/i/https://cdn.jwplayer.com/videos/KvSeVxJQ-96F1EhHl.mp4
In this video, PYMNTS.com Editor and Chief, Matt Nesto, Algorand Director of Business Solutions, Guiliana Berchicci, and Bnext CEO, Guillermo Vicandi discuss decentralized finance (DeFi) and its impact on the future of the banking and financial services industry.
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**Transcript: **
Mast Nesto (MN): Hi, I’m Matt Nesto, the Editor in Chief of PYMNTS.com and I’m happy to be joined today by two interesting guests who can really give us an update in what’s going on in the world of DeFi, decentralized finance, and neo-banks. It’s such a dynamic area, we cover it and talk about it so much.
But first, let me introduce you to Guiliana Berchicci, she’s the Director of Business Solutions at Algorand, joining us from Boston. And from Madrid, Guillermo Vicandi, he’s the CEO and co-founder of Bnext, which is a Spanish neo-bank with something like over 400,000 customers. Happy to be doing business with you two today.
Guillermo Vicandi (GV): Same here, thank you very much for having us.
MN: Glad you all could make it. So let’s just start here kind of on the 30,000 foot level, if we can. Where are we today with DeFi, in terms of the convergence of decentralized and traditional financial models? What are you seeing right now, or what is the most interesting development and the greatest concern that you’re facing?
GV: Guiliana, should I get started? So the way I see this is that, until very recently, there was this unquestioned monopoly in the exchange of value for products and services. Decentralized finance is very influenced by the big centralized, monolithic, institutions that produce their own product and sell them through their own network to their own customers. Which, to me, has always seemed like a massive conflict of interest.
I think the DeFi is not only just an unwelcome disruption to traditional banks, but more like an existential change, it is, in a sense, a cultural change, it is representing and increasing storage of value, and it is simplifying investment and borrowing for everybody. So it represents a massive change in the industry.
Guiliana Berchicci (GB): I believe that DeFi is a huge wakeup call for banks. It's really a huge catalyst for change. I don’t know whether we’re going to be in an all DeFi world anytime soon, but the fact that the services that have traditionally been offered by banks are being offered way more by digital banks will speed up the need for banks to create the value that, right now, they are not providing anymore because of obvious changes in technology.
GV: This is not only a chance for banks to change themselves, but also for institutions and governments. You mentioned that you just came back from El Salvador, I think what’s happening in El Salvador is huge. It’s a wake up call for governments and institutions.
Those guys were told 20 years ago to leave their own legal tender and join the dollar because they could participate in a bigger stronger club. But as you know, 40% of the dollars in existence today have been printed over the last 12 months.
So El Salvador and those economies have really been harmed by those decisions. I understand that El Salvador cannot control Bitcoin either, but at least they are not going to be harmed by decisions made by the Fed by moving their legal tender to Bitcoin. So it's not only a huge wake up call for banks and financial institutions, but also governmental institutions.
GB: I think it really comes down to having choices. When you have a choice and when you can actually act upon having choices, the access is changing the balance of power and I think that is what El Salvador is reminding us of.
MN: I might hazard to say that the legacy banks, the traditional lenders, call them what you will, don’t really have a choice in this matter. Hemorrhaging is probably too dramatic of a term, but they’re bleeding customers to the point where they have no choice but to react and adapt.
Tell me about the pace of that Guiliana, how do you see that playing out? What are they going to offer to stop the flow of customers, in terms of benefits and selling points that change the way they have always done things?
GB: The first step is getting them to realize that they are at a critical juncture. It is not as obvious to them as it is to us. Then acting, is another big step that they have to take. But having said this, I think the smarter ones are realizing that they need to change and adopt new technology fast.
They are not technology producers, so they are either partnering with other fintechs or acquiring fintechs.
MN: What do you think about that Guillermo? Take your biggest bank in the world, they worked hard to get big, and there are certain things that are reserved just for big banks, where caller banks can’t play. What do you think about that, that big banks need to get small and nimble and do more with fintechs?
GV: I think that Guiliana has a very good point, which is that the banks are not tech producers. Although there has been this motto that they have been adopting over the last 10 years that they are more tech companies than they are financial institutions. But that's really not true.
If you think about it, banks have spent billions of dollars trying to improve their front end. They want to make their apps look fancier, their website look cooler, UX wise easier to use, etc. But at the end of the day, banks are running on an old obsolete infrastructure that they cannot overhaul.
So, the way I see it is that banks need to take action by integrating DeFi solutions as fast as they can. This could be, like Guiliana said, partnering with or acquiring fintechs or partnering with blockchains such as algorand or with players that they can leverage.
