Bank of America Merrill Lynch’s head of strategy and innovation in global transaction services, Matthew Leavenworth, tells Joy Macknight from The Banker why he believes that blockchain’s capacity to prompt an infrastructure overhaul could prove more important than the technology itself.
Blockchain has forced us all to reconsider whether we should continue working the way we have always worked based on the same assumptions.
Transaction services is typically viewed as a slow-moving, stable part of the banking business, but even this area has not been immune to the rapid developments coming out of the fintech community. Blockchain is one such innovation that has the potential to disrupt the old way of providing services to large corporate and other financial institutions.
“Blockchain has forced us all to reconsider whether we should continue working the way we have always worked based on the same assumptions,” says Matthew Leavenworth, global transaction services (GTS) head of strategy and innovation at Bank of America Merrill Lynch (BAML).
When he took on the strategy and innovation role for GTS in July last year, Mr Leavenworth had an opportunity to look at the whole business with relatively fresh eyes. A self-described “payments geek”, he spent four years at Amazon, first in product management for its human intelligence marketplace, Mechanical Turk, and then leading strategy and execution for its global direct debit payments team, before moving to a payments role at BAML in September 2010.
“Thinking about the transaction business in general, and correspondent banking in particular, I realised bank-to-bank relationships were based on the idea that trust came from legal documents, shared experiences, etc, making them extremely difficult to establish,” he says. The infrastructure for these cross-border cemented relationships made sense from that perspective: hard-wired pipes between organisations with a trusted party providing messaging or overlay data services.
Out with the old
But blockchain allows organizations that do not trust each other to establish an immutable truth – a “trust machine”, as coined by weekly newspaper The Economist. “Now we have a cryptographically pure mechanism to transmit transaction information, store it, verify it and establish ownership,” says Mr Leavenworth. “This has prompted us to rethink our infrastructure and, even more fundamentally, re-evaluate our correspondent banking philosophy.”
Blockchain allows organizations that do not trust each other to establish an immutable truth – a “trust machine.”
However, he does not line up with the pundits that predict blockchain will mark the end of correspondent banking. “While blockchain creates a question mark over the current model and is forcing us to ask questions that haven’t been asked for many decades, it doesn’t follow that it has to kill correspondent banking,” he says. “But could blockchain change correspondent banking? Yes.”
Blockchain is one of many pioneering technologies that are furthering digitisation across the transaction services business. Mr Leavenworth defines digital transformation in two ways. On the one hand, it is changing a physical piece of paper into a digital transaction, such as digital disbursements launched by BAML in September 2014. “Digital transformation is about taking manual or semi-manual processes and making them simpler, faster, more self-contained and self-actualising, such as smart contracts in blockchain,” he says.
However, he believes that digitisation should also be used to make processes such as working capital management more intelligent. For example, treasurers currently copy and paste data from one bank’s output file into a spreadsheet and then create a pivot table – a process that may be electronic, but is not intelligent, argues Mr Leavenworth.
“The digitalisation of the working capital cycle should enable faster analysis of a treasurer’s positions, faster execution of their ideas and nimbler strategies. It will be real-time, data rich and cross-border, with the net effect being a much more intelligent and informed working capital view,” he says.
The digitalization of the working capital cycle should enable faster analysis of a treasurer’s positions, faster execution of their ideas and nimbler strategies.
Tech level collaboration
Mr Leavenworth believes that one of the most powerful technology concepts of the past decade is interoperability. “Web services and the idea of APIs [application program interfaces] means that there is no need to recode systems as long as I can simply interact with and pull data from them using interoperable protocols. This is so powerful because it takes the infrastructure we have invested in and builds off of it in new ways,” he says.
The interoperability principle presents a huge opportunity for banks to partner with fintech start-ups but also creates challenges. What does it mean to be interoperable with an entity that doesn’t look like a bank?
The interoperability principle presents a huge opportunity for banks to partner with fintech start-ups but also creates challenges, according to Mr Leavenworth. “What does it mean to be interoperable with an entity that doesn’t look like a bank?” he asks. “Clearly the Payment Services Directive 2 in Europe will force banks to open up, but how can banks test in a safe environment?”
He believes that the Financial Conduct Authority’s regulatory sandbox, which launched in May, is a positive step forward. It allows financial services firms to test new products, services, business models and delivery mechanisms within a regulatory framework. “If we don’t do that, then we are forced to wholly reinvent something and take a huge leap into the dark – which is not in a banker’s nature,” he adds.
The biggest challenge in any strategy role, according to Mr Leavenworth, is to “instil curiosity” across the whole business. “One of the big lessons that I learned at Amazon is how to demonstrate examples of innovations that other people can then pick up and make even better,” he says. “My team wants to inspire the whole organization to be bolder.
“We aren’t just trying to spin out a bunch of thought pieces, but we want to inspire others into action and – where we can – act ourselves as well."
- Blockchain can disrupt the old way of providing services to large corporate and other financial institutions
- The digitalization of the working capital cycle should enable faster analysis of a treasurer’s positions, faster execution of their ideas and nimbler strategies
- The interoperability principle presents a huge opportunity for banks to partner with fintech start-ups but also creates challenges.