Let’s get phygital – The blurring of online and offline

Has the branch network become obsolete in the near future due to pandemic restrictions? What innovative ideas exist to enable a competent and customer-focused fusion of offline and online experiences? What does an optimal phygital customer experience actually look like?


  • The move to a phygital world is nothing new – but it is fast becoming a base entry requirement for companies to succeed, as new social realities and technology permanently shift consumer needs and expectations to a new digital-enabled normality.
  • The future is already here – We are seeing more and more examples of engaging phygital customer experiences in many industries and across value chains.
  • COVID as accelerator – society is busy entering a new phase – the ‘isolation economy’ with a rapid increase in digital adoption.
  • Physical will not disappear with real world, human interactions remaining key in many scenarios.
  • Companies need to combine the best of both worlds to provide the right mix of immediacy, immersion and interaction.
  • Payments are increasingly moving into the background as the person becomes the payment, which also provides additional business model, operating model and regulatory challenges.
  • Incumbent banks need to re-focus their branch strategy to become a cost-effective and value add channel that is a crucial part of their overall omni-channel strategy, especially in the post-COVID world.
  • Incumbent insurers need to rapidly adjust their distribution and operating models to better sell, serve and manage through digital channels as far as possible, with increased end-to-end digital self-service for both customers and intermediaries.
  • Similarly, digital-only challengers need to assess the impact of any phygital gaps in their current online-only channel model.
  • Both banks and insurers need to ensure they pro-actively exploit embedded finance opportunities across other industries, defining a clear ecosystem strategy and plan.
  • It is not just about phygital customer engagement – companies need to become phygital from the inside, with leadership driving the required operating model and cultural change as a key success factor.
  • Find the strength in partnerships – With Capco and Creative Construction as partner, you will have the experience and tools needed to define and deliver a winning phygital response.

Setting the scene

The move to a phygital world is nothing new. Companies have been moving towards omni-channel distribution models for several years now, where offline and online user experiences are integrated, with the goal of providing a seamless experience as users shift between offline and online channels. This merging is called “phygital”– which basically means the combination of the best of both the offline (physical) and online (digital) worlds with the primary objective of better serving customers’ individual needs. This means you can start an interaction e.g. browsing, product selection via your mobile and then seamlessly continue where you left off once you are in-store or talking to an agent on the phone, or vice versa. Phygital is about being inherently digital, but across all channels.

This move has been driven by new generations of digital-savvy consumers preferring online engagement on their terms (anytime, anywhere) via mobile, web and more recently via IoT connected smart devices. This is also increasingly impacting users’ expectations of physical experiences – they increasingly expect the same level of personalisation, ease of use, immediacy, speed and options that they have become used to in the online world, in their daily physical experiences as well. Digital now provides the context-aware intelligence and enablement for all customer interactions.

So, while the phygital shift is not new, it is fast becoming a base entry requirement for companies to succeed – as new social realities and technology permanently shift consumer needs and expectations to a new digital-enabled normality.

The future is already here

We’re seeing more and more examples of engaging phygital customer experiences in many industries and across value chains – from customer attraction (e.g. virtual reality, video-walls, magic mirrors, holograms, geo-localised offers, beacons, AI enabled hyper-personalisation, robo assistants etc.), product experimentation (e.g. virtual testers, digital tables, augmented reality, games etc.) and transacting (e.g. self-service kiosks, remote experts, drive-throughs, in-store lockers, click & collect, cashier-less payment, cash on delivery online shopping etc.).

Despite a number of attempts from Google (Google Glass) to Microsoft (Hololens), augmented reality has not yet become established, at least in the consumer sector. However, the potential added value for users and providers is so diverse and economically so significant that a successful dissemination in the mass market could at most be slowed down by the regulatory side as soon as the right form factor has been found for the possible solution.

After Google’s and Microsoft’s unsuccessful attempts in the consumer market, Apple has now reaffirmed its ambitions in this sector, whose core competence is precisely the creation of form factors for new technologies that are suitable for the mass market.

For users, the added value of enriching the physical world with contextual digital information in the field of vision is obvious: background information on tourist attractions and works of art, navigational instructions in road traffic, contextual backgrounds and commonalities with people in the field of vision at conferences and in meetings, on products in the supermarket or the availability of real estate including financing options while strolling through one’s favourite neighbourhood – each case tailored to personal preferences – are just some of the almost limitless potentials that open up.

