automated execution of contracts, which lowers costs.
Abandoning international payments via the SWIFT network will save time and cost.
Secure transactions reduce fraud.
A transparent ledger containing all transactions will lead to higher trust.
If all parties have access to the ledger transactions and documents can be tracked.
Standardized data sources will reduce data inefficiency, leading to reduced costs. To summarize these findings, it can be stated that organizations keep on developing blockchain applications as they believe it will contribute to a better way of doing business. The key reasons to embrace blockchain are:
• It will save time (transaction time is reduced and can be observed realtime) • It will cut cost (use of intermediaries can be reduced or eliminated)
• It will reduce errors (transactions are checked, and confirmed) • It will reduce risk (fraud and information leakage is minimzed)
Given all these possible applications and industrywide convincement about its benefits, blockchain technology will at some point in time also have its impact on the way issuers are issuing credit cards. If international payments will bypass traditional channels and if peer to peer transactions will catch on, the role of an issuer of credit cards may not even be relevant anymore, and if money is not transferred through the banking channel anymore, transaction and interchange fees may erode substantially. This calls for new earnings or even business models. But it is not all positive what blockchain technology can bring. It also has its drawbacks.
2.3 Limitations of blockchain technology
Swan (2015) identified several main limitations of blockchain technology. Most of them refer to the technology itself, others to more general characteristics. Time will prove how these limitation will be overcome as it is too early to predict how this will develop. This may take decades (see also 3.3.3). Technological limitations
The size and speed of blockchains are limited. A blockchain is 25 GB and the technology can handle 7 transactions per second, with each transaction taking about 10 minutes to be confirmed. It takes about a day to download an entire blockchain.
Compare this with the levels at which for example Visa operates: 2000 transactions per second with processing time of seconds per transaction. It is clear that Blockchain is not yet ready for big growth before this size, speed and bandwith problem is fixed. It is not yet clear how long this will take. Some other technology related limitations relate to security. One mining entity could theoretically own 51% of the network and move previously transacted coins to its own account. The cryptography code can also be cracked. This leads to hesitant users.
The mining process leads already to high energy costs (about USD 15 million per day) and when growth accellerates this will increase as well and new forms of miners compensation should be considered.
There are already quite some solutions suggested to tackle these limitations. The blockchain industry has proposed offline wallets to store the majority of coins, similarly big crypto-currency exchanges can also be run separatley as a dark pool like what is also happening in the banking industry, and only periodically synchronize it with the blockchain. Some alternative hashing methods are already used by different cryptocurrencies. There are also examples of so-called sidechains to coordinate operations between blockchains.
These are all inititatives to indicate that the industry is looking for ideas to solve the limitations. It is unclear how this will develop and how much time this will take. As will be pointed out in section 3.3.3 it may take decades before the technology will be fully embedded in the existing ways of working. Other Limitations
Besides technology limitations there are also more soft limitations, Swan has found out. Blockchain needs to be integreated in existing business models, and sometimes Blockchain simply doesn’t fit in. It will lead to other types of business models, and intermediaries also change their roles, and will focus on education and implementation of such solutions.
Because of some scandals, the public might still be hesitant to embrace the blockchain technology. One Bitcoin exchange, Tokyo-based MtGox, was set up to quickly take benefits and transaction amounts were simply lost. In the end this exchange collapsed . The magnitude of such incidents do not contribute to feelings of safety and security.
Another interesting phenomenon in this field is the fact that criminals also use blockchain technology as they can anonymously transfer criminal funds to each other.
And last but not least the governments also play a role in worldwide acceptance of blockchain technology. They also need to be able to track and trace what taxpayers are doing. And a shift from income tax to transaction tax would have substantial consequences for example.
3 Disruptive power and speed of Blockchain Technology - Slowly but steadily catching on 3.1 Example of an issuer
International Card Services (ICS), a 100% subsidiary of ABN Amro, is active in The Netherlands and Germany as a non-exclusive issuer of consumer and business credit cards from the payment schemes of VISA and MasterCard. The key role of an issuer is to authorize transactions and to invoice the transactions. ICS also takes care of the marketing and issuing of credit cards, the customer service and customer management and the management and administration of the transaction and the collection processes. ICS issues its own branded cards as well as credit card programs of co-branders. In the introduction pages the payment process (Figure 2) and the position of an issuer was already briefly described. It is expected that roles in the payment process may change due to blockchain technology and changing customer preferences. The recent growth of the fintech industry has given a boost to the worldwide innovation power of financial services providers. This has led to more demanding customers who require a cheap and flawless payment process. Research firm
Motivaction has found out that worldwide the next generation of millennials is way more receptive to new disruptive technologies than older generations. In their research report they state that given their fascination for money, the financial sector may be the next candidate, after the music industry, the media industry, and the retail and shopping industry to be disrupted.
