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…
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