This is an excerpt from Finextra’s report, 'The Future of Digital Banking North America 2023'.

As we delve deeper into the realm of digitised financial services, it is becoming clear that the line between physical and digital experiences are becoming increasingly blurred. This is due in no small part to the experiential applications, products, and services which consumers are now using not only for social and leisure, but for their work, wellbeing, and of course, their financial management.

New technology trends which may at first glance appear utterly distinct or inapplicable to financial scenarios are quickly finding a foothold within innovation strategies at large financial institutions. Incumbents, challengers, neobanks, and fintechs alike are reluctant to ignore tech opportunities which may one day (soon) comprise a central pillar of the financial ecosystem. Web3, the metaverse, digital assets, and tokenisation are no longer the monopoly of global tech giants, but increasingly being shaped by financial players anxious to maintain relevance.

Naveed Anwar, global head of digital with treasury and trade solutions, Citi, agreed that the advancement of technology is opening the door to a new form of internet with new business and social models that blur the lines between physical and digital experiences. Covid-19 emphasised the acceleration of digital transformation as companies began experimenting with technologies including the metaverse and digital assets.

“As we leave the two-dimensional Web2.0 behind us with the expansion of mobile commerce and social media, we are entering into a four dimensional Web3 with lifelike virtual and augmented reality experiences that integrate with existing physical distribution and logistics,” observed Anwar.

Ahmed Siddiqui, chief payments officer at workforce payments platform Branch and author of Anatomy of the Swipe agreed, citing the early examples of Uber and AirBnB, where consumers were taking car trips or staying in someone’s home using an entirely digital payments experience. “No more fumbling for your wallet to pay—it was all taken care of digitally through the app. You didn’t have to worry about the awkward experience of paying with cash or a card once you’re done.”

This blurred experience is now being optimised by companies in the post-Covid world, in order to make the process as convenient as possible for customers. “We are so used to shopping and paying for something online ahead of time and picking it up in-person. You order and pay on the store’s mobile apps, and you make a curbside pickup. The concept of ‘pay on delivery of goods or services’ is going away because of how convenient these transactions have become; people are comfortable storing their payments credentials with the merchants so they can be automatically charged,” notes Siddiqui.

According to Jamison Jaworski, GM, SVP of retail, Green Dot Network, this continuous blurring of the physical digital worlds is all for the benefit of the consumer. As consumers want their experience with banking and payments to be frictionless and fit into the flow of their daily lives, this demand for convenience is driving the integration of physical experiences with digitally native experiences.

Jaworski cited the example of the evolution of retail during the initial rise of ecommerce, where the conversation centered around which storefront – either digital or physical – would make the other obsolete. “Neither did become obsolete, but because these retailers were forced to innovate, consumers can now interact digitally with a worker picking out their groceries for delivery, buy products online and pickup or exchange in store, load cash to their digital bank account at the same store they’re out buying diapers from, and much more."

From banking to shopping to hailing a cab, its consumers who have all the leverage in demanding convenient, frictionless experiences, Jaworski argued. “The companies that will thrive moving forward will be those that don’t view physical and digital as competing channels, but rather two elements that can be blended together to better meet the consumer where they are.”

Web3 and bringing dark markets into the light: What does Web3 offer?

While certain product market uses have been speculative in nature, increased variety of applications of Web3 across finance indicates that meaningful innovation can be built. Before the ongoing market downturns, McKinsey notes that over $250 billion was actively put to use in smart contracts, yielding autonomous returns for its depositors.

Despite this almost furious uptake, as a nascent industry many questions remain around the best approach for supervision and growth. Governance is a clear example of a complicated aspect of Web3, as by nature it is meant to take place within the community rather than behind closed doors. In this way, revenue can be returned to creators and users along with incentives for growth. McKinsey continues that this could mark a paradigm shift within the business model for digital applications by making disintermediation a core element – intermediaries can be circumvented or avoided altogether.

Additionally, questions around the appropriate and most secure method of building digital identities in order to leverage the full potential of these technologies are front of mind. Anwar believes that almost everything we do online is tied to digital identity. “In fact, digital identities have become so important that in some cases, prospective users can’t even access services or perform specific tasks without them.

“Digital identity will continue to hold a pivotal role in bridging the different ecosystems as we transition from Web2 to Web3. When fully adopted, digital identity in Web3 will allow users to carry their full selves’ through the fragmented ecosystems.”

Tim Day, VP of digital experiences at Navy Federal Credit Union explained that as more and more data on individuals is available in the digital space, security and privacy become increasingly important. “Because digital assets are not insured or fully considered in existing regulations it is of paramount importance for users and crypto service providers to keep them safe, as there is little to no recourse in the event digital assets are stolen, lost, or the subject of fraud like other more traditional assets are.”