The economic potential should have become obvious with just the few examples mentioned and explain the billion-dollar investments of every major tech player in this field.

If one considers the size of the online advertising market alone (>$600 billion in 2026) and the value that personalisation and the measurement of sales has in this context, the potential to not only know the websites visited and (through smartphone positioning) the location of a user, but also to be able to see every product a user sees – how long the gaze lingers on it and whether a purchase is made – will quickly be revealed. The privacy dimension of such “world scraping” is obvious and will be the subject of a regulatory showdown. However, the dimension of economic incentives is too big not to be realised.

Googles On-device Supermarket Product Recognition

Companies will be serving three generations of digital savvy consumers by 2030 and for millennials and Gen Z’s , the divide between physical and digital does not really exist anymore, with 82% wanting to access products both on the Internet and in-store. This requires the best of both worlds to create unified experiences so that everything happening in the digital scenario influences the physical one and vice-versa.

COVID as accelerator

Society is busy entering a new phase; the ‘isolation economy’. This is being driven by the COVID-19 pandemic and is superseding the previous ‘social’ and ‘sharing’ economies.

The pandemic has inevitably accelerated changes in consumption habits and caused digital purchases to grow, with digital adoption growing 20% globally over the past year, almost four times the compound annual growth rate of the prior four years.  Despite that, many of us miss the human touch and the personalized service we can get going into a store, and we are not yet ready to give it up.

Real world interactions remain key

Relationships are built, where products can be tested and where memorable experiences, that only physical interaction can provide, are enjoyed.

Interpersonal interactions continue to be a critical and highly valued element for customers, implying that the physical and emotional components of making purchases should always be there – if it can create added value.

If, for example, after online reservation at a car rental agency, you first have to wait in a queue to fill out a form with the information you have already submitted before you get to the actual purpose of the interaction (use of the rental car), this interpersonal experience has a negative added value. So what are the truly important components for successful phygital action?

The ingredients for success

Phygital focuses on making the “three I’s” a reality: immediacy, immersion, and interaction:

  • Immediacy: Working to ensure things happen at an exact moment in time
  • Immersion: Ensuring that the user is part of the experience.
  • Interaction: The generation of communication needed to activate the more physical and emotional part of the purchasing process.

To achieve a genuinely phygital experience, there needs to be a technology that facilitates the introduction of immediacy and/or immersion. On the other hand, the interaction that the digital realm lacks by nature gets introduced through the physical element. These three conditions applied to phygital make the consumer feel more connected to the brand, generate trust, reinforce empathy, and improve the user experience.

The impact on payments, banking and insurance

Embedded Payments – The person becoming the payment

Payment in itself is always only a means to an end: a user must necessarily make it in order to get to the service that fulfils their actual need. Thus, payment always stands in the way of a seamless user experience and is a hurdle that often leads to cancellations. Consequently, the evolution of payment in the user journey reflects the journey from payment as a conscious action to disappearing in the background with increasing customer centricity:

  1. physical payment (cash)
  2. physical payment (credit or debit card)
  3. digitisation of the payment process: this is the stage most companies are currently at. Unfortunately, the approach is often misguided and has made digitisation an end in itself instead of focusing on the user and optimising the user journey. Bad processes digitised are still bad processes, even if they are now digital. Often, in the digital context, additional steps are introduced that, from the user’s perspective, even represent a step backwards compared to previous stages of evolution. Most readers will be familiar with the following example from public transport as a painful experience: To get to the satisfaction of the actual need (travelling from A to B), the appropriate ticket has to be bought. In a digital environment sold as progress, this currently often requires the following steps:
    1. Find and download the app of the respective transport provider (“My mobile data volume…”)
    2. Register/create account (“Why do they need my address – and now create and remember a password as well…”)
    3. Select tariff (“Zones? How many zones do I need to get to my destination? How many journeys do I need today? So which fare should I choose…?”)
    4. Payment (“Now to type in my credit card information while holding the smartphone, my bag and credit card…”). In no way does such digitalisation represent an improvement in the user experience – on the contrary.
  4. payment directly by swiping with card or smartphone (ApplePay/GooglePay, etc.): In contrast to the example of buying a ticket presented under 3, a solution has been introduced in the London public transport system that does not require apps and logins and is incomparably more user-friendly. When boarding, a user only has to swipe a credit card or smartphone with ApplePay or GooglePay over a reader. No further step required. No downloading, no registering and no knowledge of fare zones is required. When leaving the means of transport, the user swipes again and the fare for the distance travelled is automatically charged. If several journeys are made in 24 hours, the cheapest fare is automatically charged – if this should be a 24-hour ticket instead of several individual tickets.
  5. payment simply by person: through the identification of biometric features such as fingerprint, hand scan, iris scan, voice- or face-recognition, payments are directly linked to the user.

