How Blockchain and Financial Services Can Reach the Underserved
With IBM and others that offer blockchain-as-a-service providing a hosted distributed ledger platform that’s ready to go for companies that wish to deploy their own private blockchain, it seems like everyone is interested in the latest tech trend. Daily headlines announcing a new blockchain pilot or the formation (or dissolution) of a consortium among big name players warn “blockchain is coming to disrupt your industry.” But what about financial inclusion?
What is blockchain?
Blockchain is a digital infrastructure often described as a distributed ledger technology (DLT). All “transactions” within a given timeframe are validated and recorded as a “block” on “the chain,” which replaces a centralized ledger. Blockchain is characterized by transparency, security, privacy, and decentralized control. You often hear references to “the blockchain,” which is a misnomer since there’s no one blockchain, but rather many public and private applications of the technology.
Why is blockchain relevant to the underserved?
The distributed ledger technology behind the blockchain provides a low-cost, high-speed system of record. Many fintech startups leverage blockchain applications to directly address some of the pain points of the financially underserved, for example the high cost of remittances or the lack of documented property rights or national identification, both of which are often required to access financial services. But traditional financial service providers (FSPs) can also integrate with, or deploy, blockchain solutions to drive operational efficiencies and better serve their customers.
How can financial service providers evaluate the opportunities?
Harvard Business Review provides a helpful analogy to understand the transformative potential and likely evolutionary path of blockchain, comparing it to the digital infrastructure that laid the groundwork for the internet. Like blockchain, TCP/IP started with a single use case — enabling email communications among the ARPAnet researchers. Similarly, bitcoin was the first application of blockchain technology — but like the internet, the potential uses of blockchain are as vast and exciting as the human imagination.
The HBR article provides a useful framework for categorizing and evaluating blockchain opportunities, which we’ve adapted for FSPs working specifically in the financial inclusion space. The two axes are novelty and complexity. As novelty increases, more effort will be required for FSPs and/or their clients to understand and adopt the solution. As complexity increases, more coordination will be required to execute the solution in a way that provides value to all stakeholders. Thus, the top right quadrant represents the most difficult, yet potentially transformative, applications of blockchain, with serious social, legal, and political implications that must be resolved before these solutions reach maturity and realize their full economic value — i.e. strategic areas for FSPs to monitor as both progress and challenges evolve over time. Conversely, the bottom left quadrant represents low-hanging fruit — better, lower cost, highly focused solutions — that FSPs can begin to experiment with or implement in the short term.
1. FSPs face high costs to facilitate payments for their customers. Stellar is a nonprofit that has developed a blockchain-based platform for remittances, micropayments, and mobile money that FSPs can integrate with directly to lower the cost of transactions and provide instant settlement.
2. Likewise, Know Your Customer (KYC) compliance can be burdensome and time-consuming for FSPs. BanQu uses a blockchain-based platform to provide a digital identity to individuals that maintains a consolidated record of their assets and transaction history, using this as a basis to offer identify verification services to FSPs and other organizations.
3. Internally, FSPs can benefit from more efficient ways to record and reconcile transactions across multiple databases. Microsoft Azure, Deloitte, and IBM all offer blockchain-as-a-service cloud-based environments for FSPs to test, build, and deploy customized solutions.
After successfully experimenting with single use cases, FSPs could consider localized closed-loop solutions. Agent network management is a critical component to successful delivery of digital financial services. In the future, one could envision a blockchain-based platform for agent management. Similarly, moving along the complexity axis, FSPs could consider running their core banking system on a blockchain; such a pilot is already underway at a microfinance institution in Myanmar. But replacing legacy systems like core banking often require the coordination of multiple actors and significant subsequent changes in organizational policies and procedures, and therefore imply longer time horizons. Finally, smart contracts represent exciting possibilities to offer innovative supply chain finance for small businesses — but these will take some time to mature.
The framework above, together with these three examples, can help FSPs figure out how to start thinking about blockchain today, and building the organizational capabilities and culture to leverage strategic and future applications of DLT to advance financial inclusion and better serve their customers.
A version of this article was published on the Wall Street Journal’s Multipliers of Prosperity, in partnership with the MetLife Foundation.