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The Metaverse and the opportunity for Banking

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Hitesh Patel is Consulting Partner within the Banking, Financial Services and Insurance practice at TCS in London

The increase in available computing power and combinations of technologies such as virtual reality (VR) and augmented reality (AR), blockchain and Web3 (decentralised internet) are giving rise to the metaverse and the opportunities within it.

Banking today has become emotionally devoid with face-to-face meetings with customers becoming increasingly rare and the much sought-after quality of trust been lost in the digitization of retail banking so far. So, does taking the next step of adding a third dimension to the client experience with added AR and VR potentially give banks the opportunity to partially restore lost customer relationships?

The metaverse brings together people and virtual spaces together offering the opportunity for banks to create collaborative and meaningful relationships with its customers. This space is evolving rapidly and early entrants to the market are likely to gain an early advantage. Some leading US and Asian banks have already set up a presence in the metaverse.

The building blocks of the metaverse are at different stages of maturation but the combination of the respective various underlying technologies like digital identification, distributed ledger technologies, increase in computing bandwidth and computational power promise to make the metaverse a truly immersive and transformative experience for its users.

How should banking executives approach it?

Senior executives in banks should view the metaverse with a long-term perspective – its maturity is still 5-10 years out and senior executives firstly need to appreciate its value and become familiar with it before any top-down strategic sponsorship is made.

A new and emerging opportunity set for Banks

The metaverse offers banks a unique opportunity to explore how they can assist customers with bridging the world of fiat assets in the physical world with their digital assets in the virtual world. It will give incumbent firms the opportunity to help shape how its customers in the metaverse save and transact in virtual assets like virtual real estate.

Enabling 3D experiences will be crucial for the future of banking in the metaverse. Banks potentially could use the metaverse to deepen their relationships with their clients and help partially restore the “in-person” dialogues that are currently missing in digital channels and help create memorable experiences for the next generation of banking customers, many of whom are unlikely to make use of the already reduced footprint of in-person banking services. Banks should not view this opportunity as another transformation project – it’s actually an opportunity to connect with a segment of the customer base by delivering and building relationships with them in a different way – albeit virtually and with augmented reality. It will add a new dimension to the current rather bland digital banking and mobile platforms and has the potential to enhance current virtual banking modalities like mobile banking, internet banking and chat functions which are emotionally devoid.

Banks that are not yet thinking of developing an approach for providing digital asset custody are at risk of failing to meet the needs and expectations of an increasing customer segment that is already transacting in this space. Banks can also issue and operate the money of the metaverse, enabling seamless transaction experiences, while simultaneously generating new and sustainable revenue streams.

The value of its own brand image by appealing to “Gen Z” should not be underestimated. Occupying a specific “location” in the metaverse can provide a competitive advantage.

Product innovations and alternative sources of revenue add to the growing benefits of being part of this evolution – banks are likely to use the metaverse as a medium to deliver new products. Virtual real estate, crypto and NFTs and other tokenised assets are already tradable in the universe. The presence of digital assets, NFTs and crypto are all growing and the demand and value for banks to assist with custody of these assets will also increase materially.

Banks should consider the metaverse as a channel to augment their current service offerings by providing advisory and payment services to clients transacting in the metaverse, third party services, integrating crowdfunding solutions, tailored AI-based financial advisory, portfolio reviews, mortgage recommendations or even money saving tips based on past transaction histories.

Risks & Challenges in Banks’ Metaverse Journey

The launch of banking in the metaverse will no doubt come with its set of risks and challenges. This is unchartered territory for all the participants in this space. Many will question whether it is ethical, safe, and inclusive and do the opportunities outweigh the challenges. It is a matter of time before global regulators extend the regulatory perimeter to include the metaverse. Regulations are likely to encompass key risks like digital identity verification and customer due diligence in a virtual world, conduct risk, AML, sanctions screening of users/addresses/nations, consumer protection and data privacy. Ultimately, the question will arise from the end customer – “Who am I actually dealing with” when transacting with an avatar in the metaverse. Banks will have to devise similar ways to identification like their current digital and mobile channels.

