In an increasingly decentralised financial landscape, adapting your business model to keep up with new consumer demands and remain relevant is a challenge faced by almost every financial institution, but none more so than traditional banks.
Decentralised Finance (DeFi), especially crypto-native fintechs, possess the technological developments that conventional institutions do not, which is where partnerships between the two can lead to growth, scalability and innovation across the sector.
What is necessary for all financial services players in the current landscape is to ensure they are not overcomplicating things with lots of processes and procedures. Being agile is very important for an organisation, especially concerning environmental or industry changes.
This agility is often found in strategic collaboration. Collaboration is evolving as critical considerations have shifted towards enhancing customer experience as adoption is increasing throughout society, alongside regulatory changes and the need to adjust to the rise of the digital ecosystem. Institutions are looking to their tech-native peers to remain afloat and ride the incoming waves of change in financial markets.
A crypto future… democratised for the many, not restricted by the few
Financial markets have historically been viewed to have a top-down influence on the economy. However, the consensus is somewhat different when we look at decentralised finance. Individual mavericks have primarily driven crypto since its inception, and today, while it operates on a mass scale, it is a far more accessible asset for trading and investing.
Cryptocurrency is on a trajectory to become increasingly established as an institutionalised and legitimised form of payment. Digital currencies will form an essential part of our lives in the future, and customers of traditional banks and fintechs will continue to demand products that make their lives easier.
Upcoming generations will expect bigger and better digital functionality when it comes to money, as we have already seen by the massive uptake by Gen Z and millennials buying and spending with crypto. The pandemic only accelerated this trend; where there is volatility, there is opportunity – a truth that young people seized by trading crypto and NFTs.
Taking a walk on the wild side… of finance
We have seen – and will continue to see – a radical public opinion shift on digital currencies. From early 2021, when many people were only beginning to take note and ask questions such as “What is cryptocurrency? How do they work? How do they impact me? Why should I care?”, we are now witnessing the widespread and normalised adoption of cryptocurrency in 2022.
Despite recent volatility and the tightening of regulations, institutional investors and big banks are now seeing cryptocurrency as the serious asset it is. According to a market sizing report from Crypto.com, the total crypto users worldwide will reach 1 billion by the end of 2022, necessitating better regulation of the decentralised markets.
As governments worldwide look to regulate the industry, top officials such as Ashley Alder, Chair of the International Organisation of Securities Commissions (IOSCO), are even suggesting a global crypto regulation body is likely to be realised in the next year. With increased regulation comes legitimacy, which breaks down the virtual walls previously imposed by traditional institutions.
Partners in crypto: navigating the depths of digital currencies
This is where challenger fintechs hit their stride. Their crypto-native expertise and agile nature permit their traditional counterparts to explore cryptocurrency and DeFi more fluidly and efficiently, even those furthest behind the curve.
Both parties can reap benefits by bridging the worlds of digital and legacy finance. Traditional players are subject to more complexity and rigidity, while emerging, agile challengers possess the freedom to offer focused product offerings and elevated customer experiences. This reality makes competing in the digital landscape very tricky for traditional banks, leading many to opt for collaboration over conflict.
Especially in payments, we have seen multiple significant organisations looking to expand their crypto payment abilities, often hand-in-hand with a fintech partner who solves vital issues such as technology capabilities, scalability and compliance.
Financial services businesses that want to get into this space must first adapt their compliance approach and risk appetite. With that in mind, processes and tools for risk and compliance are constantly evolving. As a business, you must decide: are we going to build connections and infrastructures ourselves, or should we find someone who is an expert in this? As we see with many recent announcements regarding partnerships, many players opt for the latter.
However, this is not just about the benefits for traditional banking institutions. Crypto-native fintechs have much to gain too; immediate exposure to an existing customer base, scale-up capacity, and valuable data. Banks know everything a fintech would want to know about their customers, which is indispensable when building and growing new offerings. Overall, as crypto markets bleed into the mainstream, fintechs enjoy a more democratised environment with new opportunities and rings to toss their hat into.
By taking a people-centric approach to the customer, investor and trader of tomorrow, the future of crypto payments will see minimised costs, increased optionality and a more inclusive and equitable financial landscape around the world.
Financial institutions that can hold their customers’ priorities front of mind when entering into partnerships, innovating new products and creating strategies for their future infrastructure will likely stay the course in a tumultuous but exciting financial future.
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About the Author: Berivan Demir is the Product and Banking Relationship Director at Clear Junction.