New Models to Bring in the Unbanked

Worldwide, there are large pockets of the population that operate outside of the usual banking channels, making them unreachable for any payment models other than cash or barter. But the advent of blockchain-based digital identity, assets and wallet technologies are creating new payment models for these groups. This session will detail the groundbreaking technologies on track to bring electronic payments to anyone with a mobile phone.

Transcription:

Kate Fitzgerald: (00:07)
We are going to jump right into our next session. The topic is new models to bring in the unbanked and we have here Daniela Barbosa, General Manager of Blockchain, Healthcare and Identity at Linux foundation, Executive Director of the Hyperledger Foundation. And actually, since people can read your title there, why don't you tell us in a few words, how long you have been there and where your expertise really lies?

Daniela Barbosa: (00:43)
Sure. So, my name is Daniel Barbosa, and I have been at the Linux Foundation for the last five years. The Linux Foundation itself has been in existence for 20 years. Many of you might know the Linux kernel and perhaps a little remember those when the plane gets reset in the back of the window and you see the black and it says system is rebooting and you see little penguin?, that's Linux kernel, the Linux kernel runs, most major infrastructure systems. I am sure every single person here in the room runs Linux as part of their corporate structure as well. The Linux Foundation is an open source consortium. We are made up of about 1500 companies, including companies across many different industries and financial services, healthcare and pharmaceuticals and technology as well and basically all top open source projects reside at the Linux foundation.

Daniela Barbosa: (01:37)
For example, if you are running anything in the cloud, you are probably using CNCF and Kubernetes. If you are a telecom provider about 70% of telecom stacks are built using LF networking. And if you are using SSL certificates lets encrypt is actually a project that is hosted at the Linux foundation under our open source governance models. I am responsible for projects within the Linux foundation of blockchain, healthcare and identity. What that means is that there is various open source communities that companies get together and individuals come together to work out on open source code. So they do it in the open. Anyone can contribute to these code bases. Anyone could participate, you could submit a code, you can submit an addition or an incremental increase upstream to the code basis.

Daniela Barbosa: (02:33)
We also work with many companies who want to learn how to use open source in their systems, in their future platforms and products that they are building, understanding the legal and the licensing requirements to do so. So I would say, I come to this panel as a person who understands the importance of open source in these open systems. I am gonna pull this out. I am gonna give a prop to the American banker, right? The revolution will not be centralized. It will certainly be decentralized and it will also be built in the open. And I think that is really the opportunities that we have.

Kate Fitzgerald: (03:10)
Good summary. And there would, you didn't really, we are going to get into next, how that connects with the unbanked, but briefly Aleksandra Teichman representing Cross River Bank and your credentials are pretty self explanatory. Cross River Bank is how would you describe your market positioning?

Aleksandra Teichman: (03:31)
So Cross River kind of lives intersection of banking FinTech and crypto. And over the last probably five to six years, we have been really keen on exploring and also supporting various crypto kind of use cases for our FinTech partners. Our these is every FinTech will need some sort of a crypto offering and every crypto organization will need some sort of centralized or bank kind of support. And our goal is really to ensure that we can support and bring crypto to the next billion users via FinTech partners. Cross River's originally kind of conceived, any of you are familiar with cross river bank about 14 years ago. And really our core competency at the time was around and still is today around small consumer loans also knows by now pay later, fast forward, 14 years later, we originated about 30% of the bank originated BNPL in the market today and we do it all VR partnerships. And go down a list of the kind of BNPL players in the market today. And we probably support 90% of them bringing it back to crypto unbanked. Really our goal is to support our FinTech partners and going to market and solving problems offering solutions to various segments and industries and we believe crypto is a big part of that.

Kate Fitzgerald: (05:03)
Fascinating. So the unbanked is a market that we have talked about for years, but it seems that it is constantly changing right now. We have waves of immigrants coming to this country talk to people a lot who have come here from India, Europe, and other countries, where they have a well developed payment history at a credit record and they get here nothing they are unbanked. And then you have people that are not necessarily financially literate in other ways who are coming to this country, starting work immediately, huge opportunity. And there we have old models and new models. So I am interested in talking about how these new models are going to help people who have no connection with technology. Could you explain Danielle, how does crypto or blockchain fit into reaching some of these people who have no traction even at the simplest level that they are gonna leap right into blockchain.

