Close to 40% of the world’s population, some two billion people, do not have access to a bank account. The mobile phone is starting to alleviate the problem and blockchain could be another big driver.
There are more than two billion people in the world who do not have access to a bank account, according to the International Monetary Fund. As a result, they are confined to a domestic, informal economy without access to credit and the security provided by the financial system and deprived of the use of savings instruments. Mobile banking is a growing alternative for these people and the success of M-Pesa, a system for sending money by mobile phone launched in 2007 in Africa, is very striking. However, blockchain could mean an even bigger change.
The ‘unbancarized’ make up 39% of the world’s population, a figure that increases to 47% in the case of third world and developing countries. Usually they live in rural areas outside the scope of the banking network and as putative bank customers they face a serious problem: their identity at times is not clearly registered and banks have to follow strict Know Your Customer and Anti Money Laundering (KYC/AML) policies. As a result, the process is cumbersome, requiring a great deal of documentation and the future customer having to travel tens, if not hundreds, of kilometers, and not only once, to complete it.
In short, the current structure of the highly-regulated banking system does not fit with the socioeconomic fabric of many economies in the world. Would things be different with the widespread use of blockchain?
A priori, blockchain technology could do a lot for financial inclusion. It is simple, lowers costs and prevents fraud. With a common ledger based on blockchain, one can certify at the same time one’s identity, possessions and credit history in a transparent way for everyone in the network. In countries such as Spain, Germany and the United Kingdom where 97% of the population has a bank account, these advantages are of scant interest but in other places they can represent another world.
A number of fintechs have got into the financial inclusion business through blockchain –such as WeTrust and Humaniq– but there are still obstacles than need to be overcome. In a roundtable at the Money2020 international conference, Kosta Peric, the head of financial inclusion programs for the Bill and Melinda Gates Foundation, raised some interesting issues.
In his opinion, public blockchains don’t work for domestic financial transactions because they can’t handle such a heavy flow of transactions, which he estimated at over 1,000 per second. But “it could make sense”, he said, to use blockchain for international remittances.
But at the same discussion Arjuna Costa, a partner at Omidyar Network – an investment vehicle of the creator of eBay, Pierre Omidyar, who specializes in projects with a big social impact – was more optimistic. Costa pointed out that blockchain could be a great vehicle for financial inclusion because of its ability to improve the management of small businesses (more transparency and a better ledger of payments and invoices) and certify the ownership of property, which in consequence can be rented or used as a guarantee for financial loans.
With its pros and cons, blockchain registers, certifies and imbues transparency, three basic aspects of a healthy financial system. In combination with a mobile phone, that represents the opportunity to bancarize two billion people.