If you’ve used Apple Pay or financed a purchase at checkout, you’ve already experienced modern finance.
And it doesn’t necessarily involve a bank.
A growing share of financial services happen outside traditional institutions and, instead, inside apps, retailers, and decentralized platforms. While these newer models don’t replace banks outright, they do challenge the long-standing way financial services have been delivered.
That raises a couple of important questions for investors: How are decentralized and embedded finance impacting how people bank and which companies stand to win (or lose) from that evolution?
What Is Decentralized Finance (DeFi)?
Decentralized finance, or DeFi, refers to financial services that run on blockchain technology rather than through traditional intermediaries like banks or brokerages. A blockchain is basically a shared digital ledger: a secure, transparent record of transactions maintained across a network of computers instead of a single institution.
In DeFi, financial functions such as lending, borrowing, or trading are carried out by smart contracts – self-executing programs that automatically enforce rules and process transactions. Since these systems operate around the clock and don’t rely on a bank or financial company to approve or settle activity, they can offer faster access, global reach, and potentially higher yields.
There’s no branch, no banker, and often no company mediating the transaction.
Examples of DeFi Platforms
- Decentralized exchanges (e.g., Uniswap) where users trade directly with one another.
- Lending protocols (e.g., Compound) that function like automated money markets.
- Stablecoin systems (e.g., MakerDAO’s DAI) designed to maintain a value tied to the US dollar.
While still a small and experimental corner of the broader financial system, DeFi illustrates how technology can decentralize activities traditionally handled by banks, creating innovation but, of course, also introducing new forms of risk.
What Is Embedded Finance?
Embedded finance refers to financial services delivered inside non-financial platforms, allowing consumers to borrow, pay, invest, or insure seamlessly within the flow of another app or service. Quite literally, the financing is “embedded” into the process.
Chances are you’ve encountered embedded finance without realizing it:
- Buy now, pay later (BNPL) at checkout
- E-commerce platforms offering 0% financing on larger purchases
- One-click insurance for travel or shipping
In each case, the service is intended to be convenient, fast, and frictionless.
How These Models Challenge Traditional Banking
Decentralized finance and embedded finance are altering how people use financial services.
Historically, banks have acted as the primary intermediaries for payments, lending, deposits, and financial data. These new platforms redistribute pieces of that value chain, which affects banks (and the broader industry) in a few different ways.
Financial Activity Moves Outside Banks
More financial decisions now happen without ever walking into a branch or visiting a separate website.
- Consumers borrow through BNPL programs instead of personal loans or credit cards.
- Investors earn yields or trade digital assets through DeFi platforms.
- Small businesses can secure working-capital loans from e-commerce platforms themselves.
As these alternatives capture activity, they limit banks’ traditional role as the central hub for financial services.
Margin Compression: Lower Costs, Lower Fees
BNPL loans can cut into traditional credit card interchange fees. Payment apps reduce dependency on bank-based transfers. DeFi protocols automate functions that otherwise require staff and infrastructure.
As a result, traditional financial institutions face pressure on interest income, payment fees, and lending margins.
Changing Consumer Expectations
Fast approvals, instant payments, 24/7 access, and seamless digital interfaces have redefined what “good” financial service looks like.
Banks, on the other hand, typically operate on legacy systems and slower processes. So even if a bank offers the same service, consumers may gravitate toward whichever platform makes it simplest.
The Downsides of DeFi and Embedded Finance
Decentralized and embedded finance aren’t without risks or limitations. Many of the conveniences they offer come with trade-offs that traditional banks are better equipped to manage.
Security and Technology Risks
DeFi platforms rely on smart contracts, and those contracts are only as secure as the code behind them. Bugs, vulnerabilities, or poorly designed protocols have led to high-profile hacks and losses. In fact, DeFi platforms often account for the largest share of stolen assets across the crypto ecosystem.
Embedded finance has its own share of risks too. If an app, retailer, or partner platform experiences a breach, consumer financial data may be exposed even if the individual never interacted with a bank directly.
Lack of Consumer Protections
DeFi platforms typically operate without the safeguards that exist in traditional finance:
- No FDIC insurance
- No fraud protection
- Limited recourse if funds are lost
- No central intermediary to resolve disputes
While many embedded finance offerings depend on partnerships with banks behind the scenes, to the consumer, that’s not always apparent. If something goes wrong, it might not be clear who is accountable.
Business Model Vulnerabilities
These models aren’t necessarily equipped to withstand economic stress. DeFi yields may shrink when market activity slows. Similarly, many BNPL providers rely on transaction growth or retailer subsidies, which can weaken in economic downturns (not to mention the likely uptick in defaults).
Despite their rapid growth, many platforms have yet to demonstrate long-term resilience.
How Banks Are Responding
Banks may not be the most agile enterprises, but they certainly aren’t standing still. And while it’s natural to pit banks against fintechs (the new versus the old), the industry has moved toward a more collaborative model – banks provide scale, trust, and regulatory infrastructure, while fintechs contribute speed, innovation, and user-friendly technology.
Banks are increasingly serving as the regulated partners (i.e., sponsor banks) behind many of the fintech tools people use every day. One industry report found that 96% of sponsor banks maintain more than five fintech partnerships, and most work with six to ten at a time. These collaborations are a meaningful source of business. More than half (51%) of sponsor banks’ deposit and interest income is attributed to embedded-finance relationships.
The benefits are straightforward. Banks extend their reach without having to build every new service in-house. Fintechs, meanwhile, gain access to the regulatory infrastructure and balance-sheet strength needed to scale. And consumers ultimately benefit from smoother experiences.
What This Means for Investors
- Embedded and decentralized finance are revolutionizing financial services. More borrowing, payments, and even investment flows are taking place outside traditional bank channels.
- Many banks are responding by partnering with fintechs. Roughly half of sponsor bank deposit and interest income comes from embedded-finance relationships.
- Innovation creates competitive pressure. Alternative payment rails, BNPL programs, and DeFi platforms can compress bank margins and raise consumer expectations.
- DeFi remains highly speculative. While the technology is influential, most decentralized platforms lack regulation, investor protections, and proven long-term resilience.
- Traditional banks still have structural advantages like regulation, consumer protections, and decades-established trust.
