Decentralized finance (DeFi) is often characterized as a move that could take traditional banks out of their seats once and for all – by eliminating middlemen and giving consumers freedom and choice that they are unlikely to be used to.
But there is an alternative story, one that DeFi does not hold against the banks. What if these innovative protocols could contribute to the much-needed modernization of old-fashioned financial institutions… allowing them to provide better services in a much more cost-effective way?
Even before digital assets hit the market, many banks struggled to adapt to the sudden, large-scale shift to online and mobile banking. Lenders that have been around for hundreds of years suddenly had to invest untold millions of dollars in resilient websites and apps that allow customers to access the funds on the go. At the same time, most brands felt compelled to maintain their extensive network of branches to ensure that older or less tech-savvy customers are not left behind.
Bank closures have accelerated over the past decade. In the US, figures from the Federal Deposit Insurance Corporation suggest that 4,500 branches have closed for good since 2010 – about 6% of the total. There were further closures in the UK From 2012 to 2019, there was a 22% decrease in the number of banks in high streets. With large numbers embracing digital banking (some out of necessity because their nearest branch is too far away), it has become financially unsustainable for all of these locations to remain open.
Even if consumers accept that they will have to do without a friendly face behind a kiosk, the disappearance of physical banking can also hurt their wallet. Branch closings are exacerbated by a dramatic drop in the number of free-to-use ATMs in cities around the world. Especially in rural areas, this means that many people have little choice but to use ATMs that are outside of their bank’s network – and cost an average of $ 4.64 per transaction in 2020. For those who only need to withdraw $ 100, this can be exceptionally priceless.
The lack of ATMs has become so extreme that in part of New Zealand there is only one ATM within the 418km separating rural communities of Wanaka and Hokitika. Good luck if you run out of gas and a gas station doesn’t accept cards. The UK is also considering whether to force retailers to offer cashback to all consumers – regardless of whether they make a purchase or not.
How can DeFi help?
Given the staggering costs associated with using private ATMs, it’s no wonder DeFi can provide an attractive alternative for consumers who want lower costs. While Ethereum’s scalability issues caused transaction fees to reach nearly $ 15 in early September, the sheer number of blockchains and payment networks in the industry can help drive those costs down. With some platforms making it possible to make wire transfers for fractions of a cent, banks are starting to sit up and realize they need to become more competitive… or at risk of becoming irrelevant in a rapidly evolving landscape.
Taking a few pages out of DeFi’s book could also help the industry overcome repetitive technical hiccups that are unacceptable in a digital age. Seemingly every week there are new headlines from banking apps that have gone down widely – usually on payday – preventing consumers from accessing their accounts, and some feel their cards have been declined in supermarkets because they haven’t been paid. Blockchain outages are much rarer given their decentralized nature – and when a problem does arise, it is usually due to a centralized exchange rather than the technology itself. (Of course, outages aren’t impossible. On November 12, Ethereum was disrupted due to anomalies at infrastructure providers Infura and Blockchair.)
The benefits that DeFi has to offer don’t stop here. Figures from the World Bank show that banks were the most expensive route for remittances in low- and middle-income countries – and that they made substantial portions of the income of those who need it most. To add insult to injury, old systems often mean major delays in payments and international transfers can take days to complete. DeFi can help reduce, and even eliminate, these costs while moving money from A to B in seconds.
DeFi also has the upper hand when it comes to interest, at least for now. Savings rates offered by many financial institutions have taken a hit – and in some countries, 1% is a good deal right now. The peer-to-peer nature of these protocols also makes it easier for borrowers to access credit, while banks can be notoriously picky about who they leave on their books.
The benefits for banks
Now you may be wondering … given all these high fees, wouldn’t banks prefer to withdraw the profits?
Not so, according to Cryptoenter. The blockchain infrastructure platform says it is not interested in competing with companies that already exist in the financial market. Instead, the top priority is helping banks facilitate fiat and crypto transfers in real time and erase the boundaries between the two worlds, through technology that can be integrated into existing systems. Well-designed, fiat-focused IT systems may be as little as 30% to 50% cheaper than physical operations, but Cryptoenter says the cost of its infrastructure is “virtually negligible.” Given that more and more banks are starting to explore blockchain for the first time, this can help eliminate the high cost of entering the market.
The company’s goal is to provide DeFi services with bank-like reliability – allowing banks to access new financial instruments without losing control of liquidity. According to Cryptoenter, its technology can deliver branch-less banking through a network of connected outlets, providing greater coverage in hard-to-reach regions. Remittances of any value can be transferred at a maximum cost of $ 1, and infrastructure testing suggests it is capable of handling more than 1,000 transactions per second – more if regions and countries are segmented into separate blockchain networks.
The platform also offers market expansion offers, which help encourage investment in cryptocurrency start-ups while reassuring backers that products will be released on time. There are also strict restrictions on how investors’ money can be used, and recipients are required to provide regular updates on the progress of projects to the community.
At the core of Cryptoenter is Hyperledger Fabric, a blockchain that already includes IBM, Intel and major financial institutions such as JPMorgan, Visa, Swift and the Bank of England among its members.
“Banks need to respond to modern challenges and transform the service offering to customers. Decentralized financing increases the functionality offered to customers, increasing loyalty and end users. With DeFi, banks can move to the next level of financial services without losing customers, ”Pavel Lvov, Cryptoenter CEO, told Cointelegraph.
As countries around the world explore central bank digital currencies much more aggressively, assets, including cryptocurrencies, will only become a bigger part of our daily lives. Now the ball is in the banking sector – and they have the chance to lead the way by embracing this technology early on.
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