Nov 5, 2020

The Phygital touch: fusing digital and physical in finance

Critical Software
Digital Transformation
Critical Software
4 min
Banks have undergone extensive digital transformation. But is it time for them to realise the potential of combining the physical with digital?
Banks have undergone extensive digital transformation. But is it time for them to realise the potential of combining the physical with digital...

The Journey to Phygital

Imagine a world where your bank isn’t just a bank. You can wander in, grab a coffee, meet up with friends, play a bit of table football, and then get down to business and deal with your personal financial matters.

That’s the world promised by Phygital, a portmanteau aptly describing the merger of digital and physical within a particular space. While Phygital has been embraced in the world of retail (for instance, in the recently-opened Amazon Go supermarkets where you can physically explore products and pay for them using a smartphone app), it is only just becoming a reality in financial services. Yet as customers pine for physical interaction but also appreciate the influence of digital on their lives, there’s no doubt that it will only be a matter of time before Phygital properly takes root in retail banks.

The Limits of Digitalisation

Digital transformation has been something of a buzzword amongst institutions in recent years. Many incumbent banks have endeavoured to digitise their services, allowing their customers 24/7 access to their finances at the touch of their smartphone screen. Open banking, particularly in the UK, has also precipitated easier access to finances, with APIs being built to enable 360-degree views of a customer’s bank accounts even if they are spread across different institutions.

This has had a knock-on effect on the number of brick-and-mortar bank branches available to customers, as more services are transferred online. A study carried out by Medici Research found that, between 2017 and 2018 alone, the number of physical branches in the UK decreased by almost 3%. This trend is similarly reflected in many other countries including Germany, Sweden and the United States.

But this wholly digital approach towards financial services has left some customers longing for the days when they could walk into their local branch and speak face-to-face with a member of staff to sort out their finances. Similarly, some customers will struggle to manage their finances online and so depend on physical branches to deal with their accounts.

Combining the physical branch with digital features can create significant cost reductions compared with the existing branch model while also benefiting the customer by giving them more access to information specifically relevant to them, in turn having positive effects on institutions’ income. A recent Accenture report showed that Phygital experiences generate twice as much revenue as traditional single-channel operations, as well as 30% more cross-selling and a third less churn. No wonder, then, that many banks are wanting to explore the opportunities it offers.

Phygital Focus

But who do banks have in mind when they ponder the transition to Phygital? Naturally, the main driver towards efficient, always-on omnichannel experiences is younger people, namely Generation Z. This demographic demands experiences which are fast-moving, yet at the same time they are keen to ensure that the product or service they are interested in is suitable for them, usually by visiting a store and experiencing it ‘in the flesh’. A Barclays report exploring the customer trends of Gen Z found that 46% of those surveyed would visit a brick-and-mortar store to find out more about a product or service before committing to purchase it. These findings suggest that both physical and digital elements of the customer journey should work together to allow customers to view and discuss products and services in the physical environment, yet purchase said product/service digitally at a later date, if incumbent banks want to continue to remain relevant among younger users.

However, the security of the digital elements of this process is vital, particularly amongst older customers belonging to Generation X and Baby Boomers. A study showed that 56% of Generation X banking customers and 59% of Baby Boomers valued their personal data and took care of how it is used, suggesting that banks wanting to integrate digital and physical experiences need to ensure the secure handling of customer data. This may be easier in a Phygital setting, where in-person tellers and front-of-house staff can assure the customer that their data is being well looked after, rather than some distant and aloof GDPR text.

Does Your Bank Have What It Takes?

The benefits of Phygital are clear, but retail banks must be committed to ensuring they can create fully immersive and seamless customer experiences without compromising data security. Branches will be fewer than before, but the breadth of what they offer will be greater, tapping into the customer’s desire for instantaneous access to products and services relevant to them.

Learn how to develop Phygital to suit your business by downloading Critical Software's white paper here.

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Jun 14, 2021

Basel Committee urges recognition and management of crypto

3 min
The Basel Committee has set the tone for the official handling of Bitcoin in banking through its regulatory announcement

Experts have welcomed the news that the Basel Committee on Banking Supervision has proposed splitting cryptocurrency assets into two categories and managing them according to their current stability.

The regulatory body has recommended that crypto should be assessed on its operational risks to the bank, its credit, and its market liquidity. Well-established currencies, such as Bitcoin, will be managed in line with a “new conservative prudential treatment” the committee said. 

Currently, the leading global standard-setter for the prudential regulation of banks, the Basel Committee on Banking Supervision (BCBS) is based in Switzerland and comprises 45 members from bank supervisors and central banks in 28 jurisdictions. 

The recommendations have come as a welcomed move by banking leaders and crypto cynics alike, and experts say the move now needs to be followed by a global policy that makes crypto assets safer for both banks and customers. This is despite the potential pitfalls due to crypto being associated with criminal activities and terrorism.

Cryptocurrency regulations welcomed

Although currently, banks have limited exposure to cryptocurrency, the popularity of Bitcoin, Etherium, and others is increasing rapidly among consumer and business transactions. 

Recently, El Salvador became the first country in the world to adopt Bitcoin as legal tender.

According to reports, 62 out of 84 congressional votes saw the move approved following President Nayib Bukele's proposal to embrace the cryptocurrency. This occurred despite concern about the potential impact on El Salvador's programme with the International Monetary Fund

Fintech giants such as PayPal are also loosening their grip on cryptocurrency. The California-based online payments leader recently announced at the Coindesk Consensus 2021 conference, that it would allow customers to move cryptocurrency holdings off its platform via third-party wallets. 

PayPal has also enabled users to buy and sell digital currencies through its platform since October 2020.

In an official statement released by the BCSC, the committee’s members said, “Continued growth and innovation in crypto-assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”

An opinion report in the Financial Times also backed the move, saying that the popularity of cryptocurrencies shows no signs of slowing down and therefore, its volatility, which puts retailers and lenders at risk, must be made a safer asset. 

Data shows that the value of Bitcoin makes up 50% of the cryptocurrency market, which is currently worth an estimated US$2trn. The BCBS announcement also boosted the value of the market because regulation classes cryptocurrency officially as an asset and is a significant recognition of maturation.

However, volatility remains an issue following Bitcoin’s turbulent year, which has seen it rise from $30,00 to more than $60,00 and then back down to $37,000 in under 12 months. 

Crypto cynics not happy

But not everyone is pleased about the move. The director of the CPB Netherlands Bureau for Economic Policy Analysis, Pieter Hasekamp, published an article entitled ‘The Netherlands must ban Bitcoin” in response to the news for daily newspaper Het Financieele Dagblad

Hasekamp has predicted that cryptocurrency is a bubble that will ultimately collapse. He also urged the Netherlands government to ban bitcoin and other cryptocurrencies with immediate effect. 

He said, “Cryptocurrencies are unsuitable as a unit of account and means of payment outside the criminal circuit; its use as a store of value is based on the hope that cryptocurrencies will one day replace real money. But that’s not going to happen.”

He continued, “Cryptocurrencies are essentially neither money nor a financial product, but an example of what Nobel laureate Robert Shiller calls a contagious narrative: a contagious story in which people believe because other people believe in it. Gresham’s law is replaced by Newton’s law: what goes up, must come down.”

However, so far, the Netherlands’ finance minister Wopke Hoekstra disagrees that banning cryptocurrency is right for the country and is supportive of the BCSC's recommendations.

Image credit: Getty

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