According to Anwar the digital economy has pushed the internet to its limits. As a result, to maintain relevance in this economy new security layers must be built to protect information and establish customer identity. He explains that blockchain provides these upgrades including built in digital identity and higher data security to the existing internet technology allowing for interoperability and scalability.

Although the financial services industry is still vulnerable to the risks and complexities these new technologies present, it is leading the way with adoption. A clear example of this was when the market was seeing daily volume of DeFi transactions being processed across global exchanges surpassing $10 billion. While this volume has fluctuated, these figures help to inform the evolution of Web3 across different industries.

With new developers joining the market, innovation in the space is inevitable. Being open source by nature means that Web3 creators in the field aren’t fenced off from programs or restricted to working on pre-approved company mandates. There is a true open slate when it comes to innovation and testing, and incumbents are reluctant to miss out.

The metaverse and financial services: Assessing a new world

BCG explains that the metaverse can be understood as the convergence of several developments which all involve a step change in technological capability, and with Goldman Sachs predicting that the metaverse could hold an $8 trillion opportunity on the revenue or monetisation side, it is a concept that deserves careful attention.

The developments BCG refers to include the mass online gathering of hundreds of millions of users thanks not only to the wide availability of digital devices, but the vast improvements in cloud services and connectivity, a growing market for augmented, virtual, and mixed-reality experiences, and the growing strength and usage of virtual assets powered by Web3 technology.

Citi’s Treasury and Trade Solutions business is building digital asset capabilities into its core platforms, CitiDirect and CitiConnect. CitiConnect APIs are supported through an ecosystem that includes strategic partnerships with various treasury software providers, while banking platform CitiDirect provides one-click access to global transaction capabilities.

“Whether it is CBDCs or the metaverse,” noted Anwar, “TTS aims to provide our clients with the capabilities that will allow them to transact across Web3. We have a long history of innovation in financial services especially in our use of new technology.”

While certain institutions like Citi are working to build these capabilities into their offering, Siddiqui observes that buying things in the metaverse is not particularly easy. In the same way that Coinbase made it easy to buy crypto, a player needs to make this service simple and seamless within the metaverse. “The exchange of crypto to native tokens that can be used in various metaverses is still super confusing. I don’t think anyone has cracked that yet.”

NFTs and tokenisation: An application for every industry?

Over $40 billion was spent on non-fungible tokens during 2021, and while the initial allure for the NFT concept was pegged squarely on the art world, their utility across financial products has taken centre stage – notably for the tokenisation of payments.

Tokenisation and the applications that accompany it are of significant interest to Siddiqui, who noted that it is rapidly considered to be the more secure way of moving money. While ApplePay and GooglePay may be a key example that comes to mind for most people when thinking about tokenised payment, he observes that major platforms such as Facebook and Netflix are also tokenising their payments.

“Basically, they’re taking a keyed-in card transaction, asking the network to generate a token for them, that is specific between the user and Netflix, and then using that to make recurring payments. This is not only highly secure but also protects the consumer in the event of a breach. Those tokens can be immediately terminated, and the user will be asked to retokenise for this service.”

Tokenisation of value has tremendous value for financial institutions alike Citi and their clients as it provides them with programmable assets. The underlining blockchain technology that powers digital assets also provide an enhanced internet topology with new capabilities like smart contracts, digital identity and atomic settlement.

Adopting the philosophical or the practical viewpoint

Given the complexity and far-reaching impact held by the technologies currently being explored across financial services, it stands to reason that categorisation may assist in understanding their impact.

It is helpful to look at experiential technology in two groups states Siddiqui; the technical infrastructure and the end-user experiences. An example of the former would be the companies building essential financial infrastructure such as Marqeta, where the raw ISO8583 messages from the card networks (Visa, Mastercard) are converted and made usable by developers on the Marqeta platform. The latter, Siddiqui explains, would be companies building customer facing solutions on top of this financial infrastructure, such as Branch which builds the financial infrastructure usable for end consumers. “Rarely do we see fintech companies that are great at both, because they require very different company DNAs."

Larger financial institutions such as Citi are working on tackling both viewpoints, as Anwar observes the ultimate product design is when technology becomes invisible. “Our ultimate value proposition is to become invisible and seamless, as we integrate our APIs into our clients’ systems and applications. For this reason, it is important that while we digitise our business operating model front-to-back we also keep design and invisibility in the forefront of our digital strategy."

It remains essential to deeply assess the core features of this experience-driven movement as it evolves from a trend to a pillar of the financial services landscape. The prospective disruption it holds is far reaching, and financial institutions which pay close attention to the possible outcomes will be better placed to capitalise on future opportunities.