disruptive forces and new technologies: harnessing change

Swift Lisbon Business Forum 2016 Elsa Costa Almeida Graça – CIO – Santander Totta

Disruptive forces and new technologies: harnessing change to shape the future of banking

20 Octobre 2016

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Session content

Alternative players and payments models

Blockchain strengths and weaknesses

How are banks future-proofing their strategies

What changes influence how banks innovate

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In 5 to 7 years a broad 24/7 digital commerce ecosystem with be in place…


DIGITAL COMMERCE DEVICES and MORE DEVICES CONNECTED in a COMPLEX IoT ECOSSYSTEM

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PCs

Smartphones

Tablets

Connected Devices

19 billion connected devices by 2018

Devices

Networks

APIs

Apps

Data

Sensors

50 billion expected by 2020

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This new digital commerce ecosystem will require new features and technologies.


Real-time account-to-account payments

APIs

Addressing Services

Digital Wallets Crypto Currencies

New Entrants

HCE/Tokenised/De-materialised Cards

Cross-border Commerce

DOMINANT FEATURES DIGITAL COMMERCE

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It is therefore imperative for banks to move to digitally-enabled accounts.


Digitally enabled accounts

•Current accounts

•Credit (card) accounts

$ $

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The alternative is dumb accounts - customer interaction, customer insight and branding are lost to third parties.


....

Dumb Funding accounts

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The transposition of PSD2 into national law soon, will be a key driver for banks to choose which strategic options to follow.


Become an "utility"

Become an "Everyday Bank"

My Money, My Housing, My Transportation, My Entertainment etc.

Pricing part of broader value proposition

Maximize customer interactions (x5-x10): every interaction as opportunity to sell, delight, enrich data

Constantly evolve service model with innovations engaging customers

Maximize conversion rates, e.g. from 2% to 6% thanks to real time analytics

New profit pools

Fulfillment of specific financial need (e.g. payment, mortgage)

Competition on price

Optimize interactions across channels

Manage analytics

FS offerings

Banks central in everyday life Banks as service provider

1 interaction per week (average) Daily interactions

Sell Access Sell Insight &

Services Expand Ecosystem Comply with PSD2

STRATEGIC OPTIONS

vs.

1 2 3 4

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Session content





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Blockchain first look


Blockchains can either be implemented within the same company or in a public network: public, consortium and private block chains

There is no need for the intermediation of any single central authority

Cryptography is used to ensure that copies are identical and no transaction is duplicated, and to enforce specific permissions for reading the data stored

Blockchains order and validate the transactions in the ledger to achieve the necessary consensus according to different models and rules

Blockchain is a distributed ledger of transactions, repeated in an identical copy in multiple nodes

Transactions represent a transfer of information between two or more addresses within the network: these can represent business entities to IoT devices

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Blockchain is a distributed ledger technology (DLT) for securely transmitting any type of information without the control of any central authority


Traditional ecosystem

Blockchain ecosystem

• Centralized – one or more central units

• Single point of failure

• Trust-based

• Decentralized – peer-2-peer driven

• No single point of failure

• No need for trust

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Where is it going?


Origination: Blockchain 1.0

(Currency) Blockchain 2.0

(Contracts) Blockchain 3.0 (Applications)

• The concept of a distributed ledger has been around since 1990

• 2009 Satoshi Nakamoto created Bitcoin and introduced the concept of a blockchain to incarnate a decentralized ledger maintained by anonymous consensus.

• The deployment of cryptocurrency in application related to cash

• Currency transfer, remittance and digital payments systems

• Financial markets and applications using blockchains beyond cash transactions

• Smart contracts

• Application in areas of health, science, government, literature, culture and art

CapMarkets Blockchains

Payments Blockchain

2012 2014 2016 2018 2020 2022 2024

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In 2015-2016, Blockchain became a buzzword with a wave of initiatives in the whole banking industry


Interests from leading Institutions Recent Events

Launched a blockchain ledger in assets trading

“Secure (digital currency) accounts to corporate clients from early 2016”

Citi is developing 3 cryptocurrency ledge for internal use prototypes

“UBS set up a team of 12 people to develop blockchain services. The first one in smart bonds”

Over 40 major banks including J.P.Morgan Chase, UBS, Commonwealth Bank of Australia, Santander, BBVA, Barclays and RBS have partnered with R2CEV for the development of standards using blockchain technology within the broader financial industry

• 6 out of 10 banks with sizable teams working on cryptocurrencies

• The UK government is pumping £ 10 million to explore the opportunities presented by DLT

• VC investing heavily in blockchain (e.g. Andersen) • Senior industry executives joining Blockchain /

Crypto-currency enterprises • Goldman Sachs forecasting potential for ~$ 70 BN

savings in bank infrastructure costs and ~25% price fall in remittances over 5 years

