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SECURITY IS DEFI’S BIGGEST BARRIER TO ADOPTION

Kaj Burchardi, Managing Director of BCG Platinion

 

As the rate of digital transformation in the finance sector has increased in recent years, new innovative technologies and solutions have been viewed as outliers rather than part of traditional finance institutions. For instance, decentralised finance (DeFI) belongs to the crypto and blockchain communities, rather than that of banks.

However, this is changing. Our most recent research has revealed that a quarter (23%) of insurance, banking and trading companies have already introduced services based around DeFi, while half (55%) are assessing it and its applications.

Driving this transformation are the changing demands and expectations of customers in a digital world, creating a need for newer models of financing. This in turn is creating an opportunity for traditional finance institutions to bridge the gap between the ‘fringe’ technologies such as crypto and blockchain, and financial services.

That said, DeFi adoption is still in its earliest stages, and much remains to be done to address challenges around security and regulation, and only once those concerns have been addressed will uptake of the technology grow and its widespread benefits be seen.

 

The benefits of DeFi

One of the biggest reasons for the slow adoption of DeFi is that traditional centralised finance models are already effective. This understandably creates concern when switching to DeFi. But as DeFi’s use cases have grown, businesses have increasingly begun considering whether it could become a long-term alternative or at least addition to the services offered by centralised finance.

One of the biggest arguments in favour of DeFi is that it can help provide access to financial applications for individuals and institutions that perhaps couldn’t before – and its decentralised nature would remove the need for a trusted mediator, streamlining the process.

Already the financial services sector invests roughly $1.7 billion in blockchain services per year but due to regulations and low levels of liquidity this has had little impact to date.

However, DeFi can address some of the challenges that even traditional finance models face; for example it brings considerable benefit to economies that lack widespread traditional financial institutions, better supporting small and medium enterprises (SMEs) that are growing in those countries.

While centralised finance services often benefit institutions that have larger balance sheets –  with a focus on them pursuing partnerships with similarly sized businesses to increase shareholder value – SMEs, which simply don’t have the capital to run that type of a model, cannot benefit in the same way.

The biggest opportunity for traditional financial institutions isn’t going to come from these established large businesses, but rather emerging economies and SMEs. By adopting DeFi, banking services will be removing many of the barriers facing these, in turn creating new opportunities for growth and economic prosperity.

 

Security and Fraud

With any new technology – especially where finances are concerned – there will be security concerns. And arguably the most significant drawback in DeFi is smart contract risk.

As with centralised finance, fraud remains a considerable worry, and indeed over two-thirds (70%) of companies believe that security concerns over fraud is preventing company-wide adoption of DeFi. Almost all financial institutions have fraud-risk but are reluctant to add any further vulnerabilities through the adoption of DeFi.

When it comes to DeFi, its digital nature means that the most common method of attack involves the exploitation of bugs in code and the manipulation of external price feeds for assets within protocols.

This has already happened in the last year, with notable incidents including DeFi lending platform bZx being attacked, allowing the oracle price of collateral to be changed. What’s more, $72m worth of assets from smart contracts were stolen from the Decentralised Autonomous Organisation (DAO). Critics of DeFi point to these two incidents as a reason to not consider its adoption.

However, these incidents have been valuable for better understanding the challenges facing DeFi, with each attack exposing a new vulnerability in the system, which can then be addressed to prevent them from happening in future.

Not only this, but thanks to its fast-moving nature, these attacks actually encourage developers and security professionals to take a proactive approach to security; identifying and preventing flaws before cyberattackers can even strike. And as with all digital technologies, as it matures DeFi will become more secure and will eventually match – or even exceed – the security of centralised models.

 

Breaking down the barriers of finance

Despite these challenges, it’s clear that traditional financial intuitions have acknowledged DeFi’s potential and are beginning to view it more seriously as an alternative service.

The most important component now for building businesses’ confidence in adopting the technology is security. Financial institutions understand that there is always an element of risk when it comes to change, but the benefits that a decentralised model can bring small businesses and emerging economies outweighs the drawbacks of ignoring it.

By working alongside experienced professionals in the crypto and blockchain communities, financial institutions will steadily begin building the next generation of financial services around DeFi. This, in turn, will remove barriers for both emerging economies and SMEs looking to do business on a local and global scale – boosting the economic welfare of millions worldwide.

 

Finance

FINANCIAL INCLUSION WITHIN DIGITAL PAYMENTS

NICK FISHER, GENERAL MANAGER, SALES AND MARKETING UK, JCB INTERNATIONAL (EUROPE) LTD.

 

The shift towards an economy that removes physical cash has long been on the horizon in many regions. Sweden is an example of a country rapidly heading this way. Two years ago, just 1% of Sweden’s GDP was circulating in cash compared to 11% in the Eurozone, and research by the Swedish Retail and Wholesale Council showed half of the nation’s retailers saying that they probably would not accept cash after 2025.

