Rethinking Composable Finance — Grow Up Or Blow Up


The banking and financial sector as we know it is archaic and rigid, from their processes and regulations all the way to the products that they provide us. Often people who are already in it question why so many do not participate in it fully, while everyone else basically just does not understand the jargon finance people use. Finance, economics and money are complicated subjects, to which institutions have mastered and want to keep exclusive to themselves.

Normal people on the other hand have faced unprecedented value loss on their assets, currency and livelihood in the past 3 years and it showed how many were not prepared for such a black swan event. From Covid to job loss, economic downturns and high inflation caused by unsustainable monetary policies, it now falls back to the financial institutions on how they can keep serving their customers with their net worth basically demolished.

I want to take this opportunity to highlight some areas in which re-thinking the basics can radically change finance to today’s users and present huge opportunities for an incumbent that can execute all of them in tandem.

Single Account, Multiple Buckets, Any Currency

Most banks, if not all, provide the ability of the user to create multiple accounts. However, I believe most people these days cannot even tell you the difference between a current account and a savings account, let alone accounts for education, loans, investments and so on. Instead, if we were to re-think all these allocations as buckets within a single account, where moving money between is both frictionless and obvious, that will already be a huge step-up to what banks provide to their customers today. Moreover, the digitisation of money has allowed this process to become even easier.

Extending this use case to goal-driven buckets, multi-currency holdings and so on opens a litany of use cases in which can drive immediate value to the customers from a flexibility and ease of use standpoint.

Widen Collateral Types & Stop Penalising Borrowing Flexibility

The notion of decentralised finance (or De-Fi in short) has become a serious topic even at institution level these days. The only downside that stops everyday people from using it is the fact that it’s all based on cryptocurrency. However, there are many lessons that we can draw from these protocols that I believe would benefit, if not encourage, lending and borrowing activity. Openness, transparency, decision-making and a free market are crucial to adopt.

It is not easy to get a meaningful loan as there are large processes behind it. However, De-Fi has shown that many things can be used as collateral, even bridging real-world assets into their systems, and allowing business owners to have access to funds — all without cumbersome processes. By exploring innovative ways to collateralise loans, more people will be able to access credit lines and easily track their Loan-To-Value (LTV) ratios.

Taking it one step further, we should encourage the flexibility of tenures that allows users to react to market downturns and needs. A simple example would be pairing long-term credit and investment legs while allowing users to adjust collateral levels for enhanced short to medium term cashflow if need be, at no cost. This is where having seamless movement of currencies and strong visibility from the above-mentioned point becomes key.

Make Investment Strategies Cool & Simple To Everyone

Products are usually made large and confusing to the retail investor, be it chunks of gibberish datapoints or returns that do not highlight the amount of underlying risk they have to take on. Is it to ensure the financial institution is covered legally, or is it for the actual sake of the customer to understand the product — who are we to judge? Even with access to global equity and debt markets opening through multiple platforms, how many people actually know what are they doing?

Instead, why not offer products where key data metrics (e.g. industry, country, currency type) are visualised simply and explain to the customer what to expect in good times and bad? Moreover, offering auto-hedging techniques, be it fully or partially, in times of high market volatility could offer stability and wealth protection similar to how any institution or counter-party addresses their portfolios.

With greater confidence in their positions, I believe that we can encourage more financial literary through simplicity. We can even start to explore investments as highly liquid collateral for loans as mentioned above.

Putting It All Together — A Product That Truly Cares

I envision that a product that can rethink the legacy fundamentals and customer involvement approach in the above 3 domains will be able to capture a large proportion of the current generation. They face immense challenges to generate wealth, and an even greater one to keep it. Moreover, the current generation prefers liquidity and flexibility above all to be better prepared for new market conditions going forward.

Today’s technology platforms enable this further re-architecture of how banks and financial institutions serve their customers better. The difficulty will be in them having to re-think their business revenue models that classically take advantage of inefficiencies and processes.

De-Fi is here to disrupt with seamless enablement and fairer offerings (putting aside the cryptocurrency barrier). Incumbents are here to offer simpler products with greater flexibility. How and when are the banks going to respond appropriately? Or are the “finance people” going to assume they can continue to live in their bubble of jargon?

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