• “Three meetings have taken place in the past few months between the CME Group, Euroclear, LCH Clearnet, London Stock Exchange, Société Générale and UBS in order to form a working body to discuss how blockchain technology may affect the way securities trades are cleared, settled and reported” Financial News - November 16th

- Anthony Jenkins, CEO

- Banking innovation

- Olivier Bussman, CIO

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In Santander we are also pushing the development of blockchain


Additionally during this period Santander innoventures has invested in Ripple Digital Asset Holdings Elliptic and launched several competitions on Blockchain

2015 2016

PoC for immediate international remittances between Spain and UK based on Public Ripple

Infrastructure development of Private Ripple for PoCs

Infrastructure Development of a Private Smart Contracts for PoCs Demo for AML

Immediate Payments PoC

Participation in R3 consortium

Solution for P2P payments

PoC for corporate banking

F&F Payoo based in Public Ripple

Participation with USB on the creation of a virtual currency based on Smart Contract

Payment Demo P2P based on Public Ripple

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Block Chain Has Potential Disruptive Value in Many Areas of the Economy


Financial Services Consumer Data Business & Commerce Public Services

• Payment Processing

• Custodial Management

• Market Trading & Settlement

• Retail Brokerage

• Instant Funds Disbursement

• FX Exchange

• Digital Money

• Smart Leasing

• Construction and Specialty Lending

• Smart Escrow

• Trade Finance

• Health Care Records

• Global Credit Reporting

• Global ID

• Travel Documents and Records

• Employee Benefits & Insurance

• Smart Contracts

• Smart Payroll

• SLA Agreement Performance

• Smart Accounts Receivable

• Enterprise Software License

• Content Management

• Ride Sharing

• Retail Payments

• Secure Messaging

• Smart Elections

• Global Criminal Records

• Public Records

• Licensure

• Census and Population Dynamics

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Security Governance Model

Robustness Scalability

Price Transparency vs privacy

Velocity Regulation

Advantages and disadvantages


The technology will be used and adapted to the specific use cases

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Block Chain has the potential to transform the entire value chain


A vehicle manufactured at a facility is assigned a unique identifier upon production. Vehicle ID remains unchanged throughout the lifecycle of the vehicle

Vehicle ID is logged to vehicle Block Chain ledger at the manufactory, which propagates globally to all ledgers distributed worldwide.

As the vehicle is shipped to resellers / distributors and sold to the owner, vehicle’s change of ownership is logged in the Block Chain. A vehicle title is no longer necessary.

Events such as scheduled servicing, repairs, accidents and insurance records are updated throughout use.

At the time of resell, vehicle history can be traced back to the point of production with a timeline of all events.

Maintenance

Sales

Production

Example: Auto Manufacturing Value Chain

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Exploring in banking


Many global banks are exploring the use of blockchain and distributed ledgers for cross-border payments allowing settlement in seconds, expanded access to global corridors, real-time confirmation of transfers and competitive FX rates. Recently, Santander invested $4M in startup Ripple.

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Exploring in digital gift card ecosystem


Gyft, an online platform for buying, sending and redeeming gift cards owned by First Data, is partnering with blockchain startup Chain to operate Gyft Block a blockchain platform to run gift cards for thousands of small businesses. Blockchain is an inexpensive, secure and fast solution to digital gift ecosystem.

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Exploring in banking + telco + electricity smart metering


Bankymoon is partnering with African electrical utilities to register pre-paid smart meters on the blockchain and allowing automatic account top-up using Bitcoin. 80% of Africans don’t have bank accounts, this service provides eliminates the need for customers to travel great distances to pay utility bills.

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Exploring in market infrastructures


NASDAQ is exploring blockchain technology to reduce the clearing and settlement of a security from 3 business days to near real-time. A pilot of a blockchain solution developed by startup Chain is is currently deployed in the NASDAQ Private Markets to handle pre-IPO trading among private companies.

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Exploring in market infrastructures


Trade Finance has the potential to be transformed as goods ownership, documents and funds proceeds move from paper to the blockchain. Barclays recently invested is blockchain startup Wave to help business clients reduce costs associated with supply chain management.

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Exploring in tracking and trace diamonds origin


Everledger, a London startup, is focused on putting bling on the blockchain to eliminate paper-based proof of ownership which is vulnerable to tampering and loss, and allowing insurers, law enforcement and diamond certification houses to access and supply data around the providence of a specific stone.

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Exploring in e-voting


Greek Scientists are designing a cryptographic e-voting platform that can verify that votes cast actually go to the intended candidate. The digital ballot box, called DEMOS, decreases the probability of election fraud and provides a publically accessible repository of the vote tally.

