Imagine getting a new job – one of the first things to do during the onboarding process will be to provide the details of your bank account so you can get a paycheck, but what if you don’t have a bank account? Will the employer help you to get one or agree to pay you in cash? Here’s another hypothetical situation: assume you’re willing to buy a car and want to save money for this large purchase, but you have no access to banking services. What are you going to do with all that money? Are you going to hide it in the closet until you have enough? Although it’s hard to believe, millions of people from around the world have to deal with this problem regularly, despite all the technological advantages and the rise of fintech, they still lack access to banks. So, how many of them are out there and what can be done to change this?
We would like to thank the team at IUNO for their contributions to the design and implementation of the research and to the analysis of the result.
Emerging countries are left behind
About 1.6 billion adults all over the world do not have access to banking services, and three-quarters of them live in South America, Asia, Africa, and the Middle East. Though the situation is much better in developed countries, in the US for example, there are still about nine million unbanked households and 24.5 million underbanked (which is defined as those with the lack of adequate access to banking services).
And this is not only about individuals. Over 200 million small and medium businesses do not have access to banking services, most of these being located in developing countries. According to Ernst & Young estimates, the opportunity cost of the financial exclusion of individuals and small businesses across 60 developing countries reaches $200 billion for banks.
However, this is not even close to being the end of the story. A Findex report found that 25% of bank accounts worldwide are inactive, with no deposits or withdrawals being made during the last 12 months. A representative example of this fact is India, where about 240 million accounts were opened in two years after 2014, following the Pradhan Mantri Jan Dhan Yojana (PMJDY) financial inclusion program. The program simplified the process of opening a bank account by softening the rules – these included no minimum balance required, a relaxation on KYC norms, an opportunity to apply through business correspondents appointed in remote rural areas, and several other benefits. Soon it became clear that approximately 60 million of the accounts created under the PMJDY program were unused. In response, banks themselves made sure that most of these accounts had at least some money on them, which may have come from the pockets of banks’ own staff. So, financial inclusion increased in the country, but only on paper.
Among the most common reasons for people to stay unbanked are the lack of money, financial barriers such as fees and interest rates, remote or rural locations, the lack of necessary documentation, as well as the lack of trust in financial institutions as a whole. Interesting fact: almost 60% of unbanked US citizens once had a bank account, but had to shut it down because of high overdraft fees (usually from $25 to $40 per transaction with a negative account balance and up to $150 a day on average with some banks having no limit on possible daily costs).
So how can this huge problem be addressed?
Alternatives for traditional banking are here, though ultimately powerless
One cannot get tired of talking about the rapidly increasing smartphone penetration – in fact, about 6 in 10 unbanked individuals in US have a smartphone. The widespread adoption of smartphones opens up new opportunities to access banking without banks – mobile money.
Mobile phones are becoming pocket banks for their owners, allowing them to store monetary value (or e-money) in e-wallets and transfer funds to both individuals and businesses. Mobile money removes the necessity of visiting brick-and-mortar locations, which is particularly important for citizens in rural areas.
Over the past decade, mobile network operators (MNOs), also known as wireless service providers, have been establishing their positions in the world of mobile money services. For instance, in Central Africa, which is a global leader in terms of mobile money usage, there are several large providers implementing their financial products, including MPesa, MTN Mobile Money, Airtel Money, and Orange Money.
However, mobile money is not a universal cure-all. According to Chris Skinner, author of the book “Digital Bank,” even though MNOs can be offering “micro-financial everything” including microloans, microsavings, microinvestments, and micropayments, they ”don’t want to be full-service banks, as that then introduces an overhead of lots more stuff.” Another problem, according to Robert Greenfield IV, ex-Cisco software engineer and Certified Bitcoin Professional, is that “unbanked consumers rely heavily on paper checks and cash for income and expenses, which have limited to no compatibility with mobile payment technologies.” Mobile operators still lack liquidity when it comes to depositing cash or cashing checks, especially for the citizens of remote and rural areas, which limits the affordability of mobile money for the unbanked.
Neobanks came onto the scene in early 2010 and have experienced different degrees of success since then. The most common definition of a neobank is a digital bank that provides banking services (savings, investments, debit cards, etc.) without physical branches at all. Most neobanks are from the UK, and according to KPMG, “Britain isn’t as saturated with big banks and their branches as a nation like the US, creating an opportunity for non-traditional financial institutions.” Examples of digital banks include Atom Bank (£369 million funding in total), Germany-based N26 ($212.8 million), and Monzo (£106.6 million).
Back then, most neobanks didn’t have a banking license and they worked with chartered banks (whose primarily role is to accept and safeguard money, as well as lend it out) to get insurance coverage for their deposits. With no licenses, digital banks could only provide a better interface and integrate third-party products, however, they had to face restrictions in terms of building their own financial products. The situation is changing, however – the largest players have already received their banking licenses, including Atom, N26, Monzo, and Startling Bank.
Although UK-based players have been pretty successful, neobanks are not that popular outside the country, and very few of them are available in emerging markets as its services are significantly limited. Fred Destin, a founder of Stride VC and ex-partner in Accel, expressed his concerns about neobanks: “The day that customer needs a mortgage or a loan, the advantage of the incumbents come into full force. For example, access to a mortgage product is a great opportunity for an incumbent bank to force your core banking back onto their platform, so churn is of great concern.”
