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Blockchain and finance in 2019
Democratizing Finance: How Blockchain Facilitates Global Financial Inclusion
More than one-third of the global population (nearly 2.5 bn people) do not have access to a bank or the services of a financial institution. Referred to as the ‘unbanked’ population, many of these live in developing countries within Asia, Africa, the Middle East, and Latin America. The unbanked population presents a glaring opportunity for the global community to unite and solve humanity’s long-standing battle with poverty and income inequality. Global financial inclusion could be the panacea that alleviates two of humanity’s greatest challenges, while providing tremendous opportunities for international economic progress.
There is increasing momentum towards using the latest technologies to solve these issues. Integrated with transparency, efficiency, and immutability, blockchain technology could be the enabler that integrates the traditionally-isolated unbanked population with the global financial system.
Importance of Financial Inclusion
Having access to financial services is a basic necessity in this day and age, where a deposit account, loan facility or electronic payments facilitate the rudimentary functions of society. An individual without a bank account is forced to store cash physically in a safe confine, excluded from the financial system where their capital could earn interest, and more importantly, could be used to facilitate economic growth by lending it to others needing bank-administered financing. It is unlikely that these individuals have access to payment processors that streamline transactions via electronic payments, nor would they have access to bank loan or credit facilities – a lost opportunity for entrepreneurship, investments, asset ownership and consumer spending. This hampers economic growthת and hinders wealth and value creation for individuals in society.
Financial inclusion would bring tremendous benefits not only to individuals, but also to society and the economy as a whole. These benefits include:
- Fostering Economic Growth: The mobilization of funds that are initially external to the financial system would bolster the banks’ reserves and therefore enable a more efficient capital allocation, allowing the distribution of loans towards small businesses, trade, commerce, entrepreneurial pursuits and social programs. Additionally, the advancement of technologies in the financial sector has tremendously streamlined financial transactions, making life much easier, as the higher level of efficiency in executing such transactions opens up various vectors that contribute to the overall economy, including higher time savings, increased monetary velocity and business efficacy.
- Lowering Poverty: Adoption and acceptance of key solutions such as Micro Financing has proven that financial access has the opportunity to unlock the entrepreneurial ambitions of some of the poorest people. The pursuit of small-scale businesses allows formerly poorer individuals to acquire a sustainable source of income for themselves and their families, and enables a saving habit that increases their wealth; entrepreneurial pursuits which foster employment, then increase income and reduce poverty.
- Reducing Income Inequality: With entrepreneurial pursuits throughout the community, employment will increase and simultaneously reduce income inequality, which is worryingly high in countries with low levels of financial inclusion. This is especially relevant for women and the vulnerable, both of whom stand to benefit from employment opportunities and a sense of empowerment.
Ironically, those who have the most difficulty acquiring banking and financial products and services are those most likely to benefit from them. This is why financial inclusion is poised to play a vital role in reducing poverty and inequality to fulfill the United Nation’s 2030 Agenda for Sustainable Development Goals (SDGs). Additionally, there has been tremendous economic growth in developed countries with low levels of financial inclusion but it has yet to be fully capitalized due to a slew of impediments.
Challenges for Financial Inclusion
Despite there being many incentives addressing the unbanked population, the road ahead is littered with real-world impediments to global financial inclusion:
- Immature Banking Infrastructure: The presence of banks in developing countries with low financial inclusion rates is still immature, due to general mistrust towards banks, fear of fraud involving ATMs and mobile/internet banking, excessive paperwork needed to access financial services, and a general preference to use cash in a physical setting.
- High-Risk Profile for Unbanked: It is no surprise that the poorest segment of the population has a high-risk profile for as far as financial institutes are concerned. High-risk endeavors on the part of these institutions are often avoided to mitigate operational risks. This is a vicious cycle that further increases the divide between banks and the poor population.
- Low Literacy and Income Rates: The majority of those excluded from the financial system do not have formal academic qualifications. The absence of formal qualifications disqualifies them from numerous employment opportunities, leaving only menial and/or labour-intensive jobs.
- Political Instability: Countries with low levels of financial inclusion are often plagued with political instability including government corruption, civil wars, and inefficiencies that foster structural impediments towards financial inclusion.
Facilitating Change Using Blockchain Technology and Cryptocurrency
Decentralized digital currencies predicated on ground-breaking blockchain technology could be the enabler to accessing the unbanked population, and providing the basis for a richer and more diverse set of financial services. Through the use of Bitcoin, blockchain has already been proved to promote borderless value transfer in a low-cost and decentralized manner. Blockchain replaces the need for, and reliance on, a centralized system, since the verification of transactions is undertaken by participants in a decentralized environment. Combining the openness of the internet with the strength of cryptography, blockchain could redefine various aspects of the financial system, most obviously the global payment landscape, offering more transparent, frictionless, and efficient operations. Let’s address the mechanics of blockchain technology regarding the issue of financial inclusion.
Reduction of Transaction Costs
Cross-border payments are characterized by high fees, long-waiting times, and a complex process of paperwork and red tape. Conversely, transactions executed on the blockchain are instantaneous, accurate, immutable and transparent. This significantly reduces processing costs, since transactions are peer-to-peer, with no intermediaries across the network. Cryptocurrency allows anyone from anywhere around the world to send payments globally. In effect, cryptocurrencies (such as Bitcoin) are widely regarded as universal currencies not under the jurisdiction of any one country. Gone are the days when an overseas money remittance required high fees to execute and a couple of working days to get it settled.
Facilitate Account Administration
Opening a bank account necessitates the presentation of digital identities, which is unfortunate since many of those unbanked do not any. Blockchain allows a decentralized approach towards identity management, allowing users full control over their private information within a highly secure setting. Decentralized identities would streamline account opening procedures, and allow the unbanked to access vital financial services.
The disintermediation afforded by a distributed and decentralized structure eliminates the need and dependency of trusting a single authority. Leveraging blockchain, participants in the network do not need anyone but the underlying system itself, which is publicly-available for scrutiny. The system is built in such a way that participants in the blockchain network are incentivized to work towards achieving a main objective, which is to secure transactions in the network. Unsurprisingly, this value proposition fits in perfectly with the social and cultural fabric of the unbanked, which is all about forging trust within the community and achieving a common goal for the greater good.
The merits of blockchain technology warrants serious consideration for deployment into existing financial systems, to boost financial inclusion of the unbanked population. There are tremendous opportunities within the financial system to create an inclusive economy fueled by the use and adoption of blockchain technology and cryptocurrencies.