This worldwide trend is also playing a role in the Netherlands. Customers are raising the bar towards what they require from banks. In their research report “Trendrapport over FinTech en nieuwe technologieen - De bancaire sector 'ouderwets' innovatief”, pwc states for example that Dutch banking clients demand more from their banks as a result from technological innovations that can make better solutions possible. They describe this new demanding customer as the supercustomer. Supercustomers are a growing group customers that continuously increase their expectations towards service levels as well as user experiences from banks. They are less loyal and prepared to switch. Supercustomers share certain characteristics: They trust their peers, they always expect more, they are better informed, they can choose from different alternatives, and they are able to share and communicate their opinions. It is just an illustration of the exisiting phenomenon that banks need to deal with shifted customer preferences which are fueled by technological innovations. To facilitate innovation within the financial services sector the Dutch National Bank together with the Authority Financial Markets have made it easier for fintech startups to launch new solutions to the market. They have published a discussion document in 2016 in which they show the intent to lower entry bars for start-ups in the financial market. One of the other initiatives is that the Ministry of Finance appointed a fin-tech ambassador, a former minister of Finance, Willem Vermeend. On a congress in September 2016 organized by the Dutch National Bank (DNB) and Holland FinTech, a technology platform for the banking industry, he announced to open a special fin-tech campus, where companies and banks can collaborate on blockchain solutions.
Holland FinTech, a private organization established in 2014 to help companies to connect to a worldwide network of members and partners illustrates the importance and scope of this innovative trend for The Netherlands. Among its members are banks, investors, technology providers,
universities, corporates and governmental institutions. Figure 13 provides a snapshot of the recent Dutch fintech landscape, which was published by Holland Fintech in November 2016.
As is clear from this picture there are quite a lot of startups who are challenging the traditional providers of payment services currently.
international bank transaction a lot of parties are involved. A credit card transaction is a bit different, but for a good understanding the general bank transfer process will be described first. This is
necessary as credit cards are often linked to a banking account. By drawing both processes it will be clear which currently existing steps can be eliminated when blockchain technology is applied. Figure 13: The Dutch Fintech Landscape
Let’s have a look at how an international bank transfer looks like, See Figure 14: Figure 14: Process of an international banking transaction
A customer (sender) goes to a bank to transfer the money The bank needs to conduct certain key administrative activities
identify the customer (KYC) and check Anti-Money Laundering compliancy reserve funds and calculate transaction fees
Either the bank or a money transfer operator will send the money across the border to the bank of the beneficiary by either using the Swift Network (a banking network to settle international transactions), or through local correspondent banks, which are not part of the Swift Network.
the beneficiary bank checks the identity of the beneficiary and transfers the money in the local currency to its account.
Apart from this, the banks and Money transfer operator need to submit reports with transaction details to the local regulators.
According the World Economic Forum the process inefficiencies are the following:
If a sender goes to a bank to become a client, that requires sending paperwork manually
Limited control exists over the accuracy of the client identification and authentication This can be solved by using a digital identity profile
Using the SWIFT network is costly and time consuming
With smart contracts, obligations between sender and beneficiary can be defined With smart contracts, transactions can be made real time with minimal fees
Validating transactions by correspondents is subject to errors, leading to payment rejections With smart contracts transfers are guaranteed and correspondent banks will be redundant
Correspondent banks need to hold funds, which in turn need to be hedged Currency providers can facilitate this by arranging this through the ledger
Limited control exists over the accuracy of the beneficiary identification and authentication Transaction amounts will automatically be transferred to the beneficiary account.
Required regulatory reports lead to costly processes to compile and submit them
Transaction history is recorded in the ledger. Using smart contracts ensures real time checks. Figure 15 shows how a credit card transaction is being processed, starting with the process:
Figure 15: Process of a credit card transaction
A customer makes a transaction with its credit card at a certain merchant.
The merchant informs an acquirer about the transaction
The acquirer requests transaction authorisation at payment scheme provider
The payment scheme provider requests transaction authorization at issuer
The issuer authorizes the transaction requested by payment scheme provider
The issuer sends a bill to the customer
The payment scheme provider authorizes transaction requested by acquirer
There can be two scenarios now, the credit card payment process will be changed or the credit card payment process will become redundant. Let’s first have a look at how the credit card payment process might be changed.
