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TCS Consulting Services to Achieve Success in the Digital Era
Highlights
- The current version of the world wide web has proven transformational for all of us, including for BFSI organizations
- Whether it is the introduction of online channels, real time payments, embedded insurance or open banking, all have been possible due to rapid proliferation of the internet and related technological breakthroughs
- However, the next wave of disruption i.e. web3 – promises to revolutionize BFSI in pioneering ways with some early investments already happening in this space
Web3 significance
While web 2.0 use has resulted in centralized economies and monetization of data by a few dominant players, web3 aims to create a decentralized internet where users have full control over their own data, privacy and decision making
With web 2.0, users mostly have little or no control over their data and information. Web3 aims to create a decentralized internet where users have full control over their own data, privacy and decision making. Underpinned by set of innovations and principles like Decentralized Ledger Technology (DLTs), Smart Contracts, Blockchain, decentralized Apps, Tokenization – the ethos of web3 is to level the playing field for all users, making it more transparent and inclusive, while directly rewarding community actions and engagement.
As we look towards the future, the evolution of the internet continues to present exciting possibilities especially with the advent of web3 technologies. Web3 is at a nascent stage at present, and there is no common definition of what it means. However, there is an increasing need for the internet to adhere to its original principles - democratized information sharing, trust and openness.
BFSI relevance
Web3 will be a game-changer, enabling faster transactions, enhancing transparency and an experience driven economy. Some early innovative use cases are mentioned below.
- Decentralized Finance or DeFi for smart contract-based peer-to-peer financial transactions including payments, lending and exchange, micro-transaction. This has been one of the most prominent use cases so far. Cross border payments without intermediaries are already being realized in real time, thanks to power of DLTs and stablecoins. And like more than 100 countries worldwide, the US is also continuing its research and development into Central Bank Digital Currencies (CBDCs).
- Tokenized Assets and Investments for green bonds, stocks and real estate making investment more inclusive and accessible. Tokenized real-world assets are being used as collateral for decentralized finance loans, without centralized intermediaries. Smart contracts could also handle dividends and settlements automatically.
- Impact Investing can benefit greatly from web3 as end users will get awarded for community participation in a transparent manner. In addition, it will prompt them to act on air quality, plastic pollution and waste management or other causes close to their heart, with tracking and visibility across multiple platforms.
- Smart contract-based parametric insurance will enable frictionless payouts based on predefined conditions authenticated by real-time third-party data – referred to as oracles in the web3 ecosystem. For example, it can be used in weather insurance for farmers or to address anticipated travel delays.
- Web3 technologies can be leveraged as a force multiplier for inclusive climate action. Fintechs today are helping overlooked farmers turn carbon stocks and soil care techniques into financial assets, improving the lives of farmers and their communities, while providing extra income.
- Member-driven insurance solutions are on the rise, enabling members to collectively manage pooled capital and access risk within a globally accessible marketplace. By eliminating intermediaries, these solutions facilitate direct interactions between suppliers and consumers.
- Enhanced cybersecurity: Just as cyber insurance has witnessed a huge surge, there will be opportunities for insurers to develop innovative products and offerings that augment underwriting with emerging risks like smart contract failures, lost or stolen access keys, protocol failures, de-pegging events, wallet breaches and crypto backed loans.
- Decentralized Identifiers that do not require use of centralized registries and help users be in control of their data and terms of engagement. DIDs will interoperate across multiple collaborative ecosystems and could reimagine know your customer (KYC), removing frictions for regulatory compliance.
Challenges
Despite its potential, web3 adoption in BFSI will face several hurdles at least in the short to medium term
Regulatory uncertainty: The decentralized nature raises questions about taxation and governance. Governments are still developing regulations with respect to cryptocurrencies, DeFi and tokenized assets
Security concerns: While blockchain is inherently secure, smart contract vulnerabilities can lead to exploits. Digital assets come with their risk of high volatility and scams. As per a recent bill tabled in the UK parliament, digital holdings including cryptocurrency, non-fungible tokens such as digital art, and carbon credits can be considered as personal property under the law. The US government has published a framework on Ensuring Responsible Development of Digital Assets, aiming to promote safe, affordable financial services and regulations to protect consumers, investors and businesses
User adoption: Building trust in web3 will require time, effort and ecosystem adoption. Businesses will need awareness and education on leveraging these technologies for specific use cases, with enterprise guardrails.
Integration with existing systems and processes: There will be operational and technical complexities involved. Web 2.0 is not going anywhere soon, so innovative use cases leveraging web 3 will likely co-exist in the foreseeable future. BFSI, fintech firms and Web3 futurists will form partnerships creating hybrid technology models to bridge existing and web3 systems.
Way forward
Preparing for a web3 future
Embracing web3 is not just about keeping up with trends; it’s about rethinking financial services from the ground up, fostering new opportunities for innovation, and creating a future where finance is not just accessible but also truly democratized. Web3 is a paradigm shift that offers immense opportunities with respect to enhancing customer trust, driving financial inclusion, data ownership and control. Realizing the potential requires overcoming technology maturity, regulatory barriers through collaboration and innovation. As the lines between web 2.0 and web3 blur, BFSI organizations must proactively adapt, ensuring they remain ahead of the upcoming trends. The mindset of being inclusive, purpose-driven, experiential and rewarding co-operative behaviors is too alluring to remain on the sidelines.
Which web3 technologies and use cases are you excited to explore?
