Blockchain: Banking the unbanked

Having a bank account is one important step out of poverty. But 39% of all adults have no access to banking. Blockchain could change that. Although not today.

“The unexpected tragedy of our current financial system is that those who have the least money have to pay the most to ship it,” says Joyce Kim, CEO of the Stellar Foundation.

Roya Mahboob is Afghanistan’s best-known female IT entrepreneur. She founded an organization called Digital Citizen Fund[1] that organizes digital education for Afghan women. There are now 13 IT training centers and almost 8,000 women have attended courses there. Now Roya Mahboob has a brilliant idea of how women in Afghanistan can earn money. Her company Women’s Annex shows women how they can learn how to blog and convert that into earnings[2].

Roya Mahboob. By Sobolevaphoto — Alena Soboleva Photography CC BY-SA 3.0, from Wikimedia Commons

Roya has a solution, but it comes with a problem: 99% of the women in her courses don’t have a bank account that they can link to their blog. Although women are allowed to have accounts in Afghanistan, most people do not trust this system. They trust the Hawalah, a circle of people in the Muslim world who carry out money transactions worldwide. You can give money to a member in Baghdad and someone else can withdraw that money from another member in Kabul. And no one knows the other. The system works with trust in the system. Hawalah is, so to speak, the Bitcoin of the 8th century. But Hawalah does not help in the digital world.

The lack of access that the women in Mahboob’s courses face is a problem of many people. Worldwide 39% of adults do not have a bank account. The advantages are easy to understand: Money on the account means more security than hidden in the box in the house. Producers can handle sales without cash. This does not only contribute to security but opens up new markets when seller and buyer no longer have to be in the same place. In many countries, a bank account is also a prerequisite for a loan.

But as is so often the case, financial inclusion is unequally distributed. While 94% of adults in industrialized countries have an account, in sub-Saharan Africa the figure is only 34% and in the Middle East only 14%.

Sub-Saharan Africa has been trying for some time to bring more people into banking. 12 of the 34% use mobile bank accounts via mobile phones. The most disadvantaged when it comes to owning bank accounts are the poor, the young, the women and the rural population.

Why is it so difficult to get a bank account when you’re not a working person in the industrial nations? The reason is an English double acronym: KYC/AML. It stands for “Know Your Customer / Anti Money Laundering”. Banks need a number of documents and security until they grant a new account. It takes 30–50 days for a bank to complete this process.

KYC/AML checks cost each bank an average of 40 million euros per year4[3]. It is so expensive that this process even has its own name: Onboarding. In regions with low bank density, this can be a difficult undertaking. Go to the city and organize documents, then to the bank to deliver the documents and again to open the account.

Many people fail already at the first step, they have no birth certificate or police registration. When it comes to insurance, the whole process has to be repeated.

Blockchain can help here. Financial institutions and insurance companies can store the customer identity and creditworthiness in the blockchain. There it says that Ms Jane Doe has proven her identity, her residence, her reputation and her creditworthiness and was therefore found to be a good customer.

The insurance company can access it and trust the data, as the blockchain is not corruptible. This also works when Ms Doe changes residence or bank, applies for a loan or needs a rental car. So, the financial world only needs to process a customer once for the first time.

Blockchain can therefore simplify onboarding.[4] To ensure data protection, this service would not run on a public blockchain. It would be a system run, for example, by SWIFT — the organization that handles communications for international bank transfers — or by a new blockchain competitor. As a result, this blockchain loses a key feature — transparency towards its customers. At the very least, the more favorable processing of banking services remains.

Blockchain for bank on-boarding

Even with simplified onboarding, many people are left out. They still have an advantage when they can order goods from distant regions or send money to relatives. These people may not have a bank account, but they do have a mobile phone. By 2020 there will be 9.2 billion contracts. More than one per person. Bank transfers are expensive mainly because the technology behind a transfer is old, slow, complex and maintenance-intensive. Transfer services, on the other hand, require a huge branch network. Western Union operates 550,000 branches in 200 countries, beating McDonalds by a factor of 15. Accordingly, a transfer with Western Union costs up to 10% of the transfer amount. The further away from the industrial centers, the more expensive the money transfer becomes.

