Traditional retail banks are under pressure as FinTechs and neobanks continue to draw customers away with faster, more intuitive digital services. Built on flexible, cloud-first architectures, these challengers are redefining what modern banking looks like. In contrast, many established banks are stuck trying to modernise outdated infrastructure that simply can’t keep pace with the speed or agility required by today’s consumers.
According to RelyComply, the growing presence of decentralised finance (DeFi) adds another layer of disruption. DeFi technologies are challenging the traditional financial ecosystem by offering peer-to-peer services like lending, trading, and payments without the need for intermediaries. But it’s not just services under threat—compliance standards are also being tested. Legacy anti-money laundering (AML) systems are proving ill-equipped to manage the real-time, borderless nature of DeFi transactions.
Many banks try to address this by layering new technology on top of old systems, but this patchwork approach often fails. Instead, the focus needs to shift towards partnering with NextGen RegTech providers. These firms offer AI-powered, cloud-native compliance tools that are designed for dynamic risk detection, cross-border regulation, and evolving financial crime trends—capabilities that legacy systems can’t match.
DeFi operates on distributed ledger technology (DLT) like blockchain, using smart contracts to automate financial activities. Services such as Aave and Uniswap are already facilitating decentralised borrowing and lending. These systems bypass traditional payment infrastructure, enabling borderless finance that is open-source and user-driven.
However, the compliance environment remains murky. The EU’s MiCA regulation only came into effect in late 2024. In the US, the SEC’s crypto enforcement policies are still evolving. Globally, the Financial Action Task Force (FATF) continues to monitor blockchain activity in what many consider a regulatory ‘wild west’. This uncertainty makes it difficult for banks to enforce strong AML and KYC controls, leaving them exposed to financial crime risk.
In markets like South Africa, FATF greylisting has already spurred greater urgency around compliance reform. Legacy systems reliant on rules-based protocols are often too rigid to manage risks introduced by unregulated DeFi actors. As digital assets become more mainstream, banks must rethink their strategies or risk regulatory fallout and reputational damage.
One way forward is through partnerships with crypto-native firms or regulated intermediaries offering services like digital asset custody or fiat-crypto conversion. But internal compliance still presents a challenge. NextGen RegTech tools provide a flexible, cost-efficient way to integrate real-time monitoring and automation into banks’ AML and KYC workflows.
Some of the more advanced RegTech providers specialise in blockchain analytics, on-chain AML, and smart contract audits. These tools allow institutions to flag suspicious activity in real time and automate risk scoring using AI. For example, they can enrich existing systems with cloud-based engines that continuously assess customer and transaction risks across jurisdictions and payment types.
The benefits of AI-driven RegTech extend far beyond compliance. Personalised services, seamless onboarding, and embedded financial tools like Banking-as-a-Service (BaaS) platforms are now achievable at scale. This aligns banks more closely with the expectations set by FinTechs and enhances competitiveness in an increasingly digitised environment.
Ultimately, the rise of DeFi should be seen as a catalyst rather than a threat. Banks that proactively adopt NextGen RegTech solutions can future-proof their operations, embrace innovation, and maintain regulatory confidence. In doing so, they position themselves not just to survive the DeFi era—but to lead it.
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