Is Blockchain a miracle to accelerate financial inclusion globally? (Thoughts)
Try to imagine living without access to any of the most basic financial services that many of our beloved friends and family living in developed countries take for granted: no possibility to open a banking account, therefore no possibility to obtain a debit or credit card, to get a car loan or a mortgage, to get a student loan to help pay for school fees, to get a small amount of capital to start or scale a small business venture, or any support to help get through a difficult month. It sounds hard, doesn’t it? In essence, bank accounts constitute the first step toward financial inclusion. Financial inclusion is the provision of access to appropriate, affordable, and accessible financial products and services to vulnerable and low-income individuals in a fair, sustainable, and transparent manner by institutional players (Reserve Bank of India, 2018).
Accounts allow individuals to store money and build savings for the future. Savings expand investment possibilities, satisfy entrepreneurial goals, provide guarantees for children’s education, and ensure adequate mitigation of financial shocks. Accounts allow the possibility of extending short- term microloans to self-employed individuals and thus create opportunities for themselves as well as for their communities. Additionally, having access to bank accounts makes it easier to send and receive payments via remittances, which are cross-border person-to-person payments of relatively low value, typically recurrent within migrants. Remittances act as a catalyst for financial inclusion; in 2017, remittance flows were larger than Official Development Assistance (ODA) and represented up to a third of several low-income country GDPs ( World Bank, 2018).
For a fact, access to financial products and services drive the world’s development and reduce poverty. However, more than 2 billion individuals globally currently lack the most basic financial services and therefore cannot adequately invest in their health, education, and entrepreneurship (World Economic Forum, 2018). Recent progress has been driven by a new generation of financial services accessed via mobile phone and the internet. Decentralised digital currencies — empowered by their underlying blockchain technology — have caused quite a stir in the tech and financial community, and its potential for empowering financial inclusion is being tested globally. Blockchain could have the potential to facilitate remittances for migrants seeking to transfer small amounts of money overseas; blockchain could provide a decentralised global bank account relieving financially excluded individuals from having to set one up with formal financial institutions, and blockchain could provide the basis for a richer set of financial services.
As of today, account ownership is universal in high-income economies, as 94 per cent of adults hold an account; whereas in low and middle-income economies, this share is 63 per cent.
In 2017, The World Bank estimated that 1.7 billion individuals do not hold an account within a financial institution. This segment of the population is referred to as the unbanked. The unbanked survive on less than two dollars per day and are mostly located in Africa, Asia, Latin America, and the Middle East. Not all who are considered as banked are equal. Alongside the unbanked, it is important to highlight the underbanked. This segment has limited or non-transactional access to financial services. The underbanked use money orders, check cashing services, payday loans, and other instruments offered through semi-formal or informal providers rather than traditional financial institutions or credit unions. Together these two segments account for 3.5 billion financially excluded individuals worldwide (World Bank, 2018).
The worrying landscape of financial inclusion is not limited to individuals only. Indeed, according to the International Finance Corporation, globally more than 200 million small and medium enterprises (MSMEs) in developing countries find it hard to access the traditional banking system (The International Finance Corporation, 2018). MSMEs are crucial to economic growth and future development in emerging markets, as they contribute almost 50 per cent of total employment and up to 33 per cent of GDP(World Bank, 2018). Precisely, more than 40 per cent of developing countries’ MSMEs have encountered several obstacles and burdens in accessing a financial account. When governments and industry stakeholders are unable to provide inclusive financial systems, the world’s poorest rely on their limited savings in cash, which is unsafe and difficult to manage. Non-inclusive financial systems contribute to alarming income inequalities and slower economic growth. The question to ask when looking at the positive effects of globalisation and digitalisation is: why are individuals and MSMEs in developing countries still financially excluded?
The reasons for the unbanked and underbanked not having an account:
• Geographical access to financial institutions is limited
• Insufficient funds to operate an account
• Financial services are too expensive relative to income
• Lack of necessary personal documentation (ID, passport, etc.) to formally open an account
• Family member already has an account
• Religious reasons
• Lack of trust toward financial institutions
The thoughts for blockchain
The aforementioned limitations open a window to develop solutions tailored to the needs and social and cultural patterns of the unbanked and the underbanked. Developing countries and financial institutions that act now to increase financial inclusion through a supportive infrastructure are going to be in the right position to thrive in years to come. Blockchain stands tall and can be an accelerator for financial inclusion. Blockchain technology, or “distributed ledger technology,” is a record of transactions — money, goods, or data — like a traditional ledger. In today’s world, a central authority such as a government or a credit card clearinghouse usually verifies transactions. Blockchain replaces the need for a centralised system, as verification of transactions comes from the consensus of multiple users. Matching the openness of the internet with the security of cryptography, the disruptiveness of blockchain brings in potential opportunities for the global payment landscape to be more transparent, efficient, and frictionless. Blockchain has the potential to provide everyone with a faster and safer way to verify information and foster trust.
