What Blockchain Can Do For The 1.7 Billion Unbanked

It is staggering to think that as much as a quarter of the world’s population does not have access to a bank or access to formal financial services. 1.7 billion people are considered ‘unbanked’ and are disadvantaged when it comes to financial empowerment. Simple things we take for granted like receiving a salary, sending money to our family, paying bills, saving and investing are not accessible for these people.

 Becoming banked is difficult for the ‘unbanked’ as numerous barriers such as stacked fees and expensive costs for necessary financial services, a lack of individual banking identity, and a monopoly on necessary services make it nearly impossible for these people to get a bank account or the like.

 This discriminatory imbalance towards the unbanked is identified and is slowly being addressed. We are starting to see governments and financial institutions look into new technologies such as Blockchain and stablecoins to increase the efficiency of the financial system.

Stablecoin for access

Stablecoins combine the stability of traditional assets with the benefits of blockchain technology, hence eliminating the unpleasant volatility that has plagued most cryptocurrencies.

 This might explain why traditional financial institutions such as JPMorgan, Wells Fargo, and even the retail and social media giants Walmart and Facebook are already exploring how the use of stablecoins can reduce the cost of transacting, increase the speed of sending money, and break down financial borders across the globe.

 As Facebook’s libra has struggled to get approval from regulators, discussions have shifted to launching individual stablecoins representing each country as opposed to launching it as a global currency backed by a basket of currencies.

 In fact, stablecoins representing each country may be better suited to achieve Facebook and Libras vision of serving the underserved, since the users wouldn’t be subject to FX fees on domestic transactions like they would be with Libra. Additionally, regulators may be more supportive of a system with multiple stable-currencies, as they would not transact outside the money supply as was the original intent with Libra.

Fiat Pegged (or backed) Stablecoins have an advantage over other forms of cryptocurrencies in that their transactions occur within the money supply from the national perspective of that country. There is no need to circumvent the central banks to solve the accessibility issues of these coins. 

Lack of Bank Branches affect accessibility in Low Income Regions

As illustrated in the graph below by the green column and line, commercial banks have very few locations in low income countries compared to high income countries, especially in rural areas. The number of commercial bank branches has declined in high income countries due to cost cutting measures and industry consolidation. There has also been a decrease in the number of commercial bank branches in low income countries although there weren’t many to begin with. For someone living in a rural area in these countries that means, a walk to the bank can take hours, sometimes even days. It is only comprehensible, that they would not go through the hassle of dealing with a bank often.

Considering that mobile phone penetration rates are increasing in all developing countries these days, a mobile-first approach seems to be the most feasible for solving the problem of the billion unbanked. When giving the unbanked access to their domestic currency via mobile phone, they will have financial services at their fingertips. Access to saving and transferring will no longer be a question of their location. As the Financial Access Survey of the IMF has found, mobile payments sector is growing rapidly in countries with low traditional banking coverage.

 In Afghanistan where less than 200 out of 1000 adults have a bank account, the value of mobile payment transactions has grown 400% over a period of 5 years to reach 1.2% of the GDP in 2018 (IMF: 2019). In the East African countries that have established themselves as pioneers for mobile money solutions, the value of mobile money transactions is as high as 62% of GDP in Uganda in 2017.

 Furthermore, in combination with the growing mobile payments sector, stablecoins of local currencies can lead to an increase of efficiency in businesses while giving regulators the tools to trace money mitigating the effects of de-risking, while adding more tools to central banks arsenal to carry out monetary policy. 

Digital Identities for the “un-identified”

One big reason why people are unbanked is the lack of an ID to identify themselves. Currently,  1.1 billion people lack of official identity and estimated 2.4 billion people do not have a digital identity.

By leveraging the trustless and tamper-proof nature of blockchain technologies digital identities for everyone currently lacking an ID could be created.

A digital ID allows anyone to access basic financial services as well as to build a positive track record. This track record will later support them when it comes to applying for a loan, mortgage or just normalizing spending and saving patterns. 

SPOTLIGHT: TUNISIA

All of the aforementioned concepts sound theoretically like great ideas and potentially even revolutionary, but ideas that sound good on paper, are not always as good in reality. Nevertheless, there are already cases in which blockchain technology is used to address the issue of the unbanked with positive results.

In Tunisia, the national post service has launched a pilot for a smartphone app based on blockchain originating a new national payment infrastructure. The post in Tunisia describes themselves as a trusted institution that puts their efforts into transforming their business and increasing financial inclusion. 

La Poste in Tunisia has been in the unique position of being licensed by the national bank to issue a e-currency pegged to the national currency: the dinar. Less than 25% of Tunisians had access to a bank account and even then, were not able to use Tunisian credit cards for purchases on international e-commerce websites like amazon, the Post launched the new system to increase financial access.

The new blockchain-based network allows for interoperability between different systems. Previously, customers of one public utility company could only pay their bills digitally, if they signed up to that providers platform. Now, they can manage all their utilities as well as telecommunications bills from the same mobile account. Before development of the blockchain-based app, the Post in Tunisia has already been managing the official digital currency of the country and acquired 700,000 users on the platform. All these users will now be on-boarded onto the new system. Nevertheless, they still represent just a small portion of the Tunisian population.

The national post hopes to leverage their network of 1200 branches across the country to spread the national currency, that will hopefully encourage local entrepreneurs to develop domestic e-commerce and payments solutions.

One unique challenge however, that Tunisians face is that the Tunisian Dinar is a closed currency, it is illegal to import or export the currency. A digital variant of the currency may aid financial inclusion, domestic e-commerce and remittances, however, it would not be able to realize the efficiencies for international remittances and foreign trade unless there is liberalization of capital control provisions. One thing is certain, the use of a digital currency based on blockchain creates is a step in the right direction toward inclusiveness. 

USING THE TECHNOLOGY FOR FINANCIAL INCLUSION 

Banking may seem like a small part of many people’s lives, but for those who don’t have it, and cannot get access to it, banking can make all the difference.

Without banking, people don’t have the opportunity to save and transfer their money securely. They can hardly safeguard themselves against unexpected life-events such as unemployment, accidents or illness. The only way they can store money is in cash, which is not really a reliable method in most countries. On another note, without a bank account, they cannot receive any direct deposits from an employer and are left unable to build up a credit history.

This makes it close to impossible for them to ever get a loan, which is seen as one of the most powerful tools for overcoming poverty. Just a simple bank account, can share all that.

Blockchain technology with all its revolutionary potential gives us – for the first time- a tool to solve the problem of the unbanked without giving up on regulatory oversight. By the issuance of stablecoins backed by local currencies, central banks can control the money supply and track money flows more efficiently than before while allowing anyone with a smartphone to access the financial system. For verification, digital blockchain-based IDs could be used creating a smooth user experience across platforms and lowering entry barriers even for those without government issued IDs.

As discussed previously, the potential of stablecoins as well as of blockchain for the unbanked has been discovered by many and banks, tech-companies as well as governments are already working on using blockchain to create a more financially inclusive and fairer system for everyone.

References:

This is a repost of the Article written by Aly Madhavji and Danish Chaudhry featured November 2019 in the Block Journal, Issue 13: https://blockjournal.io/shop/block-november-2019/

#unbanked, #blockchain