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The only limit to DeFi is organisational imagination… In the following contribution, we suggest that finance can be best ideated not as a process to be improved but as a powerful growth engine in its own right. For retail organisations, as well as their financial partners, DeFi (decentralised finance) can provide an innovative source of profit  as well as an effective means of engaging with both your customers and business partners. Let’s explore what DeFi can mean for your business, the potential benefits, and why you should care. For business decision-makers, new technology is never a business outcome, but a potential lever in service innovation. In this sense, the accepted definition of Open Finance – “data-sharing principles that enable third-party providers to access customers’ data across a broader range of financial sectors and products” – comes up fatally short. Transforming promising ideas into pertinent data practices requires looking beyond the APIs to envisioning what can be done with financial data freed from technological and organisational silos.  DeFi (decentralized finance) is a broader vision than that of FinTech, which leverages the cloud to improve upon traditional banking business models in the delivery of financial services. Capturing the full panorama requires attention to both the business benefits and outcomes that DeFi can deliver. The Business Benefits More isn’t necessarily better: integrating a panoply of financial services does not automatically translate into value for your customers. For traditional retail banks, Open Finance provides a strategic opportunity to disintermediate retail industries in monetising their knowledge of consumer spending patterns. For FinTech operators, embedded finance offers a much larger market to grow partnerships and ecosystems across various industries and verticals. For ambitious retail organisations, DeFi opens up a range of sales possibilities and economic benefits tied to each commercial transaction. For the ecosystem as a whole, the financial data produced by these transactions provides unique insights into the reality of each customer journey. The Business Outcomes The business value of DeFi isn’t in the data itself, but in the outcomes that can be fostered using the data. These outcomes include a more inclusive customer journey, the design of digital communities around an Internet of Value, and powerful incentives to mold business ecosystems.
  • The Customer Journey
The customer journey is defined as the potential touchpoints (awareness, evaluation, acquisition, consumption and advocacy) that a customer takes in purchasing your products, services or ideas. Traditional point of sales processes focus on a binary choice of sale/no sale, with little input into the steps that led the prospect to you, or eventually away from you in future churn. Loyalty points and cards are a first step in broadening a supplier’s understanding of how customers interact with their products. Social media analytics offer a second step in exploring the customer demographics and behavior concerning similar products before and after sales. Embedded finance takes our view of the customer to a whole new level. In providing frictionless loans, savings, and investment opportunities, retail organisations can garner a deep understanding of individual and group behavior around choices concerning social and economic wellbeing, regardless of where consumers make the final purchase. This insight into customer success is the growth engine that fuels the Internet of Value.
  • The Internet of Value
The convenience and innovation of DeFi will bridge this gap between traditional banking and the digital economy, operationalising the Internet of Value. A store of value is any asset that can be saved, retrieved and exchanged in the future. National currencies are traditionally seen as acceptable stores of value because of their liquidity. But during inflationary cycles, the purchasing power of both consumers and business declines as cost is borne by those holding these assets. As decentralised finance emerges today in times of economic uncertainty, digital currencies are set to play a significant role in building a complementary Internet-based financial system that is both open and trustless. The driving force behind digital transformation in business has been the Internet’s ability to make data cheap, available, and infinitely replicable. Paradoxically, stores of value must be relatively scarce, expensive, and difficult to access. In integrating distributed ledger technologies (DLT), smart contracts, and “tokenisation”, digital scarcity can be created for any virtual asset found on the Internet. As a result, these protocols are quickly becoming an asset-agnostic settlement layer for the Internet of Value. Because of their permission-lessness, security, and openness, the development of Open Finance and DLT protocols can improve the scarcity, divisibility, utility, transportability, durability, and non-counterfeit ability inherent in financial services. In this context, “open” means logically distributed rather than freely accessible. We have learned from nature that a distributed system ultimately leads to flexibility and greater resilience which, in addition to the distributed storage of a single value, today’s legacy and web-based systems cannot deliver.
  • Incentivising your Business Partners
In a traditional financial system, monetary and fiscal policies are used to encourage or to modify consumer behavior. Monetary policy refers to (central) banking activities that are directed toward influencing the quantity of money and credit in an economy. Contrastingly, fiscal policy refers to the governance of consumer decisions about taxation and spending. In general, monetary policy aims to spur economic activity where fiscal policies are designed to foster higher employment and income. Given the inefficiencies and uncertainties of the global economy, both can, and often have, run contrary to the specifics of a business and its ecosystem. In a decentralised financial system, monetary and fiscal policies can be harnessed to promote individual and organizational wellbeing. The governance rules are tied to “tokenisation”, the aim is to nudge consumer behavior to in the best interest of the ecosystem. The “monetary policy” of Proof-of-Work (PoW) or Proof-of-Stake (PoS) networks, for example, is defined in the protocols themselves, and regulates the circumstances under which tokens (incentives or rewards) can be minted. The fiscal policy is also defined in the governance structure of each protocol and regulates the transaction fees. DeFi thus offers organisations the opportunity to design decentralised ecosystems whose DNA aligns with specific economic or social goals. If the road to DeFi begins with rethinking financial data-sharing principles, its value will come at the end from operationalising a set of specific business benefits for financial actors, retailers and customers. In this contribution, we have looked at a panorama of the potential promises of transforming finance from a process to a product in its own right: a more inclusive customer journey, a complementary store of value, and a macroeconomic tool to enrich business ecosystems. In rethinking finance, the journey to value has just begun. [The authors of this article are: Dr. Christian Hitz, ZHAW; and Prof. Lee Schlenker, Principal, Business Analytics Institute] [Drs Hitz and Schlenker will be facilitating  modules on the Application of Digital Ledger Technologies and Smart Contracts at the BAI/ZHAW Winter School February 1-11,2022 in San Francisco]

 

Helen Child, Founder & CEO, Open Banking Excellence

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