There are any number of ways to look at the emerging decentralized finance (DeFi) space, at least where banks are concerned. Some view it as an existential threat, while some believe that banks and DeFi can work together to create a new category of financial services.
Algorand Director of Business Solutions Giuliana Berchicci and Bnext CEO and co-founder Guillermo Vicandi told PYMNTS that banks can take several cues from DeFi’s triple-digit growth and innovate as they respond to competitive pressures.
In the past, they’ve been able to compete with digital-first and digital-only upstarts chiefly on regulation and compliance, but those lines of defense may go by the wayside in an age where finance skews, with the help of DeFi, increasingly “trustless.”
Banks have already shown that they are aware of the growing urgency to pivot fully into the digital age. FinTechs have been key drivers in the development of banking alternatives, offering customers new ways to pay and manage their money, and urgency is building for banks to adapt.
Authentication plays a role in the customer experience, and DeFi can help improve trust between financial institutions (FIs) and the customers who trust them with their money, the panelists said.
Vicandi told PYMNTS that the growth in DeFi is shaking the very core of financial services. Until recently, there existed a slew of “unquestioned monopolies” in the delivery of commerce in general and across any number of verticals.
That market dominance has extended into digital finance, which has “been heavily influenced by large, centralized monolithic institutions,” Vicandi said. “They’ve produced their own products, sell those products though their networks, to their own end customers.”
But in the current environment and with the emergence of blockchains, Vicandi said that DeFi exists as a threat not only to the regional banks which tend to lack the scale and of their larger national and international brethren, but as an existential and cultural change to finance as we know it.
The ripple effects are having an impact on governments and institutions that are deeply woven into the fabric of everyday life, too. Vicandi pointed to the recent adoption of bitcoin as legal tender in El Salvador as an example. By and large, that decision has allowed the country to sidestep the impacts of monetary policy wrought by other nations — in this case, the United States, where the U.S. dollar has been El Salvador’s main currency for 20 years.
Banks are grappling with the pressures of customers’ willingness to move to digital-only firms, Berchicci said. That’s because banks, as she noted, “are not really technology producers.”
These traditional firms are burdened by legacy technologies. Vicandi said that while banks have spent billions of dollars to improve their front end, consumer facing experiences are still facing friction in thoroughly updating internal workflows and the actual products and services they deliver.
As Berchicci said, in order to accelerate their efforts to modernize and to become a bit nimbler, banks are either partnering with FinTechs or acquiring them.
Of the banks embracing those strategic choices, Vicandi said that “they can start acting as a startup — by just partner with someone that is prepared to do that.”
In taking some cues from decentralized finance, the panelists said, FIs can move to fill a number of different — and thus far, new — roles within finance. Those new initiatives might include tokenizing invoices to give commercial clients more access to liquidity and working capital.
At least at present, banks have some advantages in hand, chiefly through scale and trust. But the window of opportunity is closing rapidly, Vicandi and Berchicci cautioned.
Front-End Frictions
Vicandi contended that there’s an additional sticking point that will give banks a bit of time to rearrange their digital strategies: DeFi, at least for now, has some consumer-facing fictions. He compared the its current state to the embryonic days of the Internet.
“DeFi is still difficult to interact with. It’s still a lot of work to do in the front end,” he said, adding that “as soon as that sorted out everything to do [with DeFi] will be massive, and the trust issues are going to be forgotten.”
Drilling down into what needs to happen to bring individuals more firmly into the DeFi fold, biometrics can go a long way toward assuaging trust concerns and improving ease of use. Berchicci stated that biometrics and FinTechs that offer compliance-as-a-service can, with the aid of tokenization, help cement new financial services ecosystems.
Although complex technologies will undergird consumer transactions, the interactions themselves will be intuitive — consumers will access their financial “agendas,” select the context and complete the desired transaction. These consumers don’t need to understand that they will be buying stablecoins using algorithms or blockchain; they just know that the desired transaction will take place.
Berchicci said that underneath it all, blockchain will be the protocol that will give everybody the possibility to access value and to transact — to exchange value, but in a “trustless” manner.
Vicandi said that looking ahead, the landscape is moving toward a future where a large scale DeFi search engine and a large DeFi bank will wind up taking dominating a significant part of the DeFi ecosystem. However, the success of that ecosystem will be determined by how well every player in it can adapt and deliver an ever-broadening spectrum of products and services.
Vicandi and Berchicci envisioned a process through which each individual user of DeFi can have tokens in place that can conceivably go with them “everywhere,” continuously authenticating throughout their day and keeping transactions smooth, simple, accessible and convenient.
“There will be trends that are here to stay,” said Vicandi, with a nod to DeFi’s place within banking, “with smart contracts, and also cryptocurrencies, integrating into regular portfolios.”
In developing nations, it will be easier for FIs to use blockchain and artificial intelligence to extend credit and improve underwriting.
As Vicandi told PYMNTS, “Through the past four or five years, FinTech has maybe represented a 10% change to traditional finance — blockchain, crypto and DeFi represent the remaining 90% of the change in financial services.”