Daniela Barbosa: (06:00)
Yeah, so it is certainly blockchain versus crypto, right? So, one of the things that this spectrum of blockchain related solutions is not just crypto and Bitcoin and other coins are killer apps. They are killer apps that are built on distributed ledger technology and distributed ledger technology has core principles around digital identity, for example. So for an example of work that is being done in Europe is around the states. There is an organization that is building a central or decentralized network for people to have their digital identity in that platform. And then be able to go across states with their digital identity, with their credentials in their wallet and their digital wallet that might be around what education they have, what type of credit do they have and that is accepted because they are standards and the way to inter-operate in between those systems.

Daniela Barbosa: (06:59)
So when you look at refugees and how refugees sometimes are often leaving their countries without digital identities, without ways to prove who they are and what they have done in the past using digital credential systems that are decentralized, trusted which means that people can see the identity that is produced in the things that they specifically need to see. So there is transactions around self sovereign identity. So if I wanna show Kate something very specific about me, I do not need to show her my whole profile. If she wants to give me a loan, maybe she just wants to see is this person, these criteria to be alone. So there is a lot of techniques that are happening being created in the blockchain space that enable things like crypto to actually go institutional right to be able to have adoption of crypto because of these different technologies.

Kate Fitzgerald: (07:57)
And do at cross river bank, are you seeing that play out or where are you in the stages of envisioning this sort of thing coming to life?

Aleksandra Teichman: (08:06)
I love what you said about blockchain kind of being the enabler or the connector and bringing in the data pieces to ensure that, let's say refugees or diaspora or unbanked are able to share information and it's happening a lot more in other markets, right. And coming to the crypto, can be seen in a couple of ways, right? One is a store value. And another kind of lens is to look at crypto as a way to move funds, right? So it's not Fiat, it's crypto that's being moved, but the ability to leverage it in those kind of two different ways becomes interesting, particularly for consumers that don't have credentials or don't have banking credibility in the US market.

Aleksandra Teichman: (09:00)
If you think about even a couple of decades ago, what prepaid did for the unbanked and taking that lens and understanding the ability to have a prepaid card that a couple of things, right? No overdraft fees, the ability to now have some sort of banking credentials outside of traditional systems, completely revolutionary specifically for the unbanked today, there is still about 5% of the US population is unbanked. Whether it is the quote, unquote working poor, whether it is the diaspora that comes in immigrant population, refugee population and to be able to extend some sort of funnel or facility to get them to a place where they have credit worthiness. I think crypto becomes a really interesting value proposition.

Kate Fitzgerald: (09:53)
How do we connect the existing sort of traditional financial services, models to all of this?

Aleksandra Teichman: (10:02)
So I don't know who coined this term, but it's probably one of my favorite terms, it's the FinTech crypto mullet, which kind of the definition is you have FinTech in front and crypto in back and it's, it's great because every FinTech organization or eventually every FinTech organization will have some sort of crypto position, right. Whether it's love it or we like it, or we need to have it because our customers are asking for it. So perhaps the path forward is figuring out, do you start with crypto potentially for a group of segment of the population that is completely unbanked and offer them some sort of a means forward, or do you perhaps start with some sort of a financial tool or financial solution that starts with Fiat and then moves into crypto? There is an intersection where both are valuable.

Kate Fitzgerald: (11:09)
Daniela, are you in a position to talk about? How could you talk about how, how the rank and file or even community banks or credit unions could latch onto this through your

Daniela Barbosa: (11:20)
Sure, so there is a couple of use cases specifically around credit unions here in the US. So when we think about the unbanked there is also the underserved. And especially in rural communities in the United States there is a platform called member pass. And what they have used is a specific project within the Hyperledger community here at the Lenox foundation called Hyperledger Indian Aries. And these are self sovereign DLT networks and they are permissioned DLT networks. It's not a public blockchain, it's a permission network that is built among the credit unions in order for the individuals to be able to do a credit worthy check and then have that information be shared across the credit union so that you do not have to keep doing that. That KYC check over and over again. So these networks of credit unions are working together and we are seeing the same thing in places like N Sierra Leone in Africa with Kiva.

