Blockchain for Financial Inclusion: Banking the Unbanked?

How Blockchain Can Help Bank The Unbanked

In today’s increasingly digitalised world, financial inclusion remains a pressing global challenge for the billions of people around the world who lack access to basic financial services. These people are economically marginalised and their quality of life isn’t rising with the tides of global economic growth.

Financial inclusion not only facilitates day-to-day living, but it also helps people (and businesses) to plan for long-term goals and unexpected emergencies. Access to banking and financial services (like loans and insurance) allows people to start and expand businesses, invest in education and health, and better manage risk — all of which lead to increased quality of life.

Investopedia describes financial inclusion as: “making financial products and services accessible and affordable to all individuals and businesses, regardless of their net worth or company size.”

Financial inclusion strives to remove the barriers that exclude people from participating in the financial sector, not only as a means of improving quality of life — but also to act as a potent enabler and accelerator of economic growth and development in the wider society.

For example, in Kenya, mobile payment provider M-Pesa allows people to transfer money and pay bills through their phones. Impressively, 96% of the population there have a mobile money account and a whopping 51 million people across Kenya, the Democratic Republic of Congo (DRC), Egypt, Ghana, Lesotho, Mozambique, and Tanzania have also started using the service.

The M-Pesa example highlights how new technologies (the internet and mobile phones in this case) can help drive financially inclusive solutions in areas where people had been previously left behind. Establishing inclusive finance requires education, collaboration, and reliable systems and infrastructure.

An emerging solution that could help drive financial inclusion is blockchain. In this article, we will explore how blockchain is helping democratise financial access, thereby creating opportunities for people to take control of their financial destinies and participate in the global economy.

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Table of Contents

1. How Blockchain Can Help Bank The Unbanked
2. Financial Inclusion’s Global Scale
3. Leapfrogging Technologies & Societal Advances
4. Why Blockchain?
5. Banking On Blockchain
6. Conclusion: Blockchain for Financial Inclusion

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Financial Inclusion’s Global Scale

Improving financial access is a global and complex challenge. Large corporate banking systems have excluded a large part of society, with the World Bank estimating close to one-third of all adults — that’s 1.7 billion people — are being excluded, with a disproportionate number of those affected being women.

Access to a bank account is a cornerstone requirement for enhancing financial inclusion. The ability to receive and securely store money in a bank account allows people to safely store value and make transactions, thereby creating a transaction history that then leads to trust and the ability to access credit — itself a key element in running businesses or buying assets.

With an estimated 76% of adults having access to a bank account, great strides have been made toward financial inclusion in recent years, but there is still quite far to go. Luckily for the unbanked, financial inclusion is front of mind for globalists responsible for setting the agenda for global development goals.

Global Support For Financial Inclusion

The World Bank Group considers financial inclusion a key enabler to reduce extreme poverty and boost prosperity — and 7 of the 17 UN sustainable development goals mention financial inclusion as an enabler, identifying an inclusive financial system as essential infrastructure for an equitable and inclusive society.

Infrastructure and identification are two major barriers to financial inclusion. Globalist institutions like the United Nations (UN), the International Monetary Fund (IMF), and the World Economic Forum (WEF) have been vocal advocates of Digital IDs, seeing them as essential to accelerating developing countries’ social, financial, and economic inclusion.

The global elites have all identified blockchain as an enabling technology that can help alleviate poverty and improve prosperity. This support not only signals financial support for pushing such initiatives, but it encourages systemic and societal changes. Since 2010, at least 55 countries have made commitments to financial inclusion, and more than 60 have either launched, or are developing, a national strategy.

Know Thy Client & Know Thyself (KYC & Digital IDs)

Providing access to financial services such as credit and investment opportunities is a vital step in truly bringing people out of poverty and onto the capitalist playing field. Bank accounts and regulated financial services rely on citizens both possessing verifiable identification and having access to reliable financial infrastructure.

KYC (or Know Your Client) is a standard used in the investment and financial services industry to verify customers’ identities. The finance police (the SEC) requires that each new customer provide detailed financial information before opening an investment or banking account. This is an important measure that (theoretically) protects individuals, financial advisors, and institutes from exposing themselves to undue risk.

