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Are we ready for the democratization of finance that DeFi and the Metaverse are bringing?

The lightning-fast development of technologies is fundamentally changing the concept of finance and money. This change is based on a new kind of experience that has become available through digital innovation. To be able to prepare your financial services for the global disruption, or even lead it, you need to explore the future of banking in terms of the customer experience. I hope this article will help to define how the key technology trends could bring more value to customers by shaping the financial experience and consumer expectations in the near future.

Humanization due to Global Digitization

Some of us might remember a time when there were no smartphones, and just having a computer was a sign of wealth. Back then, the feeling of change through digitization was just on the verge of blowing up. This was a time when customers had a favorite banking clerk - mostly because they were friendly, with a good enough memory to joke about your favorite basketball team and never forgetting to ask “how the spouse is doing.”

The digital era has changed the rules, personal relations, businesses, communication and the way everyone uses their time. Businesses try to adopt new rules through digital transformation, but it’s not so easy. Data from BCG research shows that only 35% of companies achieve their digital transformation objectives. Unfortunately, the majority do not consider the various phenomena caused by changes in the way people consume, behave and interact using digital technology.

The network effect allows us to immediately get honest information from first product users whether it’s good or not, regardless of the promises in their advertising. Informational transparency allows us to share data on the critical impact that businesses have on the environment and society, thus making the world more responsible. And, automation, in turn, helps to solve routine tasks a lot easier in order to focus on more important things.

These and many other digital world transformations make the emotional experience, human-centricity and ethical consumerism into social trends. At the same time, in response to information overload, more and more people improve their quality of life through mindful living, finding enjoyment in everyday activities and practicing sincerity and honesty. Mindless consumerism is losing ground, and human needs come to the fore.

This brings us to the first and foremost banking disruption we want to address. Every member of the finance community should ask themselves this simple question: Are my expertise and resources increasingly focused on developing customers' well-being, or am I prioritizing profit and cash flow instead?

To place people over profit, a business should become purpose-driven, which requires exceptional human-centricity. And, in the digital age, this is the most profitable long-term strategy. According to Havas research, 77% of consumers buy meaningful brands that match their values, and, by making the world a better place, those brands outperform the stock market by 134%. Sixty-six percent of consumers are even ready to switch from a known brand to an unknown, purpose-driven brand, according to a Cone/Porter Novelli study.

Unfortunately, it's not so easy to adapt to the digital disruption and become a human-centered business. There are multiple blind spots in a company’s mindset, culture, processes and services that sabotage what could be a delightful customer experience delivery. The only way to bridge the gap between company services and customer expectations in the digital age is to identify and improve all of these blind spots.

Personalization Provided by Artificial Intelligence

Temenos found that 77% of banking leaders believe that artificial intelligence (AI) will be the differentiator between winning and losing banks. The latest McKinsey Global Survey on AI indicates that 56% of the respondents report AI adoption in at least one function.

Of course, we can talk about automation by AI that has already caused the largest banking jobs to be cut off throughout history. But, from the customer experience perspective, AI has a more powerful outcome.

Harris Interactive research, commissioned by Emplifi in 2022, shows that over 4 out of 5 respondents would leave a brand to which they are loyal after three or fewer poor customer experiences. That's why 87% of business executives see CX as a top-growth engine, according to a North Highland survey.

Accenture study finds that 91% of consumers are more likely to purchase from brands who recognize, remember and provide relevant offers and recommendations.

A contextual and personalized customer experience becomes the key competitive advantage. And, AI is the main technology to ensure such an experience.

Imagine having AI aggregate all the data from all your financial accounts, activities and life aspects to generate and provide valuable financial insights on the go and support you as your personal financial advisor. This will drastically impact the financial industry (as contextual Google ads did for advertising).

This way, when AI technology becomes more and more advanced, we will experience a much more serious impact than could ever be imagined. Thanks to AI, every user will have the opportunity to make more effective and impactful decisions in their daily lives using appropriate insights extracted from the big data collected by financial services. But, there is another side to this coin-mass-generated AI, decisions can create a resonance effect that will destroy self-regulation of the free market.

