It may be hard to believe, but two billion people in the world still do not have a bank account. Most of them live in low and middle income emerging markets, but even in high-income countries, large numbers of people are unable to use banks to meet their day to day financial needs. This means they don’t have access to the convenience, to security and to interest that banks provide.
Moreover, many people have access to a bank account but do not have adequate access to the financial services that banks can provide. These people are known as the underbanked. Even in the United States, for example, 33.5 mln households were recognized in 2015 as unbanked or underbanked, over 25 percent of the population! Without access to savings and credit, these people cannot participate in the virtuous cycle of economic growth, instead of remaining in a vicious cycle of poverty.
Clearly, the unbanked and underbanked together constitute a large market that is not well served by existing institutions. In the third world countries, large banks do not want to extend credit to the underbanked. Even when they do, they charge very high interest rates to offset the risk. For a time, microfinance institutions provided a way for the underbanked to access much-needed credit, but in recent years, large banks have begun to participate in microfinance. In the process, the interest charged on microfinance loans has increased significantly and become a major pain point for the unbanked.
Blockchain to the rescue
Blockchain technology has the potential to help the unbanked and underbanked by allowing them to create their own financial alternatives in an efficient, transparent and scalable manner. One of the biggest challenges banks face when trying to serve the unbanked is that many of them do not have clear identifying information, making it difficult to implement “Know Your Customer” practices.
With Blockchain, individuals can receive a digital identity for use in their banking. Property rights, long a pain point for many low-income individuals, can also be moved onto the Blockchain, allowing them to enter formal information networks and even leverage their property as collateral. And by making remittances painless and efficient, Blockchain could allow low-income individuals in different countries to save and lend together.
The countdown has started
The countdown to a future without unbanked people has already started. As examples let’s take a few Ethereum based Blockchain projects that have made serving the unbanked and underbanked their main focus.
OmiseGo technology enables peer-to-peer value exchange and payments using a digital wallet platform. They aim to encourage financial inclusion in emerging markets by creating a platform that other companies beyond Omise can use. Their network claims to decentralize market liquidity and high-scalability payments and to help resolve payments across emerging eWallet payment networks. This could become significant because if successful, it would enable the unbanked to have control over their financial lives and access financial services previously unavailable.
WeTrust: their Trusted Lending Circle product (now in beta version) would allow users to create Rotating Savings and Credit Associations on the Blockchain. Benefiting from the finality and transparency provided by Blockchain, this instrument could be seen as a stepping stone for individuals to build a Blockchain powered credit score.
Humaniq combines Blockchain and biometrics to create apps that would allow transactions and investment in the third world. Users of the platform could earn tokens at home, using bio-identification procedures, and exchange those tokens for local currencies in an app. Basically, those without any formal identification could have an opportunity to create a digital bio-identification straight from their smartphones.
Towards a more financially inclusive future
Even simple things like building savings or receiving a loan can be difficult for those who can’t access the security and convenience of a bank account. These unbanked individuals constitute a large market ready to adopt disruptive financial solutions outside of the traditional banking system. Blockchain provides a secure, scalable way to serve the needs of these individuals, and a number of technology companies are leveraging it to usher in a world in which everyone has access to the savings and credit that is an essential building block for economic growth.