DeFi, Mobile-first, and Biometrics will Change the Shape of Finance in 2022

Fintechis developing at incredible speed. With the COVID situation, businesses got even more creative, and the users got more enhanced with smart solutions. Among the most significant Fintech and digital banking, innovations are new platforms of Decentralized Finance, mobile-first solutions, and biometrics.

Despite apparent benefits like the faster pace of innovation, higher transparency, more efficiency, and lower cost cross-border payments, these trends still bring various risks, volume shifts, and market manipulations. How to avoid these risks, and what is the future of these trends in 2022?

What is DeFi?

The first of the growing trends is the DeFi – Decentralized Finance. It is an economic system and Blockchain-based form of finance that aims to create an open, accessible, and transparent financial services ecosystem. DeFi protocols don’t rely on central financial intermediaries like brokerages, banks with traditional financial technology, or exchanges. These financial systems are based on blockchain technology and utilize smart contracts. Most of them run on the Ethereum blockchain ecosystem.

The goal of DeFi is to develop a quality alternative to the traditional banking system with the help of decentralized technologies. DeFi is a tool that acts as an intermediary between the user and digital finance, skips the traditional intermediaries, and allows users to use many other services automatically.

The main benefit of DeFi is easy access to financial services, especially for those who, for some reason, can’t access the traditional financial system. Another potential advantage of DeFi is the modular framework and the compatibility of applications based on public blockchains, leading to entirely new types of financial markets, products, and services.

Why should you choose DeFi?

The main functions of decentralized finance are:

• Loans and peer-to-peer credits. DeFi is an opportunity that enables the credit system for everyone. As there is no monopoly and intermediaries, the users can benefit from lower rates, higher transaction speed, the chance to use cryptocurrencies, and no need to review the credit history. Stablecoins such as USDC and DAI allows users to borrow money directly through the blockchain using smart contracts.
• Decentralized markets. Unlike centralized exchanges such as Coinbase, some DeFi tools allow you to buy and sell cryptocurrencies online. They turn down the amount of commission and speed up the transaction process. The use of smart contracts also makes the transaction process automated, which substantially increases reliability.
  As such trading platforms require much less maintenance, decentralized exchanges charge a lower fee for trading, unlike their centralized counterparts.
• Securities. You can use the DeFi protocol for traditional financial banking services. Some platforms work with the security tokens to provide their issuers with tokenized securities.
• Insurance. While companies spend vast amounts of money on intermediaries and brokers, the DeFi program manages insurance automatically. With the help of stablecoins, you can interact within the framework of traditional financial methods but with less risk and simplified transaction regulations. Obtaining a mortgage becomes more accessible and cheaper.

Possible challenges of DeFi

Using smart contracts is faster, easier, and reduces risks for both parties. On the other hand, smart contracts also create new types of risks and challenges:

• Low productivity. The blockchain system is relatively slow, so data processing speed slows down with many network nodes.
• Difficulty in learning. It seems hard in comparison with traditional ways of financial interaction. So many users are not motivated to learn this new mechanism.
• Variability of the ecosystem. The ease of creating DeFi applications has led to many inconvenient and fraudulent decentralized finance networks.
• No main governing body is fully responsible for the actions of the participants. In this case, the developers manage all services by themselves. Despite the word "decentralized," many owners of DeFi technologies have special keys that can be used to turn off systems in case of an emergency.
• High risk of user error. Since a specific person makes all decisions, and there are no intermediaries who can interfere, the chance of making a mistake increases. And as it’s hard to change the effect of smart contracts, the cost of this error can be very high.
• You can’t block or cancel the DeFi transactions. There may be errors in the DeFi protocol codes that lead to vulnerabilities. Hackers in this area interact with so-called "flash loans" on exchanges. Since this feature doesn’t involve a deposit, it allows you to borrow large sums of money. However, traditional banks may also suffer from similar problems.

