Banking on Blockchain

BANKING ON BLOCKCHAIN A VALUE ANALYSIS FOR INVESTMENT BANKS

BANKING ON BLOCKCHAIN 2 BANKING ON BLOCKCHAIN: A VALUE ANALYSIS FOR INVESTMENT BANKS As the struggle to raise profitability continues, innovations like blockchain could offer investment banks a lifeline. As with many new technologies, it’s generating much excitement. Some analysts have likened its disruptive potential to that of the Internet, with the power to drive dramatic efficiency gains, save $billions and substantially reduce risk. But there’s also a lot of hype. So what tangible costs/benefits, business applications and ROI does blockchain really offer? To find out, we joined forces with top “We joined forces with benchmarking firm McLagan, a business unit of Aon plc, to conduct an in-depth McLagan to conduct an impact analysis and make fact-based in-depth impact analysis estimates of the cost savings and other benefits that might be achieved. and reveal the facts.”

BANKING ON BLOCKCHAIN 3 WHY THE BUZZ ABOUT BLOCKCHAIN? Blockchain – a catchall phrase for distributed ledger technology – is a new type of database system which enables multiple parties to share access to the same data, at virtually the same time, with an unprecedented level of confidence. Currently, data reconciliation sits at the heart of most business models. However, because everyone maintains their own data, the process is beset with inefficiencies, such as the need for different parties to constantly message data back and forth between them to get things done. Blockchain, by contrast, could enable a progression from today’s multiple and sequential data reconciliation models to a much more efficient process in which reconciliation is an integral part of the transactional process. THE OPPORTUNITY The long-term opportunity for banks is to repoint key operational, risk and finance systems to blockchain-based, shared data platforms. This would enable decommissioning of large parts of their process and data infrastructure. While getting to this end-state will take time and multiple iterations, significant potential for cost and efficiency gains should continue to fuel interest and investment. We believe capital Although there have been some estimates of the value blockchain could create, we believe capital markets markets leaders leaders need a more detailed impact analysis to assess the business case for blockchain. This is especially critical need a more detailed for C-suite executives under pressure to constantly evaluate the potential of multiple emerging technologies. With impact analysis to legacy systems to consider, regulation to comply with and stakeholders to convince, how can you be sure that backing assess the business blockchain will deliver the competitive advantage and shareholder value you need? case for blockchain.

BANKING ON BLOCKCHAIN 4 OUR RESEARCH To fully understand the operational impact of blockchain, operational cost data from eight of the world’s largest we conducted a study in conjunction with McLagan. investment banks (based on revenues) against our A world-class capital markets benchmarking provider, proprietary Accenture High Performance Investment McLagan performs comprehensive financial benchmarking Bank model. This gave us visibility into where blockchain of the largest banks every year. It uses granular cost data is likely to have the most impact across the entire spectrum sourced directly from the general ledgers of participating of front-to-back processes and operating metrics of an banks. In this study, we mapped McLagan’s aggregated investment bank (see diagram 1). DIAGRAM 1 © ACCENTURE HIGH PERFORMANCE INVESTMENT BANK MODEL – BLOCKCHAIN IMPACT STRATEGY DELIVERY CLIENT SERVICE Corporate Strategy Business Unit Strategy Sell / Cross Sell Products & Services Business Service Provisioning Operating Strategy Account Management Service Usage Tracking & Control CORE INVESTMENT BANK RESEARCH TRADING CORPORATE FINANCE Research Advisory Structure Product Advisory Analytics Trading Risk Management Issuance Research Production Pricing Complex Finance y Quotes & Orders y Trade Execution s s edits ed o Economic stment / s atie y ets ate o Economic stment / e ed oducts e v aluation Maturity ix v aluation Maturity Macr Sector / CompanInV Comm-oditieEquitieEquityDerivFIncomeFX &MoneMarkIR & CrDerivStructurPrMacrSector / CompanInV CROSS PRODUCT PROCESSING Conirmations Cash Management & Payments Inventory Management Data Management Clearing & Settlement Revenue Accounting & Control Collateral Management Trade Lifecycle Management CORP. CORE ASSETS LIABILITY FINANCE RISK MGMT REGULATORY TECHNOLOGY RESOURCE HUMAN MGMT MGMT RESOURCES Business Decision Market Risk Audit IT Strategy Treasury Support Procurement Organization Credit Risk Legal & Application Management Balance Sheet Financial Control Compliance Development Third Party Operational Risk Management Talent External Reporting Application Management Controlling Liquidity Risk Management & Reporting HR Services & Cost Accounting Administration & Reporting Involvement of Infrastructure Central Counterpart HR Operations & Support KEY DISRUPTION = 70%+ COST SAVINGS IMPACTED / SUPPORTED = 25-50% OUT OF SCOPE IMPACTED FUNDAMENTALLY = 50-60% NO OR LIMITED IMPACT = 10%+