The metaverse will expose FIs to new risks like digital ID theft and creation of fake avatars to commit fraud, NFT thefts and scams, cybercrimes like hacking digital wallets and crypto theft and money laundering by moving fiat money into metaverse and cashing out of crypto exchanges.

Ultimately, building trust with its users will be paramount and is likely to take time given the evolving risks of operating in this space. Building a stable, inclusive, and immersive experience will be just as important as one that facilitates confidentiality, integrity and protects it users, their data, and their privacy.       How data is shared in the virtual world will require critical consideration to ensure data privacy.

What this means for compliance functions

The emergence of a new way of doing business will inevitably necessitate the review of existing policies, procedures and control frameworks as well as the creation of new frameworks and target operating models in this space. Currently, compliance and risk professionals may be focused on how they prevent and detect traditional risks like bribery, corruption and AML. It is likely that these risks manifest themselves in new and different ways in the metaverse. It could range from verifying who the customers are to tracing the origin of virtual assets being exchanged unknown wallet addresses. Whilst the core skills set of these compliance professionals will be same, increasing their knowledge in areas of blockchain, crypto and NFTs will no doubt serve them well in expanding the portfolios they are responsible for managing. As has been discussed above, the creative and evolving ways of doing business in the metaverse will no doubt provide both challenges and opportunities when it comes to running a compliant, profitable, and a well risk-managed segment of the virtual bank of the future.

The Way Forward

Adoption of changing technologies has enabled banks to attract new customers and provide enhanced services to existing ones. A strong example is the digitization of banking services, moving from the traditional branch and contact-based banking to multi-channel digital contactless banking which enhanced customer experiences.

The Metaverse economy is predicted to touch between $5 – $10 tn by 2030 as industry reports suggest. As the Metaverse itself matures in the next 7-10 years, banks can look to tap the digital native population – Gen Y and Z, with innovative products and services that suit the needs of an emerging VR world. The next decade will witness tremendous development of the Metaverse, along with evolution of standards, infrastructure, ecosystems and industry use cases developed collaboratively by market participants for industry-wide mass adoption. A new immersive world of banking is poised to unfold by the end of this decade that will re-define financial services.

 

About the Authors                                                                                                                             

Hitesh Patel is Consulting Partner within the Banking, Financial Services and Insurance practice at TCS in London. He has over 17 years of experience spanning capital markets risk management covering market and credit risk and regulatory advisory.  Prior to joining TCS, Hitesh managed and led several risk and regulatory transformation engagements for Deloitte’ tier one banking clients. Prior to Deloitte Hitesh worked as a risk manager at Deutsche Bank and Barclays in London.

Sujata Dasgupta heads the Financial Crimes Compliance Advisory, within the Banking, Financial Services, and Insurance practice at TCS. With over two decades of experience across banking and IT services and consulting, Sujata has also specialized in financial crime and regulatory compliance.  She is a qualified Cost and Management Accountant (CMA) from The Institute of Cost Accountants of India (ICMAI) and a Certified Associate of the Indian Institute of Bankers.

Banking

Digital Banking – a hedge against uncertainty?

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By

Ankit Shah, Head of Digital Banking, Apex Group

 

The story of the 2020’s thus far is one of crisis. First the world was plunged into a global pandemic which saw the locking down of people and economies across the world. Now we deal with the inevitable economic consequences as currencies devalue and inflation bites. This has been compounded by Russia’s invasion of Ukraine and subsequent energy politics.

And the outlook remains uncertain. Tensions continue to build between China and Taiwan and inflationary conditions are forecast to continue well into 2023. This uncertainty is impacting everyone, and every sector. And finance is no exception with effects being felt everywhere from commodity and FX markets to global supply chains.

But it’s not all doom and gloom. Rollercoaster markets and an ever-evolving geopolitical situation have made 2022 a tricky year far, but, despite the challenges, digital banking has proven resilient. In fact, the adoption of digital banking services has continued to grow over the last few years, and is predicted to continue.

So, what are the forces driving this resilience?

