How blockchain can bring banking to the unbanked
Blockchain helps to solve multiple issues within the financial system. The issues range from centralization of data to long transaction times. One important issue is providing financial services to the unbanked. Unbanked people don’t have access to financial institutions.
Introduction
According to The World Bank, there are 12.6 commercial banks per 100,000 people (Figure 1). The number has grown since 2004. The average rate was 2.46%. Back in 2004, the number was 9.50. But the average is heavily skewed. San Marino has 223.8 commercial banks per 100,000 people. Most of the countries above the world average belong to the developed nations. The lowest number is in the Ukraine. They only have 0.49 banks per 100,000 people. The heavily indebted poor countries (HIPC) are at the bottom of the list. So are the least developed countries. UN classifications show 3.6-4.4 commercial banks per 100,000 people. These differences create numerous issues for those who reside in such countries. They must travel long distances and pay high fees. Not having access to banking services inhibits progress and wealth creation. This sets off a vicious circle.
Who are the unbanked?
The Federal Deposit Insurance Corporation (FDIC) defines this term. An ‘unbanked’ is an individual who doesn’t have an account with a formal financial institution. This is mostly as a bank. Currently, around 25% of the world population are unbanked. Most unbanked live in developing countries or are immigrants from such countries.
For them it is simply too expensive and unfeasible to open a bank account. Often a huge amount of paperwork must be dealt with. Low income levels, financial illiteracy are further factors stopping people. At last, inability to comply with KYC norms prevents people from opening a bank account. This happens, when they cannot show a valid ID. But for a lot of people there is no practical way of getting such identification. Rural areas in poor countries suffer from this effect. The distribution of financial institutions in those regions makes things worse.
Problems faced by the unbanked
There are numerous problems faced by unbanked people. Firstly, they are unable to get direct credits and lack a credit history. This hinders them from getting further borrowings from banks. Secondly, it is impossible to save and transfer money securely. One example is migrant workers sending money from abroad. This involves costly middle men such as Western Union.
How can a blockchain help the unbanked?
Blockchain is a distributed ledger that helps transfer money securely. It works without the use of a middle man. Traditional financial institutions are such a middle man. For the transaction to occur, the users need a computer or a smart phone. They also need the blockchain interface installed. Let’s say Bob sends money to Alice. The transaction occurs through a peer-to-peer network. The transaction is recorded in the ledger. Alice and Bob can be unbanked. All they need is access to the interface. It allows them to transfer money securely from any location.
How does a blockchain guarantee security?
Data on a blockchain is immutable. All nodes access this data. The nodes check for validity and duplicity. Once the transaction is verified to be valid, it is recorded in the ledger. After entering data, it cannot be modified.
The distributed nature of the system means that there isn’t one point of failure. Instead the data is distributed across all the nodes in the network. This prevents failure of records and the high standards of security ensures that it is difficult to hack. All these features make transactions using blockchain secure.
Is it easy and inexpensive?
The second problem that blockchain deals with is the difficulty and costs involved with traditional banks. It is easier to open an e-wallet. It can be done from any electronic device. Thus, the location of the financial institution is irrelevant.
Transactions using blockchain are inexpensive. Countries with fewer financial institutions have higher transaction fees. International transactions are especially expensive. A transaction using blockchain incurs only a small fee. These are lower compared to traditional banking fees. They are also independent of the country of origin and the destination.
Conclusion
The introduction of blockchain starts to revolutionize multiple industries. The costs of transferring money are much lower with cryptocurrencies. This is especially true for international transactions. A lot of new opportunities have thus come to unbanked people. There are already some successful projects like M-Pesa in Kenya. They show that people are open to accept change. As the reputation of blockchain grows, the number of similar success stories will also keep on growing.
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