BANKING ON BLOCKCHAIN 5 THE RESULTS Mapping more than 50 operational cost metrics from McLagan’s data against our High Performance Investment Bank model delivered clear indicators. The four examples below are a small snapshot to illustrate typical efficiency impacts with a level of granularity achieved via our proprietary analysis. 70% 30-50% POTENTIAL COST POTENTIAL COST SAVINGS ON CENTRAL SAVINGS ON FINANCE REPORTING COMPLIANCE As a result of more streamlined and At both a product level and centralized optimized data quality, transparency basis due to improved transparency and and internal controls. auditability of financial transactions. 50% 50% POTENTIAL COST POTENTIAL COST SAVINGS ON SAVINGS ON BUSINESS CENTRALIZED OPERATIONS OPERATIONS Such as trade support, middle office, Such as KYC and client onboarding clearance, settlement and investigations due to more robust digital identities by reducing or eliminating the need for and mutualization of client data reconciliation, confirmation and trade among participants. break analysis as key parts of a more efficient and effective clearance and settlement process.

BANKING ON BLOCKCHAIN 6 HOW 8 BANKS COULD SAVE $8 BILLION PLUS At today’s cost structure, the results It’s important to note that if significant problems or demonstrate initial savings of $8 billion regulatory hurdles prevent blockchain’s widespread on a cost base of $30 billion. These adoption then these savings may not be realized. estimates do not include potential costs Given predictions of material cost savings, it’s no surprise and investments required. This equates that spending on blockchain in the Financial Services sector is accelerating, especially at a time when the rising to approximately 27% across the eight cost of capital is making it hard to increase profitability by banks we surveyed. traditional methods. In September 2015, Aite Group, an independent research organization focused on financial services, forecast that blockchain spending among capital markets players in 2016 would be around $125m2. Just CRITERIA nine months later, a study by Greenwich Associates, an To guide our analysis, we used a conservative set independent benchmarking research firm, predicted that of criteria, including the following assumptions: 2016 blockchain spend by capital markets firms would 3 be closer to $280m – more than double the previous • That a network effect will only take hold estimate. This illustrates that industry investment in in mature markets by 2025 blockchain is not only accelerating, it is doing so at a rate • Regulatory rules will allow the adoption of that is rising so fast that makes it difficult to quantify the blockchain solutions and decommissioning sums accurately. of legacy infrastructure. Indeed, after the credit crisis of 2008, regulators will likely be reluctant to materially reduce the role of newly created and strengthened clearing and settlement infrastructure (ACHs, RTGSs, CCPs and CSDs) without being absolutely confident that blockchain networks are a safe, secure and resilient alternative. • The impact on cost of premises (buildings, $280M facilities) was excluded 2016 CAPITAL MARKETS • Differences between fixed and variable costs were factored in. SPEND ON BLOCKCHAIN – 2X ESTIMATIONS At this stage, these estimates could prove conservative. 1 Our initial estimates assume business and central operations would be ‘fundamentally impacted’, suggesting cost savings 30% of approximately 50%, as seen on the High Performance Investment Bank heat map in diagram 1. In fact, our initial use AVERAGE ESTIMATED case, proof of concepts and early test environments show POTENTIAL ANNUAL the potential to further increase these savings so that they SAVINGS move into the ‘disruption’ category, raising the total in excess of 70%. Considered in this light, annual cost savings would equate to 38% or around $12 billion. If we take an average of this $12 billion with the $8 billion base case cited above, we estimate $10 billion in annual cost savings.

BANKING ON BLOCKCHAIN 7 INSIGHTS & IMPLICATIONS Blockchain’s components – such as cryptographic hashes, distributed databases and consensus building – are not new. But when combined, they create a very powerful new form of data sharing and asset transfer, capable of eliminating intermediaries, central third parties and expensive reconciliation processes. Since the 2008 global financial crisis, the capital However, there is compelling evidence markets industry has faced a perfect storm of diminished that blockchain could radically reduce, returns, largely due to the rising cost of regulatory if not entirely eliminate, many existing compliance, rising capital allocations and liquidity clearing and settlement processes. costs, and dwindling revenue. “We estimate that investment banks SAVE $BILLIONS spend around two-thirds of their IT A YEAR budgets supporting legacy back-office It has enormous implications for infrastructure, plus $billions more each trade confirmations, reconciliation, cash management, asset year on cost reduction initiatives.“ optimization and other exceptions- based business logic processes In other words, it’s costing too much time, effort, that cost $billions a year. liquidity and capital to support processes that don’t offer a sustainable improvement in profits. Consequently, REDUCE TIME banks, central banks, exchanges and clearing houses are urgently experimenting with blockchain as a way to tip WINDOWS the cost fundamentals and return to profits that improve Depending on the underlying asset(s) Return on Capital. and counterparty requirements, it also To be clear, we are not suggesting that blockchain is promises to optimize settlement by greatly a panacea to remedy all the ills of investment banking. reducing the time or even completely For many use cases, conventional database structures eliminating windows for delivery versus or processes will achieve a similar outcome without the payment, while supporting the needs of costs and challenges of a blockchain solution. Examples market makers. include internal automation, staff reduction and outsourcing/offshoring. IMPACT COST DYNAMICS Ultimately, it would enable decommissioning of large parts of today’s back office infrastructure and externalization of key operational processes to industry utilities – profoundly impacting cost dynamics.

