Banks are not the answer: How blockchain can bank the unbanked

By James Stickland, CEO, Veridium. Originally published on bobsguide.

With the number of mobile phone users in the world expected to pass five billion by 2019, one would think that, regardless of geography or economic status, every adult would be granted the same services, applications and opportunities.

Yet, one major service that is not universal is access to affordable, quality banking. But what may come as a shock in today’s modern, connected world is that in the United States, 93 percent of people have access to banking options, yet globally, an estimated 2 billion adults lack access to formal financial services and those that are available are typically cumbersome and expensive.

Otherwise known as “unbanked” individuals, this segment of people largely reside in developing countries in Africa and elsewhere. Half of the unbanked people all over the world belong to the poorest 40 percent of the society. While these are fast growing economies on one hand, the lack of financial services constricts growth of the nation as well as individuals.

The rise of financial inclusion

Ever since mobile phones brought widespread internet connectivity to developing nations over a decade ago, the idea of global financial enrollment – and the economic parity that would likely follow in its wake – seemed right on the cusp of reality. Some banks are starting programs in developing nations like Barclays’ ABSA Cellphone Banking service in Africa to allow customers to use an app to open accounts, and simple mobile payment systems like PayPal and Venmo leveling the playing field. And yet, it’s still not a realty.  With 2 billion monthly active users on Facebook and much of that growth in the last half decade fueled by the developing world, we’re still confronted with worrisome data.

Between the rising use of smartphones, the continued maturity of banks in emerging markets and the natural migration of people from remote areas into large cities, those that once survived without access to financial services now require the ability to pay their bills, share money with their loved ones, and pay for food and services online. Even while considering certain roadblocks in emerging markets – like illiteracy or lack of ID documents – this doesn’t explain the disparity. With the mass penetration of mobile devices and wide scale advancements in technology and regulatory infrastructure, we should have all the building blocks in place.

The bottom line is that the unbanked population continues to be excluded from the financial fold. It is impossible for unbanked individuals to make safe money transfers, build any credit history, or borrow from any financial institution. Although some banks are making great strides in fixing this problem, many remain apprehensive to extend their services to these less “lucrative” regions.

The question is then, if banks can’t solve then unbanked issue – what can?

The answer lies in blockchain. Here are four reasons blockchain can revolutionize the unbanked:

  • Scalability and Accessibility: Blockchain first achieved its glory as the backbone of bitcoin, the web-based cryptocurrency. By using distributed networks of computer users to record and secure transaction data instantaneously, the blockchain has the potential to bypass the need for correspondent banking and other intermediaries for international money transfers. However, blockchain’s accessibility and scalability could make it a practical gateway to the global economy and provides many advantages that can overcome the handicap unbanked people face.
  • Security & Privacy: Despite being simple, blockchain maintains a high level of security. Note that nothing is completely unhackable, but there is no chance of fraud in this system. Blockchain’s security works not only because it’s encrypted but also because it’s also decentralized. This also implies that blockchain is permanent. There is also no chance of failure in record maintenance because the transactions are recorded on several computers simultaneously instead of a single centralized computer.
  • Cost Efficiency: For people living in countries with low standards of living, it is not possible to have access to banks, and there might not even be a solid banking infrastructure in place. For such people, smartphones are powerful tools with blockchain, transferring money via mobile phones is simple, cost-effective and swift too, even international transactions. The operation and maintenance cost of blockchain is also much lower than conventional financial institutions.
  • Digital Identity: Governments and individuals alike understand the complex nature of identification, and while some low-income individuals prefer to remain anonymous, the systematic and individual costs of doing so remain very high. By using the blockchain, individuals can receive a digital identity for transacting value nationally and internationally with relative ease.

While the unbanked is a long way off from having easy, cost-effective access to financial services, blockchain is promising to empower these population segments with greater financial services access. Utilization of the technology for such social purposes is in its infancy and there are many inroads yet to be made before a shift into widespread cultural adoption can occur.

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