The key issue, particularly in developing countries, is the lack of ways to formally identify customers. Without identity documentation, there are no opportunities for the unbanked to build a credit history which could then enable them to access credit.

Micro-lending is a great example of a financially inclusive service helping people in need. With loans as small as $25, micro-lending can make a real impact on people in the poorest areas. Without access to lending, the creation of wealth is stifled, and with it — economic development and prosperity.

McKinsey has explored the economic value Digital IDs can unlock for countries, stating:

“Our analysis indicates that individual countries could unlock economic value equivalent to between 3 and 13 percent of GDP in 2030 from the implementation of digital ID programs.”

The ability to be formally identified is a fact many of us probably take for granted. We have government-issued birth certificates, passports, and driver’s licenses — documents that are readily accepted by the police, immigration clerks, and KYC-compliant financial service businesses.

In an HBR report, Professor Michael Mainelli wrote:

“2.4 billion poor people worldwide, about 1.5 billion of whom are over the age of 14, can’t answer that question (on identification) to the satisfaction of authorities. While they certainly know who they are, they are often excluded from property ownership, free movement, and social protection simply because they can’t prove their identity. They are more exposed to corruption and crime, including people trafficking and slavery.”

Imagine… not being able to prove who you are. Imagine how much additional trust would be required in day-to-day life and how limited and slow services would become as a result.

How Blockchain Digital IDs Are Unlocking Financial Access

Digital IDs are a hot and controversial topic right now. While they may render the image of an Orwellian hellscape to some, many are widely recognising them as a key enablers of financial inclusion. Blockchain’s ability to provide a tamper-proof, verifiable identity system makes it a good candidate for enabling Digital IDs.

Sam Altman, Silicon Valley Superhero (who brought us ChatGPT and Y-Combinator) has recently set his sights on blockchain digital IDs — introducing an ambitious Proof of Personhood project called Worldcoin that uses fancy eye-scanning devices to scan and tokenise a person’s iris-based biometric identity, resulting in a verifiable Digital ID stored on the blockchain.

I’m not sure if I’ll be signing up with my biometric data just yet, but the project is offering potential users $50 (of Worldcoin’s native cryptocurrency) to join the network, an incentive that seemingly works, as the project onboarded more than two million people in 120 countries in its first 2 years.

Worldcoin is far from alone in the Digital ID space. BanQu is another start-up using blockchain technology to create secure and verified IDs for the world’s most vulnerable populations. The BanQu app allows people to build an online profile through facial and voice recognition that can then be used to track everything from educational qualifications to transaction history.

It’s not just Silicon Valley types getting in on it, World Identity Network (WIN) has partnered with the UN to explore blockchain’s potential to provide secure and safe forms of identification for the 2 billion people who lack such documentation.

The UN’s Tatsiana Hulko commented: “Over time, users build up a financial ID, eventually being able to open bank accounts, own property, and access healthcare and other basic services.”

From verifying identity (or proof of personhood) to connecting identity to personal records like educational qualifications — on-chain digital IDs are going to be an integral part of the financial inclusion puzzle (whether we like it or not).

Leapfrogging Technologies & Societal Advances

Societies have the opportunity to leverage new technologies to make leaps in their development. This is one of the ways developing nations and underserved populations can make technological-driven advances that help bridge the economic divide.

The most famous instance of this is the mobile revolution, which put phones in the hands of billions of people. This revolution allowed developing nations to skip directly to mobile phones without the need to invest in landline infrastructure.

This leapfrogging provides massive cost and time savings by skipping redundant infrastructure development, but it also provides an opportunity to make advances and benefit from more modern technologies. These advances can result in fast, large-scale adoption, leading to new business opportunities and standard practices that help to lift everyone.

In Africa, a phone isn’t just a phone. It’s a bank, a shop, a TV, and a government portal. It’s a source of life for millions who couldn’t go a day without it. Africa’s PC market never really took off, which means mobile devices have become the main way they go online — with about 75% of internet traffic coming from phones.

The opportunities created by mobile devices are exemplified by the explosion of mobile payment systems and digital banking apps. These new services have dramatically expanded access to financial services while allowing emerging economies to chart an alternative path to the credit card-based systems that still dominate in most developed nations.

