How open banking will help enable the rise of Web3

Web3 has the potential to radically reshape digital life as we know it. 

Imagine a new version of the internet, one that harnesses the power of decentralised technologies (blockchains, non-fungible tokens (NFTs) and new social platforms like the metaverse) to enable digital economies to flourish and give greater power to content creators and consumers.

And it’s already on its way. For many people, Web3 is closely associated with decentralised finance (DeFi) and decentralised autonomous organisations (DAOs). But the idea goes beyond creating new financial assets. Instead, it revolves around bringing the blockchain into the application layer to create more open and community-owned services.

It remains to be seen exactly what the future of Web3 will look like. One thing is certain, though: the way that we transact online is about to change.

And open banking payments are going to play a key role in making that happen.

What’s the link between Web3 and payments?

Right now, the future of Web3 is wide open. It could involve immersive social networks, new forms of digital identity, and more. Whatever form Web3 takes, consumers will likely participate in them through the use of tokens, which are digital assets that can be stored on the blockchain.

Cryptocurrencies offer an ideal model here. As tokenised, blockchain-based assets, they’re perfect for the world of Web3. In fact, some of today’s Web3 applications use cryptocurrencies for things like in-game transactions, lending protocols and power wireless networks.

Naturally, these applications will also require an on-ramp. In the same way that customers today exchange fiat currency for crypto, consumers will need to buy digital tokens that can be used across Web3 applications. And this is where open banking can play a vital role.

How will open banking payments enable Web3?

Last year, I said that open banking was one of the best ways to move funds into crypto. Security is a big reason why. Payments have strong customer authentication (SCA) built in, letting customers prove their identity without adding friction. This gives crypto companies the best of both worlds: a lower fraud risk combined with a conversion rate that’s often higher than cards.

Cost is another factor that helps open banking payments stand out. Crypto-related transactions often involve high premiums, so keeping processing fees down is essential for merchants. Open banking payments can help companies avoid the costs associated with card transactions, resulting in significant savings.

Speed is also a major advantage of open banking payments. Transactions settle immediately in countries with instant payment rails, giving crypto companies greater liquidity. Consumers also tend to use wire transfers to send larger amounts. Open banking payments cater to that habit, allowing customers to send money directly from their bank accounts while offering a faster experience.

Each of these benefits makes open banking payments an ideal on-ramp to crypto. And they could serve a similar purpose for the tokenised assets Web3 will require.

How will Web3 affect open banking?

At this point, it should be clear that open banking could play a big role in enabling the rise of Web3. But in turn, Web3 will likely influence how open banking providers like TrueLayer develop their products. 

As crypto continues to gain traction, open banking providers will further embrace the product-market fit with blockchain-based assets. They’ll prioritise products that will help merchants onboard customers quickly, train them easily, and keep them compliant throughout. 

From there, open banking companies will seek to take advantage of a Web3 economy’s unique advantages. Instead of just offering an on-ramp to blockchain assets, providers will build features natively on the blockchain itself. This will provide a seamless experience on a raft of new Web3 platforms.

Why existing regulatory frameworks are important

As all of this happens, companies will need to ask themselves a tough question: how do you reconcile a distributed, permissionless network like a blockchain with existing financial regulations?

Regulators should understand the needs of an evolving Web3 ecosystem, especially in cases where networks remain truly decentralised. Ultimately, though, regulatory oversight should be welcomed wherever a central entity controls an asset. This will ensure all actors remain legitimate while building customer trust.

So what kinds of innovation could a strong regulatory regime produce? A trusted digital version of the pound is a prime example. 

Stablecoins bring significant value to the digital asset ecosystem, and a digital GBP would facilitate a wide variety of use cases. Not only would they allow for cost-effective settlement, but they’d also allow for new payment innovations outside the bounds of traditional finance. At the same time, operating under existing regulatory frameworks would reduce risk and ensure trust amongst users.

Web3 is still in its infancy, but open banking could play a key role in helping it mature. It’s up to providers to build upon that potential and help pave the way for a new model of digital payments.

Want to know more about how open banking can elevate the crypto experience? Visit our industry page to find out more.