The original idea of cryptocurrencies, specifically Bitcoin, was to allow for fast, instant transactions with no controlling middlemen involved. The technology is already being established, however, the question remains: are cryptocurrencies enough to help the unbanked and will they able to replace the normal banking services?
Although it’s tempting to say “yes,” we suppose that crypto itself is not a universal solution for the unbanked. The basic condition for cryptocurrency and Bitcoin in particular to replace fiat money is to be stable enough so that the prices within the economy are predictable. For fiat, central banks maintain stability through supply adjustments according to the current demand. In the cryptocurrency world, no central authority controls the supply, which is fixed by the protocol, so changes in demand influence the prices respectively. For example, Bitcoin’s price fell by 13% during the 5th and 6th of September in 2018, while Bitcoin Cash’s price decreased by 32% during September 4th-11th, 2018.
Another problem is transaction fees. Bitcoin could be the perfect solution for international fund remittances, since it’s significantly cheaper when compared to banks and wire services. According to Money & Banking research, the combination of fees (including charges from both the sender and recipient) and the exchange rate margin typically eats up 7% of the amount sent. With Bitcoin, however, you can transfer money for less than $1 – most of the wallets on the market, such as Bitcoin Core, Bitcoin Knots, Mycelium, and others, allow customers to choose their own fees. However, these fees can get pretty high in case of increased demand (if you want to get confirmation on transactions within a reasonable timeframe) – e.g. in December 2017, they reached $34 per transaction, which would be as expensive as a bank transfer for a transaction amount less than $500.
The stability problem can be overcome by stable coins such as DAI being pegged to the US dollar. Still, as Robert Greenfield IV once said, “UX obstacles like the complexity of visualizing the use of cryptocurrency for the common consumer are massive cultural hurdles to mainstream adoption. If credible stable tokens can be backed by traditional banking institutions, so that it’s easy to redeem cash in the real-world and vice versa, the mobile payments industry can leverage a peer-to-peer banking economy where each individual has complete control of their assets in the palm of their hand.”
Banking on the blockchain for financial inclusion is coming
The possible answer to this problem could be building the whole banking ecosystem on the blockchain. This way users could still enjoy the traditional banking products such as savings and investments, while at the same time staying in charge of their assets without the need to rely on third parties or visiting brick-and-mortar locations. The blockchain would also allow high level of transparency in the ecosystem. Jon Wood, Chief Information Officer at Trivial.co, said, “Codified instructions generated by smart contracts can be extremely useful for reducing errors, fraud, automating the settlement process and digitizing contracts. Not to mention that blockchain also allows safe permissioning of data visibility for auditors, regulators and investors, and secure transmission and storage of sensitive data.”
We’ve created an infographic to better explain this idea to you:
The market is already seeing some projects dedicated to blockchain banking, and one of them is IUNO, which is developing a blockchain-based banking ecosystem. The solution includes three main elements:
- A payment gateway, which will allow merchants to accept credit cards without facing the risk of their accounts being terminated. IUNO is targeting over 200 million unbanked businesses from those industries that historically have little or no access to credit card services.
- A decentralized P2P online banking platform based on the IUNO wallet, which will offer customers modern banking services (including payments, deposits, transfers, savings, investments, loans, credit cards, etc.).
- Stable IUNO’s token is pegged to the US dollar. These asset-based tokens will mirror the value of fiat currency, achieved by maintaining a reserve in an equal amount to all of the tokens in circulation.
The digital-only nature of the IUNO solution, the high range of banking products available, zero transaction costs (against up to 3% per transaction plus fixed fee for merchants), zero fees, and its stable token protected from price fluctuations make IUNO an affordable choice for unbanked people who live in even the most remote areas. The company is also planning to integrate with identity management solutions, such as Civic, to eliminate fraud and guarantee the safety of all network participants.
Other projects that are working on the similar products include Bankera and Crypterium. Bankera, founded by the team that already operates a project called SpectroCoin, will offer several traditional banking services such as payments, loans, savings, and investments, as well as a crypto exchange and crypto brokerage services, thanks to SpectroCoin. Bankera is aiming to stay competitive in a cash market by issuing payments cards and partnering with existing providers or attracting agents for cash deposits and withdrawals.
Crypterium is aimed towards making mainstream cryptocurrencies more usable. The product, called Crypterium Cryptobank, provides an instant processing engine for transactions in both fiat and crypto (with interchangeability enabled), allowing customers to pay for fiat-based goods with no transaction limits and low commissions on any payment terminal, as well as in many online stores. Crypterium is also planning to launch some traditional banking services such as payments and lending.
During the past decade, banks, MNOs, and fintech players have been trying to “bank the unbanked” – with varying degrees of success. Although the number of unbanked people is slowly decreasing, there are still 1.6 million of them around the world who have no access to the bank accounts or banking services that are routine for us. The possible solution is a blockchain-based banking system that could significantly decrease transaction fees and allow access to digital money and a wide range of banking products to people from all over the world, including the most remote locations. The newcomers are already here to disrupt traditional banking, and we’re likely to see the results soon.