Banks have always taken great care to remain competitive in the market despite the other stressors that come with this category of business. The latest one on top of their list is Web 3.0, otherwise known as Virtual Reality, Augmented Reality, and Artificial Intelligence — all of which are just different flavors of the same thing: a much closer interaction between people and computers.
The main impact of Web 3.0 on the banking sector may not be as pronounced as expected, but it is more likely to be negative than positive. The banking sector has always been technology-driven and, with the help of Web 3.0, these banks may find it difficult to adapt to this environment.
Facts and studies done on the impact of Web 3.0 in banking sector
The recent BFA study was commissioned by the National Consumer Law Center (NCLC) and the American Bankers Association. It studied how banks were preparing for Web 3.0, which they identified as a major area of concern among banks.
The study surveyed over 300 banks and gathered their perspectives on how they were planning to adapt to Web 3.0. They found that most banks had already taken a proactive approach in addressing the future needs of consumers, but some major upcoming challenges need to be considered.
This includes technological limitations, operating costs, and legal constraints. One of the biggest worries is that customers will naturally gravitate towards payment methods with better customer service and security, such as credit cards or electronic wallets, instead of using their bank accounts.
Blockchain can enhance this process and lower these costs. Using blockchain for KYC purposes could reduce personnel requirements for banks by 10%, equating to cost savings of up to $160 million annually.
Web 3.0 will largely be built on three new layers of emerging technologies – edge computing, decentralised data networks and AI.
There is a growing application of ML to analyse large data sets in security. As attackers use ML, we need machines that can respond in seconds.
The cycle of change is undoubtedly constant, but its speed has certainly sped up during the pandemic. Going forward, Web 3.0 and transition towards decentralization, digital currencies, ability to monetize data effectively and stronger ecosystem collaborations for customer-centric service will continue to drive the evolution of the financial services industry.
Blockchain and crypto tokens can bring many potential benefits, such as faster and cheaper cross-border payments and trade finance, but they need to be more stable in value and have a credible backing.
Decentralized finance (Defi) refers to digital assets and financial smart contracts, protocols, and decentralized applications (DApps). Also based on distributed ledger and blockchain technology, Defi challenges the centralized financial system by disempowering the middlemen and focusing on peer-to-peer networks. The ‘total value locked in Defi’, which shows how much money is currently working in different DeFi protocols, has increased significantly in the last two years. There are several use cases of DeFi and they are continuously growing. It lets one send money around the globe, stream money around the globe, access stable currencies, borrow funds with or without collateral, start crypto savings, trade tokens, buy insurance, and manage one’s complete financial portfolio under one system.
There are several benefits of even Defi Insurance as below:
- Protection of Defi Deposits
- Protection against crypto volatility and flash crash
- Immediate redemption of tokenized crypto
- Protection against the risk of theft and attack on crypto wallets
- Protection of funds from hacks on exchange platform
- Identify fraudulent claims
- Increased reliability of medical history
- Reduced overhead cost because of efficiency and speed in the claim processing
Disadvantages of Web 3.0 in the banking sector
Blockchain technology has many advantages, but one prominent disadvantage is that it’s inherently secure without specific third-party support, since the system relies on a “trusted” third party—a node—to make sure the ledger is secure and that no one tries to tamper with it.
Therefore, blockchain developers have been working on a method of maintaining security after the protocol itself has been implemented. This is called “consensus,” and it enables the system to be secure even when some nodes operate independently.
The problem arises when only one node can maintain consensus and therefore make sure that the ledger remains secure. If that node goes offline or is compromised by an attacker, then the entire system can fall apart.
On other side, thefts and frauds are rampant on Web3. In 2021, crypto scams and theft are totally to $14 billion losses. So, security is the biggest threat in the Web3 world for BFSI segment.
In an article about Web 3.0, when discussing the impact of augmented reality on society, The Economist also included that “banking would be affected too” (The Economist 2011). The writer said that this technology would allow people to peer into their bank accounts without even logging in. It could also authenticate people remotely and control their finances at the same time.
To fully understand the present banking sector, it is necessary to acknowledge that its nature has always been technology-driven since banking was first formed. As a result, all banks have also invested in new technologies to facilitate the operations and services that they offer to their customers. They have developed faster processing systems, better internet banking platforms, more reliable ATMs, and quicker payment gateways.
Realization should temper the urge to dismiss Web 3.0 financial services as fringe efforts that many in banking missed the potential of PayPal and Chime until they became huge competitive threats
The future of banking lies in Web 3.0. Someone will felt soon the impact of these technologies on the industry, especially for banks that are still rooted in their traditional business model. Web 3.0 is transforming the financial landscape and will, most likely, affect how banks operate.