Daniela Barbosa: (12:19)
And they are a micro lending platform. And they have been in the business of micro loans for a long time using centralized systems that they controlled the trust was all in one organization that they had to build relationships with banks and other partners, but it was a centralized system and they have gone to a decentralized model allowing them to have the banks and the partners within the ecosystem be able to do that credit verification of people who typically have a really hard time getting credit checks, right? If you think they are in remote places, they perhaps have to travel three or four days to go to a big bank to get certified. So a lot of that work is happening in the permission blockchain space. And another example is Lockchain, they are part of the Inter-American development bank group in south America, they have launched a public permission blockchain network.

Daniela Barbosa: (13:12)
They happen to use Hyperledger Besu which is one of the client Ethereums that sit under us, but they have built applications. They built the infrastructure. So think of like, if you think of Bitcoin as a blockchain infrastructure, they have built a local infrastructure for Latin America work. And now there is applications building on top of it. So for example, there is consortiums of farmers who in the past would be very hard to get loans and financial services. They have created services for those small farmers in order for those farmers to sell their products and services outside of their villages outside of their warehouse. So that work is happening. And to answer your question specifically around how are they integrating these kind of systems into existing systems from a cross border payment perspective, this specific latch chain network is already integrating with Citibank's World Link API to do rate exchange inquiries, payment execution, payment status queries to change the crypto to Fiat and vice versa.

Daniela Barbosa: (14:15)
So there is systems and the big banks and the small banks and the payment providers, the visas, the MasterCards, it discovers. Many of them are working in these space to make sure that they can support these future blockchain of net words, blockchains of blockchains, essentially. You make it sound simple. It's not what are some of the major obstacles, usability and adoption? So, this is across the board, whether it's usability, even at high worth individuals, you have heard over the last few weeks or month specifically who were losing their wallet, somebody was here talking about how they lost her. They could not catch it. So usability of these blockchain networks and system is the biggest, the second is interoperability. There is not gonna be one blockchain to roll them all, forget it.

Daniela Barbosa: (15:05)
If you think that's the case, there is certainly maximalist out there that do believe that's the case. It's not gonna happen. There is gonna be blockchains of blockchains. There is gonna be public blockchains. There are gonna be permission blockchains. So how do we get these systems to interact together? If you think about a trade finance network that starts with that farmer in the Philippines who sells their product to amid essential person who then sells their product and it keeps going on, how do you make sure the interoperability of those networks so that it's easy, the cost is low, that it's still decentralized in the sense that everyone can see the transactions, but only the things that matter to them IOP usability, so UX is so important because if we don't get it right, people are gonna fail. They are gonna have bad experiences with blockchain, with crypto networks, etc., and then interoperability, those are the two key things that we will take a long time to solve. It's not gonna be overnight for Sure.

Aleksandra Teichman: (16:01)
And just to add, I think the other piece is also from a regulatory standpoint, regulation is coming within kind of crypto space, specifically, particularly in the US market. We have seen recent events and what's happened. And from a banking perspective, whether it's completely decentralized infrastructure, that's being built out and being supported in use cases. It is important to understand that there is a regulatory piece that is continuing to develop and that will establish the right guardrails and give also, at the end of the day consumers, right. And customers comfort in adopting crypto and blockchain in various use cases.

Daniela Barbosa: (16:43)
Sure.

Kate Fitzgerald: (16:44)
Well, how far away are we from seeing a kind of a critical mass of development to the point where I wanna give a sense of how urgent it is for our banks of any size to start exploring this and where should they start?

Aleksandra Teichman: (17:00)
A lot of banks are already exploring it to a certain degree in different levels and I think it's gonna be a continuous evolution and kind of progress. And it depends on their appetite and their ability to consume some of the technology that comes along with whether it's blockchain or just kind of crypto even for on ramp off.

