Blockchain Can Bring the Unbanked into the Global Economy
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Many banks and financial entities envision the blockchain as delivering value to their customers in the form of reduced fees, faster funds transfers and simplified processes. Much less heralded, but potentially far more dramatic, is the transformational impact the blockchain could have on the world’s massive unbanked population.
The blockchain first achieved notoriety as the backbone of bitcoin, the web-based cryptocurrency. By using distributed networks of computer users to record and secure transaction records almost instantaneously, the blockchain has the potential to bypass the need for correspondent banking and other intermediaries for, say, international money transfers. But for those who lack an entrée into basic financial services, blockchain’s accessibility and scalability could make it a practical gateway to the global economy.
The convergence of mobile money and digital finance has already given rise to innovations like M-Pesa and many other services to help more than 400 million people living in cash-based eco-systems have formal financial service, according to GSMA.
Despite the significant headway in recent years made by providers in reaching areas previously untouched by banking services, more than two billion potential financial services customers remain stranded. In an industry characterized by geographic fragmentation, mobile money providers have yet to find a clear path to achieving significant scale required to realize network effect for long-term viability.
Among many other uses, the blockchain could bolster these efforts by becoming the backbone to open the closed-loop mobile money services. Right now, certain payments services only work between two parties if they both have accounts. Similarly, mobile money services, often developed by the mobile operators themselves, often didn't allow for consumers to easily pay each other on separate mobile networks. But the blockchain could expand interoperability to link these fragmented, closed loop services both domestically and internationally.
In addition to enabling more unbanked users to send money to other unbanked users, such a backbone would serve to connect the banked with unbanked users in areas such as cross-border remittances and cross-border business-to-business payments.
Considering both the interoperability value proposition and blockchain’s ability to significantly improve the cost structures of inefficient cross-border payments, financial institutions understand the stark reality: the incumbents can no longer dismiss disruptive blockchain technology as a viable means to serve the unbanked masses. Doing so would mean disintermediation by competition seeking to serve the next few billion participants of the global economy.
The opportunity to reach this population is further bolstered by trends around smartphone adoption. Just as banked customers in developed markets embraced smartphones, populations in emerging markets are expected to replace their mobile feature phones with smartphones as costs are driven down — specifically with low-cost, open-platform Android devices manufactured in China and India. The affordable devices will provide them with access to the next generation of data-rich, user-friendly financial service applications.
Underpinning these applications will be the blockchain, which will supply an infrastructure that can dramatically reduce the cost of operations and support new business models aimed at sustainably serving the poor. Blockchain technology, in conjunction with Android smartphones, can revolutionize the speed of open innovation, bridging the distance between Silicon Valley and The Great Rift Valley.
Blockchain’s promise extends well beyond financial services; it extends into adjacent verticals such as healthcare and land rights. The common denominator that will link all digitally enabled services could very well be blockchain-enabled digital identity systems, securely stored and managed in a distributed ledger.
A cryptography-protected ID, accessed by a unique combination of private and public keys and verified with biometrics, also has the potential to allow users to control their own data, deciding how much of it to share. It is also conceivable that unbanked refugees might rely on the blockchain to be issued an ID so that they can begin their lives anew, free from the threat of a corrupt government subverting their rights. These same refugees, or similar populations, may have their land titles and deeds documented in the tamper-proof blockchain for proof of ownership upon return to their homeland. These same titles and deeds could act as securitization for credit.
As of now, however, competing efforts to demonstrate its value are still in their embryonic and experimental stages.
As the race to develop both public and private blockchains — not to mention, combinations of the two — intensifies, a set of much-needed best practices should emerge. While the blockchain may ultimately reshape many transaction-related practices, the technology still faces a host of tough-to-tackle obstacles, ranging from legal and regulatory issues to concerns about vulnerability. Security fears have recently been raised anew after the Decentralized Autonomous Organization (DAO) — in this case, an investment fund based on smart contracts for Ethereum — was exposed as having a dangerous software loophole.
But the potential for the blockchain to serve as connective tissue for the large unbanked market should make longstanding deterrents dissolve. The promise of the blockchain could provide financial services companies with a real business solution to serving the world’s poor.
Menekse Gencer is PwC’s global payments fintech leader.