Web 3.0 and payments

Impact on cross-border payments:

The present cross-border payments system is facing challenges such as intermediary interference, long transaction routes, and lengthy screening processes for financial crimes. This leads to delayed payments (especially if made on weekends and bank holidays). Customers and banks often wait for long periods for transactions to get processed and settled. Financial systems are not interoperable, and sending money across the world may result in complexities, unpleasant experiences, delayed settlements and higher fees than usual for transactions. 

Web 3.0 technology will enable cross-border payments by connecting global banks and making the system interoperable, efficient and affordable. Banks will have a more simplified process for liquidity management and treasury operations. By incorporating Web 3.0 technology, the cost of international payment transactions can be reduced to a level comparable with that of domestic payments. A leading technology company is working to simultaneously clear and settle cross-border payments in real time. This will allow for faster payment processing and lower clearing costs. In addition, it will increase efficiency and facilitate a robust network that eliminates multiple stakeholders from processing transactions, thereby enhancing the security of transactions. 

A payment gateway driven by blockchain technology could facilitate global payments. The speed of transactions will be significantly faster than that of payments routed through conventional banking channels, which can take up to three days to get processed.

Web 3.0 uses hashed timelock contract (HTLC) to enable efficient cross-border payments. The HTLC feature uses hashlocks (a hashed or cryptographically scrambled version of a public key generated by the payment initiator, which requires an associated private key to unlock the original hash) and timelocks (functions that set time constraints on contracts generated using HTLC) to ensure the atomicity of a transaction across the payments system. There is no need for trusted third parties as intermediaries when a smart contract is deployed for cross-border payment systems. The HTLC protocol in smart contracts can be used to manage both local and foreign currency transactions and settlements. 

Apart from this, HTLC is also being explored to enable Central Bank Digital Currency (CBDC)-based cross-border payments. 

Vendor independence and reliance on cryptographic primitives in DLTs are two unique features missing in traditional financial services. With DLTs supporting smart contracts via their programming capabilities, they can introduce more interoperability opportunities by allowing the automatic verification of complex functions and compliance requirements.

Case study: 

A DLT network (for RTGS, currency exchange, and remittance) launched in 2012 has enabled secure, instant and nearly free-ofcost cross-border transactions of any size without any chargebacks. Crypto tokens representing fiat currency, loans, mortgages and cryptocurrency along with another unit of value are supported by this network. Such a network model can be used by banks as an opensource payment approach involving fewer intermediaries, thus making the process more efficient and reducing costs.

Integration of Web 3.0 in financial services

The concept of DeFi in Web 3.0 will have a major influence on the way financial services operate. The role of the centralised authority and financial institutions will be impacted by P2P communication while providing more control and options to end users. Two key aspects of Web 3.0 will be the integration of internet and digital payments infrastructure using different technology stacks and achieving a seamless user experience. Distributed ledgers can further help in micropayments with the service provision APIs. In the traditional payments infrastructure, micropayments failed to take off due to the poor integration of the web and relatively high cost of the transactions. Now, with the introduction of Web 3.0, micropayments will be feasible and ad hoc, and not require account set-up and/or subscription.

Open banking in Web 3.0

Open banking is a global banking movement that has led to innovative financial solutions – emerging either from a mandated regulatory framework or a market-led attempt. The practice enables customers to share their financial data with third-party providers through application programming interfaces (APIs).

Till now, a major challenge in the adoption of Web 3.0 technology or blockchain-based platforms has been the limitation in API connectivity between Web 3.0 and Web 2.0. Recent innovations in these APIs by global foundations will help to implement easy API connectivity between the two worlds, thus introducing new opportunities around open banking in the Web 3.0 ecosystem.

Payments in the metaverse

The metaverse is a social network that offers a 3D virtual experience. It came into the spotlight in 2021. The vision of the metaverse is an experience where, instead of just viewing content, consumers can feel immersed in the virtual environment. Several companies are already looking at the metaverse for expansion in the virtual world.

• Investment banks are looking to enter the metaverse with a focus on customer experience, ease of access and collaborating with DeFi institutions. Recently, one of the major banks in the US entered the metaverse, paving the way for other entities to do the same. Banks can utilise their cross-border payments and trading capabilities in the metaverse. The success of the metaverse is dependent on a robust financial ecosystem that can be enhanced through Web 3.0. 
• Banks are providing an Integrated Payment Hub (IPH) to clients planning to enter the metaverse. Using DeFi protocols, a new era of digital banks will be able to help users to lend, borrow and invest across various cryptocurrencies and issue debit and credit cards that will work in both the virtual space and real world.