Web 2.0 is based on centralized data and organizations that use it without users’ meaningful consent for profit. Web 3.0 aims to disintegrate data centralization and bring about democratization of information.
As people at large grow tired of privacy breaches and the abuse of their data at the hands of a few technological giants, Web 3.0’s underlying promise is lucrative. Data is stored across distributed systems, so no individual or institution can enjoy full control. Consumers own their data and bypass any middlemen. Data is immutable and permanently recorded, eliminating the risks of data tampering, hacks and fraud.
Web 3.0 forms at the convergence of technologies such as blockchain, artificial intelligence, augmented reality and machine learning. It aims to create a secure, transparent, immersive reality with three-dimensional design and machine cognitive intelligence.
Since its inception, the new version of the internet has been nudging the finance industry in a different direction, compelling traditional institutions to step into uncharted territory.
This need for change is not a push by institutions to maximize profit but a pull by their customers who want and expect more out of the services and products in the finance sector.
Related Reading: How the Metaverse Will Transform the Way We Work
The Picture of Financial Services on Web3.0
Assume you need a car loan in the real world from a traditional bank today. You provide banking documents, educational qualifications, salary slips and declarations of assets. Even after all that, your loan application will consider your credit score, which decides how much loan you can avail and on what conditions.
You go through all that despite harboring collateral for the loan. After you obtain the loan, you pay a fixed commission to the middleman who helped you get it.
With DeFi, none of that happens. Everyone who wants to borrow and lend has the right to do so digitally and with control over their assets in a secure environment. Blockchain forms the secure and robust foundation of decentralized finance.
In 2022, the Total Value Locked in DeFi staking protocols, which represents assets deposited by liquidity providers, reached $2 billion globally, up from $400 million in the past two years.
Cross-border payments
The primary objective of banking institutions is to facilitate transactions, which happen smoothly within the confines of a country. But, when users try to send remittances abroad, they hit several walls of red tape and intermediaries who need to be paid.
That is just one of the ways centralization compromises user sovereignty, control and rights.
Financial services
The role of centralized authorities will be affected by P2P (peer-to-peer) communication as Web 3.0 offers more control and options to users. Web 3.0 is integrating the internet and digital payments through modern technology stacks.
In the financial services industry, distributed ledgers can aid micropayments, which failed in Web 2.0 due to poor integration of the web and high transaction costs.
Open banking
Open banking lets customers share financial information with third-party service providers through APIs. The movement has taken shape due to mandated regulatory frameworks and a market-led attempt.
Web 3.0 will birth new open banking opportunities as innovative APIs boost connectivity between Web 2.0 and its successor.
Payments in the metaverse
Investment banks are stepping into the metaverse, focused on customer experience, ease of access and DeFi collaboration. Banks are also providing an Integrated Payment Hub (IPH) to their customers planning to enter the metaverse.
Users will be able to lend, borrow and invest cryptocurrencies and issue debit and credit cards to use in the emerging virtual world and the real one as we know it.
Related Reading: Web 3.0 and Metaverse: Key Challenges
What Makes Web3.0 Lucrative for Consumers
Data transparency
Customers want control over who gets access to their data, for how long and what they do with the access. Traditional banks and financial institutions are already required to provide annual notices describing how they use data in everyday transactions and marketing.
Customers are wary of apps listening in on conversations and bombarding them with ads thereafter. One of the most lucrative aspects of Web3.0 for consumers is the transparency and authenticity of data collection and usage practices.
Customers want to share information but need to know how it helps them. FIs can allow customers insight into how they use customer data to bring newer services, products and improvements to the customer experience.
Control over assets and finances
When users invest in a centralized system, they also pass over the control of their assets to professional finance managers, who benefit from users’ gains but don’t lose anything when investments go down.
This also means that users have little control over their money, as banks use their assets in ways that most don’t know. And, in cases where banks see zero cash balances, such as in cases of recession and emergency, people lose their money.
“Smart contracts and cryptocurrencies highlight financial self-empowerment, with users transacting peer-to-peer around the world without the need for centralized authorities”, reads a piece on MakerDAO.
What Makes the Metaverse Lucrative for Finance Companies
As per a recent S&P Global Market Intelligence report, while cryptocurrencies are built on a digital native system, innovations in the traditional banking industry are based on applying modern technology to enhance old architecture, as in the case of using distributed ledger technology in cross-border transactions. PayPal made such a move when it rolled out the service for its users to buy, sell and hold crypto assets back in 2020.
Integrating DeFi at the heart of the emerging fintech leads to an entirely new financial system outside of the control of central authorities. DeFi makes finance all more efficient, transparent and accessible than it traditionally is.
With DeFi and Web 3.0, fintech companies can allocate resources judiciously to meet customer needs and demands, automate processes for customer journey mapping, facilitate customer engagement and build trust and loyalty.
Web 3.0 also reduces account suspensions and denial of service risks, helping finance businesses lower the cost of managing server failures and other issues.
Related Reading: The Current State of DeFi and Potential for Startups
Challenges Facing Finance Institutions as Metaverse Arrives
DeFi and Web3.0 are still nascent, meaning some glitches still need fixing. Blockchain technology is still evolving, meaning protocols and platforms may develop quickly as finance institutions play catch-up.
Global regulators have a lot to focus on as Web3.0 arrives. Especially in the finance sector, policymakers will impact how the market takes shape. Finally, DeFi is a global system that warrants newer regulations separate from the traditional banking and financial systems.
Challenges lie ahead for financial institutions and banks as a new era evolves. However, these businesses would be wrong not to prepare and plan for the future now, as it’s not a matter of if but when Web 3.0 becomes mainstream.Reach out to trusted startup advisors at KiwiTech to build on your idea for Web 3.0.