Kate Fitzgerald: (17:24)
I hear from people and maybe smaller institutions or even merchants that they it's their top priority, but they don't know where to start. Do you wanna offer some thoughts about the urgency of where to start when to start and what happens if you don't start?

Daniela Barbosa: (17:40)
I think you need to start because if you don't, others will take the market away from you. Certainly, I agree with you that banks specifically big banks have been working on building out decentralized systems and digital asset systems, right. Remittances with wholesale banking, right. If you think about JP Morgan's, IMS system, it is built using quorum, which is a permission distributed ledger that has all the same principles of a public blockchain. And what are they using for, they have a 150 over 200 banks that are using the network, the Onyx network to do their payments amongst each other, right. To do it efficiency, to do it with less transaction costs, right. And I think that's just gonna continue doing it. And sometimes people don't see those type of systems right. In the trade finance world and in the wholesale banking world as crypto they are not crypto, it's not a crypto native system, but the principles of digital assets and ownership is all it's the same.

Kate Fitzgerald: (18:50)
It's taking hold, yeah. So that's, at this level of city Alexander, do you have any thoughts on the timing, the urgency? What happens if you don't, if you aren't really, up to your elbows in exploration or research here.

Aleksandra Teichman: (19:07)
Right. I can't help, but say that it's about crawl walk run, okay. And a lot of times before you even start thinking about crypto it's, are you able to consume APIs? Do you have the right engineers or do you have the right product people in place that can even understand that value proposition and what it can potentially do for your organization, for your bank? I think you have gotta start there before you even start exploring and saying, well, I wanna dive deep into crypto and I wanna be able to support fintechs in their various crypto use cases, or I wanna be able to offer custody for example.

Daniela Barbosa: (19:41)
Yeah, education is another, and developers talent, engineering talent right now is not there. And the banks have some of the smartest engineered talent in the world, honestly, but we need more education, we need more engineers. Two weeks ago, when you find a bugs and bugs can be really critical in this code, that's live in production. So making sure that people are educated both at the business level around what blockchain is and essentially what the process will be. And then on the engineering side is making sure that you have engineers that are certified that understand the technology and more so understand the economics of the technology, it's no longer, you are just writing code to write a website you are writing code to write the economics. And I think that comes from the banks, it comes the technology providers, the vendors, partners will be there to help the banks. And that's what they are there for, but the banks need to have that knowledge institutionalized in house. If they do not, they are gonna be in a situation where they are not gonna be able to move the needle for themselves.

Kate Fitzgerald: (20:52)
So what's driving this is it, is it demand? Is it competition? Is it regulatory and which of those engines is sort of taking priority in terms of driving progress?

Aleksandra Teichman: (21:03)
It depends on the segment and the use case kind of bringing it back to the unbanked. A lot of it comes from the kind of digital banking value proposition and understanding that, at the end of the day, if it's an unbanked consumer that you are trying to offer solution to that more often than not a digital banking solution may be the path forward. And how do you offer now another vehicle for them to, to add on to it.

Kate Fitzgerald: (21:31)
Add on to build, okay, that is on what's driving it, what we are gonna see in the next few years.

Daniela Barbosa: (21:37)
Well, if you were talking specifically about the unbanked and underserved, it's a market that needs to be very nimble and cheap to operate, right. Because you are not, it's not like you are doing multi-billion dollar transactions between two banks, right? You, so you need to build a system that is really optimized for large amounts of transactions, for example, at very low costs and then low risk, right. In making sure that building these trust systems with a low risk model then allows you to offer more services faster.

Kate Fitzgerald: (22:10)
I sense a lot of, what we hear about a lot of questions people have, and it feels like hard to imagine where we are gonna be. How would you think if we look five years from now, what will be? How far along on this path that you have just described, do you think we will be partway well on our way or maybe reaching maturity?

Daniela Barbosa: (22:29)
I will definitely have more gray in my hair for sure. It's hard to tell because things like what happened last week, right, from a crypto perspective really doesn't actually affect blockchain on enterprise side because it is not crypto related but it does give people pause, right. And people say, well, I am not afraid of this. I'm not gonna set back.

