Digital Services — we need to talk!

Interoperability is the key to building sustainable businesses

In an increasingly connected world, one of the last pieces to the puzzle remains inclusive and interoperable digital financial services. Digital Financial Services (DFS) often operate in silos, meaning that they are independent of other services. For example, digital payments apps provided by banks cannot speak directly with each other, without having to navigate an expensive intermediary chain of banks, PSPs and clearing houses. Essentially, agreements have to be set up between a variety of players, in order to coordinate the exchange of data in meaningful ways.

Interoperability is the concept of having systems and digital platforms that can speak with one another; within financial technology, there are multiple angles to consider in the argument for interoperability.

First, fintech providers seek inclusion between platforms as a way to increase transactional volume and customer base, while also creating a variety of business opportunities. For governments and business developers, interoperability provides users with additional services that aid in completing desired transactions, as well as introducing economies of scale and network effects.

Second, providers may not seek to do this as it poses a competitive risk, or if they see it as irrelevant for their own business models. Interoperability requires a high degree of coordination in terms of agreeing who makes the decisions, pace of development, branding etc. Furthermore, providers may choose to use banks as the intermediary, as they traditionally have done, for fear of communicating a lack of credibility. As digitalisation gains traction, and technology improves, this behaviour may gradually lean towards reliance on technology, rather than institutional trust.

Financial institutions have consistently been the recipient some of the lowest levels of consumer trust.

— Source: TIME

Oftentimes, the pace of development depends on the slowest participant. This might lead providers to back out of the inclusion, since being dependent on a slow player is like waiting for that friend who takes forever to get ready.

In some regions, interoperability is discussed where digital financial services are established and maturing, whereas other regions are discussing interoperability before services and platforms are fully established, allowing more time to pivot and experiment.

Inclusion is not just about new products and new distribution. It’s about reimagining, with the help of partners, new ways to deliver micromoments of value for the two billion financially underserved people of the world. Source: How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines (July 2017)

While the EU Open-Banking Directive (aka PSD2) promotes an element of interoperability and provides comprehensive regulation, it still indicates that banks and partners will create their own interfaces that ultimately will not “play nice” with other interfaces. That being said, there are many synergies between financial institutions and “fintechs”, like improved product efficiency, accessibility and enhanced customer engagement.

“Nobody rises to the top of a banking organization being a disruptive innovator. Partnering is a way to build muscle in innovation and transformation. In which you can learn at minimal cost and minimum risk. But you don’t want to get into a partnership with your core banking technology.” — Ray L. Ruga, CVOX Group

Financial inclusion means providing access to financial services in a responsible and sustainable way. Companies like HiveOnline seek to solve this problem by using blockchain technology to facilitate trust in a frictionless financial environment in developing countries.

Financial inclusion is critical to building wealth in the world’s most disadvantaged communities. Banks fail at the last mile, because they’re expensive to run and face distribution challenges, while local lenders and microfinance face inefficiencies and risks which hike up the cost of lending, keeping borrowers below the poverty line. Fintech can help with a combination of traceability, reduced opportunities for fraud and dramatically reduced inefficiency, all the while creating trust through behaviour feedback loops.

When communities are lifted out of poverty they can grow more sustainably, invest in infrastructure, health, education and clean water, and exercise market influence through the strength of collaboration. We are convinced that these bottom-up, community fintech initiatives are the answer to levelling the field for the world’s least fortunate. — Sofie Blakstad, CEO HiveOnline

According to the World Bank, financial inclusion is seen to be a key enabler of solving 7 out of 17 of the Sustainable Development Goals, as well as an important element of reducing poverty worldwide. It’s estimated that approximately 2 billion adults globally are unbanked, and the majority live in developing countries. The reason why they are unbanked/underbanked is typically related to the lack of proper identification — something that blockchain may provide an answer to in the form of decentralized, digital identification.

As accountholders, people are more likely to use other financial services, such as credit and insurance, to start and expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives. — World Bank: Financial Inclusion Report

Concerning Blockchains

It’s no secret that ARYZE is looking to Blockchain technology for their platform. Currently, one of the primary issues with the technology is the difficulty in getting different blockchains to “speak together”. Without getting too technical, the challenge lies in how the chains interpret data coming in (Oracles) as well as how the chains verify said data among the users (nodes and consensus).

As it stands now, the main way of getting blockchain and ledger projects to talk together has been to utilise crypto exchanges — yet these have proven to be vulnerable to hacks. In the first half of 2018, $731 million USD was reported stolen in exchange hacks, due to lack of adequate talent and regulatory oversight.

In order to create secure and scalable blockchains, specialised chains must be aligned and work together – and it’s not just cryptocurrency projects that will be affected. As more and more traditional financial institutions look into using Distributed Ledger Technology/Blockchain, the importance of having systems to cross-communicate is vital for mainstream adoption of the technology.

Projects that are working on providing application layer and underlying blockchain technology platforms include, but are not limited to:

While important to note that these technologies are yet to be perfected, “it is usually not the best technology that achieves mass adoption, but the one that is ‘good enough’ and reaches the necessary critical mass first,” as this piece so eloquently puts it.

One possible solution for interoperability may be to operate on a platform that is fundamentally “agnostic” and neutral in terms of involvement of key players, by allowing the platform to be open and inclusive. This is the operating concept behind the ARYZE platform. Having a platform where businesses can fluidly develop and integrate their own business models fluidly in a digital ecosystem allows them to focus on their core operations, as well as providing these businesses an inclusive connection to other businesses on the same platform.

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