Payment via mobile wallets in the offline space is a good current example of the blurring lines. Payments are going cashless and card-less fast. And in some retail stores, the payment terminal is already a thing of the past – for example in Amazon Go shops, where cameras and sensors automatically record purchases and customers automatically pay via their Amazon account when they leave the location.

We are already seeing car companies partnering with payment networks to create connected mobility experiences. In the next decade, connected cars are expected to communicate with other connected devices and Point of Sale systems using biometric voice technology to facilitate payments for goods such as fuel, toll roads, vehicle maintenance, and parking—effectively embedding payments into the car so that transactions can be automated for speed and convenience. What is consistent here is that there is no act of payment. Whether in a car or ordering a taxi or walking out of a store, the transaction happens in the background.

This is and will increasingly be driven by biotechnology (thumbprints, iris scans and voice recognition). The Uber app knows it’s you through face recognition, Whole Foods through an iris or hand scan, and your Mercedes though voice confirmation. Suddenly the person has become the payment.

The main drivers for this shift are:

  • Convenience – creating no-click/one-click checkout experiences reduces friction and dramatically improves customer experience and loyalty.
  • Revenue – this convenience results in increased sales conversions, with new subscription models e.g. Netflix, Spotify embedding recurring payments that is both easier for consumers and provides more predictable and life-time revenue flows.
  • Innovation – embedding payments provide insights and data that spurs innovation and solving new customer needs e.g. In Uber’s case, this meant offering small loans to pay for petrol because they realised drivers sometimes did not have cash on hand to buy fuel and thus complete trips.

A challenge for embedded payments will be an increased need for collaboration and business model innovation as payment volumes increase and moves across borders and industries. An effective and pro-active regulatory response is also needed to ensure payment data privacy, responsible financing and consumer control is ensured.

Phygital Banking – branching out

“Banking becomes air, becomes oxygen” –Yang Qiang – professor at the Hong Kong University of Science and Technology

The COVID pandemic has accelerated fintech disruption. In a matter of months, we have seen a transition that in many markets would normally have taken years. If the 2008 recession caused a boost in fintech innovation, appetite for experimentation, and a wave of new start-ups, then this time round it is more about delivering real change and doing so quickly, borne out of necessity and real human need.

And just as the retail industry is finding tech innovations like AI (see also our Trendpaper: AI-Revolution), VR, AR, biometrics etc. enabling their phygital CX models of the future, banks need to respond to the same shift, as customers move increasingly online and expensive branch networks become harder to justify.

In parallel, banking business models are facing fundamental challenge from new non-FS and challenger players, as banking moves beyond FS into embedded and interconnected ecosystems in the ongoing move to solving customer needs on their terms. This provides a massive opportunity for banks to create compelling user experiences in a true omni-channel, phygital world.

The younger generations might argue that bank branches (or even banks) are a relic of the past and not part of their ideal banking experience, with 70% of millennials saying they would rather visit the dentist than visit their local bank branch and 40% saying that they would consider banking with Google and Apple. Above all, it is personalised services that are as user-friendly as they are purposeful that are essential components for the increasing development of trust.

Fundamentally, banking, and finance in general, is about trust, and it is increasingly difficult to build and maintain a trusting relationship with your bank in a purely digital world that has been shaped by big tech companies. This is because much of the interaction that took place mostly on a personal level just a few years ago is now shifting to the digital level. Trust can be built through the digitalisation of services, but trust is also a necessity for digital services to be accepted by customers.

The case for branchless banking (see also the Trendpaper: Banking without Banks) is compelling though.

Just about every service provided by a retail banking branch can be accessed online. From savings to loans and overdrafts to investments, customers have a range of digital alternatives to manage their money without ever setting foot in a brick-and-mortar branch.