Blockchain can handle the money transfer service for a fraction of the cost. Resource-weak countries can thus skip entire technology steps. In Africa, for example, the landline telephone has never become established for logistical reasons. But thanks to the technological leap in mobile communications, even households today have Internet access that are not even connected to the power grid[5].

Papua New Guinea is also a country that wants to make this leap. The National Bank has launched a blockchain pilot project to this end. The boss Loi Bakani has big plans: “This […] puts Papua New Guinea in the front row in the discussions about blockchain. There’s no reason why Papua New Guinea can’t have a leading role in emerging markets.”

Vice President Elizabeth Genia sums it up more clearly: “Almost 85 percent of our citizens live outside the banking system, there will be new innovations that will change people’s lives.[6]”.

In Afghanistan, Roya Mahboob also discovers Bitcoin and teaches women how to pay in crypto currency. In a seminar Mahboob talks about a woman who was beaten by her husband and who took all her money.

After accepting Bitcoin as a means of payment — which is out of reach for her husband — she was able to save money. When she has had enough, she sold her coins, went to a lawyer and divorced her husband.

Blockchain currencies are not only the hawala of the 21st century, they are above all cheap. Blockchain transfers can be charged with a 0.25% transfer fee. There are even free forms of transaction. But there is an essential catch. Using blockchain, transactions are carried out from Bitcoin to Bitcoin, for example. In order to exchange blockchain money into local currency, a bureau de change is needed. This brings us back to the branch problem and exchange fees. This problem has to be solved as well as that of awareness and familiarity. Everyone knows Western Union, but Bitcoin?

Furthermore, the target group of “unbanked” mobile phone users probably hasn’t heard of the new possibilities yet.

Blockchain for refugees in Finland

Refugees in Europe always have the same problem: they have no status, often no papers and for a long time they have no documents and above all no account. The latter, however, is a prerequisite for finding work. Finland, for example, has paid social assistance to refugees in cash until now. This is expensive, inefficient and unsafe7[7]. But the government has found a solution. For two years now, newly registered refugees have been receiving a MasterCard loaded with a certain amount. This enables them to make payments and receive money. The so-called MONI card functions like an ATM card without an overdraft frame.

Asylsum Seeker in Finland with Moni Card. Souce: MONI

The transaction data is stored encrypted in a public blockchain and enables the Ministry of Immigration to maintain some control over the refugees without having to invade their privacy too much. The MONI card is sufficient for employers as a secure proof of identity and the collected data can be used for a credit rating. This is needed to get a “real” bank account.[8]

According to Moni’s CEO, 4,000 refugees now use the MONI card. That is 10 percent of all refugees[9]. It would not be the imaginative crypto-startup world if the inventor of this card, Moni, were not already working on an implementation for all citizens of Finland[10].

Who is working to bank the unbanked

Techcrunch has named British fintech company Humaniq as Top Startup 2018 in Blockchain. They plan to onboard millions of unbanked and offer companies access to this new buyer group. They claim to already have 500.000 members. The US-startup Bloom adds blockchain based credit score on Ethereum. Then there is WeTrust with a trusted lending circle and SureRemit that is a digital voucher system much like the original Hawala. At last Civic could be a project delivering the needed global identification system on the blockchain.

But as many industries waiting to be disrupted by blockchain, the billions of unbanked will not have a working solution anytime soon. Blockchain is still in its infancy.

[1] http://digitalcitizenfund.org

[2] https://www.forbes.com/sites/laurashin/2017/08/08/how-bitcoin-solved-this-serial-entrepreneurs-problems/#2c4c5395309c

[3] Report: Four Blockchain Use Cases for Banks / Fintech Network

[4] https://www.weforum.org/agenda/2017/06/3-ways-blockchain-can-accelerate-financial-inclusion/

[5] For those who wonder how that is possible: there are charging services with car batteries.

[6] http://m.nasdaq.com/article/central-bank-of-papua-new-guinea-adopts-blockchain-technology-cm836726

[7] http://fortune.com/2016/03/16/business-apps-refugee-relief/

[8] http://www.politico.eu/article/private-sector-fill-eu-void-refugees-ngos-activists-migration-crisis-solutions/

[9] https://techcrunch.com/2016/04/30/new-initiatives-emerge-to-help-refugees/

[10] https://www.technologyreview.com/s/608764/how-blockchain-is-kickstarting-the-financial-lives-of-refugees/