Conventional wisdom has it that traditional finance (TradFi) and decentralized finance (DeFi) go together like vampires and garlic. But there is one area of TradFi where that black-and-white picture shades into gray. This is the case for why neobanks will be key to bridging these two worlds.
Neobanks, or digital banks, are basically banks without brick-and-mortar branches, meaning they offer all of their services online. A variation on the theme is challenger banks, which do most of their business on the Internet but still retain some physical presence.
By their very nature, neobanks acquire and serve customers primarily through digital touchpoints such as mobile apps. They tend to target the unbanked, younger individuals with lower incomes and riskier credit scores. Neobanks tend to offer higher yields and operate under less stringent regulations.
The most important distinguishing characteristic is their freedom to experiment and the speed of innovation -- the ability to launch features and develop partnerships to serve their customers at a pace no traditional bank can match. A useful mental model is to think of neobanks as the application layer of the banking system.
Bridge to Web3
Learning about and participating in DeFi can feel like a full time job. The sheer number of protocols vying for attention alone can be overwhelming. Then there is the complexity of services on offer, slow transaction times, latent risks, and user experience that often lags far behind what customers have come to expect with Web2 apps. It’s not surprising that despite its many advantages, DeFi adoption has been limited to only the most dedicated degens.
Read more: DeFiForAll: The State of Lending on Polygon
Neobanks have the opportunity to bring average consumers to Web3 without huge overheads. As a licensed fintech with a KYC infrastructure, they can overcome the anonymity concerns of DeFi with dedicated portfolio teams managing the backend. Neobank product teams can also leverage the composability of DeFi protocols and combine various money legos into customized financial products.
The direct relationship with consumers and understanding of their behavior patterns allows neobanks to create a much-needed feedback loop for further development of DeFi offerings that reflects consumer demand. Their participation in this space can also encourage improvement in governance schemes, including industry-grade codes and self-regulatory tools.
The Polygon ecosystem offers the perfect setting for these experiments to take place. The network is already home to DeFi protocols like Aave and Uniswap V3, NFT marketplaces OpenSea and Mark Cuban’s Lazy.com and Web3 gaming efforts including DraftKings, Animoca Brands’ The Sandbox and Decentral Games. Enterprises like Adobe, Stripe, Instagram, and Dolce Gabanna have also chosen Polygon as their entrypoint to Web3.
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