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Web3 Advances Innovation in Financial Services

Capgemini
Jul 1, 2023

Small financial services institutions are naturally positioned to ride the Web3 tsunami of innovation.

Since “Web3” entered the mainstream media discourse, the conversation has focused on how big brands—like NikeStarbucksDisney—are gaining valuable first-mover advantage in a new paradigm of community-building and brand engagement. In the Web3 ethos of co-ownership and co-creation of value, the traditional line between companies and customers blurs: one-way transactions evolve into relationships in which both participants can create and receive value. 

Can Web3 provide a new level of scale to the co-ownership model of small financial institutions? At its core, Web3 is an innovative set of technologies and ideas for conducting commerce, building a community, running an organization and owning assets. Within this framework, we can imagine and contextualize new user experiences, business models and value chains. 

A new and improved model of co-ownership  

The model of co-ownership with customers is new for most businesses, but many small financial institutions—credit unions and community/regional banks—have operated within a similar framework for decades. Credit union customers are owners and benefit directly through low fees and favorable rates. Community and regional banking drives local financial activity, benefiting customers where they live and work.  

In recent history, small businesses turned to community banks for a bundle of financial services like deposits, cash management, lending and payroll. But the cloud super-charged the competition from national megabanks with deep resources. Meanwhile, nimble fintech startups with consumer product DNA attracted customers with useability, simplicity, delight and stickiness. 

Web3: A secret weapon against industry squeeze 

Fintechs like Square and Shopify rapidly changed the financial services landscapeShopify rolled out financial services in 2016 and as much as 70% of their revenue now comes from “merchant solutions” products—directly competing with traditional bank offerings for small business. And a new breed of vertically organized fintechs—Toast, for restaurants; ServiceTitan for HVAC; Mindbody for fitness and salons; DoorDash for delivery; Miter for construction—have penetrated many small business categories with their bundles of tailored financial services and operational tools. 

Many community banks are scrambling to catch up with these modern fintech offerings. Instead of chasing from behind, small financial institutions should leverage their own DNA of co-ownership and co-creation of value to leap ahead. We can apply some of Web3’s big ideas—trustless coordination, high-velocity money, self-sovereign identity and programmable assets—to build the next generation of financial services and transform the relationships between banks, small business owners, employees, partners and customers. 

Four ways Web3 will accelerate breakthroughs in financial services  

Trustless coordination 

Web3 enables decentralized coordination among network participants, reducing or eliminating a reliance on top-down hierarchy or arbitration by trusted third parties. 

  • Could we provide an intuitive on-ramp to business formation, with corporate structure, ownership and equity arrangements, profit sharing and other contingencies codified in smart contracts, automating the integrity of the business? 
  • Could we give business owners a guarantee they’ll receive payment for a completed service or delivered product, without requiring a deposit or involving a third party?
     

High-velocity money 

High-velocity money signifies the increased frequency of transactions among participants in an economy, reduction in the time it takes to settle financial transactions and an upending of traditional banking hours. 

  • Could we eliminate the traditional pay cycle and stream wages to employees by the minute or hour, from the moment they clock in?  
  • Could we power a customer rewards or referral program with a wide menu of eligible activities that pay participants in real time?
     

Self-sovereign identity  

Self-sovereign identity is a model that gives individuals ownership and control over their digital identities and a say in how their personal data is shared, reducing reliance on a central authority. 

  • Could we perform instant background checks and employment history validation when a job applicant presents their digital wallet? 
  • Could we provide customers with the convenience of seamlessly transacting for a product or service in a physical space just by providing their ID?
     

Programmable assets 

Through the creation and execution of smart contracts, assets—from intellectual property to physical deeds—behave according to an independently verifiable, automated ruleset. 

  • Could we transform lending arrangements through automated profit collection or royalty payments to create a self-repaying loan? Or inject ownership rights that expire when debt obligations are met? 
  • Could we give employees spending power that automatically adjusts to revenue fluctuations, seasonality, macroeconomic data points or even the weather? 

Designing for a radically different near-future is a challenging exercise requiring the right mix of imagination and forward thinking as well as an understanding of the technical, regulatory and adoption hurdles to come. The Web3 horizon is just within reach as a new framework to build the future of financial services for small businesses. As blockchain financial instruments progress from niche to mass adoption, small financial services institutions can compete and win by offering small businesses a new breed of customer-facing and operational financial services. 

Already, frog is helping companies across industries ideate, experiment and evolve their technical and strategic approach to building in Web3. At frog, we help businesses focus on emerging behaviors that create and sustain profitable growth and make a company’s vision a market-changing reality. Many of the conventions that will underpin Web3 have been pressure tested by early adopters, and the space will continue to gain clarity as regulators lean in. Web3 forces a vivid reimagining of small financial services institutions, setting up early adopters to innovate and win. Now is the time to get started, shape the landscape and leap ahead of the competition. 

Read this article on the frog website.

Meet the authors

Michael Calfee

Senior Solutions Architect, frog

Sean Rhodes

Executive Creative Director North America, frog
Sean Rhodes leads multi-disciplinary teams at frog with a focus on media, retail and financial service verticals. In this role, Sean partners with firms to leverage digital, product, service, brand and experience design for competitive advantage in dynamic business environments.