The Future of Money — How Web3 Innovations Eliminate Web2 Payment Risks

By Shivi Sharma (Lead, Fraud Analytics at Varo Bank) & Parth Shah (Associate at Zebec Network)

June 7th, 2024 11:00am ET

Section 1: Payments Risks in Web2

Our credit card purchases are completed in seconds but under the surface lies an entire ecosystem of players. Let’s understand the role of each player in the payments ecosystem:

1. Merchants: Merchants sell goods or services via physical or online storefronts.
2. Payment Gateway: Software or API that accepts credit card transaction information from the card reader (either a POS terminal or online checkout page) and securely communicates to the credit card processor. Examples: Stripe, PayPal, Adyen, Braintree.
3. Acquiring Bank: Acquiring bank onboards merchants to provide them with a merchant account. The merchant account is used to receive funds from settlement. Examples: Chase Paymentech, Bank of America Merchant Services.
4. Acquirer Processor: Acquiring processor transmits data from the gateway to the card networks. Examples: First Data, Worldpay, Global Payments.
5. Card Network: Card networks supply the electronic infrastructure that enables the processors and banks to communicate and process transactions in real-time. They also set the rules and standards for its network participants. Examples: Visa, Mastercard, AmEx, Discover.
6. Issuing Bank: Issuing banks underwrite their cardholders and provide them with credit accounts. Examples: Chase, Citi, Capital One, Bank of America
7. Issuer Processor: They provide services like card approval authorizations and funds settlement. Examples: TSYS, Fiserv, Fidelity National Information Services (FIS).

In this ecosystem, users rely on centralized payment gateways or processors to facilitate transactions and ensure that funds are transferred securely and efficiently.

There are some challenges and risks associated with this centralization and reliance on a central payment gateway or processor. Some of the risks are:

1. Settlement Processes: Even if the payment itself appears instant to the end-user, settlement between financial institutions or payment processors can take time. Settlement involves the transfer of funds between banks, which may not happen immediately due to batch processing or interbank transfer protocols.

2. Technical Issues: Glitches in software, hardware failures, or issues with third-party payment processors can also cause delays in payment processing.

3. High Fees: High transaction fees eat into profits for merchants and can discourage customers from making purchases. Fees can be high due to intermediary charges from banks, payment processors, or card networks.

4. Hacking: Traditional payment systems, such as credit cards, debit cards, and bank transfers, often require users to provide sensitive financial information, including credit card numbers, bank account details, and personal identification information. This information is necessary to authenticate the user’s identity and authorize the transaction. Even though the payment gateways employ robust encryption and security measures to protect sensitive payment data from unauthorized access or interception, the disclosure of such sensitive data raises concerns about privacy and security breaches. It makes payment gateways lucrative targets for hackers. If a hacker successfully breaches the security of a payment gateway, they can potentially access and misuse the financial data of millions of users.

5. Cross-Border Transactions: International payments often involve multiple banks, currency conversions, and compliance checks, which can introduce delays compared to domestic transactions.

6. Fraud & Chargebacks: Fraudsters can exploit vulnerabilities in the payment process and conduct fraudulent transactions using stolen credit card information, fake identities, or other deceptive means. To mitigate the risks of fraud and chargebacks, platforms implement various security measures, fraud detection techniques, and payment verification protocols, such as multi-factor authentication, address verification, card security codes, and fraud scoring algorithms.

Fraudulent chargeback transactions can result in significant financial losses for both issuers and merchants. When merchants are unable to prove the legitimacy of a transaction, they are obligated to refund the customer, leading to direct revenue losses with an added chargeback fee. To safeguard against such losses, large merchants often invest in chargeback protection services, incurring additional expenses. Alternatively, they may deploy specialized teams tasked with identifying the root causes of fraudulent chargebacks and implementing mitigation strategies. In some cases, merchants face coordinated fraud attacks orchestrated by groups with access to stolen credit card information. These attackers exploit vulnerabilities in online payment systems to conduct unauthorized transactions, posing a serious threat to merchants’ financial stability and reputation

Additionally, issuers are required to provide provisional credit to customers if an unauthorized transaction dispute investigation remains unresolved within 10 business days. However, fraudulent customers often exploit this provision by spending the provisional credits before the investigation concludes, resulting in negative balances for issuers and further financial strain on the payment ecosystem.

Web 3.0 enables transparent, immutable, and tamper-proof record-keeping of transactions on a decentralized ledger. Each transaction is cryptographically secured and linked to previous transactions, making it extremely difficult for fraudsters to alter or manipulate transaction data without detection. By leveraging blockchain’s immutability, Web 3.0 platforms can significantly reduce the risk of fraudulent transactions and enhance the integrity and transparency of their payment systems.