It’s virtually impossible for them to overhaul their current technology that is obsolete and it is never going to allow them to get to the level of service that the client is expecting. This has fundamentally changed, if you think about it.
There was this concept that before, with the relationship with a bank, you were lucky to be a client. So, the bank would select you as a client and you would have to be grateful for that. But that has completely, massively, radically changed over the last few years.
You can now live without a bank and not go back to cash. So it's going to be impossible, in my opinion, that they are going to be able to go nimble, small, and act as a startup. They are going to have to partner with someone who is prepared to do that, they cannot do it themselves.
MN: That’s interesting that you said that, that they can’t overhaul what they have. I guess you’re inferring that they need to start new, start clean in some way, shape, or form.
GV: I don’t think that DeFi is going to swallow the entire banking system as we know it today, at least in the mid term. But for those banks that want to survive this new ecosystem and survive this new trend, they need to move forward fast.
The only way for them to move forward fast is for them to partner with the right partners. This could be FinTechs, blockchain networks, you name it. But that’s something that isn’t happening, because even if you are very loud in their PR efforts that it is something that they are doing, the fact is that they are not.
Santander announced that they are partnering with Ripple, but that is only for a small portion of the transactions that they are processing. So, it's more of a PR effort than a real change in mentality. Either they move forward fast, or it's going to be a big problem for all of them.
GB: I totally agree. Coming back from El Salvador, what you see is that banks had to move. Now they are really talking and trying to understand how they can offer new services. Because now they understand that there is an alternative, like Chivo, that is doing what banks have been doing so far and for more people.
So, the question is what different role can we play? For example, some are thinking about tokenizing invoices so you have more liquidity for working capital. The smart ones are already a step ahead in thinking, what else can I add that other DeFi wallets are not?
To me, there is a window of opportunity that, of course, is shrinking because what the bank has right now that matters is really scale and trust. But once you don’t need this anymore and you have digital first users, which the install base of first generation users is growing and not dying off, then banks will not have any advantage.
If anything, it’s just going to be the license to operate in a country that is the advantage, but that’s it.
MN: She said scale and trust, but I might have thrown in compliance as well which is certainly a huge thing that banks are really good at. Not by choice, but by necessity, by mandate. That’s just a thought, feel free to add to that.
But, it's not all bad, it’s not an all or none proposition. There are some things, like trust, that customers are pretty darn happy with about traditional banks.
GV: The way I see this is that we are with DeFi like we were in the early 90s with the internet. It existed back then, but it was difficult to interact with. My dad’s a doctor and I can remember him doing his thesis and having to interact with some kind of weird front end that you had to code to access the library at the hospital.
But as soon as someone created an easy to use front end, then everyone else could access it. So, we are at that point. I believe that most of your viewers or readers do not know how an email protocol works, but what I do know is that I can send an email from a Gmail account to a Hotmail account no problem.
DeFi is still difficult to interact with. There’s still a lot of work to do on the front end, but as soon as that is sorted out everything that has to do with going massive and all the trust issues will be sorted out all of that is going to be forgotten.
As soon as you understand what you are doing and as soon as you feel confident that the biometrics that you are using to access your transactions are safe, then the trust issues will be gone and everyone will move to DeFi. It’s easy to use, it’s better, faster, more convenient, it’s cheaper. So, who cares about the technology that’s underneath?
GB: We have structures and a system that meet needs that were unmet before. But now, these needs are really met through technology and the structure has become completely obsolete.
The pandemic showed us how, through Zoom, as we are doing now, that you don’t really need to go to a place anymore or travel anymore. I think this is also happening for banking and for financial services.
Thinking about compliance, this is one of the services that banks are providing to meet regulations and it creates a barrier to entry. But there are companies that are doing compliance as a service. How long is it actually going to take till you actually want to do that?
I want to be able to have my digital identity be recognized and portable. What if I could have a token that says, yes, Guiliana has passed the KYC and AML test and she should be able to do whatever she is allowed to do.
Right now, it’s banks that are doing it, but there are different ways of doing it now and I think it is just a question of time till its going to happen. In terms of trust, I agree that the comparison to the internet is so important. The internet gave everybody the infrastructure to access information.
Blockchain is the protocol that will give everybody the possibility to access value and exchange value. Right now it is in a trustless manner. Many people are still wondering, what is blockchain? The result is crypto is getting a bad rap.
But I think once we understand what it is, like with Bnext, people can send money in no time and no one is stealing it, people will move off the old system. The old system is expensive and inefficient, but you don’t need to do that anymore.
