Bringing start-ups and banks together

Interview with Marco Witteveen, Managing Director at Cegeka FSI.
Interview by Bjorn Cumps and Marion Dupire

Marco Witteveen, how do you see the sector of financial services evolving in the future?

“In general, financial institutions really have to look at their new reason of being. They are now forced by regulations to open up, become more transparent, and take part in the Fintech ecosystems.

Financial institutions have to pay attention to the disruptive models that emerge. For example, Paypal now provides credit for SMEs in Asia and America. Kabbage in America takes over personal lending. From a statistical point of view, 80% of total corporate loans in America are not originated by banks. In Europe the percentage is reverse, but I think that it will change very significantly over time. We see it already in the mortgage business in Holland: Munt Hypotheken funded by pension funds offers transparent mortgage products and brings it to the market through intermediaries. The company originated 3 billion euros of mortgages after one year of operation and have the intention to grow this to 10 billion euros in a couple of years in the Netherlands. It is not a bank but they are now a top player in originating mortgages on the Dutch market. Overall a lot is going on in-between banks and consumers, banks should reposition themselves as open banks.”

How should banks open up and deal with the cultural clash with Fintech start-ups?

“Banks are indeed struggling with their old mentality. They are closed organizations which have troubles to open up, they face a lot of regulations, so their natural environment is not the one of innovation. Banks still think that they are unique in all aspects of their organization: front-office, middle-office and back-office. They think that they are much different than their peers but 80% of what banks do is the same, and there is only 20% of distinction between banks. If they realise that, open up and become part of the Fintech ecosystem as a joint force, then they will survive. ING is a good example, they have contacts with Apple, Google, and they are gradually moving to a digital organization.”

Who do you think will win the race? The start-ups who need to scale-up fast or the banks who need to change fast?

“In between, another very important party in this transition is the integrators. We as integrators should bring start-ups and banks together. Our role is to explain to banks the importance of technology, and on the other hand to help Fintech companies to integrate their innovations within the banks. Overall, integrators like Cegeka will play a very important role in this new ecosystem.”

At Cegeka you started to work on Blockchain with several banks and major retailers, how did it start?

“I arrived at Cegeka in October 2014. After 2-3 weeks, I received a phone call from a person making a thesis on the impact of Blockchain on the financial industry. We started to look into what is Blockchain, combining banking and technology insights. We came up with several conclusions mainly on payment services and trade finance. We found out that there were a wide set of possibilities for Blockchain to create either efficiencies or new business models for the financial world.

We talked to Andre Knaepen, the owner of Cegeka, who immediately saw the potential of this technology and gave us a budget to invest in getting the necessary knowledge. We then formed a small development team in Romania, Cegeka’s nearshore agile development factory. We asked them to look into the two well-known Blockchains: Ripple for payments and Ethereum for smart contracts and find out how these systems worked. In general, the conclusion was that the software was actually quite complete.

Then we attempted to proof the Ripple environment and build a Blockchain in-between e-commerce and banking systems, accounting for new payment regulations (PSD2). The Blockchain would solve situations in which an e-commerce company is so dependent on a payment system that when the payment system is not available, the e-commerce cannot do any business. The Blockchain allows to record a payment indisputably between the e-commerce company and its customers, this is one of the major conditions in PSD2. At the moment, neither Visa nor MasterCard can fulfil this requirement. Once you are able to record transactions indisputably, it is no longer an issue for an e-commerce company when the payment system is not available. They can decide themselves whether the goods will be delivered or not. And that is a major step-forward.

We built such a Blockchain and did a first proof-of-concept.”

As a Fintech “intra-preneur” doing something new in an existing company, what are the main difficulties that you have experienced?

“My answer will be very short, I have seen no obstacles other than making sure that costs do not forefront the income. Costs gradually grow and we have to create income from experiments and proofs of concepts. But internally, this was approved within an hour. The major advantage to do this in an existing company is that we can position ourselves in a very good way because of the experience that we have. And we can pool resources if and when required.”

How many people are directly working on this project right now?

“10 people are working on it for 100% of their time including the coders, but then we lend other people for project management and application integration from the existing organization. It grew very rapidly, we were 2 at the beginning of the year. Depending on how far it goes, I think the number of people working on this will probably double by the end of the year.”