In an increasingly digital world and economy, digital banking comes with some advantages baked in, which have seen the sector continue to succeed despite the tumult in the wider world. In fact, the crises which have shaped the decade so far may even have been to the advantage of digital banking. Just as during the pandemic, technologies which could facilitate remote working saw a huge uptick in users, so to digital banking is well suited to a world where both people, and institutions demand the convenience that online banking services offer.

And while uptake of digital banking services is widespread amongst retail consumers, a trend likely to continue as digital first generations like Gen Z become an ever-greater proportion of the consumer market, uptake amongst corporate and institutional customers has been slower. This is largely down to a lack of fintech businesses serving the more complex needs of the institutional market, but, in a post-Covid world of hybrid working business, corporate clients are looking for the same ease of use and geographic freedom in their banking that is enjoyed by retail consumers.

This is not just a pipe dream – with the recent roll out of Apex Group’s Digital Banking services, institutions can enjoy the kind of multi-currency, cloud-based banking solutions, with 24/7 account access that many of us take for granted when it comes to our personal banking.

Staying compliant

One significant difference between retail and business accounts however, for banking service providers, is the relative levels of compliance which are needed. While compliance is crucial in the delivery of all financial services, running compliance on multi-million pound transactions between international businesses brings with it a level of complexity that an individual buying goods and services online doesn’t.

For digital banking services providers, this situation is further compounded by guidance earlier this year from HM Treasury – against the backdrop of the Russia-Ukraine conflict- requiring enhanced levels of compliance and due diligence when it comes to doing business with “a high-risk third country or in relation to any relevant transaction where either of the parties to the transaction is established in a high-risk third country or with a sanctioned individual.”

So, can digital banks meet these standards while also providing institutions with the kind of easily accessible, mobile service which retail customers enjoy?

The answer is yes and again, once initial hurdles are overcome, digital banking brings with it features which give it the edge over traditional banking services. Paperless processes, for example, mean greater transparency and allow for better and more efficient use of data. This means AI can be employed to search documents, as well as provide verification. It also means compliance processes, often notoriously complicated, become easier to track. Indeed, digitising time intensive manual process means the risk of human error in the compliance process is reduced.

Digital banking can also better integrate transaction monitoring tools, helping businesses identify fraud and irregularity more quickly. This can be hugely important, especially in the times of heightened risk we find ourselves in, where falling foul of a sanctions regime could have significant legal, financial and reputational consequences.

Cross-border business

Our world is increasingly globalised, and so is business. For corporate and institutional banking customers, being able to operate seamlessly across borders is key to the operation of their business.

This brings with it challenges, which are again compounded by difficult geopolitical and economic circumstances. In recent weeks for example, we’ve seen significant flux on FX markets which can have real consequences for businesses or institutional investors who are buying and selling assets in multiple currencies and jurisdictions. The ability to move quickly then, and transact in a currency of choice, is vital. Advanced digital banking platforms can help – offering automated money market fund sweeps in multiple core currencies to help their clients optimise their investment returns and effectively manage liquidity.

Control admin uncertainty

In times of uncertainty, digital banking can provide additional comfort via customisable multi-level payment approvals to enhance control of what is being paid out of business accounts, with custom limits available for different users or members of a team. Transparency and accountability are also essential, with corporate clients requiring fully integrated digital reporting and statements and instant visibility with transaction cost and  balances updated in real-time.

Outlook

For some, the perception remains that digital banking is the upstart industry trying to offer the services that the traditional banking industry has built itself upon. Increasingly however, the reality is that the pressure is on traditional banks to try and stake a claim to some of the territory being taken by digital first financial services.

With a whole range of features built in which make them well suited to business in a digital world, digital banking is on a growth trajectory. Until now, much of the focus has been upon the roll-out of services to retail consumers, but with features such as automated compliance, effortless international transactions and powerful AI coming as standard for many digital banks, the digital offering to the corporate world looks increasingly attractive.

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Banking

Security vs online payment convenience: which one is tipping the scales for customers?

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 Chirag Patel, President of Digital Wallets at Paysafe.

 

While keeping their payment details safe is a top priority for customers when shopping online, they’re not willing to jump through endless hoops or accept poor user experiences as the inevitable price of greater security.

