Blockchain is becoming the go-to technology for banking the unbanked. There are around 1.7bn adults that do not have access to a bank account. Furthermore, around 160 million small businesses do not have access to banking services. The most common reason for this is due to the lack of required identity credentials along with the absence of a credit rating/financial history. When the subject of the unbanked arises, it is common to think of those living in frontier or emerging markets. However, 22% of US residents are unbanked or underbanked, as stated by the US Federal Reserve…
The Kiva Protocol
The Kiva Protocol is a joint initiative by the Sierra Leonean government and Kiva, a microloan company based in Silicon Valley. Sierra Leoneans will now be able to sign up for bank accounts with their thumbprint, thanks to this blockchain-based financial inclusion programme. By combining both biometric and distributed ledger technology, people can link their thumbprint to their identity. This in turn will allow 5.1m adult citizens in Sierra Leone to have easier access to a number of services. Furthermore, Sierra Leone will be able to create its first universal credit bureau. Backers of the initiative are hoping that this will spur lending by banks who have previously been reluctant to loan to those without a credit history.
The Importance of Banking the Unbanked
There are a few reasons why a cash-based society has disadvantages. Firstly, transferring and saving money poses problems. It is much more troublesome and riskier to transfer and save money without a bank account. Secondly, it is possible to build a credit history with the use of a bank account. This can be used as a base for loan applications. Microloans have become popular in frontier markets. Microloans can help create ‘micro-entrepreneurs’, funding opportunities which can edge themselves out of extreme poverty. However, without a credit history, interest rates are usually very high.
Advantages of a Banked Community
Banking the unbanked creates huge opportunities and advantages for all stakeholders. Besides the profits which can be made by providing banking services to the unbanked, there are also other benefits. By giving people access to savings accounts, credit and loans, banks can help build and strengthen emerging middle-class populations. Thus, this can drive growth in the broader economy. Then of course, benefits for the newly banked population are the opportunities to leverage banking services to edge out of poverty, reduced vulnerability to monetary theft, increased internationalisation and more.
Other Unbanked Solutions
Facebook is wanting to launch a cryptocurrency called Libra – this is a currency based on blockchain technology. By bypassing the trust and costs that a bank would usually possess, and putting it into immutable cryptographic technology, barriers are lowered so that the unbanked can join the economic ecosystem. It should also be noted that Kiva is one of the 28 founding members of the Libra Association.
BanQu uses blockchain to create a digital identity for those without government credentials or credit histories. By combining evidence of someone’s credibility, users have better access to obtain a microloan which can provide them the opportunity to become more financially stable. Examples of evidence for proving ones identity could be land ownership, vaccinations, remittance income, microloan history ect.
In India, the government has created Aadhaar, which means ‘foundation’ in Hindi. This is a 12-digit identity number, linked to fingerprints and iris scans. Each user receives a card with that number on it, which can be cross-referenced with the biometric data held in a database. India’s Aadhaar program is very similar to that of the Kiva Protocol. Although controversial due to privacy concerns, we expect more countries to launch these types of initiatives. This way more can benefit from being included in the banking ecosystem.