Section 2: How Web3 Eliminates those Risks

The current Web2 payment infrastructure, while facilitating global commerce, inherently possesses several risks such as hacking vulnerabilities and fraud. The introduction of Web3, decentralized finance (DeFi), and smart payments promises to mitigate these risks through the use of blockchain technology, which provides a fundamentally different approach to processing and securing transactions. Zebec Network, a decentralized infrastructure network, aims to eliminate issues that traditional payments and payroll companies face.

Security through Decentralization:

In Web2, payment gateways and processors form a centralized structure that, despite robust security measures, remains susceptible to hacking. These centralized entities manage and store vast amounts of sensitive financial data, making them attractive targets for cybercriminals. Web3 platforms, like Zebec Network, that manage payments flows across multiple blockchains rely on a decentralized model where transactions do not flow through a central authority. Instead, they are distributed across a network of computers and devices each maintaining a record of the entire transaction ledger. This dispersion significantly reduces the risk of data breaches because there is no single point of failure. Additionally, the cryptographic nature of blockchain ledgers ensures that each transaction is securely encrypted.

Reduction of Fraud with Smart Contracts:

Smart contracts automate transactions based on pre-set conditions and are executed on the blockchain, making them immutable and transparent. This transparency ensures that all parties can view transaction histories but cannot alter them after they have been confirmed. This notability helps in significantly reducing fraud and eliminating chargebacks, which are prevalent in Web2 due to the ease of disputing charges. In a Web3 environment, once the conditions of a smart contract are met, transactions are irreversible, thus providing a clear audit trail and reducing fraudulent claims. Zebec implements smart contracts through its various supported blockchains, Solana and Nautilus Chain. These blockchains power Zebec’s PoS system and other products in Zebec’s product suite. Having Zebec’s PoS network running on a blockchain mitigates fraud and reduces chargebacks. Transactions across blockchain networks are immediate, irreversible and secure, and by consequence, eliminate merchant frauds such as chargebacks and delayed or reversible payment settlements.

Enhanced User Privacy and Control:

Web3 and DeFi empower users by enabling more control over their financial transactions without the need for disclosing sensitive personal information. Unlike Web2 payment systems where personal and financial data are often required for processing transactions, Web3 systems can operate with pseudonymity. Users can transact securely and privately using blockchain addresses without revealing their identity. Zebec Network’s products, whether its payroll, PoS terminals or payment cards, rely on cryptographic ledgers, individual Web3 wallet connections and addresses to ensure users control their private data and add many layers of security to transactions and records.

Elimination of Intermediaries:

Traditional payment systems involve multiple intermediaries, each of which adds transaction costs and potential delays. Web3 utilizes DeFi to enable peer-to-peer transactions without the need for intermediaries like banks or payment gateways. This not only speeds up transactions but also significantly reduces transaction fees.

In conclusion, Web3, with the support of DeFi and smart payments, addresses the fundamental flaws of the Web2 payment systems — such as security vulnerabilities, privacy concerns, and high costs — by leveraging decentralized, transparent, and efficient blockchain technology. This shift not only promises to enhance security and reduce fraud but also improves transaction efficiency and user control, heralding a new era in digital finance. Zebec’s product suite is providing peer to peer access through blockchains, connecting users securely and in a decentralized manner. This can eliminate the middleman such as: banks, interchanges, processors and credit card networks, all of which tag on additional time and fees throughout the entire payment process. In contrast, blockchains are able to settle transactions between merchant and customer instantaneously and at near-zero cost.

Case Study of Web2 Inefficiencies and How Web3 Eliminates Them: Global Remittance

Current cross-border remittance solutions today are costly and slow. Even with new fintech services, such as digital wallets, neobanks etc., solutions still depend on legacy infrastructure and traditional banks — making cross border P2P remittances slow, expensive and often risky. In contrast, blockchain payment infrastructure can deliver fast and secure financial transfer, instant currency conversion, immediate funds availability and significant cost savings.

Let’s look at an example (image below): Say an employee gets paid $250 during their normal pay cycle and they want to send $250 to Argentina. When they take the $250 to Western Union, they’d have to pay an 11% remittance transfer fee, which means Western Union would only remit $222.5. The recipient in Argentina would also pay a small fee depending on the pickup location to access the funds.

Zebec Network, through their nvative payroll app, WageLink, harnesses the power to revolutionize the global remittance ecosystem. WageLink is a hybrid technology solution built inside existing HCM solutions that integrate blockchains rails to accommodate modern finance — instant, efficient, cryptographically secured, programmable payments. WageLink enables cross-border remittance capabilities at a near-zero cost alongside a suite of other sophisticated financial tools, including options for USDC pay, early wage access, budgeting and paycards.