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Forget NFTs and the ups and downs of cryptocurrency – when it comes to Web3 and fintech there are more substantial impacts to talk about. Fintech is, frankly, on fire! Pandemic-driven shifts toward online banking gave an already hot mobile vertical a boost – but the story doesn’t stop there.
With more than 25,000 fintech startups vying for not only an estimated $179 billion in revenue in 2022 but venture capital funding that has remained consistent since 2018 (after doubling from 2017) – competition is fierce. Emerging economies with underbanked populations – as well as global powerhouses like China, where 90% of citizens bank via fintech – are ripe for innovation.
Considering the evolving nature of fintech, it may come as a surprise to learn Visa is the largest fintech company – valued at almost half a trillion USD – followed closely by Mastercard. Even with financial giants leading the way, Web3 has the potential to disrupt the future of fintech. Decentralized finance – or DeFi for those who love an acronym – is at the heart of the discussion.
What is Web3?
At its most simple, Web3 is the latest iteration of the web that uses blockchains, cryptocurrencies, and NFTs to transfer power back to users. Ethereum lists a number of core components of Web3:
- Decentralization – Instead of an internet “controlled and owned by centralized entities, ownership gets distributed amongst its builders and users.”
- Permissionless – With Web3 access is never an issues, as “everyone has equal access to participate in Web3, and no one gets excluded.”
- Native payments – Web3 “uses cryptocurrency for spending and sending money online instead of relying on the outdated infrastructure of banks and payment processors.”
- Trustless – Web3 uses “incentives and economic mechanisms” instead of relying on third parties.
Web3 and decentralized finance
In the third point above, we see that “the outdated infrastructure of banks and payment processors” is not a part of the picture. This is where decentralized finance comes into the picture.
DeFi is based on similar distributed ledgers to those behind cryptocurrency – eliminating the control banks and other financial institutions have over money and other financial products.
If the idea of handing over your life savings to Web3 sounds intimidating, here are some of Investopedia’s key attractions:
- DeFi eliminates the fees that banks and other financial companies charge for using their services.
- Users’ money is held in a secure digital wallet instead of a bank.
- Anyone with an internet connection can use DeFi without requesting approval.
- Transfers take seconds and minutes.
The challenges of DeFi
Of course, much like cryptocurrency, DeFi likely has an uphill battle to climb with many potential users. All but the earliest adopters are understandably hesitant to put their money where “anyone with an internet connection” can gain access. As stories of plagiarized and stolen NFTs abound, convincing cautious consumers that Web3 is a safe place to keep their money is, perhaps, the biggest challenge for DeFi advocates.
That being said, Nasdaq reports, “There are three major dynamics driving the rise of DeFi. First and foremost, mistrust in the traditional banking system has led to a growing interest, particularly among young people at the beginning of their financial journeys, in exploring non-traditional financial offerings. In 2020, 57% of customers reported not trusting banks to look after their long-term financial well-being, while in 2021, 51% of Gen Z and 49% of Millennials identified a fintech, rather than a bank, as their most-trusted financial brand. More broadly, this desire for more transparent, fairer relationships between individuals and platforms is fueling the growth of Web3, an Internet ecosystem defined by users’ ownership of their data, content, and finances.”
In other words, DeFi may just be the future of finance – and fintech.
Opportunities for fintech and Web3
With the potential for growth in mind, “crypto-native firms and the institutions they seek to replace are rapidly hiring for Web3-focused positions, signaling growing mainstream interest and adoption,” according to Nasdaq.
As the SEC pointed out in a 2021 statement, there are still concerns about DeFi – leaving many questions to be answered. The opportunity for fintech lies in those unanswered questions. Barriers to adoption are still many, but fintech users – especially those using products not associated with big banks – are often inherently less risk averse and willing to try new things.
Fintechs that rise to the challenge of delivering safe, secure Web3 products for these users stand to win the race to the decentralized future.
Want to learn more about Web3 and fintech? Join us at Fintech Growth Summit in Miami.
