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.
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