Bank accounts, insurance, and credit cards may seem like a necessity for many in the developed world, but unfortunately, access to these financial tools is actually a luxury. The World Bank says that there are 1.7 billion people in the world who don’t have a bank account, and even more than that are underbanked.
Unsurprisingly, those with unreliable access to modern financial services are also the world’s poorest. This fact raises an important question: Could a faster, safer path to financial inclusion help defeat poverty once and for all?
Since the rise of Bitcoin, blockchain technology has shown that it can be a tool to bring digital payments to anyone, anywhere. Now, the technology is aiming even higher, trying to alleviate poverty through financial inclusion!
We would like to thank the team at TraXion for their contributions to the design and implementation of the research and to the analysis of the result.
Difficulties Participating in the Current Financial System
Being unbanked or underbanked is a serious problem. The Asian Development Bank found a significant correlation between being underbanked and higher poverty rates. Some of the key reasons someone might not have a bank account include:
The first problem is being able to physically access financial services. Barriers that prevent full access to financial services include things like:
- No physical bank branches nearby
- Lack of transportation
- Bureaucratic paperwork and legal barriers
When the barriers to entry are high, people resort to risky measures such as putting their savings under a mattress or using loan sharks.
Many of the world’s unbanked say that the costs of opening and maintaining a bank account are simply too high. This is especially true in poorer communities where many have very little to put away into savings or insurance policies.
3. Transparency and Corruption
Even with access to banking at a reasonable cost, corruption can also make things difficult or impossible. The lack of trust in financial institutions has been found to be one of the main reasons people stay unbanked.
We’ve created an infographic to better explain this idea to you:
Ways Crypto Might Be Able to Help
Internet access is growing at an incredible rate around the world at the same time that smartphones are becoming more affordable. This combination is already making it possible for many unbanked people from around the world to start using technology like Bitcoin as a financial tool. Decentralized platforms like Bitcoin are, in theory, available to everyone, and the only barrier to entry is Internet access.
The cost of using cryptocurrency can also be much lower as opposed to a traditional banking system. Right now, the cost of transacting on Ethereum is $0.30-$0.70. That’s already pretty low by international standards, and there are new platforms on the way, such as EOS, that plan to offer zero transaction fees.
Another key feature of crypto technology is its inherent transparency and immutability. There’s no way to censor or change a transaction record after it has been processed. There is no central point of control that has this authority. Power can be given back to a community thanks to the distributed nature of the network. It’s much easier to have confidence in a system like this, so that you can take that money out from underneath the mattress.
Obstacles in the Way
Of course, blockchain technology is not a magic bullet that’s going to suddenly save the world from poverty. It’s a technological tool that can be utilized, but using this tool effectively has some major challenges.
The first obstacle is building the technological infrastructure capable of reliably delivering crypto-based financial services to the masses. At the moment, this doesn’t exist. The two biggest networks, Ethereum and Bitcoin, have big scaling problems and get highly congested in times of high demand. Internet penetration is also a huge factor. Access to an Internet connection is the first condition for using a distributed network.
Then there is the problem of regulation. Big regulators are making moves on cryptocurrencies, so the free ride for blockchain projects is quickly coming to an end. Many ICOs are forbidden in the United States, and some cryptocurrencies can also experience problems in China. Any platform looking for widespread international adoption will have to work with regulators to come up with solutions. Integrating with the current financial banking system will be important.
Another key hurdle will be providing a platform with enough benefits to lure people to it. Network effects mean that the value of a network, like a payment network, is determined by the number of people using it. Getting enough people using it in the right places (in this case, the places with the highest poverty rates) isn’t easy.
Attempts at Realization With Blockchain
Humaniq is another project trying to decentralize banking in order to bring financial services to the unbanked. Calling themselves a “new generation bank” built on blockchain, they say that with Humaniq, all you need to connect to the global economy is a face, a smartphone, and access to the Internet.
The unique selling points for Humaniq are the use of biometrics to identify individuals, and its focus on mobile. Humaniq is even planning on developing their own line of phones to use with their system. Proof-of-face is a unique system that limits the number of coins a person can mint based on their biometrics. Also, people with limited access to financial services are likely to have less access to education, too. For this reason, the Humaniq platform is built to be as simple as possible so that everyone can use it. Photos of your face replace passwords, and Humaniq encourages using whole coins in whole numbers, so no decimal points are needed.
The third decentralized financial service platform we’ll look at is Everex. This is a project that wants to bring bring down the barriers to affordable credit and create a frictionless way to move and store money.
Similar to the other projects we’ve discussed, Everex focuses on blockchain and mobile technologies to achieve its vision, but they also put emphasis on machine-learning software. Artificial intelligence will be used by the Everex system to calculate risk profiles similar to credit scores to calculate interest rates. This will be the foundation for providing credit on the Everex platform for those who can’t access it through the traditional banks.
TraXion aims to bring borderless financial services to the people. They are building a blockchain-driven environment and a set of services that allow people to easily load, send, save, spend, and borrow money online with a phone and Internet connection.
Basically, TraXion is building the online platform that brings financial tools like savings, remittances, peer-to-peer lending, fundraising, and philanthropy opportunities to the parts of the world that struggle reliably accessing them. Including Southeast Asia and much of Africa.
TraXion is working on a number of services that provide financial products to the unbanked that have the properties of data integrity, accountability, transparency, and trust. These services include:
- TraXionWallet – Combines TraXion’s insurtech and fintech apps into one place.
- TraXionChain – Blockchain solutions for businesses.
- TraXionContract – Smart contracts.
To get the levels of transaction throughput that is needed to build such a system, TraXion will be using the Hyperledger Fabric Blockchain Framework. A permissioned blockchain technology that allows participants to agree on how an asset is digitally represented, and then that asset can be exchanged by a permissioned group. This is important for working with financial enterprises that need to comply with strict data protection regulations. Having private contracts on a permissionless blockchain, such as Bitcoin or Ethereum, isn’t feasible for many organizations.
TraXion is a company from the Philippines, and they will start its quest in Southeast Asia with the plan to eventually grow worldwide. As it expands, TraXion will aim to remain compliant with Know Your Customer (KYC) and anti-money laundering regulations.
The full list of plans by the end of 2019 includes providing payments, savings, remittances, peer-to-peer lending, insurance, investments, fundraising, crypto-trading, and philanthropy to the unbanked around the world.
Are Crypto-technologies the Way to Global Financial Inclusion?
Crypto technologies have the possibility to provide faster and more direct access to financial systems over the Internet. It also promises to provide these services at a lower cost than the current options, and with more transparency.
These are bold claims, and the key obstacles at this stage have to do with building the technological infrastructure capable of supporting these services, and making sure it plays well with the regulatory bodies. The platforms that do these things and effectively grow their network to a useful size could make significant progress towards global financial inclusion.
With financial inclusion so heavily linked with reduced poverty, this is certainly a noble goal!