Bits: Decentralized Fintech
Why DeFintech is inevitable and imminent
Consumer fintech has transformed how we interact with our banks and financial services. In that process, we’ve seen tremendous business model innovation (e.g. Robinhood’s zero fee trading, Chime’s early paycheck access).
Still, fintechs rely on the existing financial stack in many ways, breeding a swath of fintech infra companies that offer banking-as-a-service, brokerage-as-a-service, etc. These companies build necessary but thin layers between the incumbents and the innovators. Because of them, it’s easier than ever to launch a financial product. Yet, fintechs often hit a few walls as those products scale:
- Business model — at some point there’s only so much margin to go around. Most fintechs seek to move up the food chain by capturing interchange and the sticky direct deposit relationship. To do so, they often launch high rewards savings accounts or credit cards. In the early days, fintechs are happy to pay for speed to market to build their audience, but as they grow the market demands they keep more margin in house.
- Flexibility — While these infrastructure players help companies get to market quickly, they lack much flexibility when it comes to iterating on the product. Eventually, fintechs hit the traditional rails again and recall how difficult it is to overcome old tech, heavy compliance, slow moving risk teams, etc to quickly try a new product line or tweak your underwriting / risk criteria. That limits the reach and rates available on these fintech products.
Together, these factors push fintechs to bring more of the stack in house, inevitably recreating the incumbents they sought to disrupt (including replicating parts of the labor costs around compliance, legal, risk, etc).
Crypto and DeFi represents a real chance for fintechs to escape both of those traps over time. As Robinhood and Cash App has shown, crypto trading alone can be a high value business line. I would expect to see more fintechs adopt that imminently.
From there, fintechs will see other opportunities. Wealthfront recently dropped their “high-yield” rate to 0.10%. When I first signed up less than two years ago, the rate was 2.57% — that’s an amazing 25x+ cut in value in a matter of 22 months! DeFi offers a tremendous value prop in the yields on stablecoins alone.
To extend this a few steps further — DeFi represents a means for users to access early stage venture for the first time directly. It could unlock payments and loans that are x-border, and create a universal savings rate. In fact, some of the best use cases for DeFi in fintech may be ex-US. Finally, DeFi’s composability and building blocks like Uniswap and Compound means launching a DeFi-based product is also becoming easier each day. I’d anticipate we see fintech companies rebuilt on the DeFi stack at hackathons in the coming months, as more developers leverage those building blocks accordingly.
That’s to say, Decentralized Fintech will come from both angles. If you’re building here, I would love to chat.