Building bridges between fintech and Web3 with Fiserv and ConsenSys

The following was produced by Tearsheet Studios. We worked with payments provider Fiserv to create a podcast series about open finance and the work of empowering fintechs, brands, and FIs to collaborate and innovate together.

In our sixth conversation in the series, we speak to SVP and head of fintech at Fiserv, Sunil Sachdev, and senior strategic sales manager at ConsenSys, Daniel Lynch. We discuss the potential for fintech to leverage Web3 technology to enhance customer experiences and inspire loyalty.

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The following excerpts were edited for clarity.

Daniel Lynch, ConsenSys: My name is Daniel Lynch. I work at ConsenSys as a senior strategic sales manager. Previously, I worked at Swift on their payments innovation initiatives for several years. 

ConsenSys is the largest blockchain software company in the world. We address different verticals within the market simultaneously. We work with developers, retail, and large institutions, as well as directly with the popular protocols - layer one and layer two DeFi lending protocols. That gives us a unique perspective and a 360-degree view of everything happening in the ecosystem. 

I work with institutional adoption. I help institutions think through how to participate in the innovation happening on the protocol and developer side around Web3, DeFi, and all these new financial primitives.

Sunil Sachdev, Fiserv: I’m Sunil Sachdev, and I head up the tech and growth at Fiserv. Fiserv is one of the largest fintechs in the world and the number one provider of core banking solutions to financial institutions in the US. We are also the number one merchant acquirer in the country. We sit at the nexus of commerce. 

The group I lead, fintech and growth, is an enterprise organization that sits horizontally across the company. We created it to help us take different products and services and branch them out to a broader addressable market than just chartered institutions or merchants. 

That is where I had the privilege to meet with Daniel and see if there are opportunities for us to collaborate to develop Web3 solutions or help bring Web3 a little bit more mainstream.

In the series of podcasts, we've been taking a deep dive into open finance. Today, we're talking about the potential for Web3 tech to help make the promises of open finance a reality. Let's start by talking about which elements are embraced by financial service providers and how they're adopting them.

Daniel Lynch, ConsenSys: At ConsenSys, our flagship product is the Metamask wallet, the most popular non-custodial wallet in the world. It allows you to interact with any Web3 experience. You can buy, sell and hold different assets. It also acts as a single sign-on - if you want to participate in a DeFi protocol or have an NFT that proves your identity to get you into some gated experience. 

We're all proud of the progress Metamask has made and continues to make. I hope everyone listening will download Metamask. It's free, check it out, and it's fun. 

But over the past few years, we saw that not everyone wants to manage their keys all the time or deal with that complexity. So institutions are thinking about how they can offer these experiences to their customers. 

There is a spectrum between thinking about them as purely financial assets, providing people with avenues to buy, sell and hold these assets and participate in the financial aspects. But there are also non-financial properties of these assets. 

Institutions are at different levels of enabling Web3 experiences for users. For several years, a few players specialized, like Coinbase and Gemini. They have mature offerings in buying, selling, and holding Web3 assets. They also provide wallet infrastructure to send a remittance, participate in DeFi pools, and lend or use NFT held with that account to gain access to a gated experience. 

Fintechs replicate traditional business in a more exciting or usable way. For the money service bureau business, there are Venmo and Cash apps. For the broker-dealer experience, Robin Hood. These institutions have been in an interesting place where they are just behind those crypto-native institutions in rolling out these capabilities. 

I work a lot in Latin America, where some institutions are maybe a few months or a year ahead. They are starting to offer services like Coinbase and Gemini. Then traditional financial institutions are also increasingly looking at ways to enable these experiences for their users.  

Many announcements over the past year from Fidelity, Bank of New York, Visa, and MasterCard, starting to provide custody for other FIs or directly to retail customers. 

There is a pretty heterogeneous mix of activity happening across institutions. But from the more crypto native to the more traditional FIs - we see them taking the same path. It is just a question of how you interpret regulatory guidance and your ability to offer capabilities to your customers.

Sunil Sachdev, Fiserv: At Fiserv, our perspective comes from the fact that we are rooted in centralized finance. We talk to financial institutions, and they're always trying to figure out ways to ensure that they continue to stay relevant for their existing customer base, whether retail or commercial. They see opportunities in DeFi, blockchain, and crypto to create more efficient ecosystems to move data and value. 

Now, one of the things that you probably know, over the last couple of months, we've been through an interesting sojourn with the regulators. That doesn't look like it will abate anytime soon. We've been in conversations with regulators because we are extensions of our banks in most cases. They talk to us about how we are facilitating and enabling those types of transactions. What are some of the guardrails that are in place? But the regulators are coming at it from a very open mind. 

Financial institutions are looking at use cases specifically to ensure that they're prioritizing big bets. That usually starts with some commercial transaction enablement before they jump into retail. 