And branches are expensive – In Germany, an average bank branch requires roughly between €500,000 to €1,000,000 in operating costs per branch per year. Already, major banks in Germany, the UK, the US, and many other global financial hubs have shuttered tens of thousands of branches in their networks in the last two years alone, with the number of German bank branches declining by a third over the past decade. Some banks in Germany are also starting to share their branch locations in an effort to save costs.

Yet the physical branch network still offers value that is particularly challenging to shift online.

Not only does a bank branch hold cultural, historical and prestige value for communities – it also is the final bastion for key segments of the population that cling to cash. Typically these are small businesses, the mainstay of local economies.

In addition, in many developing countries the bank branch is still a primary channel for serving largely poor, rural and in many cases unbanked customer segments.

Also, while many consumers are comfortable opening a basic savings account online, the need for face-to-face interaction and advice increases as product complexity or value increases, with a large majority of consumers in both developing and developed countries preferring a branch visit to discuss a mortgage or wealth management account opening.

This all means that banks need to re-focus their branch strategy to become a cost-effective and value add channel that is a crucial part of their overall omni-channel strategy, especially in the post-COVID world.

In order to achieve this, branches should focus on delivering specific, high value, physical interactions and experiences that can complement a digital banking core. And in true phygital spirit – digital technologies should also be used to augment physical branch experiences and make services faster, more secure, and more convenient.

The effective use of smart self-service kiosks enabled by AI -driven robo-advisors that effectively complements human interactions, with specialist advisors on hand to provide real value add service and advice, will be the elements of a winning branch recipe in the future, thus making the branch a “Apple Store”- experience for banking – a more human-friendly space that allows consumers to engage on an emotional level — not just to perform routine transactions — but to actually help create new, more meaningful products.

This means a smaller network of branches providing a wider variety of services and experiences, potentially even beyond finance that offer real value to customers by showcasing the best of what they have to offer in terms of education, trust, advice and networking. But they also must be places where people will choose to spend their time. These could be department stores, car showrooms, real estate agents or museums.

There are many banks that have begun experimenting with new style branches – modelling them on coffee shops or technology retailers, for example – Barclays’ 25 Eagle Labs converted a series of closed branches in the UK into entrepreneurial shared-work, mentoring and networking spaces. Of course, they also provide SME banking advice, and Capital One bank has opened cafes where you can bank, plan your financial journey over coffee with coaches, or just enjoy your time there as it is fully equipped to serve as a coworking space.

This could also extend to outside the physical branch with drive-through banking enablement (seeing a re-surge in the US during COVID).

This move to phygital will, of course, impact on the workforce. The skills and roles required for retail banking professionals will have to be re-assessed. Branch colleagues will need to be better trained, have more soft skills, and a wide knowledge base supported through effective technology. This could also enable a revitalised and re-motivated workforce now focusing on real value-added tasks.


As mentioned, the phygital shift is of course relevant beyond the branch use-case. As banking becomes embedded in a whole range of other industry value chains from retail to mobility to education, entertainment, logistics, manufacturing, travel etc – banking and payments will present itself in a host of daily customer experiences as they navigate their life via physical, digital and phygital interactions with brands, whether it be paying for your Uber ride, ordering something via Alexa or Siri, taking out a student loan, paying for a hot-dog at a sports event etc.

Like embedded payments, the move to phygital in banking holds similar benefits to those seen in embedded payments:

  1. Increased Customer Value and Reduce Costs – Phygital banking automates repetitive backend and frontend tasks and reduces the time required to open a bank account and service an account. This reduces the need for large workforces and expensive real estate.
  2. Improved experience – Phygital banking gives customers instant and seamless omni-channel access through their medium of choice when they want it.
  3. Increased insights and innovation – Phygital in banking leverages AI, ML, and big data analytics to extract valuable individualised insights that informs new personalised propositions.
  4. Increased Market Share – Phygital banks build a connected ecosystem where they can find new customers among the worlds’ 7 billion unbanked population, who still do not have a bank account and either do not trust digital banking or do not have sufficient digital access or knowledge.

