TradFi & DeFi deep dive 2(a): TradFi Platforms
Remember when The Next Block discussed how there is a hybrid hypothesis for the future, of TradFi and DeFi, suggesting that each are on a path of convergence as they tackle similar challenges to modernize the financial services experience?
As a refresher, we made the following hypotheses::
Hypothesis #1: The future of finance is hybrid & distributed.
Hypothesis #2: The future of DeFi is multi-chain & distributed.
Hypothesis #3: The future of underlying infrastructure is multi-cloud and distributed.
Hypothesis #4: The future of finance governance is hybrid & distributed.
Here’s another refresher on the landscape that we see playing out, keying in on where we will focus in this post:
… and the following image shows a view of the respective vendors and projects building out the DeFi Infrastructure of the future:
TradFi Platform component 1: Centralized Exchanges (CEX).
This bucket represents the Centralized Exchanges (CEX) that most TradFi’s like capital markets institutions interact with, such as the New York Stock Exchange (NYSE), the NASDAQ, Shanghai Stock Exchange, and Euronext.
Key to note that there is movement in this space where TradFi exchanges are starting to shift towards the “Hybrid and Shared” column of our future of finance landscape. A great example is exhibited by NASDAQ Marketplace Services Platform and Cryptocurrency Exchange Software to support crypto exchanges.
TradFi Platform component 2: Open Banking and API’s.
Prior to Open Banking and API’s, most TradFi’s used a complex, fragmented web of bespoke services and point to point integrations for internal and cross-TradFi communications. Open banking has since allowed TradFi’s and FinTechs to much more easily communicated to share financial data with various third party software for payments, account aggregation, and other digital-native capabilities that conduct financial services.
The FinTech natives that initially disrupted this space include Plaid, which allows for instant TradFi account authentication, connections to any US bank, and frictionless payments.
Also, Stripe, which primarily provides payments services infrastructure for internet based companies, ecommerce and mobile applications, as well as other financial services and business operations. Stripe provides APIs that developers and engineers can leverage to integrate payment processing services from TradFi’s into web and mobile apps. Recently, Stripe also announced it will enable millions of merchants to convert payments into Bitcoin via OpenNode, showing that it is expanding its payments infrastructure to include digital assets and cryptocurrencies.
Additionally, the Cloud Service Providers (CSPs) are entering this space as the rise of the “industry cloud” is taking hold for all industry verticals in public cloud. Notably, Google Cloud’s open banking and embedded finance offering, on the back of its Apigee offering, is a means for TradFi to enable open banking in a cloud-native way. Additionally, Amazon Web Services (AWS) is bolstering its Partner Network with Independent Software Vendors (ISV) like FinConecta in order to bring a diverse suite of third party solution and professional services providers to enable Open Finance.
TradFi Platform component 3: Core banking software platforms.
Core banking software platforms, and other core financial services, for those TradFi’s that wish to “buy” versus “build” custom and leverag Commercial-off-the-Shelf (COTS) platforms to suit their needs. While some players of significant scale, technology budgets, and in-house talent can develop custom solutions, a majority of banks use vendor solutions that are configured and customized to their needs. FIS, nCino, Thought Machine and Temenos are great examples.
Many of these platforms have started to shift to (1) both digital and cloud-native offerings, and (2) also starting to trend towards the “Hybrid and Shared” column of our future of finance landscape by starting to offer services in the digital assets and crypto space. For instance, FIS serves a number of TradFi customers as well as DeFi-natives to provide blockchain services such as its Card-to-Crypto offering.
