Banking the Unbanked — An Opportunity for a Blockchain-Powered Financial Ecosystem
An “unbanked” individual, as defined by the Federal Deposit Insurance Corporation (FDIC), is an adult who doesn’t have an account at a formal financial institution, such as a bank. An assumption that comes to us easily is that everyone has a bank account where they get their salaries credited and which they also use to pay their bills. But what may come as a shock in the modern, connected world is the fact that close to 25%, or one in every four people in the world, almost 2 billion adults, do not have a bank account and do not have any access to formal financial services.
Most of these unbanked people reside in the developing economies, or are immigrants belonging to such countries. Half of the unbanked people all over the world, which equals 1 billion adults, belong to the poorest 40% of the society. While these are fast growing economies on one hand, the lack of financial services hampers individual as well as collective growth of the nation as a whole.
Although the volume of non-cash transactions has been on a rapid rise in the past few years, the World Bank Financial Inclusion Database shows that 61% of world population has a bank account, 40% has debit cards, while 23% use the same for payments. And in low and middle income countries, only 53% have bank accounts, 31% have debits cards while just 14% use the card to make payments.
The reasons behind such a huge chunk of population still staying unbanked are many — cost of opening a bank account, the time needed for the same, paperwork involved in the process, low income levels, financial illiteracy, inability to comply with strict KYC norms and distrust in the traditional banking system are some of them. The problem here is double-sided with banks and other financial institutions also guilty of not getting these people into the financial fold. Inability to serve such regions, apprehensions to extend services to such a risky population and low market size of such regions does not make such people a “lucrative” market for banks.
Problems of the unbanked people
The problems faced by unbanked people are numerous. First, of all it is difficult for them to receive direct deposits for services they render to their employers. This also means that they are unable to build any credit history. And thus, borrowing in the future from any financial institution is impossible for such people.
For the unbanked, it is impossible to save and transfer money securely. Since they have no access to formal and safe financial services, when they need money they depend mostly on informal providers for financial services, like friends and family, or indiscriminate moneylenders. They may even get trapped with intermediaries who help them get loans from financial institutions but charge them extravagant fees for such facility. For migrant workers trying to send money back home, not having access to financial services often pushes them into the hands of unscrupulous middlemen who charge exorbitant transaction fees for remittances.
Financial illiteracy of the unbanked population becomes a huge hurdle as they stay financially excluded from the system. They have no access to debit or credit cards, credit services and so on.
A Blockchain-based financial ecosystem can provide the much needed solution to all such problems. It is a simple shared platform that provides the environment of a bank inside the smartphone of the user, eliminating the need of a third party to transfer money.
It is a decentralized, peer-to-peer ecosystem that uses a distributed network of computers throughout the world. Transaction data are recorded and secured instantly on digital ledgers, a relevant version of which is available to every user.
The blockchain-powered system is all set to be mainstream since it comes with multiple advantages that can overcome the handicap unbanked people face.
It is immutable
All the information on Blockchain is stored on a ledger that is publicly distributed and accessible to all nodes at all times. The details are visible to everyone who is a part of the system. Moreover, this reliability is enforced by algorithmic standards, and does not require any human intervention, which means there is no additional cost for maintaining the authentication of blockchain.
It is simple to use
Compared to banks, that require a great deal of documentation for services like opening accounts or taking loans, there is no such need with a blockchain-powered e-wallet, for example. The standard process of banks comes across as a deterrent for many individuals, particularly the ones who are not finance savvy. Blockchain does away with all that jargon and makes it easy for common people to become a part of a financial system.
It is unhackable
Despite being simple, blockchain maintains a high level of security. There is absolutely no chance of fraud in this system. Old entries cannot be modified or deleted even by bonafide users. This also implies that blockchain is permanent. There is also no chance of failure in record maintenance because the transactions are recorded on several computers simultaneously instead of a single centralized computer.
It is inexpensive
For people living in countries with low standards of living, it is not possible to have access to banks, and there might not even be a solid banking infrastructure in place. For such people, smartphones are powerful tools — with blockchain, transferring money via mobile phones is simple, cost-effective and swift too, even international transactions. The operation and maintenance cost of Blockchain is also much lower than conventional financial institutions.
The acceptance and rise of fintech in the unbanked regions of the world has many examples. The popularity of M-Pesa, a phone-based money transfer, financing and microfinancing service launched by Vodafone in 2007 in Africa is a shining example of such an effort.
Blockchain has shown its utility in creating solutions to the world’s most complicated solutions. Its use in creating an inclusive alternative financial ecosystem is well-known. Blockchain not only eliminates the need for repetitive processes that are a part of financial and lending system, it also eliminates the need of middlemen and third parties in such transactions. That too, without compromising on transparency and efficiency that is much needed. Blockchain not only makes for secure online transactions, but also allows users to protect digital information like identity cards, contracts, legal documents etc. Blockchain can help improve the financial inclusion of unbanked population as there is no need to have an ID or elaborate banking infrastructure to use it. A smartphone and internet access is all that is needed to send money from any place to any other place in the world.