At any rate, there is no doubt that AI will disrupt the traditional financial industry, and we need to find an effective way for this technology to improve financial services for the consumers.

Extension by the Metaverse

The metaverse is an interconnected network of digitally enhanced surroundings that use virtual reality (VR) and augmented reality (AR) to provide consumers with a variety of immersive experiences. And, this whole new world in virtual reality is fast approaching.

We may say that the current digital world as we know it now is just in the preparation stage of the metaverse, which will be drastically expanded in a few decades. A Gartner survey of 324 consumers during January 2022 found that 58% of respondents had heard of the metaverse but do not know what it means or how to explain it, and 35% said they had never heard of the metaverse. Gartner predicts that 25% will spend at least one hour a day in the metaverse by 2026, either for work, shopping, education, social or entertainment. According to the McKinsey forecast, the metaverse may generate up to $5 trillion in value by 2030.

The metaverse will undoubtedly be the source of the next revolutionary disruption. In the gaming industry, VR and AR have already become commonplace. “Vendors are already building ways for users to replicate their lives in digital worlds,” said Marty Resnick, research vice president at Gartner.

For decades, the expansion of banking activity was determined on the plane of two coordinates: the service range and the number of branches. Global digitization has changed the rules of the game. Today we see that a Fintech application with one usable and clear feature can gain more customers in a shorter period of time than a hundred-year-old bank with myriad branches and features. Digitization and the mass transition to cashless finance already provide a relatively low-cost way to quickly scale any financial service, but the metaverse will go even further.

The development of the metaverse will create a new virtual world in which people can experience innovative interaction, entertainment and work. And, financial transactions will certainly be in demand there as well as in the real world, but from the users’ point of view, it should be free from territorial, temporal or spatial boundaries.

The metaverse will definitely become the next milestone in the extension of financial services.

Disruption caused by the metaverse will require a transition from a mono-dimensional market to a volumetric digital space, consisting of multiple dimensions with different rules of interaction in general ruled by a creator economy. Instead of the two familiar coordinates, such as range of features and the network of branches, the financial industry will have to adopt unique coordinates of multiple connected virtual worlds in which users can easily create new virtual stuff that can be sold or exchanged.

After all, in an unbelievable digital world, equally unbelievable financial services will be in demand. In time, overall metaverse capitalization will greatly surpass the real world. And, the only way to identify and prepare for such a demand is to start building up financial competencies in the metaverse today. But, there is no need to rush; just take your time.

Simplification Powered by Embedded Finance

This recent financial trend is carried out by integrating financial services into non-financial enterprises, making it easier for consumers to buy products or services that are being offered. Embedded finance is a great way to ensure the customer has a frictionless and efficient service when they need it the most.

The outcome of rethinking services in terms of the user experience has huge potential. Old and well-known consumer loans features opened up a new, trendy Buy-Now-Pay-Later market through an embedded experience. The BNPL model gained great popularity, making Swedish Fintech Klarna the biggest unicorn in Europe in only five years at a more than $10 billion valuation. And, big tech also comes in with Apple Pay Later no-fees announced at WWDC.

Retailers, big tech and software businesses, vehicle manufacturers, insurance providers and logistics organizations are all considering or ready to introduce embedded financial services to serve their businesses and customers.

According to Statista data, in the United States, the revenue generated by embedded finance in 2020 was estimated at $22.5 billion and was forecasted to reach over $230 billion by 2025. Oracle predicts that the embedded finance market will be worth over $7 trillion in the next ten years.

The Future of Banking - Market Value

The main financial industry disruption from embedded finance will be affected by simplicity. Embedded finance removes friction from the purchase cycle, making it more affordable and faster for the customer.

This simplicity changes the traditional paradigm in which consumers come to banking providers in search of the required service. Instead, embedded means that the customer receives the service exactly when it is needed without much effort.

Simplicity provided by embedded financial services will definitely take customer experience and expectations to a whole new level. Consumers will require easy-to-use and fast digital service from every financial provider, so even those who do not provide embedded finance should be ready to compete for simplification.

Democratization Driven by Decentralized Finance

The current global economic system was built on the opportunities and requirements of the industrial age. The world's transition to the digital age results in new demands with advanced possibilities for financial interactions.

