Digital banking: How DeFi can lower costs for everyone

Decentralized finance (DeFi) is often characterized as a movement that could unseat traditional banks once and for all — eliminating intermediaries and giving consumers levels of freedom and choice that they’re probably unaccustomed to.

But there’s an alternative narrative, one that doesn’t pit DeFi against the banks. What if these innovative protocols could help provide desperately needed modernization to old-fashioned financial institutions… enabling them to deliver better levels of service in a much more cost-efficient way?

Even before digital assets burst onto the scene, many banks were struggling to adapt to the sudden, large-scale shift to online and mobile banking. Lenders that have existed for hundreds of years were suddenly having to invest countless millions of dollars in resilient websites and apps that would allow customers to access bank balances on the go. Yet at the same time, most brands felt obliged to maintain their expansive networks of branches to ensure that older or less technologically savvy clients weren’t left behind.

Over the past decade, bank closures have accelerated. In the U.S., figures from the Federal Deposit Insurance Corporation suggest that 4,500 branches have shut their doors for good since 2010 — approximately 6% of the total. There have been even more closures in the U.K. From 2012 to 2019, there was a 22% fall in the number of banks on high streets. With vast 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’ll have to do without a friendly face behind a kiosk, the disappearance of physical banking has the potential to hurt them in the pocket, too. Branch closures have been compounded by a dramatic decline in the number of free-to-use cash machines in towns and cities worldwide. Especially in rural areas, this means many people have little choice but to use ATMs that fall outside of their bank’s network — and on average, this cost $4.64 per transaction in 2020. For those who only need to withdraw $100, this can be exceptionally prohibitive.

The dearth of cash machines has become so extreme that, in one part of New Zealand, there’s only one ATM in the 418km that separate the rural communities of Wanaka and Hokitika. Good luck if you run out of gas and a petrol station doesn’t accept cards. The U.K. is also considering whether it should force retailers to offer cashback to all consumers — irrespective of whether they make a purchase or not.

How can DeFi help?

Given the staggering costs associated with using private cash machines, it’s little wonder that DeFi could offer an arresting alternative for consumers who want lower fees. Although Ethereum’s scalability issues did cause transaction fees to spike to almost $15 at the start of September, the vast array of blockchains and payment networks in the industry can help to drive these costs back down. With some platforms allowing transfers to be executed for fractions of a cent, banks are beginning to sit up and realize that they need to become more competitive… or risk becoming irrelevant in a rapidly evolving landscape.

Taking a few leaves out of DeFi’s book could also help the sector overcome repeated technical hiccups that are unacceptable in a digital age. Seemingly every week, there are new headlines of banking apps that have suffered widespread outages — usually on payday — leaving consumers locked out of their accounts, and some finding 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 arises, it’s typically down to a centralized exchange rather than the technology itself. (Of course, outages aren’t impossible. On Nov. 12, Ethereum suffered disruption owing to irregularities on infrastructure providers Infura and Blockchair.)

The advantages that DeFi can offer don’t end here. Figures from the World Bank show that banks were the most expensive route for remittances in low and middle-income countries — taking substantial chunks out of the earnings of people who need it most. To add insult to injury, ancient systems often mean there are long delays to payments, and it can be days before international transfers are finalized. DeFi can help reduce these costs and even eliminate them entirely, while moving funds from A to B in seconds.

DeFi, at least for now, also has the upper hand when it comes to interest. The rates for saving 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 make it easier for borrowers to gain access to credit, whereas banks can be notoriously choosy about who they let onto their books.

The benefits for banks

Now you may be wondering… given all of these high fees, wouldn’t banks prefer to trouser the profits?

Not so, according to Cryptoenter. The blockchain infrastructure platform says it isn’t interested in competing with companies that already exist in the financial market. Instead, its top priority is helping banks to facilitate fiat and crypto transfers in real time and erase boundaries between the two worlds, through technology that can be integrated into existing systems. Well-designed, fiat-focused IT systems may only be 30% to 50% cheaper than brick-and-mortar operations, but by contrast, Cryptoenter says the cost of its infrastructure is “virtually negligible.” Given how more and more banks are beginning to explore blockchain for the first time, this can help eliminate the high costs of entering the market.

The company’s goal is to provide DeFi services with banking-like levels of reliability — enabling banks to access new financial instruments without losing control over liquidity. According to Cryptoenter, its technology can deliver branchless banking through a network of connected retail outlets, delivering greater coverage in hard-to-reach regions. Remittances of any value can be transferred at a maximum cost of $1, and tests of its infrastructure suggest that it is capable of processing over 1,000 transactions per second — more if regions and countries are segmented into separate blockchain networks.

The platform also offers market expansion offerings, which help encourage investments in cryptocurrency startups while giving backers the assurance that products will be released on time. Strict restrictions are also placed on how investor funds can be used, and recipients are obliged to offer regular updates on how projects are progressing to the community.

At Cryptoenter’s core is Hyperledger Fabric, a blockchain that already counts 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 range of services offered to customers. Decentralized finance will expand the functionality offered to customers, thereby increasing loyalty and end users. With DeFi, banks can move to the next level of financial services without losing customers,” Pavel Lvov, the CEO of Cryptoenter, told Cointelegraph.

As countries around the world explore central bank digital currencies far more aggressively, assets including cryptocurrencies are only going to become a bigger part of our everyday lives. Now, the ball is in the banking sector’s court — and they have an opportunity to get ahead of the curve by embracing this technology early.