Can Blockchain Power Financial Inclusion?

1.   Introduction

When this Paradigm was chosen on the Blockchain-powered financial inclusion, there was skepticism of its worth, due to its nascent concept with limited data and adoption.

However, I was optimistic about the immense capabilities of eliminating intermediaries, establishing ownership, creating transparency, its immutable nature along with its computational power and logic.

The thought got a boost when a story got published where Mr Mukesh Ambani in 42nd reliance industries AGM has backed the blockchain technology to prove how the vast data we have in India could be the wealth.

Mr Ambani was betting big on Blockchain with commitment of Reliance Jio InfoComm to establish one of the world’s largest Blockchain network across in India over next year.

An inter-ministerial committee headed by Finance Secretary MR Subhash Chandra Garg acknowledged that Blockchain would improve the efficiency and inclusiveness of the financial system as well as transparency in government services for citizens

According to World bank, there are still 1.7 billion population unbanked, who are not able to invest in essential financial services and hence not able to invest. A study conducted by ASSOCHAM and EY, 19 % t of Indian the population continues to remain unbanked, or financially excluded, despite the best efforts of banks and financial services providers. Not all the banked can get the benefits of financial inclusion who comes under the category of underbanked

The puzzle of financial inclusion will get solved through the fundamental tenets such as digital identity, digital verification, cost and intermediary avoidance, trust & accessible capital flow, then it leads Governments to establish digital identity of individuals & their associations to provide access to financial services right from opening the bank account, sending & receiving money, applying for loans , cross border remittances, efficient delivery of government schemes etc. to improve active participation in broader world economy and still reduce the chances of fraud or error in the delivery of financial services to the underserved or unbanked section of society.

However, this shift in paradigm of Blockchain-powered financial inclusion requires to fill the Knowledge Gap of collaboration and consortium of public and private sector to speed up the innovation and to create a holistic, robust ecosystem, which Mr Ambani in India is trying to do through National Blockchain Network.

2.   Financial inclusion current scenario & its limitations

Many of us living in developed and developing countries take the most basic financial services for granted. People not having access to the underlying financial infrastructure, including bank account is a cause, which affects people being not eligible to transact financial instruments and inaccessibility to loan related to home, education, or healthcare.

The first step to tackle the issue of financial inclusion is a bank account. As an example, India has done tremendous job in terms of creating national identification through “Aadhar” and opened bank accounts through their flagship program “Jan Dhan Yojana.” There are other financial inclusion tools across the world such as

• MPesa is a mobile phone-based money transfer, financing, and microfinancing service in Kenya and Tanzania
• BKash is a mobile financial service in Bangladesh, helping users to deposit money into their mobile accounts and access a range of services for small remittances.
• Venmo/Paytm: Mobile payment services where account holders can transfer funds to others via mobile phone app

All the above initiatives taken at different parts of the world have helped storing money in banks & help save for the future.

However, the progress of financial inclusion is slow due to the factors such as

• Establishing and verifying digital identity by banks as intermediaries
• Access to capital flow hindered because of high fees, high settlement time, and low usage.

World Bank estimated that 1.7Billion people across the world do not hold any bank account Unbanked. Population who have access to bank accounts, but do not use the traditional financial infrastructure are called Underbanked.

Together unbanked and underbanked forms a staggering ~3.5 Billion population who are excluded financially worldwide along with 250 Million medium and small enterprises (MSME) in developing economies and if included can potentially add ~$400 Billion to the world economy.

3.   Blockchain-Powered Financial Inclusion – Key Tenets

For a robust platform of Blockchain-powered financial inclusion following are some of the key tenets or constructs.

3. 1.   Digital Identity & Verification

There are ~2.5 Billion people who live in places where there is no financial infrastructure support,

Despite financial support, people lack identification documents such as passport and other documents. People are devoid of financial services and instruments and not able to open a bank account, which is the first step of financial inclusion.

Since 60% of the 2.7 billion unbanked people already own mobile phones, these devices make the best platform to connect to the global economy. The identity could start as simple as taking a photograph through a smartphone without requiring any valid proof of government identification with bio-identification as a first step towards the crypto wallet.

Blockchain-based crypto wallets enables people to access financial infrastructure and products, e.g. a moderator like BanQu, a ground-breaking for-profit / for-purpose blockchain-as-a-service software company is solving the toughest global problem – Extreme Poverty by connecting people to global supply chain they participate in and brands, organizations, and governments to power them. This identity consists of the digital or electronic credentials that define a person’s history of economic interactions in the world economy.

Another e.g. of a moderator is a start-up Humaiq’s Blockchain-based on Ethereum application creates profiles based on the biometric data. Potential users need not have any valid personal identification documents but facilitates KYC and enables low-cost money transfers by overcoming the geographic challenges facing the unbanked and underbanked.

