Digital payment boom needs DeFi governance and AI analytics to avoid fragility

Digital financial inclusion and digital transformation can strengthen payment and settlement markets, but only when financial institutions develop the capabilities needed to integrate decentralized finance (DeFi) and advanced analytics into regulated infrastructure, finds a new study by researchers from the University of Tabuk.

The study, Digital Financial Inclusion, DeFi Capability, and AI Analytics in Payment Market Infrastructure: Implications for System Resilience and Performance, published in Systems, examines data from 422 professionals in Saudi financial institutions and finds that digital inclusion and transformation improve sustainable digital payment and settlement market performance both directly and through DeFi adoption capability, while AI and big data analytics strengthen key parts of that relationship.

Digital payment systems need more than technology diffusion

According to the study, digital finance does not automatically generate stronger market performance simply because it spreads widely. Diffusion matters, but outcomes depend on whether institutions have the internal capabilities to absorb, govern and scale digital innovation. A market may have high adoption of digital services and still fall short on resilience if institutions lack coordination, analytics, risk controls or readiness to integrate newer financial technologies.

Financial systems adopt digital wallets, mobile payments, instant transfer networks, open banking tools, blockchain-linked services and decentralized finance models. Each technology can improve efficiency, but each also adds complexity. More users create more transaction data, more interdependence and greater exposure to fraud, cyber risk and operational shocks.

The paper focuses on Sustainable Digital Payment and Settlement Market Performance, a market-level measure covering efficiency, stability, transparency and resilience over time. This moves the debate beyond firm-level profits or user adoption. The question is not only whether banks and FinTech firms use digital tools, but whether the whole payment and settlement ecosystem becomes faster, safer, more transparent and more reliable.

Saudi Arabia is a case in point because of its rapid financial modernization under Vision 2030 and the Financial Sector Development Program. The country has expanded electronic payments, real-time payment infrastructure, open banking initiatives, digital banking licenses and FinTech activity. Electronic payments have become dominant in retail transactions, reflecting the country's accelerating shift toward a cashless economy.

The study uses two theoretical lenses. Diffusion of Innovation explains how digital financial services spread through institutions and markets. The Resource-Based View explains why some institutions turn that spread into durable performance gains while others do not. Together, the framework suggests that digital payment performance depends on both diffusion and capability.

Digital financial inclusion refers not only to access to accounts or payment apps, but also to active participation in digital financial services. When more consumers, merchants and firms use digital channels, payment systems gain scale, transaction density and traceability. This can lower costs, improve liquidity and support more transparent settlement processes.

Inclusion also creates pressure on financial infrastructure. Higher digital participation means more diverse users, more transaction volume and more exposure to operational risk. Without analytics, interoperability and institutional readiness, wider inclusion may not produce stable outcomes. The study finds that digital inclusion improves payment and settlement performance, but its impact becomes stronger when institutions can translate inclusion into structured DeFi and analytics capabilities.

DeFi adoption capability links innovation to market performance

DeFi is often discussed as a set of blockchain-based financial tools that operate through smart contracts and decentralized protocols. This paper takes a more practical institutional view, examining whether financial institutions can identify, evaluate, implement and integrate DeFi-enabled solutions into existing payment and settlement processes.

The study does not suggest that decentralized finance will simply replace traditional finance. Instead, it points to hybrid models in which DeFi logic, smart contracts, tokenized assets or programmable settlement mechanisms interact with regulated financial infrastructures. In that environment, the key issue is not speculative DeFi use, but institutional readiness.

Financial institutions need governance frameworks, technical expertise, compliance mechanisms, cybersecurity controls, transaction monitoring and operational risk systems before they can safely connect DeFi-related functions to payment and settlement markets. These capabilities allow institutions to test new settlement mechanisms without weakening system integrity.

The results show that digital financial inclusion positively affects DeFi adoption capability. As more users and businesses participate in digital finance, institutions face stronger demand for secure, interoperable and innovative transaction infrastructure. That demand pushes financial institutions to upgrade their systems and develop the capabilities needed to explore DeFi-linked payment and settlement services.

Digital transformation also improves DeFi adoption capability. Institutions that modernize processes, integrate digital platforms and shift operations toward data-driven systems are better placed to evaluate and implement DeFi-related solutions. Transformation provides the architecture, while DeFi capability provides the bridge between innovation and operational deployment.