Today, almost every aspect of banking is managed by centralized systems. Consumers can only access financial services through financial intermediaries. All intermediaries, such as banks, exchanges and lenders, set fees and conditions for access to each financial transaction.

Fintech has greatly expanded the experience of financial consumers by increasing the number of avenues and making financial services, capital and assets more accessible to everyone. It has essentially undermined the monopoly of banks and traditional financial institutions on access to financial instruments, thereby democratizing it.

The next step in the development of financial relations, after democratization of access to financial instruments, is the democratization of financial instruments themselves. We are now seeing the first attempts in this direction: cryptocurrencies as a digital alternative to money, NFT as a digital alternative to investment assets and ICO as a digital alternative to IPOs.

Already, these experimental digital alternatives have created a multi-billion dollar market. There are more than 18,000 cryptocurrencies, and the total capitalization, despite the market decline, is about $1 trillion. This demand is justified because the market needs a solution for the further upgrade of the economic system for the digital world.

We are talking about a global democratization of value and liquidity that will allow billions of unbanked people to participate in the creation and distribution of value just as the internet has democratized access to information, entertainment, learning, commerce and communication. And, at the heart of this new economic paradigm will be decentralized finance (DeFi).

At the moment, decentralized finance uses cryptocurrency and blockchain technology to manage financial transactions. DeFi aims to democratize finance by replacing outdated centralized institutions with P2P relationships that can provide a full range of financial services, from everyday banking, loans and mortgages to complex contractual relationships and trading of a variety of assets, including non-digital ones.

DeFi will make everything around us liquid through the appropriation of tokens, so people who do not currently have liquid assets will be able to turn everything they have into it and participate in global economic exchange without intermediaries. In effect, this is a total democratization of the financial and investment market.

Transparency of blockchain technology will make it possible to trace the path of each transaction and include full responsibility in the exchange of value. A smart contract will automatically ensure fair execution of the terms of the transaction. This will greatly increase the security of financial settlements and significantly reduce corruption, crime and fraud in economic relations, which is extremely important for low-income and unprotected groups. A single transaction will be enough to identify the entire chain of participants, but this will probably require regulation and deanonymization.

As a result, DeFi will fundamentally change people's financial experience, as the very perception of value will change. Virtually anything can be turned into an asset and used without intermediaries in a financial exchange with sufficient liquidity. Most likely, decentralized liquidity markets for different types of assets will be created spontaneously every second, just as easily as content is now being published on social networks, or instant transactions are being made. Pop! Someone wakes up with the idea of tokenizing their dreams, and, by the end of the day, millions of people around the world are already entering into smart contracts to sell and exchange their dreams.

It makes sense for all players in the financial industry to think about their place in the world of DeFi right now━what kind of upgrade your service will need and how you can start integrating it ahead of time. Everyone who starts to work on providing a new generation financial experience today will undoubtedly have an advantage in the DeFi market of the future banking.

Conclusion

Each of the challenges discussed above leads to the democratization of finance, making it more accessible and convenient for the mass user without any boundaries. At the same time, technological innovations will push the development of the financial experience both vertically and horizontally.

Vertical development means deepening the experience, for example, AI-driven personalization of services based on user context and big data or integrating financial solutions at a deep service level, be it metaverse worlds or finance embedded into the everyday experience.

To provide a deep customer experience financial companies must be a step ahead and be very flexible and, in some cases, even invisible.

The horizontal development of financial services implies going beyond the existing economic paradigm and considerably expanding the range of massively accessible financial instruments. In essence, we are talking about creating new principles of value creation and exchange, in which value can become a much wider range of phenomena different from our traditional perceptions.

For example, the development of crypto coins and tokens has created a trillion-dollar liquid market in digital assets, but the same principle can also be applied to non-digital objects, such as real and movable property. According to expert estimates, this will happen within 10-15 years. Also, the horizontal increase in the number of financial instruments and transactions will occur through the development of the metaverse, that is, the expansion of the reality available for the customer experience.

 

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Alex Kreger

Alex Kreger

Founder & CEO

UXDA

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Riga

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This post is from a series of posts in the group:

Banking Strategy, Digital and Transformation

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