BanQu Uses Blockchain to Fight Poverty
A growing number of blockchain companies are tackling social issues. Factom is working with the Gates Foundation to digitize medical records, the Republic of Georgia is using blockchain to register land titles, there are many more examples. In countries with weak institutions and high rates of corruption, blockchain’s promise of inexpensive tamper-proof recording holds great allure.
Personal identification is perhaps the most fundamental record. Being able to prove one’s identity is often a prerequisite for asserting property rights and accessing services. BanQu aims to solve this problem using the blockchain.
BanQu was founded by a group of economic development professionals who were looking for ways to alleviate poverty. Their goal is to eliminate global extreme poverty by providing the poor with an “economic identity.” BanQu believes a verifiable identity will give the poor greater access to the global economy, which will bring them greater economic opportunities and materially improve their lives.
Access to Global Markets
Participation in the global economy does reduce poverty. In fact, globalization is one reason the world is reducing extreme poverty faster than expected. The UN’s Millennium Development Goals set a target of cutting extreme poverty in half between 1990 and 2015. The target was met five years ahead of schedule. This happened, in part, because poor countries’ economies grew faster when they integrated into global markets.
China is the perfect example. Exports, trade and techology transfer have been instrumental to China’s decades long run of high growth rates. This remarkable economic growth has allowed many millions of people to escape poverty. But it’s not just China. Countries around the world have leveraged globalization to spur growth and reduce poverty.
However, these examples speak to macro-economic trends and policies. They suggest that poor countries do well when they participate in global markets. Does it follow that the same is true for poor people?
Bottom of the Pyramid
In 2004, CK Prahalad published The Fortune at the Bottom of the Pyramid whose core idea was that the poor were a large neglected market. If businesses would address the market they could reap profits and improve the lives of the poor in the process. This idea created a new branch of economic development known as Bottom of the Pyramid (BoP). BoP has moved beyond the initial focus on the poor as consumers, to view them as producers and entrepreneurs as well.
The BoP model is an attempt to integrate the poor into world markets. Large corporations like CEMEX and Proctor & Gamble have created product lines targeting those at the bottom of the economic pyramid. These products usually offer very low prices that the poor can afford. Companies rely on achieving large scale to generate profits. To date the results have been mixed, with some companies pulling their products after failing to achieve revenue goals.
There are also some successes. VisionSpring is a non-profit that partners with distributors to sell low cost glasses to the poor. It has sold one million pairs of glasses in Bangladesh alone. While VisionSpring is a non-profit, the distributors do make a profit on every pair sold. This creates a low margin high volume business that benefits poor consumers by providing them access to improved vision and productivity.
When Bottom of the Pyramid projects work, they leverage global markets to provide low cost goods and services that improve the lives of the poor. Whether it is glasses, clean water, or access to finance the goal is not only to make a sale, but also to remove obstacles preventing the poor from escaping poverty.
Why Blockchain
BanQu is a BoP initiative; its target market are people with very few resources. Like other BoP projects, BanQu must offer a low-cost service that achieves wide adoption to be successful. Given these requirements, BanQu’s decision to leverage Blockchain technology makes perfect sense.
There are legitimate concerns about the scalability of the Ethereum blockchain. However, these limitations are unlikely to constrain BanQu. There are two types of actions that are executed on the blockchain: a read and a write. Writes add information to the blockchain and are comparatively expensive. They must be validated by the network and the network can only process a limited number of transactions per second.
However, reads do not require validation by the network. Anyone with a local copy of the blockchain ledger can read it locally. Because the ledger is secure and unchangeable, the reader can be confident that the information contained in the ledger is valid.
On the Ethereum blockchain, the cost of a write in monetary terms depends on two factors: the complexity of the computer code executed and the acceptable time lag in processing the transaction. According to Eth Gas Station, which tracks Ethereum transaction costs, a simple contract with a less than two minute lag would cost one fifth of a cent to process.
BanQu may need to execute multiple write transactions to register a customer’s identity on the blockchain. Even so, they could conceivably register their first million customers for several thousand dollars. Compare that to AWS, the leading public cloud provider in the world. To serve a million customers would likely cost several thousand dollars a month on an ongoing basis. On the blockchain, once the data is written, ongoing are much lower because it is inexpensive to read data.
Services like AWS are designed to be elastic, meaning an application can scale easily and one can pay only for the resources needed at any one time. In practice, however, most applications require a baseline infrastructure to be sufficiently functional and reliable. This might include load balancers to allow multiple servers for redundancy and growth; and replicated databases for higher performance and protection from failure.