Mobile-first solutions

Another critical trend is Mobile-first solutions that don’t require any download. They help to use mobile experience and various digital channels of communication. Mobile banking can improve the level of interaction with consumers. Smartphones allow not only to control credit limits on cards but also to place deposits, receive cash back from purchases, use new platforms for making payments.

When implementing a mobile-first design strategy, a company first releases a mobile version of its website. Only then does it invest time or resources in developing a desktop version. Often, an essential desktop website comes with a mobile version, but this desktop website can only consist of a landing page that links to a mobile app or basic information such as a FAQ page.

Another vital factor motivating companies to use a mobile-first design strategy is the additional data and features that mobile websites provide. Because smartphones now typically use touchscreen interfaces, owners of mobile-enabled websites can get detailed user experience (UX) data on how the user physically clicked or scrolled the page. In some cases, website owners may even receive data about the user's eye movements.

This trend will continue to develop as consumer habits have changed during the pandemic. Now the banks switch to automation of banking operations and set up their CRM systems for marketing campaigns and communication with customers online.

Financial technology businesses are increasingly prioritizing mobile versions of their web pages thanks to the growing popularity of phone browsing and online shopping among consumers.

Biometric Security Systems

Experts say the demand for biometric data is only growing. Customers show more interest in accurate and simple identification methods and the general improvement in the capabilities of Artificial Intelligence technologies. Instead of remembering a password or entering a PIN, users can choose biometrics as a better alternative.

Watch the presentation about KYC and customer onboarding in Fintech.

Unlike traditional authentication procedures, biometrics complicate the use of illegally obtained consumer credentials by attackers. However, this does not mean that there are no risks. In 2015, a US government database was hacked, and the fingerprints of 5.6 million federal employees were stolen. In addition, the usual forms of authentication can simply be changed, which is impossible with voice or face recognition systems.

Today the biometrics offers the following types:

• ​​Face recognition

In recent years, face recognition technology has significantly improved its accuracy, approaching 98 percent. The other two percent are the detected methods of deception, user errors, and the defective face reader. Hackers could use biometric information stored in secure databases and print photos that can fool most biometric face recognition devices.

Face recognition may also require the use of advanced, specialized cameras. Authentication accuracy depends on the device, which may not be quick. Many consumers report that it is quite difficult for them to adapt to this technology. They also can feel embarrassed to make "authentication selfies" in public.

• Fingerprint recognition

Most touch scanners store only one fingerprint of each user in the system, and many use only three specific fingerprint points. The practice showed it is not always a reliable way of biometrics.
Moreover, cybercriminals can intercept fingerprint data from Internet-connected biometric scanners while transmitting it for processing to a server. Until 3D fingerprinting becomes available, financial institutions should choose more secure authentication methods.

• Iris recognition

The iris recognition technology is easy to use and difficult to deceive. Among other unique human characteristics, such as fingerprints, facial features, retina, etc., the iris is one of the most reliable biometric identification factors. The time of analysis and decoding images by the scanner is only 30 milliseconds. Biometric technology based on the use of the uniqueness of the iris is a faster method of authentication than others due to less time to image decryption.

• Voice recognition

Today, voice biometric technology is used for eSignature, allowing customers to perform certain operations on the phone or other smart devices. A real-time voice authentication technology can detect a customer's voice in a noisy environment.

The authentication method is reliable even when the user is sick. Voice authentication works with every language and every regional accent. If the voices don’t match, the subscriber is asked additional questions.

Although many systems now use the same type of biometric identifier, it is expected that in the future the technology will include multifactor authentication, which will include fingerprint scanning, retina, and even heartbeat. This will ensure an adequate level of protection while maintaining comfort and speed of use.

Generally, all these trends are an effective alternative to traditional financial systems, free from legal and political interference. DeFi networks, mobile-first approach, and biometric trends are actively developing. However, it is too early to say about the effectiveness of the DeFi financial system and its acceptance by the community.

Read more about the future of Fintech in the material about KYC (Know your customer).