First of all, merchants and customers may act directly with each other using a payment scheme, bypassing both the acquirer and the issuer.
Merchants may attract customers to use their own payment solutions by reducing the fees to be paid for credit card payments. It may even reduce costs further by being able to lower intrest costs because it becomes way more datadriven and have better insights. Merchants may also use their own loyalty programs, so consumers may not need the credit card loyalty schemes anymore. Secondly merchants may issue their own credit cards and act as issuer themselves. This will imply a concentration of roles within the payment cycle and separate issuers may be less necessary, or at least reduce the significance of their role.
As a third possibility, alternative finance providers are also able to offer comparable payment solutions like credit card companies do now, using peer to peer lending application, which can replace credit card lending facilities. This will put pressure on the role of issuers as entire new schemes will increase competitiveness between payment scheme providers which in turn puts pressure on costs and subsequently puts pressure on the fee structure of issuers. This will lead to decreasing scale efficiencies of credit card providers.
A fourth option is that bank account providers and payment solution providers cooperate to develop their own authentication and authorization processes. This will make the role of issuers in the current process less important, and at least reduce the importance and together with it a revenue stream for issuers is lost.
But according to the World Economic Forum, the credit card may even be completely bypassed in the future as is shown in figure 16. The reasoning behind it is that with blockchain technology, merchants can also have their own lending programs. Consumers may also choose for payment solutions that directly link to their bank accounts, without needing to use a credit card anymore.
Figure 16: The displacement of credit cards
Given the shifts in demands from current and future customers and possible changes in the
payments process it is important to know, how fast these developments will take effect to know how much time is left to prepare for a new or changing role in the payment process.
3.2 Current impact of Blockchain Technology on the credit card business
It is believed that blockchain technology may have a big impact, when applied to the banking industry, as many inefficient back-office and payment processes exist (Zuberi, 2017). She writes that early 2017, 30 large corporations, among them IBM, Microsoft, JPMorgan Chase and Bank of New York Mellon, announced they will join forces to build a system based on Ethereum’s network. Their aim is to make a worldwide standard of the Ethereum software for data tracking and financial contracts.
Financial Institutions are expected to invest more than $1 billion in blockchain projects. According to the DTCC whitepaper “Embracing Disruption – Tapping the potential of distributed ledgers to improve the post-trade landscape”, most financial institutions experiment with this technology in isolation, where in fact a more industrywide collaboration would be beneficiary for all institutions. Blockchain technology for cards and payment services is basically focussed on automating and decentralizing processes or, to put it in other words, on removing the middlemen and establishing direct contact. In a Lafferty report 7 main applications for the card business are identified:
Integration of domestic payment networks
Wearable and IoT payments
P2P lending
B2B payments
Remittances
Banking the unbanked
Social media payments
Source: https://www.techinasia.com/talk/blockchain-cards-payments-industry
In order to assess what is happening in reality, the actions of the 4 largest credit card companies in the world will provide some insights on what they are focussing on. For the situation in the
Netherlands it is worth mentioning what the main banks are doing. Actually it is non of the above mentioned applications from the Lafferty report yet.
UnionPay – Loyalty points
Together with IBM, world market leader in card payments China based UnionPay has developed a loyalty points plan from multiple banks using blockchain technology.
http://www.nasdaq.com/article/credit-card-companies-have-no-choice-but-to-embrace-blockchain-cm704880
VISA – Focus on settlement of payments
On August 15, 2015 VISA announced it would form a team of 400 engineers in Bengaluru, India, to use blockchain to improve its digital payments processes, specifically Visa Checkout and mVisa, two mobile payment products. This teams is expected to expand quickly to about 1000 engineers to work together with its research labs in Singapore and the US.
VISA had not started to collaborate with any Indian technology partner but said it is open to collaboration with possible technology partners to work on blockchain.
Source: http://www.livemint.com/Industry/xFjsCbdRBon4Z0zTcTCagM/Visa-joins-firms-betting-on-technology-behind-Bitcoin.html
The researchlab in Europe, VISA Europe Collab, announced about a year later (September 2016), a pilot in collaboration with Canadian firm BTL Group to explore how to use blockchain technology in the settlement process between banks and how smart contracts can help to streamline domestic and
A month later on October 21, 2016 VISA announced it will lanch a b-to-b solution, VISA B2B Connect, which it developed with Chain, a blockchain startup. This is a near real-time settlement platform. http://www.coindesk.com/visa-blockchain-payments-service/
MasterCard – API technology focussed on payment settlements
The launch of an API platform in September 2016 by MasterCard Lab has resulted a month later in three APIs connected to its internal blockchain work. These APIs are used for smart contracts and settlement of payments. Other possibilities like applications around digital identity and the exchange of know-your-customer information are also under investigation.