Blockchain technology reduces these costs significantly. The blockchain is architected so that any computational work is done by a network of computers that together maintain the ledger (where the data is written). This means that you get redundant databases and servers for free. Reliability is built in. Computers can drop in and out of the network and your code will run and data will be preserved regardless.You can start with one customer and scale to one million without changing your blockchain application.
While cloud providers like AWS generally charge by the hour for server use. On the blockchain, you truly pay only for what you use. If your code is not executed you are not charged. Making for a much lower startup cost.
Which is to say, blockchain is a perfect technology for building low cost services to serve large audiences.
The Value of An Identity
A verifiable identity is a basic requirement for many economic activities. It is a source of trust that can unlock many otherwise unavailable economic opportunities. Solving this problem can unlock a flood of benefits for the poor. For proof, look no further than Grameen Bank and Group Lending. Group lending solved the identity verification problem for lenders and was instrumental to the creation of the micro-finance industry.
Under its group loan framework, the Grameen Bank provided loans to individuals for which the group as a whole was responsible. If someone did not repay, everyone in the group could lose their access to future loans.
While social pressure to repay is often credited for group loans’ high repayment rates. However, the more important innovation was its solution to the identity verification problem. Because micro-loans are so small, the cost of verifying a borrowers credit worthiness made them unprofitable. Grameen Bank needed a low cost method of of identifying borrowers who were likely to repay.
Their solution was the Group Loan. Instead of the lender verifying the borrowers credit worthiness, group lending passes this responsibility down to the other members in the group. Typically they live in the same community and know each other well. Since each member is liable for any loan received by any other member of the group, they have strong incentive to only allow members who are likely to repay.
Group loans solve the identity verification problem in a very specific context. The solution does not generalize to other situations, such as proving ownership of land, or membership in a community. This is why a universal identity verification system is potentially more powerful. Not only can it allow users to build a credit history to access capital markets, it can allow them to access government services, and perhaps more easily enter the formal economy.
Challenges
Certainly BanQu will face many challenges going forward. Market based approaches to poverty alleviation often find it difficult to attain sustainability. This is especially true when they target the extreme poor as BanQu aims to do.
Depth of Poverty
The depth of poverty refers to how far the poor are from the poverty line. The deeper a person’s poverty the more difficult it is to escape it. The extreme poor are likely to face more challenges and have fewer resources with which to confront those challenges.
For BanQu, this means that the extreme poor may find it more difficult to access BanQu’s technology. BanQu’s website states that the 60% of the unbanked own cell phones which they could use to connect to the global market. However, the unbanked are not all poor. In fact, the unbanked cite a variety of reasons for not having bank accounts, as seen in the chart. Furthermore, the poorest among the unbanked would presumably be the least likely to own a cell phone.
All this means that if BanQu targets the extreme poor, the ability of their target market to access their offering may be more limited than it appears.
Social Isolation
One interesting aspect of BanQu’s strategy allows the unbanked to leverage family and other connections to build an economic history and identity. Lots of research suggests that poverty and social isolation are closely related. Indeed they tend to reinforce each other. It stands to reason, then that the poorest would be the most socially isolated and the least likely to leverage social connections to pull themselves out of poverty.
That is not to say the idea is without merit. The corollary to the above is that social connections are important to economic advancement. Furthermore, as the chart above indicates, nearly 30% of the unbanked cite having a family member with an account as a reason for not having one themselves. This is a substantial number. Leveraging social connections could prove a powerful strategy for helping people out of poverty. The question is how many among the extreme poor have the kind of social connections needed for that strategy to work for them.
Competition
Identity verification is a fairly crowded space projects like ID 2020, BitNation, Taqanu, and The Humanized Internet are all working to provide verifiable identification to those who lack it. Additionally, many other projects aim to make digital identification more efficient in the developed world; potentially creating technology that could be applied in the developing world as well.
Nevertheless, with over two billion unbanked people in the world there is room for many of these nascent projects to get a foothold. The threat from the competition is real, but not likely to impact BanQu in the early going. Successful tech startups generally build on a small enthusiastic group of customers and scale once the product has been perfected.
The key to reaching the growth stage is to establish proof that its service offering delivers value to customers. To that end BanQu has established several pilot programs that use their technology to bolster economic development. The result of these pilots will likely illuminate the path forward for BanQu and its future prospects
