The hype about cryptocurrencies and their potential to reshape our financial system is justified—but not in the way most people would expect.
Outside of tech-forward circles of rich young men, most Americans still don’t know or care very much about Bitcoin and its contemporaries. There is immense opportunity to apply the unique properties of cryptocurrencies to build products for the 80 million Americans who are least served by the existing financial system—a group sometimes referred to as the emerging middle class.
This population spends $90 billion year on alternative services such as check cashers, payday loans, auto loans, and more. Their particular financial needs—liquidity, fast payments and access to affordable credit as well as saving and planning tools—are poorly met by industry incumbents. The challenges of this mass market segment shine light on the areas where the financial services industry is truly broken. Build solutions for the emerging middle class, and you’ll create value for everyone.
Among the most exciting innovations in cryptocurrency are applications that leverage Bitcoin’s distributed trust network to create faster, more secure platforms for currency exchange. So-called crypto rails like the Ripple network allow currencies and payments to flow cheaply, rapidly and smoothly as information on the internet. (Disclaimer—my venture capital firm, Core Innovation Capital, is invested in Ripple Labs.)
Platforms like Ripple and other cryptocurrency features can benefit everyday people in four primary areas: remittances, liquidity, access to cash and access to credit.
Global remittance flows top $550 billion a year, with $20 billion flowing between the U.S. and Mexico alone. The typically lower-income people who send money to friends and relatives in their home countries pay 8.14% in average transaction costs, spending a total of $3.5 billion in remittance fees per year.
Crypto rails can help provide relief from such costly fees. Numerous digital currency startups already make it easier to buy Bitcoin with cash (Local Bitcoins, ZipZap), a phone number (Blossom) or credit and debit cards (Circle). But the numerous steps involved in the process, a lack of trust in the system and limited ways to buy Bitcoin with cash inhibit people from using Bitcoin to save on remittance fees.
Ripple Labs and BitPesa among others, are striving to address these problems. BitPesa is a new remittance service to Kenya that leverages Bitcoin to reduce the cost and time of money transfers. The Ripple protocol is a distributed exchange network that allows exchanges between any fiat currency as well digital currencies like bitcoins and ripples. Using this protocol, users in the U.S. can send dollars to places like Mexico, routing the transaction through the lowest-cost exchange path on the network, and have the payments converted into pesos and delivered into the recipient's wallet in seconds.
Emerging middle class consumers can also benefit from the liquidity and speed offered by crypto rails. People who lack access to traditional bank accounts pay $1.8 billion in check cashing and $700 million in bill pay fees each year to receive and make payments rapidly.
Crypto rails enable these consumers to receive funds sent by peers, employers, or lenders in a digital wallet in minutes or seconds. Users can also use their digital wallets to pay bills or send money to family members at a rapid speed and minimal cost. Meanwhile, companies like Xapo are developing bitcoin- and ripple-based debit cards that will allow customers to use existing point-of-sale merchant infrastructure to make digital currency payments offline.
Customers who prefer to use cash can load money onto digital wallets at thousands of participating merchant locations thanks to ZipZap. The company's cash-loadable digital wallets helps people who lack easy access to traditional banks to accumulate savings, perform cross-border payments, send money transfers and make online payments
Finally, crytpocurrencies will eventually help creditworthy but overlooked customers to gain access to affordable loans. Customers who regularly pay bills through alternative channels can struggle to establish credit history. Because cryptocurrencies have common, public ledgers that log all transactions, they can offer lenders a clear view into an individual’s payment history as revealed by a public wallet address. Just as analytics companies like InVenture, Cignifi and First Access use consumers' mobile payment history to evaluate creditworthiness of unbanked people in emerging markets, underwriters will soon be able to evaluate public wallet addresses for insight into cash-flow and bill payment history.
The cryptocurrency ecosystem is steadily maturing. Bitcoin is evolving from a speculative asset to a medium of exchange, while mainstream companies are starting to build essential infrastructure to support digital currencies. Bad actors will increasingly be screened out by anti-money laundering and know your customer compliance gateways, and major industry players are joining the revolution, as demonstrated by the lineup for American Banker’s Digital Currencies event on July 29th.
But we have a long way to go before cryptocurrency powers everyday transactions for most Americans. By building solutions for the emerging middle class, entrepreneurs will use cryptocurrency for good and accelerate widespread adoption of these powerful tools. And that will benefit all of us.
Arjan Schutte is the founder of and a managing partner at Core Innovation Capital, a venture capital firm targeting financial technology companies for the emerging middle class. He is based in Los Angeles.