Can a neobank ever be built on DeFi rails?

When legacy banks were on life support in the aftermath of the 2008 financial crisis, a new group of challenger banks came to life. Their mission: to overthrow the status quo in banking. 

Buoyed by the introduction of easy access regulatory licenses for providing payments, forex and credit services in Europe, Monzo, Revolut and N26 have led the neobanking boom. From hot pink coral cards to instant payment notifications to budgeting tools, they aimed to upend an industry long thought of as stale, uniform and inaccessible. 

Now, a new set of “neobanks” are coming into the frame. This time, however, they’re aiming to do away with the concept of banks altogether by building in keeping with the mantra of decentralized finance, commonly known as DeFi. In simple terms, this means they will rely on public blockchains such as Ethereum and smart contracts, allowing users to access financial products that are not controlled by a single intermediary. 

Thus far, fintech firms have had success in simply repackaging existing financial services into slicker digital forms. Raisin, the savings marketplace, is a prime example. 

“I think it’s unreal that Raisin has £4 billion plus AUM and frankly, their product offering is 0.25% to 1% [easy access] interest accounts,” says Fabric Ventures’ Anil Hansjee, an investor in Unstoppable Finance which is a DeFi wallet geared towards mass market consumers. “They haven’t created a fantastic new investment product — all they’ve done is simply disaggregate the horrible, complex journey towards financial products.” 

The new breed of neobank, on the other hand, aims to entirely reinvent what we think of as a bank. 

The new kids on the block

It’s likely they’ll have to wade through a murky regulatory greywater to get there, however. 

Currently, there’s no specific regulatory framework for DeFi wallets or protocols to adhere to, says Itamar Lesuisse, founder of Argent. Argent is a DeFi wallet designed to cater to what users of standard fintech services are accustomed to. For now, organizations like Argent outsource KYC checks to payment partners such as MoonPay and Ramp. 

Neither Hansjee nor Northzone VC Wendy Xiao Shadeck, who has invested in DeFi protocol Gro, seem put off by the onset of regulators, saying that the opportunity to shift banking onto DeFi rails is still very much in its infancy. 

They both take the view that once products are built to handle regulatory hiccups, such as validating the conversion from fiat to crypto with regulators, the DeFi sector will begin to appeal to the everyday consumer. 

One quirk of DeFi is the opportunity for users to shape how protocols are governed. In traditional finance, banks are centralized — they decide what products to offer, where to set interest rates, and who qualifies for credit. In DeFi, a decentralized autonomous organization (known as a DAO) issues governance tokens to put decision-making in the community’s hands. 

For instance, the governance token of Gro can be used to vote on proposals such as increasing the yield of its high risk product Vault, removing withdrawal fees, and even how much of the budget should be allocated to the protocol’s marketing efforts. 

Proponents say this system has the potential to displace the power of banks and democratize finance. 

But by contrast with the user-friendly interfaces of fintech firms, DeFi still requires customers to possess deep technical knowledge of protocols, yield farming, and a host of other crypto-specific terms such as seed phrases and block confirmations. 

“The need to innovate for the current DeFi user base on the UI layer hasn’t been as stark, as these people just want higher yields and more opportunities,” says Maximilian von Wallenberg, co-founder of Unstoppable Finance. “The next phase of customers that will come in will be used to the interfaces of fintech — neobrokers and neobanks — where the UI is friendly and explains financial terms.” 

Gro founder Hannes Graah agrees that much of the innovation in the sector has been geared towards the 100 million people currently in DeFi, not the next 100 million.  

The not quite so super super-app

While Argent’s Lesuisse brushed off comparisons to Revolut — “their UI has become quite busy” — they share the goal to become a super-app.

At launch, Argent operated on Ethereum Layer 1, the base level of the blockchain, where it now has 60,000 users. It has since shifted to Layer 2, a network built on top of the blockchain that cuts the cost of transaction levies known as gas fees. 

Lesuisse sees Layer 2 as a key step towards becoming an on-chain bank as it will offer developers the ability to build on top of its lower costs. “Right now you cannot pay your electricity bill, your rent, or even buy food today on DeFi rails,” he admits.

It’s for this reason that he, along with Unstoppable Finance’s von Wallenberg, have built startups more akin to a DeFi neobroker than a neobank. Both are adamant that a DeFi neobank will come, but it will take time. 

Recent news suggests they may be right. Solana — the blockchain that Unstoppable will support at launch — launched Solana Pay earlier this month. The payment protocol will enable merchants to accept USDC or SOL and is fast, cheap, and consumer-friendly (purchases are enabled by QR codes). 

How do you decentralize customer service? 

Still, Northzone’s Xiao-Shadeck, who led the firm’s investment in Gro, says that the human side of banking can’t easily be replicated on decentralized rails. 

“From the financial point of banking, I totally see there being an on-chain bank,” she says. “But from the people management part of banking, I just don't see how that can be done on-chain. There will have to be either nodes that provide this function or something like an NFT credit rating.” 

Fabric VC’s Hansjee agrees, saying that this is an issue that has yet to be dealt with. Much of the attention has instead gone to DeFi’s high yields. 

His team floated ideas of a decentralized customer service, where those involved in the community would help a wallet like Unstoppable Finance tackle issues.

“When you touch customers' money, we're never going to get away from not owning the responsibilities of the customer, but how that gets delivered on the backend is the million-dollar question that nobody has quite answered yet,” he says.