Applications of blockchain technology for financial inclusion of unbanked across the globe.
Over 1.7 billion adults across the world are unbanked. Pursuit of financial inclusion is rising with the growing concern among policymakers and central banks to bestow financial power as a way of stabilizing economies and fostering growth across communities. According to the World Bank, there is a high connection between poverty and financial exclusion.
Therefore, both fintech and banking institutions have a role in bridging the gap and attracting more people into opening accounts. A study conducted by the Gates Foundation found out the number of adults who already owned a financial account between 2014 - 2017 rose from 62 percent to 69 percent.
Blockchain Applications for Financial Inclusion
Prevalent causes of lack of accessible financial services were attributed to geographical limitations, stagnate innovation, and overreliance on the physical banking ecosystem which might not be available across all regions. Furthermore, the cost of accessing traditional financial services is high and above the daily income of the majority of the unbanked population. Another study by the World Bank indicated a high number of unbanked adults earn less than $5 a day, and the majority of them leave below the international poverty line.
Small and Growing Businesses (SGBs) and microfinance institutions in these regions have been tackling financial exclusion issues and making credit, loans, mortgages, and insurance more accessible across such populations. While their efforts have been productive, they have not made much progress in reaching most of the world’s unbanked. What has and is still bridging the gap between financial services and the financially excluded is blockchain, cryptocurrencies, and decentralized finance. These emergent technologies in fintech possess lots of potential in transforming financial inclusion and banking the unbanked.
Identity Verification through the Blockchain
Identity validation is the biggest hurdle between financially excluded people and their ability to access banking services. The blockchain stores the identity records of each individual on a public ledger and validates all transactions through mining nodes. Credit/debit card issuance companies will deny most people services due to lack of identification; sometimes subjecting them to a long application process. Besides, financial institutions are likely to refrain from providing loan facilities to unbanked people without official banking data. As a result, these people are contained with a vicious cycle without a possible escape from poverty.
Through the blockchain, individuals can create user accounts and input their biometric data. The digital prints of these data are stored on the blockchain where financial institutions can seek permission to view the data and provide decentralized financial services to these people.
Reduced Transaction Fees
Traditional financial institutions are plagued with lots of third parties when processing transactions. On the other hand, blockchain transactions are driven by smart contracts, eliminating the need for a third party. Therefore reducing additional transaction costs that would have been otherwise paid to the middle-men. Additionally, smart contracts reduce the time it takes to process and approve a transaction. Other benefits include the elimination of banking fees, cross-border remittance fees, and currency conversion.
Transparency in Project Funding
The blockchain is immutable. Immutability means any transaction recorded on the blockchain cannot be altered or deleted. Issues pertaining to project funding and transparency can be solved through the decentralized ledger and ensure funds reach the intended groups. Governments in developing nations usually allocate a particular segment of their budget to the unbanked. Due to corruption, most of the money does not reach the intended people. Through its public ledger, the blockchain facilitates tracking and tracing of the funds to ensure they are properly allocated. Stakeholders can trace the history of a transaction on the blockchain and note any suspicious activity, such as wiring large amounts of funds to one individual account.
Smartphones Adoption Rate
Decentralized finance is making mobile banking more robust, convenient, and fast. In most countries with the highest percentage of financially excluded populations, there are fewer brick and mortar bankings structures within convenient geographical locations. Adopting smartphones to facilitate finance has been on the rise. A country such as Kenya has over 80 percent of its population relying on mobile money services to conduct business, make payments or receive money. Cryptocurrencies can be transferred from one person to another through smartphones. Anyone with a smartphone can therefore access financial services without the need of paying a visit to the local bank. Digital currencies are also secure, private, and fast.
Experts believe the blockchain holds a lot of potential in helping the unbanked across developing nations. A study by the Blockchain Council reveals adults in Africa and Asia without a bank account are more likely to adopt cryptocurrencies as an alternative financial solution rather than adopting traditional finance. Fintech startups are tailoring personalized financial solutions geared towards the unbanked population, and most of these solutions are hosted on the decentralized ecosystem. By addressing high transaction fees, eliminating middle-men, enabling instant payments, and facilitating decentralized tracking and management of financial accountability, the blockchain will go a long way in revolutionizing how the unbanked access financial services. Eventually, the world is heading towards a cashless environment where transactions can be made real-time to any location without meeting additional cross-border fees.