BOSTON— December 14, 2022—Senior executives within the financial industry estimate that web3 capabilities could cut operational costs needed to deliver banking services by as much as one quarter, according to new research by Bain & Company. Bain’s Senior Financial Services Stakeholders Survey shows that more than half of nearly 70 executives believe that web3 will disrupt activities historically performed by banks. Lack of regulatory clarity was cited as the major hurdle to web3 adoption.

Findings come as banks are threatened with becoming disintermediated from their customers due to competition by fintechs and other major technology firms that are working to capture slices of traditional banking activities. Despite these challenges, Bain reminds banks that they are well-positioned and have an opportunity to defend and even gain market share by offering improved and integrated services that leverage web3. Therefore, the central question for each bank is not whether to explore web3 technologies, but exactly how, where, and when to engage.

“We view web3 adoption as something analogous to the advent of electronic trading in terms of the amount of disruption as well as the nature of the opportunity,” said Thomas Olsen, Bain partner and global co-lead of Bain’s Web3 & Metaverse practice. “Electronic trading created efficiencies for capital market participants; firms that invested early came out ahead, and many of those who stuck with old approaches lost share. Our research shows that while not every bank needs to go all in now, the next 2-3 years likely will present significant opportunities to influence and shape ecosystem development and regulations, and develop internal capabilities in ways that reap future benefits. Therefore, there are specific actions many banks can take now to prepare for web3.”

Web3 brings opportunity

In addition to reducing operating costs, Bain says web3 innovations can bring a myriad of other opportunities for banks including reducing operational risk and freeing up capital on bank balance sheets through streamlined processes. Bankers told Bain that they are interested in launching new offerings with programmable payments and securities, intermediating a wider array of private market assets once tokenized, and harnessing higher-quality data availability for new analytics and advice. Web3 capabilities will enable banks to provide services around tokenized assets, including allowing them to be used as collateral and to manage liquidity.

Additionally, Bain says early adopters of web3 hope to harness aspects to reshape their economics by making banking services more integrated and seamless for customers, while greatly improving efficiency.

Barriers to adoption

While web3 will make the banking system more efficient, it is not without challenges. Web3’s effect on overall profitability is uncertain as efficiencies and competition affect pricing. Meanwhile, Bain says the path to widespread web3 adoption will be complicated by several barriers. To start, legislators and regulators have only begun to consider clear guidelines and rules that will be essential for incumbents to move ahead. In addition to nascent regulation and legislation, survey respondents also cited the amount of change that is required to existing banking processes as another leading obstacle. Respondents said they believe adoption of web3 in banking will come within five to six years on average; thus, progress through 2030 will tend to be gradual and vary by use case and geography overall.

“The speed and ultimate level of adoption or disruption will vary by business line,” said Richard Walker, partner within Bain’s Financial Services practice and global co-lead of Bain’s Web3 & Metaverse practice. “Adoption is expected to occur sooner in simpler ecosystems within vertically integrated markets or where banks can act alone or in small groups, as well as in areas where existing infrastructure is limited and the potential for efficiency gains is greater. Our research suggests that the earliest likely candidates for significant adoption of web3 are wholesale cash management and retail payments, custody and asset servicing, and private capital markets.”

Impact on digital identity

Another consideration for banks is web3’s impact on customers’ digital identities. Bain found that customer identity is a critical factor in unlocking web3’s potential, and that banks have the opportunity to lead the charge in developing persistent and portable identities. Bain’s research shows that realizing web3’s potential in a regulated space hinges on tying digital identity to a robust know-your-customer (KYC) framework. A portable identity, which allows customers to own their data, use it across applications and to share discrete pieces with service providers; would transform the relationship between customers and providers, Bain found.

As companies compete to shape the future of identity online, digital web3 wallets will likely play a large role. These wallets act as unified or interoperable digital identities that will connect users with applications by offering universal sign-in and connect capabilities.

Banks have a strong claim to oversee digital identity but will have to figure out how to shepherd a broad ecosystem toward common standards. Collaborative approaches may be needed to establish a KYC and identity utility that can authenticate users, or a regulatory and governance body will need to set standards to promote interoperability.

Banking aspects to change

As web3 develops, Bain says banks will want to think more like disrupters if they wish to succeed. To do this, aspects banks should change include:

• Operating models: Banks can create central web3 coordination that aligns initiatives with the overall ambition, better track outcomes, capture technology synergies, and place big bets on high-value situations.
• Selective ecosystems: Captive approaches to web3 will fade for most institutions as partnerships generate more value, including by plugging into or building ecosystems.
• Investment strategy: Compared with many other investments that banks make, web3 investments have a long, uncertain payoff period, even as the market changes quickly. Many use cases will require coordination with other institutions. Banks must be willing to reinvent processes and cannibalize existing businesses, though this must be balanced against financial considerations, the capacity for change, and regulatory compliance.
• Talent: Web3 talent is scarce, so banks should develop structures that will attract these individuals, as well as seek ways to access talent and capabilities through ecosystem partners.
• Risk: Web3 will push legacy risk control frameworks to adapt and evolve, which puts a premium on risk and regulatory staff involvement at every step of product development. Web3 should offer significant improvements in risk management, but banks will need to evolve existing processes and methods as well as work with regulators to evolve relevant regulation and supervision.

Preparing for the transition: a set of no-regret moves

A set of no-regrets moves that Bain says banks can take to help them prepare for their transitions to web3 include:

1. Define the enterprise-level web3 ambition, and position the business from “wait and see” to “cautious explorer” to “progressive incumbent” to “web3 leader.”
2. Decide which use cases to pursue given the existing business and customer mix and accounting for the network effects and potential cross–use-case applications.
3. Define a course of action for each of those use cases and an investment strategy.
4. Define the right mix of build, buy, and partner to deliver the use cases.

Staying ahead of the competition

Although the financial services sector has been a relative early mover to investigate and test many of the nascent web3 technologies, Bain is reminding banks that the transition will likely be a jerky and uneven ride, especially before regulatory frameworks begin to settle. Incumbent banks must manage through the uncertainty, or they risk finding themselves surpassed by fast-moving competitors.

Editor's Note: For more information or interview requests please contact: Dan Pinkney, Bain & Company, tel. +1 646 562 8102, email: dan.pinkney@bain.com