By Erin Earl

No sooner had banks and other traditional-finance firms come to terms with fintech competitors such as PayPal, Block, Chime, and Stripe than came the DeFi wave.

On the surface, DeFi — decentralized finance — looks to be even more disruptive to banking and TradFi. The first fintech wave at least leaned on the existing banking system; DeFi seems to want to render it obsolete.

That won’t happen anytime in my lifetime. But DeFi’s rapid growth means banks large and small must contend with two types of emerging competitors: 1) Existing banks that strategically harness the power of blockchain at the heart of DeFi; and 2) neo banks chartered by DeFi firms who see opportunity in what’s now anything but a staid old business.

DeFi fintechs are going for banking licenses

With respect to the latter, the 18 national charter applications filed in 2025 through early December with the U.S. Office of the Comptroller of the Currency included ones from Coinbase, Fidelity Digital Assets, Circle, Ripple, and Foris DAX — all crypto firms.

That’s more charter applications than the OCC received in the previous four years combined, and it’s clear evidence that DeFi leaders are recognizing that they can’t overcome the advantages a traditional bank has without becoming one themselves.

These will be formidable competitors, nimble and unencumbered by legacy intermediaries and inefficiencies. They will harness blockchain-derived automation to provide highly competitive traditional banking products plus DeFi offerings such as cryptocurrency investments, blockchain-based cross-border payments, digital asset custody, tokenized securitization of typically illiquid assets, and more.

DeFi is good for traditional banks — and vice-versa

But traditional banks also stand to gain from a convergence of DeFi and TradFi. DeFi’s use of tokenization and automated, self-executing smart contracts enables low-cost, immediate, decentralized, peer-to-peer transactions that are accessible to anyone with a digital wallet and transparent because they’re recorded on a public ledger.

TradFi brings liquidity and scale, deals in real-world assets, offers government-backed deposit insurance, and delivers proven regulatory compliance. Banks also provide hard-earned reputations, well-known products (checking accounts, business loans, mortgages), and familiar currencies (U.S. dollars).

DeFi comes with drawbacks that convergence with TradFi can help alleviate. Compliance slows things down and boosts costs in banking, but the regulatory frameworks are well established compared to the fast-evolving patchwork of global rules emerging for DeFi. DeFi’s decentralization comes with the potential costs of hacking and theft.

Also, banks can help address a big issue shadowing what’s otherwise one of DeFi’s biggest selling points. A bank’s ability to provide FDIC (or, outside the United States, similar) deposit insurance for fiat-currency deposits is well understood — as is the lack of such deposit insurance for crypto holdings. Less widely recognized is that investors in tokenized real-world assets are, at least for now, unsecured creditors. The backstop of a bank stands to lower the perceived risk of these tokenized holdings, and, with that, help move RWA tokenization to the mainstream.

The DeFi-TradFi integration has already begun

If DeFi-TradFiconvergence is the foregone conclusion it appears to be, the question is, then, how a bank should go about bringing DeFi into the fold? The answer to integration depends in part on the bank’s size and resources. Many global players are well along in implementing DeFi products, and the likes of BlackRock and JP Morgan can afford to do the development in-house — and, in JP Morgan’s case, roll out its own stablecoin. Citi, taking a different tack, has built a private, permissioned blockchain for cross-border fund transfer. Bank of America, which holds dozens of blockchain patents, also plans to launch a stablecoin.

Tier 2 and smaller banks will have to find DeFi technology partners to build out internal capacity and/or roll out white-label products. They must collaborate with other banks on common stablecoins and rely on DeFi firms as well as larger fintechs for their technology solutions if they are going to keep and attract younger customers.

There is no single roadmap as far as how a bank should move ahead with DeFi product integration. Among the more straightforward options look to be tokenized bank deposits and cash collateral for settlements, cross-border payments based on blockchain, tokenizing real-world assets, and doing what banks were best known for from the beginning: safely storing money, in this case digital asset custody.

Banks should demand solid back-office operations from DeFi partners

Banks as well as DeFi firms aiming to partner with them should be getting their back offices in order, with their ledgers as well as subledgers for stablecoin-denominated products on reliable platforms. Reporting and analytics must be rock-solid at both banks and, in particular, with DeFi firms, which not infrequently have been building the plane while flying it. A DeFi hoping to work with banks — much less become a bank — must hold itself to banking standards in governance and operations like Coinbase has.

For banks and DeFi firms alike, this convergent evolution is more about integration than competition. Unless they’re content to serve as technology providers, DeFi firms need the real-world assets and gravitas of banks. Banks need the heightened efficiencies and product diversification that DeFi offers. DeFi will bring competition, but it will be from banks chartered by DeFi firms and big institutions with the resources to implement their own DeFi solutions early in the game. Banks of all sizes must follow suit through partnership and collaboration — or risk irrelevance in the new money ecosystem.

Erin Earl is a Financial Services Sector Executive Advisor at SAP.