Blockchain in Financial

Services
ISSA presentation
May 2016
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
10 things you should know about Blockchain

1▪ Blockchain is a nascent technology with the potential to bring about step-function improvements in
efficiency and security to the financial industry - or it could simply be over-hyped and unnecessary

2▪ Investment in blockchain is gaining momentum (~$600 MM of VC investment in 2014Q4-2015Q3)

and is expected to rapidly grow; the banking industry is expected to spend ~$400MM by 2019

3▪ >60 Nascent use cases1 exist across multiple industries with a primary focus in financial services
(~40%) and cost reduction (~70%)
4▪ Blockchain has likely the highest potential in products like private stock, repo and syndicated lending
and in the post trade part of the value chain i.e., reconciliation, settlement and corporate actions
5▪ 70% financial organizations are in the early stages2 of experimentation but there is no active
broad commercial application in capital markets today

6▪ Most of the impact from blockchain solutions is likely to come from payments, and capital markets,
and preliminary sizing of 4 use cases in these areas suggest significant value creation - the estimated
impact of those use cases alone is $70-$85B but feasibility varies significantly
7▪ However, blockchain is not the silver bullet solution for all the pain points in the industry

8▪ Enabling collaboration, shaping a positive regulatory environment and clear business cases
justifying the transition costs will pose the biggest challenges to implementation

9▪ By overcoming these challenges, blockchain technology could reach its potential in 5 years
▪ Organizations can unlock the value of blockchain through a five-step journey: Education, Strategy,
10
Solution Design, Implementation, and Approach

1 Blockchain solutions other than solutions that are purely related to Bitcoin
2 “Wait and see” and Early equity investor stages

McKinsey & Company | 1

 …or it could be the most over-hyped and unnecessary tech solution,
1 ever

Dilbert:
May, 2015

Dilbert:
Nov, 1995

McKinsey & Company | 2

 PRELIMINAR
Y
>60 nascent use cases1 exist across multiple industries with a
3 primary focus on financial services and cost reduction
Demographics Design considerations
Number of use cases, % by category Number of use cases, % by category

64 54 44 63 62

Other 11 15 Revenue
Other2 22 21 Public
Idea stage 27
Europe 11
Arts & 18 Risk
6
Entertainment Private:
In development 24 Multiple
Public Sector 14 30 18
Global (no output yet) owners

Consumer 11
Tested but
Healthcare 8
Financial Services (~40%)

not yet 27
Securities 3 commercialized
8 Private: 68 Cost
Identity
North 56 Single
Register of 48
11 America owner
ownership Commercialized
- Not scaled 27
Payments 17 Commercialized
- Scaled4
0
Industry Geography Type Primary
Lifecycle
intention3

1 Blockchain solutions excluding solutions that are purely related to Bitcoin; 2 Includes insurance, real estate, automotive, energy, social sector, etc.;
3 In many instances use cases have a secondary intention; 4 Annual revenues $1+ MM

SOURCE: McKinsey Panorama, web search McKinsey & Company | 3

 Capital markets experts expect different levels of disruption across
4 asset classes, value chain components and impact levers…

Level of expected disruption by Block chain in Capital Markets…

…by asset class …by value chain component …by impact lever
Higher expected Private stock Reconciliation Reduced settlement risk
disruption/impact
Repo Settlement Reduced counterparty risk

Syndicated lending Corporate Actions Operating costs

Non-cleared OTC derivatives Collateral management Improved compliance

Equities – cash Trade confirmation Capital relief

Securities lending Custody Reduced custodial risk

Fixed income – cash Issuance and distribution Margin relief

Exchange-traded derivatives Client onboarding Optimized collateral

Cleared OTC derivatives Compliance (incl. reporting) Reduced systemic risk

FX – spot Risk management Increased revenue

Valuation Reduced market risk

Execution
Lower expected
disruption/impact Pre-trade analytics

SOURCE: McKinsey survey McKinsey & Company | 4

 Although financial institutions are at different stages of experimentation,
5 most executives believe it will take at least 18+ months to have a
material impact

How would you describe your organization’s position

on the ‘S’ curve of blockchain tech experimentation?
% of respondents1
50

Internal pilots
Fully imple-
Partnering in a mented solution
consortium to
design blockchain 26 Financial
solutions
technology labs
Blockchain
accelerator 18
programs/ Venture capital
hackathons/ funds/ equity stakes
position papers
6

“Wait and see” Early equity Partnership or Fully implemented

investor internal pilot solution

1 N = 35

SOURCE: Based on survey of senior executive leadership in financial institutions, Feb 2016 McKinsey & Company | 5
 Use cases in just two areas could generate ~$70B to $85B in High

5 impact but feasibility is challenging

feasibility
Low
feasibility
Value generated by Affected players &
blockchain ($B) blockchain benefits Feasibility / path to adoption Implications
▪ Lower cost and  Involve the top companies  Net positive impact for
Trade ops risk, faster from each industry each player
finance 17 – 20 turn-around,  Start with limited use case  Potential value flow
increase in  Develop standards through from FI to corporations
revenues industry working groups

▪ Lower cost and  Replace correspondent ▪ Correspondent banks

Cross-border fees, increased banks with blockchain will lose high margin
B2B 50 – 60
security and platform revenue stream
payments speed ▪ Increased competition

▪ Lower cost and  Disintermediate existing ▪ Accelerate disruption

Cross-border fees, increased clearing and settlement by increasing
P2P 3–5 security and network competition
payments transparency ▪ Lower margin due to
competition

Repurchase TBD – Value in ▪ Lower  Involve industry utilities and ▪ Removal of day-light
agreement risk and capital systematic platforms to lead the risk of lenders and tri-
transactions reduction risk, increased transformation party agent banks
(repos) liquidity in repo  Introduce change by steps: ▪ Increased price
market first blockchain, then couple transparency and
with central clearing liquidity

SOURCE: McKinsey analysis McKinsey & Company | 6

 Based on the current evolution, blockchain solutions are
9
PRELIMINARY

expected to reach their full potential in the next 3 to 5 years…

Future of blockchain

Momentum Exploration Expansion of Commercial

Ages of Bitcoin age and hype of use proof-of- deployment at
blockchain building cases concepts scale

Only 10-20
100+ 20-30 use
Bitcoin successful
solutions cases
based business
explored tested
solutions cases

Blockchain 3 first set of hurdles 3 main hurdles

solutions & ▪ Agree on potential benefits ($) of ▪ Legal / regulatory framework established
Criteria for
survival
use cases ▪ Viable business case (incl. justifying
▪ Relevance to and severity of costs of implementation incl. integration)
current pain points and proof that ▪ Agreement on key standards and active
Blockchain is the best technology collaboration across all required players
▪ Critical number of players want to
move

2009 2016 2017 2018 2019 2020 2021

SOURCE: Mckinsey, expert discussions McKinsey & Company | 7
 …but today most executives expect the time required for blockchain to
9 have material impact is to be 5+ years
Organizations have moved along the ‘S’ curve of block- ▪…and have become less optimistic about the timing
chain tech experimentation over the last few months… required for blockchain to have a material impact

% of respondents
49
46
Internal pilots Fully imple-
mented Blockchain
Partnering in a solution round table
consortium to February 2016
design block- Financial
chain solutions technology 6
labs
Blockchain
86
accelerator
programs/ Venture capital
hackathons/ funds/ equity
SIFMA round
position papers stakes
table
May 2016
14

“Wait and see” Early equity Partnership or Fully 1-2 years 3-5 years >5 years
investor internal pilot implemented
solution

SOURCE: McKinsey survey, SIFMA blockchain survey McKinsey & Company | 8