Kate Fitzgerald: (22:55)
It's set back. So we can't predict it's hard to say.

Daniela Barbosa: (22:57)
Yeah, and that was, it's a small market set back. Okay, but the consumer adoption people being able to trust the systems in a trustless way will take a while.

Kate Fitzgerald: (23:12)
So that's on where we will be in five years.

Aleksandra Teichman: (23:15)
I think that what happened a still kind of happening right. Couple of weeks ago, maybe a little bit of an eye opener rather than a setback. Okay, and allows everybody kind of the pliers. And then also the kind of those looking from the outside to understand that you do need a some sort of regulatory lens on it, whether it's in a permissionless kind of environment, decentralized environment, but you do need guardrails in order to ensure that you give confidence and comfort to your customers. And also some sort of stability in the market. Fast forward five years, I think we will be in a much different place even a year ago, right. We were vastly accelerated in terms of crypto adoption, whether it's on the institutional side or kind of the retail side and consumer value proposition. So we will be ones way in five years.

Kate Fitzgerald: (24:10)
Certainly it feels like things are changing rapidly. I wanna ask people in the audience, raise your hand if you have tried or finished the payments trivia quiz in the app. And if you did not you should do that. And also a clue to one of the answers was given here by Daniela, hint, what is chase doing with blockchain? You named the project, what is it called? Onyx, okay. Now we know one of the answers,

Daniela Barbosa: (24:43)
So, I like to add on this one of the things that many of the panels here over the last two days have talked about central bank, digital currencies. Okay, and the adoption of banks there is over 80 central banks around the world all the top banks that are experimenting or putting central bank digital currencies into production. So we are already seeing the Eastern Caribbean bank, the bank of Nigeria. And there is a couple other that have experimentations. The central bank of Europe did a lot of experimentations and they have some pilots in play bank of England. And more importantly, things like the Boston fed where the Boston fed and MIT got together and they open source project Hamilton into the public. And one of the things, being at the Linux foundation, talking about open source, we work with the central banks and banks as well to understand the importance of building these things collaboratively.

Daniela Barbosa: (25:34)
So one of the things that I love to do a call out for everybody is if you need to be, if you want to be part of this movement, you have to participate in an open source community like what is happening at the Hyperledger foundation and others, because the code is being written in the open for you. We are just published an ebook there is 17 different use cases around central bank, digital currencies that happen to be using Hyperledger technology, Hyperledger fabric, Hyperledger Besu, enor. The bank of Cambodia was the first central bank that launched the retail CBDC. And the reason is that Cambodia did not want to lose the remittances and the payments that were going across to other, and they have a great case study on it as well. So I recommend going to hyperledger.org and reading those case studies to really get an idea of the real work that is happening and going into production.

Kate Fitzgerald: (26:26)
Wow. That is an amazing amount of information you guys have offered and lots to think about, but I wonder if we have any questions, it's a complicated topic. Anybody. Yes. Here we have the microphone's coming behind you. She is right. She is almost there.

Audience Member 1: (26:50)
This might be a very loaded question, especially since it has to do with the underbanked, I am just curious all the sophistication you are talking about the technology, the fact that you side at JP Morgan chase is working on blockchain and that bank should be encouraged to get developers and everything else. So speaking precisely from institutions like mine that are under a size of, let's say 5 billion. Is there any concern of how this is gonna work out in the long run to where you have such sophisticated technology, that the only ones gonna be able to deliver it are those that are larger. So you actually end up effectively making less choice. So maybe it is less decentralized. I mean, the United States kind of has a decentralized banking option now with all the small access to credit unions and small community banks that was proven during the PPP era to where they were the most effective in getting out to smaller businesses with any kind of flood relief.

