According to the World Bank, an estimated two billion adults worldwide don’t have a basic financial account. Let that sink in for a second; two billion people don’t have access to financial services that will allow them to save money for a rainy day, get a loan to start a business, or receive electronic payments from an employer.
Enabling these unbanked or underbanked individuals to attain a financial account would have a significant impact on their lives. On a global level, it would be a major step towards sustainable growth, as financial inclusion is an enabler for 7 of the 17 UN sustainable development goals.
While both laudable and improving economic growth, there’s the question of how to actually deliver financial inclusion for the unbanked who reside across numerous jurisdictions - many far from financial service providers - and must overcome fees and cultural issues such as trust and religious views.
Into this void of financial coverage, new technologies present solutions that are affordable, scalable, and provide enough data transparency, security and accuracy to improve financial inclusion. Specifically, distributed ledger technologies (DLT) such as blockchain, offers a way to lower costs and process financial data in a way that syncs with the needs of the unbanked.
Lower Transaction Costs
One of the promises of DLT is that it will lower transaction costs, due to the lack of middlemen and the fact that the entire transaction process can be automated. While recently, the cost of Bitcoin transactions made the news for their soaring fees, other blockchains are touting low or no fees. For financial services providers, the low fees of DLT make it feasible to expand their offerings to the underserved.
One area that is ripe for potential innovation is for remittances. Over US$600 billion is sent every year, and the average fee is seven percent – that’s a lot of money ($42 billion) that is not ending up in the hands of people for which every dollar counts. Also, as it can take four days or longer for the recipient to receive the funds, causing frustration and stress for both parties involved.
DLT has the potential, according the US Fed, to “reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets.” These improvements in efficiencies can lead to lower transaction costs for remittances, and further enhancing the feasibility to serve the unbanked.
Another major advantage of (public) DLTs, is that all transactions are recorded and tracked on a public ledger. With this level of transparency, all parties are more likely to get a fair deal in a transaction.
Consider one example, the coffee supply chain. Traditionally, farmers would have to wait months to get paid for their product. With a DLT powered supply chain that allows buyers to see, grade and purchase the beans at harvest, the farmer gets their money quicker and there’s more accountability through the system.
DLTs can also improve property title records, enabling a better collateral situation. In many cases, there are few or no records of property such as real estate, vehicles and equipment. With provable formal title in place, assets can then be considered in risk assessment, or actual collateral for loans. While local governments would have to implement the system, the lower cost of DLT record-keeping makes it more cost-effective to introduce.
One of the biggest stumbling blocks to financial inclusion is the lack of proper identification. Financial service providers are required to verify identities to comply with Know Your Customer laws. Unfortunately, many people do not have a government-issued ID; perhaps they were never issued one, or through displacement their ID is no longer valid or available.
DLT based identity systems have been proposed to help solve this issue. According to the International Telecommunication Union (ITU), “individuals can receive a digital identity verified with biometrics which is securely stored and managed for transacting value nationally and internationally. Essentially, the identity manifests as a cryptographic key that the user can provide, using a specified biometric marker to verify and authenticate themselves when needed.
However, as OWI Labs points out, “digital identity, however, reflects a natural entity and fundamentally involves at least one attribute of a physical individual or thing. Some part of identity will always exist ‘off-chain.’ That means identity will always involve at least one intermediary between the physical human (or entity) and its on-chain digital representation, and that pivot point could be a source of inaccuracy, fraud, or exclusion.”
So the question is, how can identity be effectively put on DLT if there’s no entity that can properly establish identity in the first place? In jurisdictions where there are established systems, such as India’s Aadhaar system, the processes are there to enable effective digital identity. For other jurisdictions, they’ll need to create an approved process to guarantee proper identity at input.
With proper identity systems in place, the opportunity for financial inclusion increases dramatically. The risk to financial service providers — in regards to both fraud and noncompliance — decreases, enabling expansion minded businesses to proceed.
While there’s a lot of promise for DLT to improve financial inclusion, there’s lots of work to do. Questions concerning privacy, security and scalability still need to be worked out. Individuals, companies and government agencies need to adopt the new systems. Rolling out advances to two billion people will take time. There’s hope though. Perhaps in the not-too-distant future, thanks to technologies such as DLT, we’ll all be financially included.