In the past, financial services and products are only limited to those who can afford it and the ones who have connections in the industry. Thankfully, DeFi has been introduced and provided access to the financial system to most of the population. FinTech, through DeFi, offers various innovative products and services that can provide opportunities to the unbanked and the underbanked.
In the past, the global financial markets are only limited to the affluent class who have the right connections in the right location with endless amounts of wealth ready for their disposal. Financial services are not easily accessible to most of the population, and this includes investing, banking, loans, and growing a portfolio.
Right now, innovations in the financial industry have been introduced. Financial technologies, mainly decentralized finance (DeFi), have paved the way for a new system in the global financial markets. Through DeFi, centralized, traditional financial products and services today, including insurance, savings, and loans, can now be easily accessible by anyone who has an internet connection and a smartphone.
The goal of DeFi is to remove the barriers that traditional financial systems have. It aims to provide financial services to everyone. Anyone can not have access to financial products that were once limited to the wealthier class. This provides more opportunities for everyone, especially the unbanked and the underbanked.
DeFi and its opportunities
The traditional financial system uses monetary transactions through financial institutions such as banks. On the other hand, decentralized finance enables digital transactions that are not run by any centralized channels and distinct currency values.
“Decentralized finance (DeFi) does not use a centralized authority to maintain currency values across nations. Due to the inequalities observed across the different financial systems worldwide, the necessity of enabling convenient cross-country or cross-currency exchanges was developed,” states in an analysis report by Jenco, a FinTech company that offers decentralized trading and lending services.
The use of DeFi through FinTech will allow global accessibility of various financial services, lower transaction costs, and secure exchanges.
“Utilizing DeFi is more beneficial since users do not have to follow centralized rules. Direct, peer-to-peer exchanges can occur, given that various values are agreed upon irrespective of the current offline values. Dealers or third-party mediators can also be utilized. However, transactional prices are significantly lower than when using traditional and offline institutions,” according to the same report by Jenco.
Through DeFi, most of the population can now have access to financial products that are once only available in centralized institutions. Those who live in far-flung places can also participate in the financial system by only using the internet and smartphone. DeFi has been made possible by FinTech innovations.
Transforming the current financial system through FinTech
The centralized, traditional financial system limits the unbanked and the underbanked from entering the financial markets for numerous reasons such as wealth, status, and regional jurisdiction. With the introduction of FinTech, those who have limited access can now finally experience financial services. FinTech has introduced several innovations that help most of the population gain access to different financial products and services. This number is continuously growing.
“[Financial] technology can reduce transaction costs, generate distributed trust, and empower decentralized platforms, potentially becoming a new foundation for decentralized business models. In the financial industry, this technology allows for the rise of decentralized financial services, which tend to be more decentralized, innovative, interoperable, borderless, and transparent,” says in a research paper published in the Journal of Business Venturing Insights.
For example, opening a bank account requires tedious processes, including a lump sum amount of money. For those working from paycheck to paycheck, producing such an amount can be challenging, limiting them from having a bank account. Now, DeFi innovations allow anyone to have a bank account without going through lengthy processes.
Such innovations allow users to participate in financial services by transforming the current system. Through DeFi powered by FinTech, millions of people can now access financial platforms that are only limited to wealthier classes.
To date, around 1.7 billion adults are still unbanked—those without any account at a financial institution or even through a mobile money provider. With FinTech and DeFi, this number will decrease. More and more people will gain access to financial services, opportunities, and products through these innovations.