Blockchain creates a mechanism of immutable, and distributed ledger of financial records by building economic identities necessary to connect with unbanked and underbanked with the global economy.

3.2. Cost & Intermediary Avoidance

Blockchain if adopted fully will enable near-real-time payments, reducing the transaction payment costs associated with clearinghouses, credit & debit card networks and banks, thereby removing all the intermediaries by very decentralized nature of Blockchain.

Moreover, the Blockchain-powered virtual currencies help unbanked and underbanked to send payments globally through a universal means of exchange, making all the remittances incurring low fees.

3. 3. Trust

Blockchain reinforces trust, which is a clear value proposition that fits the social practices of the unbanked and underbanked as there is no single authority controlling the ledger and driven by consensus protocol, which is reminiscent of cooperative networks familiar to unbanked.

3. 4. Accessible Capital Flow

Once the digital identity, Digital verification is established through an infrastructure to transact & trust there are few ways to make capital flow accessible with initiatives such as

Microloans:  The traditional microfinance though is not a wrong model but has considerable challenges in terms of who put the money and who get the money as well. Also, it has failed to take off due to the issues of transparency & existence of middleman that Blockchain could avoid.

Microloans through Blockchain platform could be the gamechanger to lift people out of poverty by using the small loans to the unbanked and underbanked. It not only eliminates the middleman and creates transparency but also help people achieve economic independence without the traditional financial infrastructure like Banks.

The provision of microloans on a Blockchain platform based on repayment by recipients will help build a credit history and access to other financial instruments such as loans to improve their businesses and thereby participate in broader economy

Micro-Insurance: Micro-insurance programs typically struggle to enroll farmers. Take-up rates in India, where the government subsidizes crop insurance, are estimated at less than 5% of eligible small farmers. Small farmers do not believe they will get paid when the monsoon destroys their crop or if they get paid, the benefits will reach them too late.

Micro Insurance with blockchain and smart contracts both involves crop insurance. When an extreme weather event strikes — drought or a typhoon, say — the small maize farmer in Kenya or the rice paddy farmer in Sri Lanka do not even need to submit a claim. Nor does the insurer send a claims adjuster. A claims payment is triggered automatically by a blockchain-enabled smart contract.

Cross Border Remittance: Today, remittances represent the most significant flow of funds into the developing world, surpassing foreign direct investments and official development assistance. According to the World Bank Group, the remittance industry experienced significant growth in the past years, up 8.8% in 2017, and 9.6% in 2018. However, the problem is with huge fees, third party services and the time to transfer the money

The main goal of blockchain remittance companies is to simplify the entire process, removing unnecessary intermediaries. The idea is to provide frictionless and nearly instant payment solutions. Unlike traditional services, a blockchain network does not rely on a slow process of approving transactions, which usually goes through several mediators and requires much manual work.

Humanitarian Help: The very fundamental way of using the Blockchain is resolving the conflicts such as refugee crisis, natural disasters through digital identities to help reach the humanitarian aid to the right people

Targeted humanitarian aid will help people come out of crisis and build their lives through the monetary help to their business interests, education and help participate in broader economy and avoid corrupt practices by reaching deserving population

4.   Blockchain-Powered Financial Inclusion – Key Challenges

Regulation & Governance: Government regulations are still not in place for traditional financial institutions like banks to participate in Blockchain networks

Consortium: For an adequate infrastructure on Blockchain it needs consortium of Financial institutions, Regulators, Private businesses etc. to coexist on one platform to enable standardization and to take maximum advantage of network effects

Environment and Scalability: Blockchain networks need a massive amount of computing power to process the high amount of data consumption, and its current interoperability is a hindrance to scalability

Culture: Most of the people are used to place their trust in central authority like Banks so unsettling that to a decentralized trust is going to be a huge change management exercise.

The above challenges need to be addressed so that a technology like Blockchain will resist energetic attempts of falsification and come out successful

5.   Conclusion

Blockchain is a promising disruptive technology that solves the puzzle of Digital identity and power the economy with decentralized financial infrastructure that could help the wellbeing of the developing economy in terms of poverty level reduction along with remote work and economic growth.

It also helps in terms of creating new financial models and products that would help unbanked and underbanked and reduce inequalities along with broader participation of people in the economy.

Blockchain can provide solutions to the market of unbanked and underbanked more in terms of distributing value than wealth. There is a considerable window of opportunity to create an additional ~$400 Billion by 2021 through the unbanked population to power the economic transformation.

About Algoleap
We are a niche digital engineering services and technology consulting firm that specializes in Application Modernization, Digital Platform Engineering, Product Development & Data Engineering. We are a born digital company already servicing a combination of Fortune 500 clients and well-funded unicorn start-ups by helping in their transformation initiatives.

We are a growing team of top engineering talent delivering mission critical capabilities by through design thinking lead enterprise architecture, best in class engineering practices and managed innovation and at the core of our business are our people and customers.