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Web3 Banking: Its Implications for Banks, Customers, and the Fintech Industry


Leo Henkels

Leo Henkels

The financial world is on the precipice of a profound transformation —- it’s all about to change. About to evolve. About to get more complex. More exacting. More efficient. And that change is happening right now. At the heart of this revolution is the concept of Web3 bank. Built upon the principles of decentralization, Web3 banking is ready to reshape the entire landscape of finance. To shift the paradigm and reestablish what banking can and should be. In doing so, it brings with it a smorgasbord of opportunities and new challenges that stakeholders across the industry have to navigate with foresight and adaptability. The main goal of this article is to demystify the concept of Web3 banking and illuminate its profound implications for traditional banks, customers, and the broader fintech industry.

What is Web3?

To understand the implications of Web3 banking, it's crucial to grasp the transformative nature of Web3 itself. What exactly it is and how the tech is here to topple the old paradigm and usher in a new financial reality. Web3 represents the next evolution of the internet — it’s the next step. According to a 2022 study of blockchain tech Web3 is slowly overwhelming the world and becoming a driving force for a financial revolution. It is what the future will be based on and built on — To many, it will reinvent not only the internet but everything that links up to it.  Web 3 is mainly characterized by decentralization, trustlessness, and the integration of blockchain technology. In the context of finance, Web3 introduces a new way of doing things where traditional intermediaries are challenged, and individuals gain greater control over their financial interactions.

business center building

Web3’s Transformative Nature

Web3 is not merely an incremental upgrade — it’s a new reality. It’s the difference between having high speed internet and a dial tone. It’s the difference between a calculator and an iPhone. To call it a paradigm shift would be negating its true potential. Traditional web applications rely on centralized servers, controlled by a few entities, making them susceptible to censorship and data breaches. In contrast, Web3 applications are decentralized, running on a distributed network of computers, ensuring greater resilience and censorship resistance. They are more robust, automotive, and self-reliant — human biases, and human errors have been edited out. 

Web3 Banking: The New Frontier

Web3 banking represents the application of these decentralized principles to financial transactions — Web3 bank will radicalize all industries, from medical to entertainment, still one of the biggest chances will be felt in finances. At its core, Web3 banking leverages blockchain technology and cryptocurrencies to create a trustless environment for conducting financial operations. One based on algorithms, pre-set rules, and smart-contracts. This means that intermediaries like banks can be bypassed, and transactions can occur directly between parties, often with the use of smart contracts — and even within the banks, and traditional institutions, this system will allow for a more audited approach. One that is more objective, and far more efficient. 

Blockchain technology, the backbone of Web3 banking, offers transparency, security, and immutability. Every transaction is recorded on a public ledger, visible to all network participants, eliminating the need for trust in third parties. Cryptocurrencies, such as Bitcoin and Ethereum, serve as the native digital assets powering these decentralized financial systems.

business partner discussing company growth

Web3 Banking Implications for Traditional Banks

Potential Competition

One of the most significant implications of Web3 and banks is the potential for increased competition. Consumers will no longer be limited to traditional banking institutions — for example they’ll be able to obtain loans from individuals. And said loan will be governed by a smart-contract. As Web3 banking platforms gain popularity, they offer customers alternatives to the old way of doing things. These platforms often provide the same core functions as banks, such as payments, lending, and saving, but with greater efficiency and accessibility.

This translates to traditional banks having to adapt or evolve to the new landscape —- or risk losing market share. 

Evolving Business Models

Web3 banking challenges traditional banks to rethink their business models. To go outside their comfort zone and think on what they can do digitally or how they can adapt to the new landscape. Banks have normally profited from intermediation fees, managing customer deposits, and offering various financial products. With the advent of Web3 banking, some of these revenue streams may be affected and highly diminished. They’ll have to find a way to adapt to this punch to their bottom-line and see how they start to generate new profits. This could include becoming custodians for digital assets or providing advisory services related to cryptocurrencies and blockchain investments.

Web3 Investment Banking

Web3 banking extends its reach beyond traditional retail banking, encompassing investment banking as well. Decentralized finance  - DeFi -  platforms built on Web3 principles are disrupting the investment banking sector. These platforms allow users to participate in a wide range of financial activities. Activities like:

  • lending
  • borrowing
  • trading
  • yield farming

What Web3 Banking Means for Customers

Web3 banking doesn't just reshape the financial industry — it has significant implications for customers and their overall experience.

Let’s look at how Web3 transforms the customer experience:

Enhanced Financial Sovereignty

One of the most appealing aspects of Web3 banking for customers is enhanced financial sovereignty. In a Web3 ecosystem, individuals have complete control over their assets, eliminating the need to trust third-party institutions with their funds. This newfound financial autonomy aligns with the core principles of cryptocurrency and blockchain technology.

successful settlement of the contract

Opportunities and Risks

While the idea of Web3 banks presents numerous opportunities, it also introduces new risks. The decentralized nature of Web3 means that there is no central authority to turn to in case of disputes or fraud — there’s no oversight committee or customer service rep’ you can call. Individuals will have to be more prepared, more educated and have a better grasp of their financial responsibilities. 

The Evolution of Financial Products

Web3 banking fosters innovation in financial product development. DeFi platforms offer a wide array of financial products and services, from decentralized exchanges to algorithmic stablecoins. These products are often more accessible and cost-effective than their traditional counterparts. Customers can expect to see a high proliferation of novel financial products in the Web3 ecosystem — each carefully designed to meet a diverse range of needs.

Collaboration vs. Competition Between Fintech and Traditional Banks in the Web3 Era

The relationship between fintech startups and traditional banks in the Web3 era is complex. And that relationship is still on a first date basis — banks know that they will have to enter the Web3 arena eventually yet they still want to see how the whole revolution plays out. While there is competition in some areas, there is also room for collaboration. Traditional banks possess significant resources, regulatory expertise, and customer bases that fintech startups may lack.  Collaborative efforts can lead to mutually beneficial outcomes. Banks can tap into the innovation and agility of fintech startups, while fintech startups can gain access to established banking infrastructure and regulatory support.

Web3 banking is not just a buzzword — it’s a transformative force that is reshaping the financial industry. The Web3 era is here, and those who embrace it with foresight and adaptability will be best positioned to thrive in the evolving landscape of finance.