When we look at the merchant side of the house, we've seen several announcements where merchants are open to accepting crypto or stablecoins at the point of sale for purchase. But that's still a little bit of a rarity. It's not commonplace at this point. 

But again, merchants are trying to figure out what they can do with DeFi to enable stickiness and relevance with their existing base. We saw a great announcement recently where Starbucks announced an NFT Odyssey solution with Polygon. 

We're excited to see where that goes. Starbucks is a leader in the loyalty space, and they have done some great things with their program. We're privileged to support Starbucks in many areas of its business. And we're curious to see how this Odyssey NFT launch goes and how we can potentially learn from that and maybe share that with other merchants as well.

I know we're in the early stages of maturity around it, but what are your thoughts on what DeFi could bring to the financial ecosystem?

Daniel Lynch, ConsenSys: At ConsenSys, we work directly with protocols, and at the same time, we work with large banks. One thing I noticed was the gap between these communities. People are doing innovative and cool stuff in DeFi, but they do not quite get the challenges of compliance or cybersecurity like a large institution. 

At ConsenSys, we try to bridge that gap. To illustrate the potential of DeFi, here is an example: I'm a big saver, so I'm not always very liquid. I got a credit card alert last year on December 23. And I had to buy my nephew's Christmas presents. It would take a little while to get a new credit card, and my checking account was just low. 

But I was able to participate in one of these decentralized lending protocols such as MakerDAO, AAVE, or Compound. I deposited a little bit of my ETH. I collateralized a loan, and I was immediately issued DAI, which is a US dollar stablecoin. I sold the DAI instantly, and I could go off, buy some cool gifts, and have a great holiday with my nephews. 

In the traditional financial ecosystem, I would have been very hard-pressed to have tapped that liquidity as easily and quickly as I did. What we see a lot in terms of institutional adoption is how they can begin to provide services like that or use these types of protocols to provide that frictionless experience to their customers. 

We see a lot of innovation happening with compliance tools so that you can analyze an entire lending pool. In decentralized lending, there is no individual Counterparty. The protocol is the Counterparty. 

We have been developing tools for participants to analyze decentralized finance pools. Additionally, we've been in talks about creating KYC decentralized liquidity pools. Where you have the efficiency, but there's no individual counterparty risk - the entire protocol is the Counterparty. We want to create ways where institutions feel fine, knowing that all 4 million depositors completed their KYC, and we've been working with several larger FIs and regulators.

Sunil Sachdev, Fiserv: From a Fiserv perspective, again, the adoption rate is going to be based on efficiency. Financial institutions send transactions down different rails. Each rail has a different regulatory component, a different commercial component, and a different timeline in terms of when they can exchange value. 

There is a need to create more efficient back office and middle office systems for financial institutions. They can have a single protocol that sends data and value and understand the time the customer needs to complete their transaction.  

We're having conversations with financial institutions looking to create efficient back office systems for cross-border transactions and domestic commercial transactions. That's where the biggest ROI is right now.  

But eventually, we do see folks looking at DeFi and learning from DeFi.  DeFi will play a critical role in how this entire industry evolves because it's almost like an R&D area. There's a lot of experimentation.

We have things as recently with Tornado Cash, where people are trying to decipher where the OFAC line gets drawn. Does it get drawn at a protocol? Or does it get drawn at a person? Those are the types of conversations that are bubbling up. As those conversations happen, we will see the two worlds coming together to drive better efficiency across the entire ecosystem.

I want to switch gears and talk about NFTs. Where do you see NFTs evolving, and what other uses do they have?

Daniel Lynch, ConsenSys: I'm a little bit privileged when it comes to NFTs. When I worked at Swift, I used to participate with ConsenSys and several other institutions in events Microsoft hosted in Times Square called the token taxonomy initiative. There were efforts to standardize different types of tokens, such as securities tokens with attributes representing a bond, a stock, a derivative, or a utility token.

One thing we talked a lot about was non-fungible tokens or NFTs. Over the past two years, there have been exciting things that I'm excited to see. The traditional high-value art world is creating these works, and newer folks are now forming part of the traditional art world.  

There's also some speculative activity around NFT art collections, like Crypto Punks, where there is an element of some art, but you do want this asset to accrue value. Then thirdly, it also provides you with a type of identity, right? You can use it as your Twitter profile, etc. All these things are exciting. 

I'm lucky again to have been thinking about NFTs before this boom because there are a ton of other applications. There was Batman NFTs issued last year, which were quite exciting at a low cost. No one buys them and intends to sell them for like a million dollars later. What they do give you is the right to participate in the ideation of the future Batman storylines. 

I think it's cool that these kids can hold these Batman NFTs. They can use them as profile pictures and trade them with each other like collectibles, much like trading cards in the past. But it also gives them this agency to determine future Batman storylines. There's a field of NFT experimentation like that. 

