Banking the unbanked: The promise of Bitcoin
In ‘The Rise and Decline of the Medici Bank’, Raymond de Roover wrote that the Medici dynasty created the first instance of “modern capitalism based on private ownership”.
Like any modern bank, the Medicis held deposits and profited from loans. Most of theses deposits and loans came from the aristocracy. They were used to fund the Prince’s birthday or military campaigns for example.
The Medici Bank was born in 1397, and since then, the banking system didn’t change much.
According to McKinsey, 2.5 billions people around the world don’t use any type of financial services to make payments, save, borrow money, or even transfer funds. 2.5 billions people have no credit score. They can’t buy a home, start a company or send their kids to college using modern financial products.
Yes, 2.5 billion people don’t have a saving account or a credit card.
Of the 1.2 billion adults who use formal financial services in Africa, Asia, and the Middle East, at least two-thirds, a little more than 800 million, live on less than $5 per day.
World Bank Group President Jim Yong Kim said that access to financial services is “a bridge out of poverty.”
In this piece, I will write about what has be done so far, what went wrong and how can Bitcoin change everything.
Banking the unbanked != financial inclusion.
Until today, financial services institutions, governments and even NGOs are focused on fixing one problem : How to make the poor open a bank account.
By focusing solely on banking the unbanked, we tend to forget about their real needs and how they tend to spend their money.
People in the developing world tend to spend their money differently. In 2007, Banerjee and Dufloo wrote a report on The Economic Lives of the Poor* where they describe the spending pattern of the poor and the choices they face everyday.
Let’s look at the spending of a typical household in Udaipur,India where family members live on $1 per day, per head :
- 56% — 78% of income on food
- 5% on alcohol and tobacco
- median household spends 10% of annual budged spent on festivals (e.g. religious festivities, weddings,…)
- 11% own a radio, no one owns a TV
- 99% own some plot of land, but most is dry scrubland which can’t be cultivated for most of the year (small parcels)
- less than 1% own a fan, sewing machine or a bullock cart or any motorized vehicle
56 to 78% of the income is spent on calories.
Y = C
Almost all their income is spent on food. They don’t save. What is interesting to see in Banerjee and Dufloo’s report is that the reason the poor don’t save is not due to lack of access to credit and insurance or labour market rigidities.
“Saving at home is hard: the money may be stolen or simply grabbed by your spouse or your son. Alternatively, you are constantly resisting temptation to spend. The poor seem quite aware of their vulnerability to temptation.”
S=0
In a paper on “Money Management, Financial Inclusion and Banking the Unbanked”, Elisabeth Rhyne wrote that to deal with their low and uneven income streams, poor people engage in many kinds of financial arrangements. “They keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends and neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers.”
How do people keep track of all theses transactions ?
In their heads, small notes or a passbook. “They may operate with what behavioral economists call heuristics or rules of thumb — simple strategies such as keeping business and personal money in different pockets, or saving by setting aside a handful of rice every day.”
Even after M-Pesa, Cash is still King
A lot of services and institutions have tried to including the 2.5 billion unbanked in a formal financial system, but what has this resulted in?
Launched by Safaricom in 2007, M-Pesa has allowed people to deposit money in accounts and transfer money person-to-person using basic SMS text messages.
M-Pesa’s success was huge. In 2014, it reported 19 million registered users, 12.7m of whom are active and over 6 million daily transactions.
Despite the huge success of M-Pesa, people still prefer cash. Over 90% of transactions still happen in cash and 2/3 of all transactions using M-Pesa are conducted over the counter, meaning they pay an agent cash in order to make a transaction.
Similarly, according to a survey conduced by the FITS , a lot of Pakistanis aren’t opening an account because they didn’t see the need to open one. Most of their transactions are also conducted over-the-counter.
The poor only make one transaction before cashing out.
According to the CGAP, “M-Pesa transactions are one loop, meaning that there is only one electronic transaction before money is cashed out.”
