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Definition: centralized finance drawbacks


The traditional problems with centralized finance spawned the new wave of cryptocurrencies and decentralized finance (DeFi). Following are most of the issues with centralized systems. Contrast with DeFi. See crypto glossary.

The Unbanked and Underbanked
It is estimated that half the world's population is unbanked, which means people do not have access to bank checking and savings accounts because they do not possess the required identification to open an account or they cannot keep the required minimum balance. The unbanked use alternative financial services such as check cashing services, money orders and cryptocurrencies. The underbanked may have a bank account but also use alternative services.

High Fees and Low Interest
Merchants pay fees for accepting credit cards, and depending on the bank may not even qualify for credit card servicing. Consumers pay exorbitant interest rates on credit card balances and receive practically nothing on savings accounts.

Settlement Times and Fees
For large monetary transactions, it can take several hours or days to settle. Banks charge hefty fees for wire transfers between countries.

Cyberattacks
A cyberattack on a bank or financial institution can dramatically disrupt the community. The U.S. and other developed countries may be able to bail out their financial industries, but that is not the case with many governments in the world.