 

In 2019 in the UK, cash payments decreased by 15%, although physical money was still the second most frequently used method comprising of 23% of all payments. The Financial Inclusion Commission in the UK states that there are over 1 million people that do not have a bank account, and the World Bank estimates that there are some 1.7 billion adults globally that still lack access to a bank account.

 

The finance industry has collaborated over the years to develop various credit products for affluent communities. These customers are considered a lower risk. However, institutions should continue to prioritise the advancement of services to serve an audience which remains – ‘unbanked’. Research by EY showed that financial inclusion could improve GDP by up to 14% in more rural, developing economies like India, and by 30% in frontier markets like Kenya. While the positive reasons for fully embracing digital payments and eliminating physical cash are plentiful, including lower payment processing costs for the retailer and customer convenience, physical cash provides the ‘unbanked’ with the ability to function day-to-day with a legal tender.

 

To establish digital solutions for the unbanked, payment players should adopt an inclusive mindset. The race towards a digital cash society will naturally get closer to the finish line with the passing of each generation, but governments could lend a hand to the unbanked by encouraging financial institutions to sponsor organisations that provide legal quasi digital cash products. In my opinion, the financial industry has an important part to play in developing low cost solutions to support the unbanked with authentication tools – such as biometrics and risk tools to manage real-time credit risk reporting with anywhere accessibility.

 

In both developing and developed countries, QR codes can play a superhero role as they offer simple, low-cost ways of processing payments on basic mobile phones. In June last year, we collaborated with FIS to enable cross-border QR codes in the APAC region. The ‘Worldpay from FIS 2020 Global Payments Report’ found that digital wallets, at the time, accounted for 58 % of regional ecommerce purchases and were expected to reach almost 70 % percent by 2023.

 

In developed regions, we are issued with a formal identification when we are born, no matter our circumstances, and this comes in the form of a birth certificate or, later in life, a passport. This does not always happen in developing countries as resources are often limited. Yet, advances in biometric technologies, such as fingerprint or palm vein may offer a solution to the requirement for proof of identity to open a bank account or to create a mobile wallet. Biometric organisations, payment leaders and innovators, such as Google Pay and Apple Pay, have partnered to make this a reality, despite the initial cost implications for development.

 

In summary, understanding the reasons for why some prefer physical cash, and others prefer digital cash, provides holistic learnings to achieve a society that ultimately uses digital cash only. Empathy is paramount for building customer-centric commerce. For me, at least, a world without physical cash cannot be considered responsible, or fair, until everyone can be accommodated.

 

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Business

THE EFFECTS OF JOB HOPPING ON YOUR RETIREMENT OUTCOME

By Neli Mbara, Certified Financial Planner at Alexander Forbes

 

Job hopping – defined as spending less than two years in one position –  is a very controversial subject. It can be an easy path to a higher salary but can also be a red flag to prospective employers, not to mention your future financial goals if you are cashing in your retirement fund every time you make a move.

When changing jobs, whether it be once a year or once every decade, one has to make decisions regarding career growth and retirement plans which affect one’s long term financial plans. One of these decisions is ‘what to do with my retirement fund?’

Neli Mbara

For many people, the first thing that comes to mind is using their pension money to pay off their debt. Alexander Forbes Member Watch statistics show that 91% of members do not preserve their retirement savings when changing jobs. As we are living in times where most household income is used to finance debt, most people use job hopping to gain access to their retirement funds, and use this money to pay off debt. However, a quick fix and instant gratification comes at a price, which in this case could be a delay in your retirement plan.

Your retirement savings are simply for that, your retirement, to pay you an income once you stop working.

 

Early access of your retirement fund can result in:

  • Not having enough money at retirement – this is simply because most of us are already not saving enough for retirement
  • Robbing yourself off the compound interest you could have potentially earned from the investment.
  • Never making make up for the lost benefit
  • Creating a bad habit that will delay you from achieving your retirement plan and desired income at retirement

It is easy to cash in your money from a retirement fund at resignation but it is much harder to make up for the lost benefit (capital cashed in plus interest). Calculations show that for you to make up the lost benefit depending on your retirement age and investment time horizon, you will likely need to invest more than double your contributions towards a retirement fund.

Since only 6% of the South African population are reported to have accumulated enough to retire comfortably, without having to sacrifice their standard of living, you will most likely have to invest much more towards your retirement fund to make up for the lost savings.

Therefore, leaving your retirement fund invested and preserved in a preservation fund is the recommended option when changing jobs, as this keeps you committed to your retirement plan.

Changing jobs is a life-changing event, and it is therefore important that you seek advice from a professional financial adviser who will guide you in your retirement planning ensuring that your retirement needs are taken care of, by providing solutions that help you to ensure your financial wellbeing.

 

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