What exactly will the future of banking look like? Although the sector has already gone through tremendous revolution, more advances in technology look set to disrupt the sector even more.
The forthcoming changes are riding on the development of peer-to-peer blockchain financial solutions, setting the stage for a future where Decentralized Finance (DeFi) will control banking.
The advent of this new technology will be brought home in the first DeFi conference in East Africa set for March 17 and 18 in Nairobi
Nhial Majok, founder and CEO of Kesholabs believes that the growth of DeFi solutions, an equivalent of M-Pesa but for the entire world, is going to rapidly pick up over the next two to five years.
“Medium term projections show that the whole space will hit Sh100 trillion in that time frame. In a span of less than two years, the ecosystem already has the equivalent of Sh100 billion value,” he notes.
According to Paxful, Kenyans are doing manual trades of Sh100 million a month on peer-to-peer digital platforms.
“This is an industry that is growing and Kenya being one of the top innovation hubs in Africa,” Mr Majok remarks, adding that the country needs to lead this discussion. “The time is now,” he says.
For Africa, the new wave of banking disruption holds plenty of promises.
“This is important for African economies because it looks to explore which opportunities lie in the tools of decentralised finance to lower transaction costs and transaction time of financial value in order to broaden access to millions of people who are currently unbanked,” Roselyne Wanjiru, a blockchain expert, told Digital Business.
DeFi is a modern way to remove friction and current constraints in the processes of moving money and using financial services.
Experts say the first generation of blockchain users have been people motivated to learn how to navigate through the complex concepts of cryptocurrencies. The next phase will present a new scenario, they add.
“The next step in blockchain adoption is the on-boarding of millions of news users oblivious to the technology, enabling the services they need to finance their businesses, send money overseas or for protecting their savings from erosion by inflation,” says Eddy Travia, chief executive of London-listed Coinsilium Group Limited that supports early-stage blockchain technology companies and the digital token economy.
The quicker a society removes the barriers to using financial services, he says, the faster its citizens can benefit from the cost and time efficiencies brought by switching to a blockchain-based decentralised infrastructure.
“DeFi has the potential to open a wide range opportunities for new, cheaper and more flexible services. Once the DeFi Pandora’s box is open, conditions are created for greater creativity to design open financial solutions which can contribute to better and fairer societies,” he explains.
Although Africa stands to benefit immensely from, DeFi, it has a set of setbacks to confront. Presently, there is low Internet connectivity and higher latency on the continent, and applications built on a decentralised protocol require strong and fast internet connection.
“In most African countries, internet is yet to reach the masses and is costly. But there is a lot of research work going into increasing connectivity across the continent via free public WiFi,” says Ms Wanjiru.
Technically, some decentralised finance applications require specific features like fingerprint verification for security, which is not standard for all smartphones.
“Huge gaps in terms of financial literacy exist, as many people are not aware of just how powerful their mobile phones are in regard to giving them access to tools they can use to generate and distribute financial value.”
Resistance to change by some actors, especially those who benefit from their established position in the legacy financial systems has been cited as another hurdle.
“Centralised infrastructure has limited competition through high-entry barriers, high cost and privileged access to central authorities. Removing friction in centralised systems means diminishing revenues deriving from this friction,” says Mr Travia.
Making money movement cheaper, he says, will benefit small and large clients of financial services while disrupting the business models of established financial companies.
Mr Majok is optimistic that Africa, which inherited the age-old banking infrastructure that has existed for centuries,will still benefit from this new financial system.
“Blockchain gives African banks the freedom to test new ways of tracking wealth, sending and receiving money without exposing their already existing platforms to hacking risks,” he says.
“While this also puts them at risk if they don’t innovate, it gives them an opportunity to provide a faster method of payment with lower fees available round the clock, across borders, and with the same security guarantees that the legacy system can offer.”
For the global economy, it enables new ways of holding wealth and performing transactions that eliminate the need to place data in the hands of third parties like correspondent banks and reduces any risks of a single point of failure.
But Africa has suffered huge financial losses resulting from sophisticated cybercrime attacks. How secure are Decentralised Finance systems?
“DeFi systems run fundamentally on blockchain technology, which, by design is highly secure. In order to change a specific entry, you must alter the entire set of entries, which would take an unnecessarily high amount of computing power and make no financial sense,” observes Ms Wanjiru.
At the point of conversion to cash, however, users must take keen care to protect their passwords, private credentials and to avoid online snares such as phishing, botnets, scripts, ransomware, Denial of Service and deepfakes.
“Finance companies not only need to secure their firewalls, but also fight hackers from the perspective of a malicious hacker. They must have a team of certified ethical hackers to detonate any information breach attempts,” says Nadav Zafrir, chief executive of Israeli think tank and cybersecurity company Team 8.
DeFi has several use cases, ranging from micro investing, digital asset marketplaces, resource staking, micro rental income, asset tokenisation, peer to peer lending and borrowing, margin trading, derivatives markets to alternative savings.
“The key thing about decentralised finance is bringing unprecedented financial access and control to people, in that they can use trustless and transparent systems without a myriad of intermediaries. DeFi puts people, rather than institutions at the centre of financial value,” says Ms Wanjiru.
Although pre-requisites are similar to fintech solutions, such as a good internet or mobile data connection, Mr Travia says, it is still a challenge today for those with no experience with digital assets to use DeFi tools.”
Like traditional financial markets, DeFi markets need users and liquidity. Therefore, DeFi applications are used where there is a concentration of users familiar with cryptocurrencies.
Current DeFi usage, in a similar way to the first years of digital currencies, is concentrated in trading and investment activities.
However, Mr Travia adds, a new wave of DeFi tools are being built to enable the move towards fulfilling mainstream needs, such as financing homes, cars, businesses and education costs, and with new user interfaces removing the need for blockchain tech literacy.
“I expect the impact of DeFi to be compounded by easier, more accessible DeFi applications and by the general awareness boost generated by the upcoming and multiple governments-led experiments with and implementations of Central Bank Digital Currencies (CBDC),” he says.
DeFi, Mr Travia notes, will first be used in countries that have a limited range of accessible financial services, such as countries with tight monetary controls or where financial infrastructure is unfit to serve their citizens adequately.
In this scenario, DeFi will change the overall financial system infrastructure of the future. But as with all technological revolutions, this transition will not happen in a day and, separately from DeFi, accounting and corporate finance activities are increasingly dependant on software.
“However, these software tools basically automate processes coming from the centuries-old double entry bookkeeping system; blockchain brings a new, trust-minimized, distributed ledger to our society.”
Some accountancy roles, especially the low-skilled ones such as entering transactions in an accounting ledger will have to give way to new roles such as making sure smart contracts are correctly implementing the business logic as originally sought by the organisation.
Smart contracts are programs enforcing a specific logic on a blockchain. They are a type of simple 'if - then' function where, if certain conditions are met, the input, the program issues a predefined answer, the output.
These roles, according to Mr Travia, will require a deeper understanding of software and blockchain technologies, but he anticipates that will be true overall across most functions of tomorrow's organisations.