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Exploring in e-residents


Bitnation and the Government of Estonia offer a blockchain notary service allowing e-residents, regardless of where they live or do business, to notarize their marriages, birth certificates, business contracts and other official documents on the block chain.

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Exploring in healthcare


Philips Healthcare is currently exploring potential applications for blockchain technology with blockchain record-keeping startup Tierion. Blockchains offer a viable option to today’s centralized database and file cabinets containing patient records by providing transparency while respecting user privacy.

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Session content





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The technologies that have disrupted other industries are coming to financial services – and lead to happier customers


…Big Techs defining a new standard in

customer centricity…

…As a result, customer behaviors and

expectations evolve

New Technologies redefining the “art of

the possible”…

DEVICE PERFORMANCE

NEW DEVICES

INTERACTION MODELS

AUGMENTED REALITY

COGNITIVE COMPUTING

BIG DATA CLOUD SOCIAL

CONNECTIVITY

Average Top 100 Brands

TRANSPARENCY ACCESSIBILITY

CUSTOMIZA-TION

SIMPLICITY

EASE OF USE

Access to service

anytime and

anywhere

Transparent pricing, service

levels and terms

Services targeted to customer’s habits and

needs

Reduced steps or ‘clicks’ to perform a

task

Intuitive & responsive interfaces (quick to

learn)

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Margins are coming down in financial services – a consensus view from analysts see 10-20% reductions in profit pools


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Analysts consensus

Average Retail Bank

Profits

LENDING

10-20% of

Profit Pool at risk

EXAMPLE

60-70%

PAYMENTS

20-30% of

Profit Pool at risk

EXAMPLE

5-15%

INVESTMENTS

10-20% of

Profit Pool at risk

EXAMPLE

20-30%

Current market share

~1% ~0.1% ~0.2%

Even though current market share is low,

volume gains through

disintermediation and price advantage suggest that there will be pressure in

banking core businesses

0,7%

3,0% -75%

5,9%

7,0%

Lending Club best rate

Industry average

-16%

Unsecured lending Interest rates

TransferWise Industry average

International Money Transfer fees

0,5% 1,0%

-50%

Betterment Industry average

Asset management fees

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In conclusion, 4 forces are contributing to the disruption of the banking industry


• Mobility & Cloud • Big Data & Analytics • Robots and process automation • APIs and platform development • Blockchain and IoT use case

development • Artificial intelligence & cognitive

technologies & learning • Natural languages & virtual agents

• Digital services demanded • Demand better services & advice • Used to global digital services • Need to trust

• Legislation protecting the customer • Transparency encouraged • Facilitation of new players entrance

• Fintech emerging • Industries blurring

Customer behavior evolution

New entrants & industry rivalry Regulatory as an enabler

New emerging tecnhology

Disruption in the

banking industry

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Session content





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Banks are trying to rapidly scale-up the R&D thinking and culture into the organization


Evolving its innovation culture & workforce (design thinking & agile methods)

Partnering with labs & participate in consortiums to integrate new technologies

Experimenting, learning and rapidly prototyping to build hands-on experience

Collaborating with fintechs and integrate them in the business

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In Santander : Innovation is working jointly with Strategy, Business and Technology to approach digital opportunities


Strategy

• Define a long term vision for the Group and the resulting priorities

• Support the Business in defining and executing strategies aligned with Group’s vision

Business Retail & Commercial Banking

• Ensure customer loyalty/advocacy

• Commercial and digital transformation

• Best-in-class risk management

Innovation

• Identify and develop new revenue sources

• Capture opportunities in core business

• Improve cost base leveraging innovation

• Strategy for Partnerships, Joint Ventures and Fintechs

Technology

• Deliver fast, efficient, resilience and high-quality IT Services

• Build and operate Digital-ready Infrastructure, Platforms and Data

• Build and deploy Digital-ready Technological capabilities

• Technological support to Innovation

Business lead agenda with

resources in country

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In Santander : We have a clear set of philosophies that guide our approach


4. Grow the talent pool with appropriate skills

• Find new mechanisms to attract type of talent required

• Invest in alternative incentive models (spin-outs, shadow equity) to attract entrepreneurial talent

1. Empower countries to deliver

• Drive innovation within the federal model by working with the countries.

• Implement new ways of working, reducing governance significantly

3. Create and nurture new testing environments

• We will try new things and some of these will fail. That is OK. And we will learn from our failures.

• Strive to find ways of having the countries collaborate, but not at the expense of not making any progress

2. Deliver through partnerships

• Leverage 3rd party know how to deliver new solutions efficiently and learn in the process

• Improves speed to market, allows us to select best of breed solutions (and subsequently change our minds)

Swift Lisbon Business Forum 2016 Elsa Costa Almeida Graça – CIO – Santander Totta

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