Let us explore how blockchain technology can drive financial inclusion.
1. Blockchain addresses the high fees issue
Processing payments via national payment systems are often expensive and time- consuming. If fully adopted, blockchain can enable near-real-time and accurate payments, thus reducing transaction processing costs. As highlighted before, blockchain can remove the costs and fees associated with clearinghouses, credit and debit card providers, and banks, thus removing the need for all of the aforementioned third-party intermediaries. Moreover, blockchain-powered virtual currencies would allow the unbanked and underbanked to send payments globally, constituting universal means of exchange. This frees individuals from paying currency fees while transferring money to different countries. Remittance users would not incur inter-exchange spreads, as the sender and the receiver will be able to agree to transact the same virtual currency.
2. Blockchain facilitates the account opening process
Globally, 2.4 billion people do not have a digital identity, and this is one of the main issues preventing their access to financial institutions. Working with identity solutions tools, blockchain can assist in creating a decentralised approach to identity management, and manage social and financial entitlements. For example, startup Humaniq’s blockchain-based Ethereum app creates profiles based on biometric data, i.e., facial and voice recognition. Potential users are not required to have a passport or an email account. Individuals can use a smartphone to take a photo of themselves and record a video in which they make different facial expressions. Moreover, blockchain-powered solutions could help detect and prevent illegal behaviour and activities, thereby enhancing Know Your Customer (KYC) efforts and reducing the burden of time and costs associated with gathering personal information — a typically painful process for traditional financial institutions. Indeed, the immutability and transparency of blockchain could enable the creation and secure storing of clean and up-to-date customer data, leading to greater operational efficiency, increased trust, and a reduction of labour-intensive data gathering. Low-cost transfers facilitated through blockchain can also be an incentive for account opening and can overcome the geographic challenges facing the unbanked and underbanked. In light of mobile phones’ high penetration levels, low and middle-income individuals will be able to open an account on their phone, and in so doing avoid the costs of travelling to a bank’s branch.
Start-Ups like FlexFinTx have since launched FlexIDs in Sub-Sahara Africa! FlexIDs are easily accessible digital identities that any one of these families can access through their mobile phones using USSD or WhatsApp at a minimal cost. Once a FlexID is authenticated they can start receiving Verifiable Credentials to have undisputed authentication of claims which addresses the issue of trust amongst all the stakeholders. The use of FlexIDs to access government services e.g. to renew a driver’s license, eliminates the need for time constraining administrative processes which have loopholes for corruption, whilst reducing the cost to governments by up to 80%!
3. Blockchain reinforces trust
The Economist has defined blockchain as the machine for building trust. The real promise of blockchain technology is its clear and trustworthy value proposition, which fits the social and cultural practices of the unbanked and the underbanked. There is indeed no single authority controlling the ledger; the only rules are dictated by a “consensus protocol” — a mathematical algorithm that requires a majority of other computers on the network to agree on changes. This decentralized network, which relies on the collaboration of its participants, is somewhat reminiscent of the cooperative and consensual networks familiar to individuals from developing countries.
Conclusion
Given the value of global remittance flows (US$466 billion in 2017, World Bank), the remittance business creates fruitful opportunities for the design of appropriate, affordable, and convenient financial products that could enable unbanked and underbanked individuals to send or receive remittances. It is estimated that the major participants and players of the payment industry could generate incremental annual revenues of US$200 billion if they targeted financially excluded individuals and MSMEs in 60 developing countries (World Bank, 2018). Blockchain technology can play a pivotal role when it comes to boosting financial inclusion toward the unbanked and underbanked, and there are significant opportunities on the horizon. However, the use of blockchain technology is still at an early stage, as there are serious challenges to its widespread adoption. In light of the importance of financial inclusion and the complex nature of the obstacles described, collective action from private sectors and the government is required to provide innovative solutions within a sustainable and supportive ecosystem. Blockchain is not the sole answer, but it can be a game-changer by accelerating and boosting financial inclusion.
