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Web 3.0 promises big changes in financial sector, if regulators are on board

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Web 3.0 promises big changes in financial sector, if regulators are on board

Industry practitioners in the financial services sector expect the rising prominence of web 3.0 to usher in radical changes, but convincing policymakers to embrace the new possibilities would be the first step.

Web 3.0, also known as the "Semantic Web," is built upon edge computing, machine learning and decentralized data architecture. The decentralization of data leverages blockchain technology that creates an open, secure and transparent environment, enabling participants on the network to interact without requiring an intermediary, while ensuring that data ownership resides with the users. Combined with artificial intelligence, the expectation is for web 3.0 to create efficiencies in the financial system and deliver a smarter user experience.

In a series of panel sessions at the recent Singapore FinTech Festival, veterans across the insurance and banking sector discussed how web 3.0 has influenced their businesses and outlined their expectations for the future of financial services.

Enhancing customer interactions

Web 3.0 is already transforming the way financial institutions and tech companies interact with customers.

HSBC Holdings PLC's Nuno Matos, chief executive of wealth and personal banking, noted that web 3.0 has enabled the bank to provide hyper-personalized insights in their wealth management business. "Just last month in Hong Kong, we offered 22,000 different combinations of personalized wealth advice to individual customers, recommending exactly what they should be doing to rebalance their portfolios," Matos said. The bank immediately saw 10 times more conversations between their relationship managers and clients, he added.

For tech players, web 3.0 offers a means for them to extend financial services to their customers, enhancing the overall user experience.

Forest Lin, Tencent Holdings Ltd.'s corporate vice president and president of the firm's financial technology unit, said that the technology has brought about embedded finance that allows tech players "to bring the capabilities of financial institutions to users at the place they want it, in a seamless way."

Radical changes ahead

It is still early days, however, and bigger changes lie ahead.

According to Julian Teicke, founder and CEO of Berlin-based insurtech wefox Germany GmbH, what has been achieved in the insurance industry so far with real-time underwriting, claims processing and policy management has merely improved the customer experience, and this innovation is not a big breakthrough. Teicke foresees that by 2025, each individual will own roughly 15 smart devices that will be connected to the internet and the application of contextual analytics on the vast volume of data can turn insurance into something proactive where the focus is on risk mitigation.

Traditional insurers share the same vision and have taken steps in this direction.

Mike Wells, group chief executive of Prudential PLC, said that many of the technology investments made by Prudential in the last five years focused on improving longevity. This has, in turn, brought down claim levels on health insurance, he said.

At HSBC, Matos expects the role of insurers to pivot from "being a sick care provider to a preventive care and well-being provider."

Five years from now, banking veterans expect that cross-border payments will be available round the clock, and at a low cost.

Today, some parts of the cross-border payment system are pretty clunky, said Tan Su Shan, group head of institutional banking at DBS Group Holdings Ltd. Weekend payments, for example, might not settle for a few days, Tan said. With blockchain and smart contracts, however, Tan believes cross-border payments can be instant and frictionless.

Agreeing with Tan, Takis Georgakopoulos, head of wholesale payments at JPMorgan Chase & Co., added, "Consumer payments are going to be 24/7, going to be invisible to consumers, and are going to happen at virtually zero costs."

Phased transformation

While web 3.0 has driven significant developments in decentralized finance, changes in traditional financial sectors that are rooted in centralized structures may occur at a slower pace and in phases.

Unlike the cryptocurrency market, for example — which is built on a digitally native system — Vikram Pandit, CEO of The Orogen Group and former Citigroup Inc. CEO, said that innovations in the traditional banking sector are based on applying new technology to improve old architecture, citing the use of distributed ledger technology in cross-border payments as an example.

"It is not a paradigm shift," Pandit said, predicting change is going to happen in steps and will be evolutionary rather than revolutionary.

Tan echoed this sentiment in a separate session, adding that this calls for a need for financial institutions and regulators to find a happy medium between managing existing and future innovations.

"We're not going to move from web 1.5 to 2.0 to 3.0 in a hurry; we need to be toggling both. I call this being ambidextrous — managing what's here and now, and managing what's in the future," Tan said, while acknowledging that finding this middle ground will be a "massive challenge for everyone."

Policymakers need to be on board

It is clear that web 3.0 holds vast potential for the financial services sector. But policymakers need to be open to the realm of possibilities and redesign regulations around the potential of decentralized finance.

In the context of trade finance, Tan believes that there is a strong use case for blockchain if governments and different legal systems can be convinced that trade documents can be digitized and put on the blockchain. The fact that blockchain is immutable, transparent, and can be permission-based such that certain authorities can get access to it allows for it to be trustworthy, Tan said. Tan added that this could solve problems around fraud and long turnaround times in trade finance.

Georgakopoulos noted that technology is reaching a level of maturity but that there needs to be greater clarity on regulations. While acknowledging that existing innovations have sparked many conversations among regulators, there has not yet been a clear strategy and direction, he shared. Rules today are also hugely inefficient and should be simplified, Georgakopoulos added.

In regulating decentralized finance, policymakers should adopt a ground-up approach, Pandit suggested. This starts with understanding what the technology can enable and then migrating the regulatory architecture to the promise of the new technology, where a lot of trust and regulation can be built into smart contracts. This is fundamentally different from the current approach of trying to fit new technologies into the existing regulatory framework, Pandit said.