Facing challenges from new FinTech start-ups and shifting consumer expectations, retail banks are seeking out ways to ensure they stay ahead of the curve and keep customers satisfied. The continuing rise of DeFi (Decentralised Finance) has the potential to be embraced by retail banks to improve their offering and hold off innovative competitors.

DeFi encompasses a wide range of financial applications and instruments that represent an alternative to the conventional financial system. From investing, saving to trading and borrowing, customers have the ability to access a range of products using these blockchain-based technologies and solutions.

Embracing innovation

While there is no question that the rise of DeFi will remove the role of some banks and financial institutions as intermediaries in a number of areas, including processing transactions, the banks that successfully integrate elements of DeFi into their operations will be able to give their clients access to a range of new services.

As DeFi has the potential to provide members of the unbanked community with access to products that have traditionally not been available to them through conventional banking, retail banks would benefit from integrating or collaborating with platforms in the space to offer underserved people more financial options. With solutions being blockchain-based and relying on cryptocurrencies to operate, retail banks will also need to warm to digital currencies and assets to make the most value.

Collaborative focus

Despite a challenging few months for cryptocurrencies, the total value locked in protocols is more than $55 billion as of May 2022, according to DeFi Pulse. Customers increasingly want their bank to provide financial services outside of their conventional offering, with propositions like crypto trading and products for retail investors helping to attract new customers.

As there are areas of contention between the decentralised aspects of DeFi and the centralised characteristics of traditional financial institutions, banks would benefit from engaging with regulators as they begin to form frameworks to ensure banks are able to play a role going forward in the expanding DeFi space.

Year after year, mainstream adoption is only growing, with banks needing to investigate areas where they can co-exist with DeFi in the future. The ecosystem is rapidly evolving and seeing disruptive new start-ups entering the space on a regular basis. By partnering with leading firms in DeFi, banks can help develop innovative financial products that find a middle ground between DeFi and traditional options, leveraging the strong reputation of mainstream banks and the potential of DeFi firms.

Banks that take a forward thinking and proactive approach towards the evolving DeFi space will find themselves at the cutting edge of innovation and bring those benefits to their customers. Ignoring this ecosystem and simply focusing on traditional financial products may mean that retail banks will face a high number of customers migrating to rival institutions that better meet their needs.

Written by Finbarr Toesland, Editorial Contributor, VC Innovations

Join us on 12th July at FTT DeFi, where we will explore how collaboration and a network of partners are enabling financial institutions to bridge the gap between TradFi and DeFi and better serve their next generation of customers.