This is by design. If you break bitcoin, such that it’s only usable by large financial institutions, you completely remove the decentralized nature that made it attractive in the first place.

Congratulations guys, you made the banks SWIFT 2.0. I’m sure they appreciate it very much.

How is allowing two parties to transact off chain, and settle up later on chain, not a decentralized solution?

Because of the cost involved in setting up a channel. It's still not suitable for paying for a coffee or restaurant for example... Unless the cafe/restaurant happens to have an existing channel with an exchange that you yourself happen to also have a channel with; then you pay through that exchange... You can see how in this hypothetical word, it would be better to have fewer exchanges... More centralization.

The lightning network is actually a textbook example of a decentralized network. But I agree, how it will work out in practice is unclear and it could lead to centralization. I see it as a trade off between cost and convenience on one side and freedom on the other.