Role of Hybrid Models of Defi and Traditional Banking Systems in Improving the Profitability of European Banks: An Analysis of the Future Possibilities

Abstract

Introduction: This study examined the influences of Decentralised finance (DeFi), digitalisation, Fintech, the regulatory scenario, efficiency, and risk and safety management on the performance of European banks. Methods: The data was obtained using a structured questionnaire survey on five-point Likert Scale from 381 professionals, banking executives, and Fintech specialists across different European countries namely Germany, France, the Netherland, Sweden and Estonia. In this study, the profitability of European banks is the dependent Variable. In contrast, independent Variables are DeFi adoption, digitalization and fintech adoption, regulatory environment, operational efficiency, and risk management. The data was analysed using the Partial Least Square-Structural Equation Modelling (PLS-SEM) through SmartPLS. Results: It has revealed that digitisation and Fintech adoption (B= -0.020, P-value= 0.650) has a negative and insignificant impact on bank performance. Integration of DeFi solution (B= 0.083, P-value= 0.025), Operational efficiency (B= 0.103, P-value= 0.035) and Risk and safety measures (B= 0.749, P-value= 0.000) have positive and significant impact on bank performance. Furthermore, regulatory environment (B= 0.021, P-value= 0.674) are indicated to have insignificant and positive impact on bank performance. Conclusion: These results, therefore, call for a combination of technology management with legal requirements to improve the performance of banking institutions.