MN: To extend on that idea that you both touched on, about the internet. The early internet had Netscape and Napster and they’re gone. Will we see something similar, that early push the forefront of technology companies that come and go? Or do you see something that is a little more consistent? When is the Google of DeFi going to emerge, how long will that take?
GV: You’re right that Netscape disappeared, but what’s left is the concept behind Netscape. It’s an easy way to interact with the internet. There have been bigger companies after Netscape that made Netscape disappear, but the whole concept that someone is creating a simple interaction with a complex technology survives.
That is happening in DeFi as well and I can use Bnext as an example. We worked with Algorand building a money transfer, money remittance service. From a UX perspective, it's as simple as you access your agenda, select the contacts, select how much money you want to send, and send it.
Nobody needs to understand that we’re buying the stable coin using the Algorand blockchain then the offramp. UX wise, it’s super simple, it takes four seconds, and it's the cheapest product out there.
There are two trends out there that I see. The more crypto native, the more tech savvy are trying to get one step ahead and take it one step further and are building more sophisticated solutions. Then there is another trend of people who are trying to take a layer of complexity out and make it simpler to interact.
I think we will see a big DeFi search engine and a big DeFi bank that won’t take over the entire ecosystem, but a big part of it.
MN: If I could just jump on that, I think that what you are saying is that they’ll get one thing in place and get really good at it. Like the way Google started with just maps and search and Youtube and now it’s become Alphabet. I think that’s probably going to be the case here as well.
GB: Take also Amazon. Amazon started in 1995-96, but it was able to change and adapt. It was very focused on what value it was bringing and really changing the whole organization on what they were delivering.
I think the players in DeFi, the ones who are able to understand what they are delivering and really deliver on that, are going to stay. A lot of that is based on learning from your customers and also learning from the past.
GV: I think it’s important to take into consideration, when we have these conversations, that we are only in the very super early days of this. I read the other day that, in some publication, that only 5% of the world knows what Bitcoin is.
So for us here, for your readers, Matt, Bitcoin is already a mainstream concept, but it isn’t. It’s something that’s for the 1%. It’s something that’s in the super very early days. So, it’s impossible to anticipate where this is headed.
But I think people will see how DeFi is increasingly becoming a bigger storage of value and growing somewhere around 700% a month. It’s crazy how fast it is growing. Everyday there’s a new solution, every day there’s a new actor, every day there’s a new technology out there.
It’s moving so fast that it’s unstoppable already, even though we are only in the very early days of it happening.
GB: I also want to point something out that sometimes we don’t think of. You know, when you say it’s 5% of people who know of Bitcoin, but when you go to Venezuela or Argentina, it’s way higher than 5%.
I was talking to some younger people at a conference, everyone was younger than I was, but some of them were saying ‘If you have to choose a market, there is a market where it is just another option and there is a market where it is the only option, or the best option that you can have’.
Take Bitcoin, for example. In Venezuela, it’s so important for them to have access to digital money so they can restore value. In the US, you have so many other ways of investing, or keping value.
I would say, it depends very much on where in the world you are. In some cases you’re going to be leapfrogging. If you think of how much more advanced some people in Africa were at using their phone to pay, because they had no alternative they will adapt faster.
MN: I just want to gauge your reaction, both of you, to some recent news, I’m sure you’ve all seen it. The big German neo-bank, N26, after 18 months in the US, pulled a u-turn and pulled out of North America.
What is your reaction? What is that saying to you about the company, about the US, about DeFi, about neo-banks? Why did that happen?
They had plenty of money, plenty of capital, and they framed it as an effort to focus on their core market. But, to do that kind of a u-turn in 18 months, there’s something more going on there. What were your thoughts on that, when you saw that headline?
BV: I did see that, honestly I think that they are going to IPO in the next couple of years, or maybe even the next year or so, and that they really are focusing on their core market so that they can report for the final IPO submission results that are as solid as they can be. I do think it’s that.
I am positive that all the big neo-banks are working on their DeFi efforts as well. The only thing is that, for us at Bnext, we are a smaller organization and maybe we can move forward a little faster than they can. But, the guys at N26 can move faster than any traditional bank can.
They have surprised us already a couple of times with some solid changes. They launched their crypto wallet in 2017, so they were pioneers in doing that. So, I’m pretty sure that it’s not something.
In the US, they probably underestimated how hard it was to get a significant market share over there. There are some very relevant neo-banks in the US as well. It’s probably a matter of them facing their IPO and wanting to be as solid as possible when that happens.
GB: I agree with Guillermo, but I don’t really have enough insight, information, or data to really tell you that it is one way or the other. I mean, you can say that when you’re all digital you can approach a country faster, but you can leave faster as well.