MasterCard mentions it is collaborating with startups through their Start Path Global program and that it already submitted 30 blockchain patents. Furthermore it believes that collaboration on blockchain should lead to partnerships with banks, merchants and industry parties.
(http://www.coindesk.com/credit-card-giant-mastercard-releases-experimental-blockchain-apis/) American Express – Peer to peer networks and open source technology
Early 2017 American Express announced it would participate as a premium meber in the Hyperledger project. This is a cross-industry initiative from the Linux Foundation with over 100 members from all over the world. The aim is to create an open standard for a new generation of transaction
applications. This after it already took steps in 2015 to invest in peer to peer networks based on blockchain technology.
(http://www.nasdaq.com/article/american-express-bets-big-on-the-blockchain-joins-hyperledger-project-cm742419)
It is worth mentioning that in the UK on November 15, 2016, a blockchain based retail card payment system was announced by SETL in collaboration with Metro Bank, based on the blockchain
technology of Deloitte. (https://setl.io/)
They all show that they only very recently took initiatives to dedicate substantial investments and efforts to address the importance of blockchain. This has not yet led to substantial shifts in mainstream payment processes and it is expected that it will also take a while.
In the Netherlands it was announced in april 2017 that around 20 organizations have organized themselves in the ‘Nationale Blockchain Coalitie’ to collaborate on making the Dutch financial sector a worldwide frontrunner on blockchain technology. The financial services sector is represented in this initiative by ABN Amro, ING, De Volksbank and NN. They say that blockchain technlogy is still in the pioneering stage of development and that collaboration with a broad spectrum of partners is a key prerequisite to really become wordlwide leading in this field.
(http://www.banken.nl/nieuws/20173/abn-ing-de-volksbank-en-nn-in-nationale-blockchain-coalitie) So it can be concluded that Blockchain technology is on the strategic agenda of all main players, they are all investing heavily in it and they participate in networks together with partners from all sectors. They have started doing this more substantially in the last 3 years and they are focussing on different applications. It has not yet led to disruptive ways to pay, only to some pilot projects.
Given the focus of the large players, the strategic level of collaboration and the amount of funds they invest in blockchain technology it is worth knowing how fast these inititatives will continue to
3.3 How disruptive is blockchain technology?
Executives of leading Dutch banks are all convinced that blockchain will have impact on their industry, but few know how fast this will develop, or want to speak out how fast this will go. The theory of diffusion of technological innovation may therefore provide a deeper insight in which factors determine how fast or slow this may develop.
ING – It will go fast, but nobody knows where it is going
Benoît Legrand, head of FinTech at ING Bank, says that it is in the DNA of banks to move slowly, and is convinced that the blockchain will move fast, but he has the impression that nobody knows how and where this will going.
https://www.oreilly.com/ideas/changing-technology-is-a-start-the-real-wins-come-when-banking-culture-changes
Rabobank – It will take some time before it is mainstream
CEO Wiebe Draijer says in an interview on a blockchain conference that short term effects might be overstated and long term effects may be understated. After 7:45 minutes in the interview he is asked when blockchain technology will be scaled up and concludes that it is basically impossible to predict how fast this will develop: https://blockchaininnovationconference.com/conference-2017/wiebe-draijer/
Maarten Korz, Innovation Manager at Rabobank, explicitly refers to the Gartner hypecycle and says that it will take some time to become a mainstream technology, however without mentioning how long this will take.
http://www.schadecarriere.nl/nieuws/schade/innovatie-in-fintech--samenwerken-aan-ultieme-relevantie-voor-je-klant/32437
ABN Amro – It will go fast, and it is unsure how banking will look within 5 years
Arjan van Os, who is the leader of the Innovation Center within ABN Amro puts forward that Blockchain is out there and that banks need to acts fast and that developments will go fast, without explicitly mentioning how fast. He has repeated this message over time and through many channels.
