3 Ways Blockchain Can Accelerate Financial Inclusion
This article first appeared on the site for The World Economic Forum.
Of the many hundreds of applications of blockchain technology people come up with, targeting financial inclusion is always brought up. However, like most blockchain applications, people just talk about theoretical and ignore the implementation aspect. It is as if the general public just knows what blockchain is and will adopt it because everyone says so. In this post I’ll focus on three specific ways that blockchain can execute on the theory.
As a quick background, it is estimated that more than 2B people around the world lack access to any form of transaction account. Studies have shown having a basic banking account automatically raises standards of living: people save more, they can borrow for education or opening a business, they can buy property and so on. Yet there have to be some major barriers preventing people from joining the financial world. So let’s move onto how we can lower those barriers through Blockchain.
Step 1: Make It Easier to Onboard Customers
Know Your Customer and Anti-Money Laundering, commonly known in the banking world as KYC/AML, is a major obstacle for the financially excluded. The amount of documentation a bank is required to collect and keep up to date is cumbersome. As a result it turns off many people as they have to gather multiple items and then at times wait weeks for verification. In certain parts of Asia and Africa, it is quite difficult as it requires the person to travel and spend a lot of time.
Blockchain can power a KYC Shared Ledger that multiple banks in a region can use. With this system, only one bank needs to onboard the customer. The information collected is then validated in the blockchain and recorded. If everything checks out, then the customer has their identity created onto the blockchain. Now when that customer goes to another bank or insurer, that institution can look up the customer, see they are already on the shared ledger and all the proper documentation has been verified. This second bank can now open the customer’s account immediately. If the customer changes jobs or addresses, the second bank can update the system and all the banks on the shared KYC ledger has the latest information. They all trust the data. As a result banks lower their compliance costs and reduce all the friction in onboarding new customers. Imagine how happy a bank would be to have thousands of new customers.
Step 2: Make It Easier To Send Payments Domestically and Internationally
Now that customers have been onboarded, a blockchain based payment rail allows for the fluid transfer of electronic money. People may not have banks accounts but in the countries outlined in the graphic above, mobile phone penetration is massive. By 2020 there will be 9.2 Billion mobile phone subscriptions. That’s more than 1 for every person on Earth.
People want to be able to buy goods from neighbouring countries, migrant workers need to send funds back home, and communities want to control their own ecosystems. By building a blockchain payment rail and connecting it to the mobile phone, customers can easily send funds across borders quickly and cheaply. No more standing in line for hours at money exchanges. People will be to do it right from home and still get a low rate.
The use case that excites me most is a community deploying their own payment rail for its residents and merchants. This would keep out Visa and MasterCard from moving in and charging the small merchants 3–5% merchant fees. The community with its own blockchain payment rail could be free or even just charge 0.25%, more than 1/10th of what the big players charge. This is able to happen because a blockchain based system can be launched for a fraction of a cost the legacy systems.
Step 3: Create Better Insurance Products for a Changing Market
Ask any person what they generally think of insurance and they are very likely say one of the following:
“I don’t know if I am paying too much.”
“There is no transparency.”
“I don’t trust it. “
Pretty much it comes down to little trust, no accountability and lack of transparency. Well those three things are exactly what the blockchain sets out to solve.
One of the biggest challenges in insurance today are legacy systems and processes for issuing policies and managing claims. Old technology and high human involvement for basic tasks drives the cost up and makes the price high. No wonder that in places like India, insurance adoption is less than 5%. To sell to that market of 1.3 Billion, insurers will have to lower the cost by a lot. A blockchain based insurance platform will allow insurance policies to be issued onto the blockchain and be transparent for all. Smart contract systems will allow for real-time claims management so the customer doesn’t have to spend time gathering the materials, making copies, mailing it in and then waiting 3–6 months for the payout. Everything is automated.
Now that a lower-cost foundation has been built, the insurers can get very creative when selling to emerging markets where the people have been financially excluded. Insurers can sell short term policies or usage based insurance at a low cost and still make a profit. Things like personal injury insurance, hospital stays, bike insurance all comes down.
KYC, payment and insurance - these are three direct ways to accelerate financial inclusion with the Blockchain. At Bluzelle we work with large enterprises to give them such blockchain solutions so they can deploy products like the above. In doing so they are able to attract new customers while at the same time help millions of people raise their living conditions.