We've worked in several gated experiences for lifestyle brands, sports, etc. We've worked with some soccer teams that used NFTs as backstage passes to the special box at the stadium. Where you have these gated experiences to consume this media or get time to chat with your favorite artist or athlete. That's another way that we see NFTs used concretely. 

Finally, you can also have pretty standard financial use cases implemented. We've talked a lot before about financial inclusion. Several governments have subsidies for certain people in the case of things like insurance policies for extreme weather events for poor farmers, etc. 

You can have an insurance policy implemented as an NFT and then an oracle that will feed you - if an extreme weather event happens. When that happens, they either take the NFT or burn it and get paid instantaneously with a stablecoin. 

Someone who doesn't necessarily have a lot of assets or time must get that liquidity instantaneously instead of presenting a lot of paperwork for this insurance policy. We're just taking out this friction of getting this insurance payment they deserve.   

I think the ubiquity of NFT use cases is exciting. When you zoom out, it is bigger than people have been thinking about over the past 24 months.

Sunil Sachdev, Fiserv: I agree. But we see it as loyalty 2.0. The ability to provide an enhanced experience through the identity function at many venues. 

We have a part of our enterprise called Clover Sport, where we work with stadiums across the country. One of the coolest things I've heard about the potential use of NFT is to provide it as a season ticket. Where the ticket holder not only gets to use the NFT to get into the stadium but also gets access to special events. 

Additionally, through the same NFT, they can unlock all the experiences that the stadium provided to a person sitting in that seat for the last 50 years. If it was a hockey stadium, every important hockey goal from the vantage point of that seat can be unlocked by that NFT. I thought that was pretty cool. 

We're looking forward to seeing what Starbucks is going to do. We think others are going to jump in. We've had merchants inquire about leveraging NFT as loyalty 2.0 and creating more curated experiences for different segments of their customer base and how NFTs can fulfill that service.

Regulations are still in the air, and we see the move from proof of work to proof of stake consensus with the recent merge for Ethereum. What do you guys make of it, and how are you operating in a somewhat undefined space for an industry that requires definition?

Sunil Sachdev, Fiserv: We have been on a journey with the regulators. In every interaction I've had with regulators, they came with an open mind looking to learn as much as dictate the policy. There's still a lot to unravel because there's so much potential. I believe there is an efficient protocol to leverage to make lives better and ensure a more inclusive system develops for everybody. 

There's an opportunity to bring the world closer together from an economic standpoint. So the regulator still has a lot of work to do. I think politics will play a role, unfortunately, or fortunately. We'll see what happens with the midterms as we get into the next election cycle. But I am confident that we'll get this right because I believe for us as a country to continue to be a leader from an innovation standpoint, we have to address this problem head-on or take advantage of the opportunity that blockchain and Web3 provide us.

Daniel Lynch, ConsenSys: As a senior strategic sales manager, I would defer to our excellent government affairs and policy team at ConsenSys. They put a lot of thought into what type of activity is financial activity and what type of activity is like collectibles. How can you enable folks to participate in art or collectibles in a way that is parallel to the world that exists today, which is different from the financial services sector, then also have appropriate activity for the FI sector with your issuing a security token? 

Where I get excited is in working with customers. We want to give them the way to set policy, carry it out operationally, and then document it across any risk they may have. That could be mandated by the regulators, industry standards, or proving your value to your counterparties or customers. 

We're excited to develop the compliance tools that are appropriate to DeFi. So if you're analyzing whether you want to deposit into a pool with 4 million depositors, we'll help you set a policy that will identify not only the addresses on the OFAC list but addresses that have done things that could get them on the OFAC list. For example, terrorist financing, illicit content, or other things open to interpretation. 

You can set a policy such that across all 4 million of these deposits, you can identify which addresses have participated in activities that would either foreclose business or much of the traditional world check if it is a false positive. There are always sanctions hit when it just turns out that the person is not the person on the OFAC list but an accountant from Flatbush, Brooklyn. We want to provide tools to do similar activities in Web3 and DeFi. Not just in terms of financial crime compliance but also anti-fraud and security. 

We're very dedicated to providing audits of smart contracts to ensure that they behave the way they do. We have a very mature audit business where we deliver an audit for you. We also have a tool called Fuzzing that lets you brute force attack any of your smart contracts as you develop, implement and design them to find potential vulnerabilities. 

Then, of course, we are always excited to work with folks on how they can develop custody solutions. Our Metamask institutional offering integrates with probably seven or eight custodians, and we have worked with large institutions on key management. 

It is always top of mind how we can enable the adoption not just in non-custodial wallets but at an institutional level. And that takes a number of these tools, such as financial crime compliance, custody, fraud monitoring, smart contract auditing, etc.

Sunil Sachdev, Fiserv: That’s why we look forward to collaborating with ConsenSys – it is about building bridges. We do not necessarily think it is an either-or question with DeFi because there is an opportunity for both sides to learn and build the foundations of what finance could look like in the future.