Financial services disruptors, from cybersecurity to blockchain
Technology creates challenges and opportunities for financial services
In this Q&A, Jay Schulman, RSM principal, weighs in on the financial services industry, technology’s impact, information security, blockchain and winning fintech strategies of the future.
How well are financial services companies handling the critical task of cybersecurity?
Jay Schulman: Financial services organizations are struggling with cybersecurity. One of the reasons it continues to be a challenge is that it’s changing so rapidly. Just as we think we have solved an information security problem, it changes again. As we think about the future of information security in financial services, we have to understand that it's going to continue changing, and therefore, we need to continue investing in it.
Name an example of an information technology security foundational best practice that financial services companies need to adopt.
Schulman: Asset management: the computers, devices and infrastructure you have plugged into your network. So many institutions don't understand what they have and if you don't understand it, it's hard to secure it. Financial services companies can protect themselves by starting with those assets that they now know, and developing a program to make sure they are continuously kept secure. That includes patching, configuration and doing upgrades that many companies often forget.
What kind of people are needed to staff a highly effective cybersecurity function?
Schulman: The financial services industry has a real challenge finding the right information-security specialists right now. There's such high demand for the skill set. There's also such a high demand to build out the infrastructure to support security. We have to start thinking about new and innovative ways to address the issues while also accepting the fact that the best people are hard to come by. One of my fears about cybersecurity is that, as we move forward, the information security professionals don't keep up. We have to continue to grow our people. There is a responsibility for companies like RSM and others to train our security people for this growing threat. Information security is not going away, so we have to make sure that not only do we have good processes and good technology, but we have to continue to grow our people along with it.
How does the vast interconnectedness of financial services companies complicate the cybersecurity task?
Schulman: We often think about what financial services companies can do to protect themselves, but it's not just about what's happening in your company. It is also about what happens in your partners’ and the different interconnections you have that make your business processes work. Consider the act of processing a payment. If you're relying on a telecommunications vendor or another outsourced provider to make that transaction work, you need to focus on their security on an ongoing basis as well. Make sure all those third parties have a plan for addressing security breach events.
How can people be better attuned to the tactics of these bad actors in cyberspace?
Schulman: People have the impression that the bad actors are people who sit in the basement wearing sunglasses, hiding out in the dark, typing on the computer. I want people to think about the bad actors being more like marketers. They're constantly adapting; they're constantly trying to get you to click on a link, just like any of the major retailers. When we think about them more as marketers and less like attackers, we’ll have a better time adressing security risks.
What do financial services professionals need to understand about bitcoin and blockchain?
Schulman: Bitcoin is just one example of blockchain technology. In fact, it is blockchain technology broadly speaking that is going to be so disruptive to this industry. First of all, a blockchain is immutable. When I write something to a blockchain, I can't undo it, I can't reverse it. Secondly, it is a digital ledger, a permanent record of every single transaction that occurs. When you combine those two things together, you create a very disruptive technology.
What is a key risk of dealing in cryptocurrency?
Schulman: There’s an expression: “Possession is nine-tenths of the law.” I like to say that with cryptocurrency, possession is ten-tenths of the law. If you lose your cryptocurrency, it is gone forever. If we think about the concept of immutability—I can write a transaction, and it can never be edited—that means if I send cryptocurrency to someone, I can't get it back unless they send it back to me. There's no reversing that transaction. So we have to have controls in place to make sure we're not going to lose our cryptocurrency.
What should an average middle market financial services company be aware of in adapting any aspect of blockchain technology?
Schulman: Middle market companies need to be aware of a number of things before adopting blockchain technologies. The first is the potential for disintermediation. Third parties that you have to deal with disappear when you do something on a blockchain. You may be used to having a bank, or a custodial agent or some person involved in this ecosystem doing activities for you, and when you put those on a blockchain, the third parties go away.
What are some examples of efficiencies that might be brought to financial services as a result of blockchain?
Schulman: Let’s start with tracking mortgages. If you start writing mortgages to a blockchain, you’re able to share these across different companies and throughout an industry. You could now see who owns the individual mortgages and have a much higher assurance that the mortgages are genuine and there's no fraud involved. Now let’s consider commercial real estate. The biggest buildings in commercial real estate have a very limited number of buyers. One of the ways that we can change the way commercial real estate works is by putting some of these buildings on a blockchain, where we can split the building up into 100 or 1,000 parts or whatever makes sense. When we do that, we allow a whole new set of buyers. We can actually create liquidity, so that buyers and sellers can come in and out.
What will determine the winners and the losers among the many fintech firms out there?
Schulman: The winners and losers in this space are not going to be based on who has the best technology, but on who has the best network. If we look at bitcoin, it is the number-one cryptocurrency, not because it's the best, but because it has the biggest network. We should be thinking about which financial technology companies can build the biggest network.