Phygital Insurance in a post-COVID world

The insurance sector has been following a similar phygital trend in recent years (see also: Trend: Insurance – On-Demand Transparency) through various digital transformation efforts, as they recognise the need to combine the trust and warmth of human interactions (crucial in many insurance interactions) with the convenience and efficiency of digital services.

However, they have been slow to respond with innovations in key customer moments of truths incl. product research/browsing, purchasing, servicing and claims.

COVID 19 has presented incumbent insurers with a watershed moment as customers shift more and more into digital channels, causing many of them to experience a significant drop in new business due to challenges in their existing business and distribution models. Online and direct channel insurers are on the other hand experience similar or increases levels of engagement.

Digital-only insurers also continue to be the innovation leaders – with HUK24 in Germany providing real-time assistance via their mobile app, Lemonade leveraging AI to enable claims payments in 3 seconds, Zego providing on-demand auto insurance, Flock providing on-demand drone insurance, FloodFlash using IoT flood sensors to provide instant pay-out flood insurance, Zeguro providing instant cyber insurance coverage, Ottonova providing a full-service digital health insurance including gap/top-up cover, to name a few.

Incumbents have also been finding success with new digital offerings, such as Geico with its digital servicing capabilities, but many still experience a high failure rates in digital interactions due to a broken omni-channel experience, where users need to switch to in-person/phone channels to complete a transaction. The underwriting and claims processes are still noted as key user experience pain points, where complex manual and in-person processes frustrate customers.

Legacy systems and manual processing requirements (e.g. requiring paper signatures, in-person medical examinations) are no longer an acceptable excuse and insurers need to find new solutions. Enabling a seamless phygital experience for policy sales and servicing reduces cost by reducing labour-intensive phone calls and in-person visits and in turn earns greater consumer loyalty.

Given the nature of insurance, many customers however still rely on and expect offline channels, which remain the primary channels across life, commercial, and personal insurance lines e.g. people want personal advice and assistance during claims interactions, and when researching and buying life insurance.

Yet here too, digital tools can provide a better experience for both intermediaries and customers – they just need to be coached to use digital self-service channels, and insurers need to ensure the online tools are easy to use. In addition, complex products need to be simplified to be a better fit for an end-to-end online journey.

Intermediary / broker adoption of digital channels remain low, with only about 33% of brokers in the US, UK and Canada offer any form of mobile apps or self-service portals however this is increasing, especially since COVID hampered their ability to continue face-to-face interactions. One key enabler for a shift to digital in the broker force is a re-alignment of incentives and scorecards – one insurer in Germany changed its incentive system to persuade a sceptical salesforce to accept online channels. The company set new compensation rules for digitally closed contracts, while continuing to reward high performers.

Leveraging video engagement tools seen recently in telemedicine (e.g. video for conducting appointments and photo- or screen-sharing) can also help re-create complex, advice-based conversations virtually while also protecting consumer privacy and security.

Insurers also own massive amounts of customer data and can do much more to unlock value in data-driven customer segmentation, lead generation and personalised life-time customer relationship management through investment in intelligent big data analytics capabilities.

And lastly, similar to banking, the move to embedded insurance ecosystems (where insurers is in many instances better offered as part of other industries value chains e.g. banking, retail, auto, travel, health), provides incumbents with huge opportunities to expand their role and offerings to new customer groups, including through insurance-as-a-service offerings to other brands via APIs.

Finding focus on the path ahead

It is clear that the phygital world is here to stay and will increasingly establish itself as the new normal as technology continues to solve user needs (known and new) in ways not previously thought possible.

And as companies continue to define their business models through the customer- first lens in the post-digital, post-COVID world, it becomes clear that more than just their products and channels need to adapt. Fundamentally, companies need to re-architect their internal operating models, structures and most importantly, their organisational culture (starting with leadership tone and direction) to also be built on phygital-first foundation.

With new technology comes endless possibilities, and companies also need to ensure they steer clear of the choice paradox, by always ensuring that new phygital propositions offer memorable, human experiences that solve real customer needs, and is clearly linked to overall business strategy and vision. Only then will a phygital transformation be successful and sustainable.

Navigating this ever-shifting path successfully can seem daunting when tackled alone. With Capco and Creative Construction as partners, you will have the experience and tools needed to define and deliver a winning phygital response. Why not start with our digital maturity assessment to see how prepared you are to succeed, and what starting points exist for immediate improvement.

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