In China, the number of people who use mobile payments has been rapidly increasing — from only 35 percent in 2015 to over 67 percent in 2018. China’s WeChat Pay and Alipay have over 1 billion active users.

These examples show the scale and speed at which nations can harness technological developments to quickly improve financial access for large populations. Blockchain has the chance to ride on the shoulders of giants — mobile phones and digital payments — increasing access to even more efficient, secure, and innovative financial services.

Why Blockchain?

Imagine a world where your money is digital — your payments, income, invoices, and accounting all exist in one system and speak the same language. This system is highly transparent, efficient, and reliable. This is what the future of the blockchain-based financial world could look like. Let’s explore blockchain’s value propositions in this context.

Cost-Efficient Payment Systems

Blockchain transactions can compete with traditional payment methods in terms of scalability and cost, making it an attractive alternative to traditional systems. Payment giants like Mastercard and Visa are getting in on the action, showing that blockchain-enabled payments and assets provide a very real alternative to the traditional banking and payment systems we are all familiar with today.

Reduced Costs & Automated Accounting

Smart contracts are self-executing contracts native to the blockchain, with the rules directly written into code allowing for financial processes and manual decision-making to be automated by code. This automation can reduce the need for intermediaries and paperwork, enabling automated accounting practices, and efficient payments, and more accessible reporting. The ability to streamline processes can dramatically decrease costs associated with traditional financial systems, leading to reduced costs for everyone involved.

Enhanced Security & Data Protection

Blockchain’s decentralised and cryptographic nature provides a high level of security and accountability. The open and secure nature of the public blockchain ledger can protect financial data and transactions — providing transparency and accountability, fostering trust, and leading to a more secure and stable financial system.

Tax Transparency & Accountability

Tax transparency? Eyes start darting around the room. The transparent and immutable nature of blockchain can enhance accountability within the financial system. Imagine if the sales tax was coded into a smart-contract and whenever a transaction occurred, the sales tax was automatically collected and documented without any need for human intervention. We all want schools, hospitals, and roads. If this tax collection could be done fairly and efficiently — with full transparency of the collection and even expenditure of these taxes — this can help foster a more inclusive and trustworthy financial environment for everyone.

Blockchain Innovation & Open Financial Services

The financial controls and regulations that keep us safe are the same ones that can restrict access to these services. You probably heard stories about former dogecoin millionaires who had to swap their Lambo dreams for the bus to work. In the financial world, investing is limited to those whose human-ness is verified — and also to those whose risk profile is deemed acceptable.

These regulations exist for good reason, but the launch of internet-based financial services, meme-driven crypto projects, and gamified trading apps like Robinhood signal a new era of more accessible and inclusive financial services and products.

Blockchain’s democratic nature has already helped unlock access to financial services that were previously out of reach (or non-existent before). Digital assets like Bitcoin are gaining popularity, and it is clear that blockchain’s efficient and borderless promise makes it a catalyst for unlocking access to new types of services and investments.

Traditional Finance vs. Decentralised Finance (DeFi)

Decentralised finance (or DeFi) is blockchain’s second wave of financial innovation. Traditional asset exchanges in Amsterdam, New York, or London have provided a place for people to trade assets (like stocks, bonds, and commodities) for years. These exchanges have allowed people on the inside of the system to earn outsized returns — the likes of which have not been available to the marginalised and unbanked of society.

Okay, okay… Those who can’t verify their identity or open a bank account are probably more concerned about getting paid and putting food on the table than making crypto trading gainz. But once they have a place to receive and store their money, make payments — and eventually access credit and create businesses — they might just start making investments like those in the developed and financially inclusive world. Blockchain is already bringing forth innovative services that will be rising alongside the freshly banked populations of the world.

DeFi: Democratised Finance?

Decentralised crypto exchanges like the famous Uniswap protocol are great examples of the second wave of blockchain financial innovation known as DeFi (or Decentralised Finance). Uniswap is what’s known as a ‘Decentralised Exchange’ (or DEX) — and is a great example of the open-finance ethos that is native to the wider blockchain and Web3 movements.

Uniswap (and its many clones) uses a novel protocol design that allows anyone to contribute to and use the exchange — both by allowing anyone to trade digital crypto assets, but also by providing access for anyone to contribute funds to the protocol, essentially helping run, and share in the profits of, the exchange. This is a far cry from the secretive backroom dealings of Wall Street.

