The Future of Credit and Digital Payments in Web3

May 2023

Whenever the term “Web3” is mentioned, it can admittedly be difficult to get past its association with turbulent digital asset prices, or the criminal indictment of alleged fraudsters in the broader crypto space. But as the Web3 movement continues to expand and mature, capturing the curiosity of the public and the attention of institutional investors, the possibility of a full-scale transformation of the internet seems more likely by the day. And while we may not know exactly what to expect, we do know that it has the potential to disrupt entire industries and could very well play a crucial role in shaping the future of credit cards and digital payments.

In this blog, we’ll provide a brief definition of Web3 as it currently stands, before exploring some recent developments in the space and how the modern credit and payments sectors may ultimately benefit from the integration of Web3-based technologies.

What is Web3?

Web3 is intended to be the next evolution of the internet, in which users can choose to own, store, and transact with digital assets through the use of a blockchain. This includes monetary transactions, meaning blockchain transactions would most likely utilize alternative assets (looking at you, cryptocurrency!) instead of traditional paper-backed currencies controlled by centralized banks and financial institutions. More broadly, Web3 hopes to introduce new mechanisms for establishing and tracking personal ownership online, whether it’s a user's individual data or creative content.

If that all sounds a bit overly complicated, that’s because it is; at this point Web3 is still a relatively open-ended concept being promoted by various entities with distinct visions for what it can, or should, become. However, one of the most coherent explanations can be found in an article published by the Ethereum blockchain, whose co-founder Gavin Wood has been credited as the original “author” of the Web3 idea.

To provide a brief overview, an ideal implementation of Web3 according to Ethereum would be defined by the following four principles:

Decentralization. Whereas the internet today is largely controlled by only a few large entities and corporations (Google, Apple, Facebook, etc.), Web3 allows control and ownership to be distributed freely and at the discretion of the builders and users of a given platform or online community.

Permissionless access. Web3 can be equally accessed and utilized by anyone without permission from a centralized institution or regulator.

Native digital payments. Web3 aims to replace the “outdated infrastructure of banks and payment processors” by promoting the store and exchange of digital assets, or cryptocurrencies, on a blockchain.

Trustless interactions. Rather than relying on a bank to facilitate a transaction or a legal representative to verify an agreement, Web3 turns to blockchain technologies like transparent payment ledgers and smart contracts to allow users to interact online without the need to “trust" a third party.

How will Web3 be used?

Despite skeptics claiming that Web3 has no actual real-world utility beyond the speculative trading of cryptocurrencies and NFTs, or the eventual exchange of virtual goods and services within the “metaverse,” ongoing developments involving large financial institutions and major players in the credit and digital payments industries may be finally putting that argument to rest.

For example, after creating and successfully transacting through its own decentralized finance (DeFi) platform in late 2022, JP Morgan Chase is reportedly opening a new innovation lab in Athens focused on blockchain-based data encryption and security solutions. Separately, Mastercard has just announced a new partnership with Web3 payments protocol, Immersive, which will enable users to securely settle transactions in Web3 through the real-time conversion of USDC stablecoins—digital tokens pegged 1:1 to the US dollar—into fiat currency on the lender’s network.

Additionally, there are a number of emerging Web3 applications focused on the increasingly popular peer-to-peer (P2P) payments space. Known as decentralized applications, or DApps, these platforms allow payments to be sent or received by consumers without the need to access a traditional bank account. Because transactions are automatically verified and transparently recorded on the blockchain, users can exchange digital assets freely and in the absence of a trusted third party, i.e. a centralized financial institution.

But DApps also have the potential to go beyond simple payments and into the realm of P2P lending, potentially opening up new borrowing opportunities to those who have limited or no access to traditional credit. After all, Web3 technologies are inherently data-centric, and it makes sense to leverage the increasing volume and availability of online consumer data toward making more accurate, fair and flexible assessments of a consumer’s creditworthiness. And while data-based lending assessments aren’t entirely new, many emerging startups and their investors believe that Web3 will only continue to increase financial access through the refinement of artificial intelligence (AI) and machine-learning technologies.

Regarding our own exploration of Web3 trends while attending Nexus’s 10th annual fintech conference, we found the goal of achieving greater financial access as well as lending flexibility to be a primary theme. Additionally, we observed some real excitement surrounding the value created by Web3 for online merchants and content creators, particularly as it relates to frictionless, real-time payments and the digitalization of ownership. In fact, more than half of the merchants surveyed by Nexus in 2022 said they strongly agreed that Web3 would ultimately become integral to their overall e-commerce strategy.

Overall, while no one knows exactly how the Web3 saga will play out in the long run, its potential to become a true disrupter in the credit and payments space is becoming impossible to ignore. From the advancement of real-time payments to the reimagining of risk assessment and ownership in the digital age, Web3 looks more than poised to surprise its skeptics and become an increasingly transformative force in the years to come.

Recent posts