Banks aren’t going to disappear.
Banks form the backbone of the world’s financial system and are largely responsible for its sluggishness, crises and market manipulation. Businesses, big and small, need money and capital that they may not readily have available to scale, run current operations and pay for a myriad of expenses.
Banks, having hoarded considerable capital, profit from their position by giving out credit lines at interest, thus making the global economy run, providing their funds as grease for the gears. However, though the concept may seem clear-cut and straightforward, the system itself is incredibly cumbersome, mired in bureaucracy, and steeped in corruption.
Challenges Faced by Traditional Banking
The banking system is ultra-conservative in its operational manner, resorting to minimal conceding when it comes to giving any added value to the client or matching potentially more profitable offerings on the market. Such a stale form of management, coupled with the oftentimes exuberant interest rates charged on loans, and the meager interest provided on savings, makes banks unattractive as both investment partners and as go-to solutions for financial management.
But the global financial system has recently been shaken to the core by the latest crisis that has surfaced the multiple shortcomings of the financial system and exposed its vulnerability to competition from digital technologies that are capable of streamlining fund flows in a more efficient manner. Such ‘disruption’ is putting banks on an anvil, forcing them to take on the path of adaptation and adoption of such technologies to remain competitive.
Among the technologies making banks nervous is blockchain, which adheres to the principle of decentralization and massive incorporation of a vast number of services within a sector known as Decentralized Finance.
Centralization And Its Course
Decentralization foresees the exact opposite of what centralization stands for. The lack of a central authority would mean the hypothetical elimination of a single point of failure and manipulation.
Centralization is all about the opposite – having a single point of control as a traditional form of governance that banks rely on for decision making, ownership and distribution of profits. That system is the flaw, as the ossified form of management and adherence to existing values is no longer capable of keeping pace with the rapid and dynamic changes that are taking place not only in the global economy, but in the mindsets of clients.
The rules governing centralization are not bad in themselves and are designed to prevent money laundering, fraud, diffusion of responsibility, and for ensuring a single point of governance.
The shortcoming is that this form of governance was invented a long time ago and has already become outdated in light of new technologies and economic, and social requirements. The revision of these rules is unprofitable for banks, because it opens up room for competition from companies that can offer a more efficient and client-oriented approach that is no longer based on profiteering as the core concept of the enterprise.
So What Can the Decentralized Finance Startups Offer?
Decentralized finance startups are offering more to their users in terms of combined value than modern banks, making such companies more attractive.
Apart from giving full transparency of operations based on blockchain technologies, as well as higher transaction speeds and low commissions, DeFi startups provide a full scope of financial services that outstrip the product lines of banks.
Anything from peer-to-peer lending, passive income generation via staking, and even business-scale support in transaction flow streamlining is on offer at rates that are far lower than anything banks would ever agree to charge.
Greg Waisman, Co-Founder & COO at Mercuryo.io
Trends In Decentralized Finance Taking Over
One of the important trends that can be noted on the global financial arena is that with digitalization and the coming to power of a generation more open to technologies, companies are starting to develop their products in accordance with the needs of their clients, and not in accordance with the visions of the founders and their interests. The implementation of decentralized solutions for greater transparency and the use of digital currencies is one of the main requests being voiced by online environment users.
The greatest trend being traced in finance over the last two years involves the broadening of financial freedoms to include cryptocurrencies as a legally accepted means of payment. The demand on the part of users to have such currencies included is clear, since they provide an escape from the oppression of banking fees and the disturbing surveillance and monitoring of all financial flows.
Time to Catch Up?
In addition to freedom, cryptocurrencies offer vast opportunities for generating income on services that DeFi applications provide as viable and highly popular trading and staking venues.
It is not surprising that many banks are starting to catch on the trend and are developing their own strategies of entry into the decentralized market. Among the first steps is the development of proprietary blockchains, but states are apparently outpacing banks in both capabilities and legal opportunities through the deployment of CBDCs.
Unlike banks that cannot issue their own coins, states have such an opportunity on a legal basis and will be implementing it to ensure ongoing monitoring of financial flows, while giving citizens what they want in terms of digital currency usage.
The Future of Financial Institutions
In a world that is increasingly moving into the digital environment that provides more opportunities and exposure than the physical world, banks have no choice but to start catching up. There is no chance that large institutions will start abandoning their centralized models of governance, instead, they will start incorporating the opportunities and functionality of decentralized technologies into their operations and product lines.
Among the areas where banks can leverage the possibilities offered by blockchain and cryptocurrencies are the following:
Payments – banks can start using blockchain as a repository of transaction records to improve transparency and give users the benefit of faster processing speeds and lower fees.
Clearance and Settlements – blockchain could reduce operational costs and turn transactions made through banks, such as overseas transactions, into real-time events.
Launchpads – there is no reason why banks could not act as startup launchpads and provide venues for hosting fundraising events or providing other capital-raising opportunities, given their vast networks of contacts with funds and investors.
Trading – banks can also act as trading venues for stocks and digitized securities that can be sold or digitized on blockchain infrastructures.
Loans and Credits – banks could make money by providing blockchain-based lending platforms to their clients and thus create a more user-oriented approach to credit that they could oversee and manage as gatekeepers in a decentralized manner.
Inclusive applications – banks could release mobile or web applications that could host decentralized analogues of their interfaces and thus act as access points to financial services with expanded functionality at lower costs.
KYC and AML – blockchain technologies provide an excellent infrastructure for customer checks and monitoring of financial transactions, giving banks the ideal instrument for compliance and due diligence.
The banking system is a sluggish and rather greedy beast that is no longer capable of catching up with the feed that is getting smarter and is inclined to dive down the Rabbit Hole of decentralized alternatives.
As such, banks will soon have to deploy their own services in a decentralized manner and include digital currencies in the arsenal of assets they operate. Only the broad inclusion of new instruments and systems would allow banks to cater to the needs of clients and their whims.