BANKING ON BLOCKCHAIN 8 THE BLOCKCHAIN GENIE IS OUT OF THE BOTTLE There is undoubtedly good reason for all the excitement around blockchain in Financial Services and particularly in capital markets. While we don’t believe it will completely disintermediate or replace the current ecosystem players, we do think its impact will be transformational. A common analogy is the rise of the Internet: those who embraced change created entirely new products and business models – and reaped the rewards. Of course there were many business models that resulted in costly failures too. In a similar way, blockchain is challenging industry players to fundamentally reimagine their data sharing processes. There is no turning back, especially considering the pronounced impact it will have in prompting investment banks to re-architect current business models, operational functions and profitability profiles – in both the short and the long term. However, C-suite managers should consider making controlled and well-hedged bets to avoid expensive mistakes while being well positioned to reap benefits of the new model. But to fulfil the promise, investment banks must rethink their strategies and approaches to workforce optimization, data center requirements, storage, networking and security. As with the Internet, the early adopters will be best placed to optimize costs, drive entirely new revenues and benefit from all that blockchain can deliver. Learning from past “Blockchain is experiences with transformative technologies, investment banks have adopted the strategy of setting up in-house labs, challenging industry joining industry consortiums and funding or forming joint- ventures with firms fully invested in blockchain. players to fundamentally With this tantalizing prospect attracting reimagine their data so much interest, innovation and sharing processes. investment, are you ready to seize the opportunity? There is no turning back.”

BANKING ON BLOCKCHAIN 9 NEXT STEPS ACCELERATE YOUR ACTION PLAN Leveraging blockchain technology starts with an action plan to address key questions such as: STRATEGY ALIGNMENT What is your strategy to evolve your How do your multi-year investment plans business to the next level and what align with how the available technologies, combination of innovations will be key capabilities, and market offerings are to achieving that strategy? Where will developing? Are you investing / building you find the most value? within the limits of today’s capabilities or tomorrow’s potential? KNOWLEDGE EXPLORE Are you plugged into the right Have you explored the human and industry, regulatory, and cross- technology resources required to industry innovation forums to stay support blockchain DLT environments? informed and be an active player in shaping how the next period of innovation will play out (to your best advantage)? ARE YOU READY TO BENEFIT FROM BLOCKCHAIN? As our research suggests, blockchain technology could deliver significant benefits. While many parts of the investment banking ecosystem first need to align for distributed ledger technology to maximize its potential, we are already seeing some industry leaders demonstrate what is possible, right now. By putting the right pieces in place, allied to a clear vision, you could start to achieve short-term wins while building a more efficient, secure and cost-effective operating model to unlock sustainable gains, savings and long-term competitive advantage.

CONTACT JOIN THE CONVERSATION To learn more about the benefits of blockchain for your @AccentureCapMkt business or discuss how any of the ideas in this paper accenture.com/investmentbankingblog could improve your organizations performance, please visit accenture.com/blockchain or contact: ABOUT ACCENTURE ACCENTURE Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, David Treat consulting, digital, technology and operations. Combining Managing Director, Capital Markets unmatched experience and specialized skills across more New York than 40 industries and all business functions – underpinned [email protected] by the world’s largest delivery network – Accenture works at Chris Brodersen the intersection of business and technology to help clients Research, Blockchain & Capital Markets improve their performance and create sustainable value for New York their stakeholders. With more than 394,000 people serving [email protected] clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com. MCLAGAN Chris Blain ABOUT MCLAGAN Partner McLagan provides compensation consulting, operational London benchmarking and best practice research across the [email protected] financial services industry. McLagan combines 50 years of Rashad Kurbanov thought leadership in strategy, performance, human capital Associate Partner management, and compensation data with fact-based advice New York to create a tailored solution specific to your organization. [email protected] McLagan is part of Aon Hewitt, a business unit of Aon plc (NYSE: AON). For more information on McLagan, please visit mclagan.aon.com Reference 1 Operations defined as: a) Business Aligned: Trade Support and Middle Office, Clearance/ Copyright © 2017 Accenture. All rights reserved. Settlement/Investigations, Documentation/Confirmations, Accenture, its logo, and High Performance Operational Control, Customer Service/Client Relationship Delivered are trademarks of Accenture. Management, OTC Clearing This document makes descriptive reference to b) Central Operations: Funds Transfer, Collateral Management/Margin, trademarks that may be owned by others. The Corporate Actions/Income Processing, Static Data/Data Management, use of such trademarks herein is not an assertion Reconciliation/Investigation, Client Valuations/Pricing, Network of ownership of such trademarks by Accenture Management, Know Your Client/Client Onboarding, Operational and is not intended to represent or imply the Control – Shared Services, Tax Operations. existence of an association between Accenture 2 Aite Group: click to view report and the lawful owners of such trademarks. 3 Greenwich Associates: click to view report