Financial Inclusion: Here is How Blockchain Can Improve Access to Finance

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Financial Inclusion: Here is How Blockchain Can Improve Access to Finance
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Most people you know can participate in traditional payment transactions. Yet, for about 2 billion or 38% of the world’s population, this is not the case. The “unbanked” do not have access to basic financial services. Sometimes it is because they lack personal documentation to formally open a bank account or sufficient funds to operate it; sometimes it is because they may live far from financial institutions or mistrust the existing system. Either way, the unbanked may be unable to invest in their family’s health, education, and housing, or take out loans for new business opportunities. They rely on their limited cash savings, which may be unsafe and hard to manage. This is how non-inclusive financial systems contribute to rising income inequalities and slow down economic growth.

FinTech Offers Opportunities and Solutions

Most recent technological developments have ensured that almost everyone around the world can be digitally connected, paving the way for new opportunities for businesses and new solutions for the “unbanked.” Entrepreneurs have quickly jumped into the newly-created space. China’s Ant Financial, the financial affiliate of e-commerce giant Alibaba has been making it possible for low-income individuals in rural areas to take out loans. The company also provides the necessary training and equipment to ensure the good use of the digital means of payment.

Another example is M-Pesa – a mobile phone-based money transfer service launched by the largest mobile network operators in Kenya and Tanzania a decade ago. M-Pesa allows users to store value in their SIM cards, making it possible to exchange value in the form of an electronic currency, purchase products, and convert it into physical money. Thanks to this technological platform, Kenya’s financial inclusion increased to more than 75% of adult population from 26% in 2006. 

Blockchain Offers Lower Costs and Faster Processing

Today blockchain technology can play a pivotal role in further encouraging financial inclusion for the unbanked. Its ability to make unlimited transactions with a universal currency at a low cost and in no time is of utmost importance. It ensures that more people can create a digital identity and participate in payment transactions without involving central authorities that can hinder the process.

Image: deloitte.com

Processing transactions within traditional payment network usually takes a long time and costs a lot of money, as third parties such as banks are involved in verifying transactions. In addition, international payment traffic is constrained by the legal frameworks and the conversion of foreign currencies. However, payments via the blockchain are universal. By making third parties unnecessary for transactions, blockchain technology allows for faster and almost free transactions.

Here is how cryptocurrencies are helping Filipinos to lower remittance costs. Coins.ph makes it possible to send remittances to the Philippines without paying excessive transaction costs while also saving time. People convert their money into crypto currencies like Bitcoin, then send it to the Philippines, so that it can be withdrawn there as physical money. The beauty of this example is that the Philippines is still using traditional financial service providers this way, while making the process smoother. More than five million customers have already been helped this way around the world.

Digital Identities and Trust Help Improve Financial Inclusion

Unfortunately, many of the “unbanked” have no digital identity. As a result, they cannot participate in traditional payment transactions. Blockchain makes it easier to get a digital identity without a passport or email address. For example, Humaniq’s Ethereum app allows digital identities to be created based on biometric data, voice, and face recognition. In addition, the transparency of blockchains prevents illegal transactions or makes them more transparent, when they occur.

The use of blockchain technology does not require a central authority to verify and process transactions. Blockchain uses a mathematical algorithm that requires the majority of the decentralized users to make changes to the network. Users need to ‘collaborate’ to make the network successful, which is impossible without openness and trust. This system goes well with cultures and social norms typically found within the collaborative “unbanked” communities that already often operate on a consensus basis. Here is an example in Sierra Leone, where “Africa’s first blockchain and decentralized digital identity implementation” project was launched to provide citizens a formal identity through blockchain technology. The government initiative in collaboration with Kiva, a global microlending non-profit, brought together all the necessary parties, who are on the same page about the benefits of their community’s improved access to financial services. 

With around 2 billion people unable to use traditional financial services, there is a dire need for new technologies to step up and boost financial inclusion. Yet, although there are significant opportunities offered by the blockchain, there are many roadblocks ahead, from lack of awareness to government regulations. Ultimately, the extent to which blockchain realizes its potential for financial inclusion will depend on how well stakeholders support its development.

Contributed by @LordCatoshi

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