Audience Member 1: (27:47)
It's always these smaller institutions that are able to effectively get cash and liquidity into people's hands. But as we get more sophisticated, what is the worry that you are gonna essentially become less accessible? Because it's all ran by a few Jamie diamonds of the world. And, we actually slit our own throats, just trading visa, MasterCard interchange for crypto technology. So that's kind of what I hear in the back now. I am obviously here., So I am full fan of innovation but the crypto part as you said, the usability is still the key. I mean, I trade crypto in SoFi PayPal anywhere that I can for a normal person get access to it. But, there is still eventually gonna need to be somebody big with a lot of assets and capital. It's not gonna be WeQ in Bellingham, Washington, that's gonna solve this. So how do we avoid actually limiting choice by chasing technology?

Kate Fitzgerald: (28:49)
And then we are only got about a minute. So you guys wanna kind of give a snappy answer to that. It was a great question.

Aleksandra Teichman: (28:58)
I can answer that maybe in two ways. One is, it's about evolution a even small community banks, mid-size banks. It's about evolution when it comes down to it, right? Because when we look at, you mentioned kind of JP Morgan but there is other banks that are able to support whether it's neobanks, whether it's fintechs, others in market that can, solve problems for specific segments. And they are not only the larger banks. So that's 1 side, right? It's about evolving and understanding who your customers are and how to speak to them. And it kind of maybe goes back to APIs and goes back to kind of that core, that core competency and back to education to your point, that's one. And you mentioned PPP cross river, for example, we are relatively small-ish bank where FinTech focused kind of FinTech enable bank. But we were able to, through our partnerships, through our FinTech partners, roll out, I forget the exact number, but we were top three, our top four in PPP loans in the country. And we did it purely through our technology via our partners. And we are considered, I think in many circles as small community bank as well.

Kate Fitzgerald: (30:12)
Daniela, do you have any thoughts on how small banks can avoid getting locked out of all this?

Daniela Barbosa: (30:16)
Open source is the answer, being able to understand where the code is and partnering and understanding. If you understand the open source, you understand the process to contribute, participate, and use the open source. You are gonna find the right partners like that credit union example that I talked about with member pass, right? There are partners in that group that are working together but open source is certainly it just the decentralized world, something that every single person in this room should understand and incorporate into your business strategy.

Audience Member 1: (30:50)
Can I quick follow for that? Sorry. sure. Open source is great, because we we were chasing our own, but it's expensive and we were chasing the same developers that you guys are, right? The talent, is very limiting and expensive and only getting more expensive. So the only real logistical offset is to close branches and to limit physical access like cross river. Do you have branch?

Aleksandra Teichman: (31:15)
One.

Audience Member 1: (31:16)
The one. So there you go. So it is really difficult to chase both of those as a 2 billion organization.

Aleksandra Teichman: (31:24)
Consumers are also changing, right. And customers are also changing. I forget who referenced it earlier, but they said my 20 year old doesn't even wanna go to a bank. They don't even know how to fill out a check slip. They only do business through an affirm or through their bank neobank app that they have and that's how they exist. And that's where all their financial solutions live, right.

Audience Member 1: (31:47)
I guess. Yeah. That's different conversation. I definitely, I don't want to go down the branch non branch and believe me, I am not a defender of the branch brick and mortar, but it's good.

Kate Fitzgerald: (31:57)
You raised good points and it's like not gonna happen overnight.

Audience Member 1: (31:59)
Right, but specific for underbanked is it your belief that we are better off servicing underbanked through a digital means than having local physical people to go out and have that access just based on education level in the states and everything else. So where do you see it heading? Are we able to solve the solution digitally or is it alright again? Sorry.

Aleksandra Teichman: (32:27)
I do not know if digital or not digital and unbanked are necessarily mutually exclusive. I think customers just consumers in general are changing in the way they consume financial services and the way they transact and the way they purchase and the way they live their lives. A lot of it ends up being digitally and so in order to meet your customer where they are, it ends up being in a digital environment, not saying that there is no place for brick and border branches. I love going to a local branch and talking to somebody personally, I think it is about meeting your consumer where customer, where they are.

Kate Fitzgerald: (33:06)
I think we are out of time and those are great questions and this really exciting panel and these people, these brilliant ladies are available for follow up. Thanks so much.

Aleksandra Teichman: (33:16)
Thank You.