Online payment security has been top of mind for merchants since the very first internet purchase: a copy of Sting’s ‘Ten Summoner’s Tales’ CD. Even though payment technology has become more sophisticated over time, the eCommerce explosion has brought about an ongoing battle between increasing security and ensuring convenience.

Chirag

Customers are ever more aware about the risks of online shopping and concerned about their financial details falling into the wrong hands. Simultaneously, demand for a good user experience has also risen steadily. But greater security typically introduces friction into the checkout process, which continues to be one of the leading causes of cart abandonment.

In our latest Lost In Transaction report, we surveyed 11,000 consumers in 10 countries across Europe and the Americas regarding the balance between security and convenience in online payments.
Here are the key take-aways for online merchants moving forward.

 

How concerned are consumers about online fraud?

According to our research, customers continue to grow increasingly worried about online fraud.
59% of respondents are more concerned about it today than they were 12 months ago. Not feeling comfortable sharing financial details online has increased from 49% in 2021, to 70% in 2022.
More to the point, our research shows that, when they have a choice, 44% of respondents will invariably pay with the method they perceive as safest while only 21% will choose the most convenient payment method, and even fewer (14%) will choose the fastest one.

These findings aren’t surprising considering that fraud has become more frequent and more serious during the COVID-19 pandemic. For example, in 2021 the average US fraud victim lost $500 and the average UK victim lost £806.

However, what merchants need to keep in mind is that, even though security typically dictates the choice of payment method, there’s a limit to how much friction customers are prepared to tolerate. And our research suggests this limit is close to being reached, with 42% of customers reporting that they would prefer more payment security but only 19% open to accepting whatever measures are necessary for increased protection against fraud. The other 23% would only accept a minimal increase in inconvenience.

 

A fine line to walk

If you’re a merchant, the situation is positive but challenging to navigate.
Fortunately, 44% of consumers think merchants are getting the balance between security and convenience right — up from 26% in 2021 – and trust is also high. 53% think online payments are more secure than they were twelve months ago. And 64% of respondents are more likely to shop from merchants who already have their payment details on file, compared to 54% in 2021.

The challenge is that security risks are ever evolving. Cybercriminals are constantly refining their techniques, which means measures that are highly effective today can become inadequate tomorrow. And regulation is constantly developing, at times at odds with consumer sentiment. The introduction of Strong

Customer Authentication rules, for instance, sparked fears that the deliberate friction they required would hurt sales, which, admittedly, has had less of a negative impact than anticipated.

Consequently, while security enhancements are inevitable if merchants are to continue meeting high standards, there’s margin for error now that more consumers are reaching the limits of their tolerance for friction.

For every new security measure they introduce, merchants must be increasingly mindful of the impact on the streamlined payment experience customers expect.

 

Finding a common ground: boosting security with trust and technology

While maintaining – or even improving – the current balance between security and convenience might seem impossibly tricky, payment technology has evolved to a point where it’s doable.

With embedded payments, for instance, the consumer pays through a user-friendly interface at the point of need. And because financial details are stored securely in tokenized format, there’s no need to share them every time you make a purchase.

eCash is another such solution that enables customers to buy online quickly, securely, and privately.
A unique barcode is generated at the checkout which customers can then get scanned at one of one million points of sale in 55+ countries to pay in cash. Which means they can buy online without having to share or even store any financial details.

This presents a great opportunity for merchants to take advantage of the high levels of trust these payment solutions enjoy. While our research shows that there’s still a significant knowledge gap, particularly in embedded payments, consumers are becoming more open to both technologies. So now is the time to explain the benefits clearly to customers and, more importantly, address concerns.

 

Online payment security is crucial, but not at all costs

Keeping their financial details safe is the most important element of the payment process for most customers. But while fraud protection may be winning the battle against convenience hands down, merchants need to carefully navigate the process of increasing security without adding too much inconvenience.

As critical as it is for merchants to protect customers’ data, a zero-fraud strategy would also likely cause way more friction than most customers are prepared to tolerate. A smooth, seamless payment experience remains as important as ever.

 

 

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