In May 2022, Uniswap surpassed $1 trillion in trading volume and hit roughly 3.9 million users. Blockchain-enabled financial services like Uniswap have found a role in the digital asset economy — replacing what would have been a centrally controlled behemoth institute with open blockchain ledgers (databases), digital cryptocurrencies, and smart contracts.

This asset exchange role had traditionally been reserved for Wall Street types who are subject to heavy regulation and oversight. This new type of digital asset exchange has shifted towards economically liberal and (sometimes degenerate) software developers. This means open access and fast-paced innovation.

While the Uniswap protocol started on the periphery of the internet, originally restricted to those with technical know-how, it is now a user-friendly, mobile-first app accessible to anyone with an internet-connected device (like those in Kenya earning and paying with their phones). This is a pioneering example of the types of inclusive financial products and services that blockchain is helping bring to market.

Interestingly Uniswap’s latest feature update includes traditional finance’s KYC… a big step in bringing traditional financial safety and identification measures into the blockchain finance world. Many would argue this is a necessary step in the mainstream adoption of blockchain-enabled financial services that are looking to disrupt and democratize traditional finance.

Banking On Blockchain

Financial inclusion requires a place to store your assets, reliable infrastructure, and financial services that allow people to build trust and access credit. Typical banking systems require cash, human-run retail stores, and large ATM networks to provide services effectively. These services have worked pretty well for most people in the system, but things are changing.

Developed and emerging economies are moving digital. When payments are made with digital currencies and sent and received from an internet-connected phone, the old ways start looking a bit redundant and expensive. Blockchain wallets allow people to store digital assets securely, crypto tokens like Bitcoin provide a way to store and exchange value, and financial services built on top allow people to access credit.

Blockchain-enabled virtual currencies have allowed the unbanked to buy items digitally and become part of systems that may have previously excluded them. Blockchain’s low-cost, secure, and transparent means of exchange makes it a very real rival to traditional banking services.

Blockchain banking services have been rising: from crypto banks like Nuri, bank & DeFi provider Nexo, and innovative DeFi protocols like 0x, Curve, and the aforementioned Uniswap. Popular crypto exchanges are facilitating so much trading volume and holding so many assets that they are becoming bank-like. This has led to some of them even branching out into traditional banking products such as issuing debit cards and credit facilities.

Alex Fork, CEO of pioneering blockchain finance company Humaniq, says:

“We believe this can help bring people out of poverty by giving them banking tools that can provide liquidity for entrepreneurial ventures via loans, investment, online work, and crypto-financing as well as create new opportunities in the digital economy, locally, nationally and internationally.”

Conclusion: Blockchain For Financial Inclusion

The old systems have done well for many — but we need new systems that include everyone in today’s global society. Blockchain can make payments cheaper and it can provide a verifiable proof of identity system that unlocks access to services that weren’t available (or simply didn’t exist before). It can help us save time and money, and potentially help alleviate poverty and democratise finance.

From Bitcoin, Worldcoin, and Uniswap — we have ample examples of innovative, democratic, and inclusive financial products that are arising thanks to technological revolutions like blockchain. But what about the challenges and criticisms?

We know George Orwell would say something about indomitable surveillance and control. We just hope our elected leaders and international institutes are capable and morally guided. We know scammers gonna scam. We can expect that as blockchain applications mature, education spreads, and regulations catch up — that the frequency of scams, security vulnerabilities, and opportunities for exploitation are reduced. Where there’s an opportunity to steal value, people will always try. Luckily, blockchains transparent and immutable transaction ledger make these crimes less appealing as more and more criminals are prosecuted.

Cash is king? Fiat money serves a purpose and will continue playing a role until the world’s monetary systems move fully digital. Cash is useful for payments and trade where the digital infrastructure or power grid isn’t reliable yet or when a layer of privacy is desired (something many won’t want to give up).

Perhaps we aren’t all fully ready to go 100% in on digital. We will embrace a hybrid of digital and traditional technologies while we stride towards financial inclusion. As we continue the digital transformation towards financial inclusion, we will be sure to see blockchain as a key part of the story.