• 2017: http://executivefinance.nl/2017/01/als-je-naar-blockchain-kijkt-en-weet-wat-je-nog-niet-weet-dan-begrijp-je-het-potentieel/ • 2016: https://www.intermediair.nl/carriere/een-baan-vinden/branches/-Er-is-een-keiharde-wedloop-gaande
• 2015: https://www.abnamro.com/en/newsroom/blogs/arjan-van-os/2015/the-next-big-thing.html
In his blog in 2015 he refers to a video on blockchain made on a startup Friday. In this video, Marjan van der Plas, innovation manager, at ABN Amro states in her presentation on Blockchain that she is unsure about how the banking landscape will look like within 5 years. See full video at:
http://www.banken.nl/nieuws/3486/arjan-van-os-abn-amro-blockchain-zet-financile-wereld-op-zijn-kop
ICS – It will not have substantial impact on the credit card industry within 15 years
The CEO of ICS, Gijs Wildeboer, recently commented on the blockchain revolution in a live radio interview (livestream at: https://www.bnr.nl/nieuws/tech/10326566/blockchain-zal-zo-n-vaart-niet-lopen) on the Dutch channel Business News Radio. He doesn’t expect it will have substantial impact on the Dutch credit card industry in the next 15 years.
So field experts may feel less free to commit themselves to speak out loud how fast this technology will develop. The company, many institutions refer to when it comes to predict if technological developments are a hype or have become mainstream, Gartner, claims it wil take 5 to 10 years for blockchain to become a mainstream technology, without being specific about how it will affect the
Conclusion – Opinions differ and people are hesitant to forecast how fast it will develop So within mother company ABN Amro and ICS it is clear that blockchain will change the banking sector but the opinions differ about the speed.
It is therefore worth checking these different expectations and if they are in line with what may be expected after an analysis of how blockchain will develop in the future based on the model of diffusion of technological innovation. This is the main topic of this chapter.
In a research paper Zane Witherspoon (2017) mentions that one of the very well known models to describe the adoption of a certain product or, in this case, technology is the Diffusion of Innovations model, which has become popular due to the extensive research of Everett Rogers. In essence Rogers argues that in the lifecycle of a product first it needs to be bought by innovators, then growth
accelerates as early adopters buy it, when growth slows down the early majority is embracing the product, and when growth declines there is still a late majority that buys it, and at the end of the cycle the laggards follow, and total demand of the product is then theoretically met. See figure 17. Figure 17: The product adoption curve
Witherspoon also mentions that Geoffrey Moore’s book ‘Crossing the Chasm’ has been inspired on this model and that Moore states that in order to get to the maturity stage it is key to already have an idea of the entire product or solution you want to offer. This entire product consists of a core product and further includes basically all other features, modifications etc. that are necessary to provide customers with a strong need to buy it. This includes, in the case of blockchain, a whole range from installation to training, hardware, software and anything else that comes into play when using blockchain. Witherspoon identifies 3 building blocks that may affect accelerated adoption of blockchain technology:
The abstract idea,
o for a widespread adoption, uders need to get familiar with the technology and learn the skills to use it.
The whole product
o the gap between the promise of a product and the ability to completely fulfill this promise. When extended with some services that facilitate grasping the total benefits, the costs of adoption will be lower.
Complementaries
o If additional services or applications are developed that make the technology more useful, adoption is expected to accelerate.
The Gartner Hype Cycle for Emerging Technologies 2017 (see Figure 18) predicts that Blockchain is expected to become mainstream adoption in 5 to 10 years. Currently it has almost past the Peak of Inflated Expectations stage.
Figure 18: Gartner Hypecycle for Emerging Technologies 2017
From many papers about blockchain it becomes clear that one of the most widespread applications of this technology is Bitcoin, and Bitcoin itself is considered to be in its infancy. So in terms of Everett, it can be concluded that blockchain technology is currently be adopted by innovators, and that it may take 5-10 years to become a mainstream adoption.
A closer look to factors that may either delay or speed up the adoption may provide some more background to assess how this technology will develop.
3.3.1 Factors that may delay speed of adoption
When using the three blocks that affect the speed of adoption, as described by Witherspoon, the delaying factors can be grouped around them.
The abstract idea
Behavior: There may be resistance to change. Customers need to get familiar with the idea that blockchain transactions are safe, secure and complete.
Intermediaries like Visa or Mastercard also need to change. They may continue to maintain relationships with their clients. (Crosby et al – 2015)
Scaling: Scaling of BlockChain based services is a real challenge. People need to download the complete BlockChains that exist before they can even make a transaction. If the blockchain has already faced increased growth it may take hours. (Crosby et al – 2015)
Bootstrapping: Already existing contracts and documents need to be migrated to the new BlockChain. This requires a substantial time investment. (Crosby et al – 2015) The whole product
