What Embedded and Decentralized Finance Mean for Traditional Banks

Banks are no longer the only transaction game in town. Technological progress and competition from fintech firms have changed the landscape for customers, requiring banks to adapt to an increase in non-traditional players.

Embedded finance, decentralized finance (DeFi), and central bank digital currency (CBDC) are trends that will drive the future of transactions, according to Payments Journal.

In embedded finance, financial services are woven into non-financial products and services. For instance, if a customer uses a ride-sharing app, he may be able to access loans or insurance through that app rather than his bank. The ease that this presents for consumers and the opportunity for merchants to attract business with digital financing options are clear benefits, writes Puneet Chhahira, Head of Global Marketing and FinTech Engagements for Finacle.

Banks are using a product management approach to adapt, offering digital wallets, mobile payments, and other cost-effective digital services. They can also increase revenue by providing existing customers with extra services, such as lending and insurance, Chhahira writes.

Second, DeFi, which is in its early stages, refers to using blockchain technology to create secure decentralized financial platforms and services that operate independently of traditional financial institutions. No central authority controls the system, keeping it less susceptible to fraud and censorship. DeFi also helps people who may not have traditional access to conventional banking services, such as underbanked and unbanked populations and those in emerging economies.

Finally, CBDC involves digital versions of fiat currencies issued and backed by central banks. Like DeFi, these provide access to the underserved. They could simplify cross-border transactions with a unified digital currency, reducing conversions and exchange rate fluctuations, Chhahira writes.

To remain competitive and innovative, traditional banks should take heed and adapt to these future trends.