5 Reasons to Understand Why Blockchain Technology Can Promote Financial Inclusion
When thinking about blockchain technology, people many times tend to think solely about cryptocurrencies, tokens and crowdfunding through digital assets. However, these are just expressions of a technology that has the potential to transform multiple industries and organizations. Just like the Internet, blockchain technology has the capacity to transform the lives of billions of people all over the world by creating social impact. On this context, blockchain technology is being explored by many companies all over the world on different industries such as health, education, supply chain management, insurance, financial and donation industries just to mention a few.
Now, one crucial feature of blockchain technology is its capability to bank the unbanked. According to the World Bank, nearly half the world lives on less than USD 5.50 per day. If we just take in consideration how GDP is distributed per capita on India or Africa, the situation is desperate to say the least. Moreover, when analyzing The Changing Wealth of Nations report from 2018, results show that a great portion of worldwide private wealth is becoming more and more concentrated in fewer hands. Many people that don’t have access to credit live on extremely poor rural areas where there is no direct access to banking services. Additionally, they usually don’t have a credit history so they may not be accepted or provided with credit by the legacy financial system.
Under a complicated scenario like this, how could blockchain technology promote financial inclusion among the ones that really need it?
1 – By reducing costs as blockchain technology can clearly help people around the world spend and exchange money in a cheaper and faster way. Cryptocurrencies could eliminate intermediation, which leads to high fees. Banked population from rich countries doesn’t usually require remittance services but these services are constantly used by the most vulnerable which have to deal many times with exorbitant fees.
2 – Blockchain technology could be used to provide transparency to government public spending that should be allocated for financial inclusion projects. By providing traceability on how funds are effectively distributed and used, blockchain technology could drastically contribute on the process by eliminating typical situations such as corruption and funds deviation.
3 – Unbanked population does not have in many situations identity documents as they don’t have the means to pay for them. Blockchain-based identities would not require the typical legacy documentation and would enable billions of people to become easily identifiable on a public blockchain. This would open a whole new range of possibilities for commercial banks as credit history could be easily linked on a blockchain enabling the unbanked to access financial services. Banqu is helping on this process by enabling the creation of personal digital profiles comprised of different records of personal and financial activities. These profiles could be widely accepted by financial institutions as legitimate ID information.
4 – By executing transactions in a secure, automated and decentralized manner, intermediation costs when applying for a loan or sending a wire could be drastically reduced.
5 – Blockchain technology could also reduce settlement times and eliminate error handling by providing real time tracking of transactions without double spending issues.
Decentralized and public blockchains will always provide a framework to enable financial inclusion but traditional actors from the financial system will also participate in the process, as there are clear incentives. According to a report from the World Bank, USD 380 billions could become the estimated revenue generated by banks by 2020 within emerging markets from unbanked population. Moreover, the report mentions that blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance in the range of USD 15 to 20 billions per year by 2022. If we add to the equation the fact that (according to the report) mobile penetration even in low-income countries is over 50%, mobile apps interacting directly with blockchain technology could generate a massive influx of new customers.
What about the drawbacks? Here are a few that could slow down the process for massive adoption of blockchain technology for financial inclusion:
1 – Security & Privacy for Identities: Regardless of the usage of public or permissioned blockchains, data security will be of paramount importance and is a topic that is widely investigated by blockchain experts.
2 – Regulatory Status: Government regulation will be required for traditional actors to become interested on playing the game. Non-traditional actors will always represent an interesting option for anyone interested on exploring blockchain technology but some portion of the unbanked population would prefer support from traditional financial actors.
3 – Widespread Adoption: Blockchain technology will require users and companies to adapt to a new technology on which the learning curve may be slow for new-comers both from the private and public sector.
4 – Initial Costs: As we have analyzed above, blockchain technology could generate a big influx of new income but high implementation costs could considerably slow down the process for commercial banks. However, decentralized and public options will always be available for the unbanked.
At RSK, we are working with different partners to promote financial inclusion and credit access for the unbanked. Circles of Angels, Givetrack and Blockchain for Humanity are good examples of how we are helping people all over the world through blockchain technology.