The promise of Bitcoin.
“The combination of ubiquitous Internet-connected mobile devices and digital currency presents a tremendous opportunity to radically expand access to financial services on a worldwide basis” — Jeremy Allaire, chief executive officer of Circle Internet Financial
Bitcoin can allow us to create new type of financial products targeted to those who live in poverty.
Every Penny Counts.
“Bitcoin is the first Internetwide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about 2 to 3 percent — and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher.“ — Marc Andreessen.
With Bitcoin and a cheap mobile phone, they can pay anyone in the world any amount of value of bitcoin, without the need of an authorization and almost without fees.
With Bitcoin, the Middleman Is Dead, Long Live the Middleman !
They can exchange money with no pre-existing trust. They don’t have to trust a private bank or the government with their money.
Trust is hugely important in the developing countries where corruption is known to be relatively high.
But.. Bitcoin can’t teach people how to read
So what ? No it can’t and it won’t need to. Making a bitcoin transaction would eventually be as easy as making a phone call. There are 4.88 billion cellphone users in the world and they are doing just fine using their phones. There has never been an easier way to pay than bitcoin. Ok maybe cash, but that’s it.
Bitcoin, as a money transfer service.
According to a research by ODI , Africa’s diaspora pays 12% to send $200 back home. And according to the same research, Western Union in Rwanda charges closer to 18–19%.
A new innovative Bitcoin startup in Kenya, Bitpesa, is trying to tackle this problem by taking bitcoins and paying out Kenyan shillings.
“Bitcoin offers an immediate remedy for cross border payments, remittances, online payments and business-to-business payments because it takes less than an hour to send and receive money, with an added advantage of final settlement” — Michael Kimani, Chairman of the African Digital Currency Association.
When Muhammad Yunus’ meets Bitcoin
Yunus is known as a pioneer of the Microcredit concept, “small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.”
Theses small loans have helped lift millions of families out of poverty in the developing world by helping them purchase a motorbike or start a business. These loans have also allowed for the bulk purchase of food at a lower cost than the ‘normal’ behaviors of buying it on a daily basis. For the poor, small change is big change.
Microfinance has been a revolution of sorts as it was really the first thing that took some power away from the banks. It reversed the power relationship between the borrower and lender.
With Bitcoin, transactions can happen from person to person without the need of a trusted party.
Now with Bitcoin, loans can also occur without the need of a middlemen.
Loans of the people, by the people, and for the people.
Peer-to-peer lending using Bitcoin is already happening with companies like BTCJam, a service that connect individual lenders with borrowers.
But what about their credit scores ?
There is a real possibility of creating a credit score system for the Poor using Bitcoin.
Using Machine learning, BTCJam already built a proprietary credit-scoring system.
Closing Thoughts
In his piece on the state of consumer FinTech, @TanayJ wrote that one of the three way technology is disrupting the consumer finance industry is by “Enabling individuals to borrow, invest and transfer money at lower rates than traditional financial institutions”.
Until now, most of the services offered in the developing region are trying to enable people to transfer money at a lower rate than traditional services.
When it comes to the Poor, we tend to forget that Y = C + S.
By focusing on offering them a transactional service and forgetting about improving their saving and borrowing options, we failed to convince them to leave cash and go digital.
Surely we could do better. Maybe it’s time to try something else.
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” — Buckminster Fuller
Bitcoin still has a long way to go. It is still fairly inaccessible to the developing world.
“Bitcoin is for money what TCP/IP is to the Information Age” -Micky Malka
Currently, Bitcoin is a just like the internet before the browser. It will take time until we build robust and realistic solutions for the developing world.
But it will eventually happen, and it will change everything.
We are just getting started.
Thanks to Saul Minkoff & Tanay Jaipuria for reviewing a draft of this. If you want to discuss anything on this piece, I’m @mmkhalifaa on Twitter.