Do you think that companies like Swift, Atos, MasterCard, Visa, Euroclear like to see that much effort being put into Blockchain? Could it be a threat to their activities?

“Yes, these companies are probably quite nervous on what is going on. MasterCard and Visa are still relying on their card systems with transaction fees. Retailers do not like these systems and would prefer to pay a flat fee regardless of the transaction volumes. With Blockchain we can create a cheaper service. The regulation aspect is also important. PSD2 is requiring to record payments in an indisputable and irrevocable way. That condition is difficult to fulfil with a credit card system, but possible with Blockchain thanks to the digital signature which is put on every transaction in a cryptographic way.”

About 60-70% of Fintech start-ups are all about cryptocurrencies and Blockchain. But accelerators often do not allow them because they do not see a business case behind it. Is there really a lot of value potential in this technology?

“With a new technology you always have to prove that you are right. That is what we do via experiments.

We currently undertake experiments with banks in Belgium and the Netherlands on trade finance, which is still very paper-based. As an outcome of these experiments we see a real change in the supply-chain management cycle. Banks have their competences to set up smart contracts on the Blockchain. All physical documents like orders or invoices can be replaced by smart contracts coupled with digital signature technologies. That is a source of value creation and will have a major impact on the role of banks.

We investigated this business case, the corporates are very open for it. Paper-work is very expensive and prone to error.”

Blockchain will one day be available to all different parties. What will be the differentiation factor?

“The Blockchain is an infrastructure that is based on a 14-year-old technology. It is based on the digital signature, cryptography and peer-to-peer technologies. This new technology is resilient, disruptive, and put “trust” in a different perspective, but today we see some limitations of scaling it. But as always with new technologies, this will be resolved as other limitations that we will encounter.

On the one hand we have the Blockchain which allows to scale the infrastructure in a very cheap and economical way. On the other hand there are a number of Fintech companies which are building very smart applications that either solve efficiency problems or cover new business models. But in the middle you need a platform to connect the Fintech applications and the Blockchain in a good, safe and efficient way.

Cegeka is positioning itself as an integrator. We have a lot of knowledge on the Blockchain and built a platform on top of that. This platform is a sort of library of connectors that Fintech can use to lend and communicate with the Blockchain. We developed services to have customer on-boardings administered properly, to facilitate cryptocurrencies, and a number of other services around Blockchain and offer this as pay as you go production environment and as platform for hosting our experiments. In order to safely be part of this worldwide infrastructure, the banks and other companies will require these services.

In sum, we are positioning ourselves in terms of understanding the Blockchain, building a platform on top of it, providing all the services around it and potentially developing some applications.”

There are a number of reasons why Blockchain can be seen as a technology which will never fly: it is very technical and business people do not always see the potential, there are a lot of big players who have an interest not to make it happen, it has to be scaled on a global level but it is very difficult to make all banks work together. What is your response to these obstacles?

“When the Internet started in the early 1990s, we were facing the same obstacles. If I would have asked you whether banks would ever do money transactions on the Internet, you probably would have laughed at me. It is a question of time, it has to mature and this will not happen tomorrow. Some applications, such as voting systems for political elections, will probably be operational much quicker than others, such as an international payment system.

In addition, new business models like microfinancing cannot be supported by the current payment networks because settling and clearing costs are very high. The Netflix of today still charges a monthly fee because that is the minimum amount that they can settle in an economical way. But what they want is to have more volume by not pay a monthly fee but pay per view. Blockchain is the new infrastructure needed for the new business models of tomorrow.

It will also have a major impact on the current models that banks are running. For example, the trade finance technology will be an enormous efficiency and transparency gain for these organizations. Concerning payment solutions, in one or two years from now everyone will be able to become a third party payment provider, if the banks do not do it themselves other players will and banks will then be left with transaction processing only. If banks are not willing to implement the Blockchain technology, they will lose out.

Finally, this technology is probably not as difficult as we imagine. Of course you need real experts who are able to explain it to you, but it can easily be understood by business people. And most importantly, this will happen, banks cannot afford themselves not to understand this.”

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