This should lead us to think, what should I really do to enter a market? The fact that we’re digital and can deploy universally, does not mean that you don’t have to take into account some specific features or the recent dynamics of the market.
The fact that you can be global, doesn't mean that it’s going to pay off all the time. I think you have to be aware of specific circumstances and regulations.
MN: So, it’s not some indication of a character flaw in US consumer appetite for neo-banks and DeFi? Not some leading indicator?
GV: I don’t think so, but I don’t know.
GB: Look, it depends. I’m not sure what I can disclose or not, so I’m going to keep it quite generic. Think remittances. If you are someone here, in the US, sending money home to someone in El Salvador, do you think that they are going to keep using the regular ways and keep paying 10% or 20% to send money? They won’t.
So, it depends again and goes back to what I was saying before. If you have a better service that is vital for you, you will go for that. It’s also here in the US, what are they solving for (the neo-banks)?
MN: We touched upon this a little earlier, the area of trust. Trust in this invisible, unknown, unspoken thing that you take for granted until someday suddenly it isn’t there or has been broken. Tell me about authentication and the advantages that the DeFi space has over traditional lenders.
GV: The way I see it, is that DeFI, in the short term, it’s not going to be super long term, but in the short term DeFi is going to offer the path of least resistance to access financial services. Today, with traditional finance, you can only access certain products for certain prices. This is going to be completely gone with DeFi.
In the path of least resistance, authentication is something that is going to be key. Like Guiliana was saying, what if I can have a token that’s valid everywhere and everyone can just check that token and I don’t have to do KYC everytime I just want to open a new bank account.
What if I can just interact with a payment method online and I don’t need to type all my personal information because this token that’s imbedded in my computer enables a biometric authentication process.
So, for this whole concept I’ve been describing, where I’m trying to get one layer of complexity out that would help with a better understanding and therefore more trust, authentication is a key part of that. If we can keep it smooth, simple, accessible, and convenient, it is going to be a massive change in how people interact with DeFi products.
GB: Absolutely, I totally agree. It is critical. We are seeing some very strong solutions coming to the floor.
MN: As I look at the clock and try to wind things down, I’d just like to ask you both to get out your crystal ball and give us your path forward for the next 2, 3, 5 years. Tell me what you’re looking for and what your primary challenges and obstacles are.
GB: I can tell you from what I’m seeing from my side, I work for Algorand, which is a blockchain protocol, I think we are going to be seeing a lot more blockchain based financial services, like what Bnext is providing. You’re going to be seeing a lot more tokenization.
Blockchain and tokenization give you a way to unlock your assets. So, I think that will be a trend that is here to stay. Same thing with smart contracts and also cryptocurrencies that are integrated into your regular portfolio. These are the things that I’m seeing the most, that people are working on.
Also, because I work more in Latin America, I see more instances of extending credit to people who normally would not qualify for credits by using artificial intelligence and blockchain, in some cases.
GV: The way I see it is that, we’ve been in fintech for the last 4-5 years. I think that fintech has represented a 10% change to traditional finance, whereas crypto, blockchain, DeFi is going to represent a 99% change in how we see financial services.
Like I said earlier, I don’t think DeFi is just another unsettling disruption for banks that they are going to try and fight via compliance regulations. That’s not going to happen. It is a cultural change. It is a massive storage of value that is increasing at an unbelievable rate.
If I was the CEO of a big bank, I would totally try to embrace that and take steps towards integrating DeFi solutions. Why not help shape the regulation? I understand that DeFi, in terms of trust, might be a difficult situation for some people to interact with because of the trust issues.
Because it might be riskier, or they feel it is still a bit riskier. But, as soon as some of the big DeFi players embrace the task of helping to shape the regulation, banks cannot commit to participate in that.
Not thinking like they did 5 or 7 or 9 years ago that compliance and regulation is something that can be thrown at fintechs so that they can stop them. If they approach this instead of from a risk averse perspective, from an innovation first perspective, then we are going to see a massive change in what is going to happen in the next few years.
It’s already happening today, but I think it's just going to accelerate.
MN: I’m going to break my own rules here, Guillermo, with a quick question. Are you thinking that that process is going to be led from the consumer side, or from the producer side, or will it be indecipherable and in parallel?
GV: With DeFi, I think everything is about community and decentralization and therefore I think it’s going to be led by the community. There will be tech companies that try to build specific products to solve the needs of that community and there will be banks that try to adapt to the demands of that community or shape it.
It’s a massive cultural change and therefore it's going to be chapped by the demands of the community. Of course it’s not going to be possible for us to meet 100% of the demands of that community, but we are going to listen to those demands in order to shape something that is inclusive for everybody.
