There is a lot of talk about how banks could lose out as a result of the trend toward decentralized finance. But that is a misconception.
There are actually ways in which decentralized finance could be a real commercial opportunity for financial institutions.
Decentralized finance flips the traditional banking model of accepting deposits and providing loans on its head, by enabling the borrowing or lending of money on a large scale between unknown participants and without any intermediaries. Applications bring lenders and borrowers together and set interest rates automatically based on supply and demand. The protocols are inclusive, anybody can interact with them at any time, from any location and with any amount.
Some banking players are already doing cool things to move into this space, and there is lots of evidence that there is still room for competition in the market by banks and card networks. Generally, the buy now/pay later trend has been led by the merchant side of the coin, but in the future it will likely also become prevalent on the card-issuing side. Here are a few examples of banks and card networks that are getting involved: Citigroup via Citi Flex Pay; JPMorgan Chase via My Chase Plan, which lets customers pay off big purchases over time for a fee, but still linked to banks’ traditional credit cards; and Mastercard and Visa enabling cardholders to split transactions into installments.
Despite the current rhetoric, banks are actually at a huge advantage when it comes to taking advantage of DeFi, because they hold the most data about their clients. There is a big effort around the client/user experience, and it’s not just related to providing traditional banking services. It is about providing guidance, advice and decision-making tools — and the best decision-making tools are those driven by data. The bank has insights into their corporate clients’ entire payment network, which means they are able to rationalize and contextualize those insights, and provide them back to the client in the form of an incredibly powerful client experience — one that could be commercialized.
This is a large opportunity for the bank, as their role will evolve from storing money to distributing it, and acting as the validator between various decentralized ledgers (and they will be able to do this better than anyone else because of their access to data). A large number of global banks will become connected by this very highly permissioned, highly secure network where they can communicate to each other about a wide range of data points. But in the short term, account validation is where the bank is key. In the future, that is what will change the ease, the openness, the time and the execution costs of how we move money internationally.
Some other interesting use cases for DeFi are ones that could make banking more inclusive — for example, for those who do not have access to banking services. It could be a good option in regions where banking services are too expensive compared to income, or in remote locations where financial institutions are too far away. In order for this to be viable, decentralized applications would have to adopt more user-friendly interfaces, so there is still work to be done in this area.
Decentralized finance, in tandem with financial institutions, could create a more efficient, convenient, wider-reaching and more secure experience than traditional finance alone.
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