The study finds that DeFi adoption capability directly improves sustainable digital payment and settlement market performance. It also partially mediates the effects of both digital financial inclusion and digital transformation. In practical terms, inclusion and transformation improve market outcomes partly because they strengthen institutional readiness to integrate emerging financial technologies in a controlled way.

The finding challenges the idea that digital transformation is mainly a front-end service improvement. Payment apps, mobile banking and digital platforms matter, but deeper performance depends on the modernization of back-end infrastructure, settlement processes, data governance and risk controls. DeFi capability becomes part of that deeper infrastructure.

The results also suggest that digital transformation improves market performance directly. Institutions that digitize processes, integrate platforms and modernize payment systems can reduce transaction frictions, improve speed and strengthen reliability. But the indirect pathway through DeFi capability shows that transformation has greater strategic value when it prepares institutions for future settlement technologies.

The evidence is particularly relevant for regulators and banks in fast-modernizing financial systems. Digital transformation should not be treated as a scattered collection of apps, dashboards or customer-facing tools. It should be tied to market infrastructure goals: interoperability, real-time processing, traceability, settlement reliability, resilience and controlled experimentation with programmable financial systems.

AI analytics strengthens resilience in complex payment ecosystems

The study also examines AI and big data analytical capability as a conditioning force in digital payment markets. The capability refers to an institution's ability to collect, integrate, analyze and act on large volumes of data using AI and analytics tools. In payment systems, those tools are increasingly used for fraud detection, transaction monitoring, operational risk management, compliance and anomaly detection.

The findings show that AI and big data analytical capability strengthens the effect of digital financial inclusion on payment and settlement performance. When digital participation expands, analytics helps institutions manage the added complexity. It can support onboarding checks, fraud prevention, transaction monitoring and service reliability. This makes inclusion more likely to result in sustained usage and system resilience rather than merely higher access.

Analytics capability also strengthens the effect of DeFi adoption capability on market performance. DeFi-linked systems can generate complex transaction flows involving smart contracts, tokenized instruments and new settlement arrangements. Strong analytics helps institutions monitor these flows, identify risks early and manage integration more safely.

However, the study finds that analytics capability does not significantly strengthen the direct link between digital transformation and market performance. This suggests that digital transformation may influence payment markets through broader infrastructure and organizational mechanisms that do not depend solely on advanced analytics. Transformation can improve architecture, interoperability and operational routines even when analytics does not act as the decisive amplifier.

The artificial neural network analysis adds another layer to the findings. While the structural model confirms the hypothesized relationships, the predictive model identifies AI and big data analytical capability as the strongest predictor of sustainable payment and settlement market performance. Digital financial inclusion and DeFi adoption capability also show strong predictive relevance, while digital transformation appears to operate more structurally and indirectly.

Digital financial inclusion may deserve immediate managerial attention because of its high importance and performance gap. But analytics capability may be the stronger long-term predictor of resilience as payment ecosystems become more complex. In other words, inclusion is a near-term lever, while analytics is a strategic control layer.

The study recommends a shift from adoption-centric strategies to capability-configured strategies. Financial institutions and regulators should stop treating digital finance as a simple matter of getting more users onto platforms. The priority should be sustained usage, secure participation, interoperability, governance alignment and the capacity to manage risk at scale.

Saudi Arabia's payment modernization strategy should continue to expand digital financial inclusion, but it should also ensure that institutions build DeFi adoption capability within clear governance frameworks. Regulatory sandboxes can help test decentralized settlement mechanisms without exposing the broader system to unmanaged risk.

Furthermore, a stronger analytics-enabled oversight is needed. As transaction volumes rise and payment systems become more interconnected, regulators and financial institutions need AI-driven monitoring tools that can detect fraud, anomalies and operational disruptions quickly. These tools are not optional add-ons. They are part of the infrastructure needed to sustain trust in digital payment markets.

The findings have global relevance. Emerging and advanced economies alike are building faster payment systems, digital identity layers, open banking platforms and blockchain-linked financial infrastructure. The study suggests that market performance will depend less on any single technology and more on how digital inclusion, transformation, DeFi readiness and analytics capability are aligned.

The study also identifies limits that future research will need to address. This includes its cross-sectional design and reliance on survey responses from Saudi financial professionals. It does not prove long-term causality, and the findings may vary across countries with different regulatory systems, infrastructure maturity and market structures. Future research could use objective indicators such as transaction volumes, settlement latency, fraud rates, system outages and operational disruptions to test the model over time.