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Man holds up his mobile phone showing a M-Pesa mobile money transaction page for the photographer at an open air market in Kibera in Kenyas capital Nairobi
Images: Man holds up his mobile phone showing a M-Pesa mobile money transaction page for the photographer at an open air market in Kibera in Kenyas capital Nairobi. REUTERS/Noor Khamis

Can Blockchain Help the Unbanked World?

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Images: Man holds up his mobile phone showing a M-Pesa mobile money transaction page for the photographer at an open air market in Kibera in Kenyas capital Nairobi. REUTERS/Noor Khamis

Bill Gates and Warren Buffet, two of the world’s richest people, may have become the latest in a long line of critics to attack bitcoin, but the technology that sits behind the cryptocurrency could help lift some of the world’s poorest out of poverty.

The technology is blockchain, a digital decentralized ledger where economic transactions between two parties can be recorded publicly and chronologically that is visible to anyone that may have access to the system. Originally designed to support bitcoin, potential new uses for the technology are emerging in the developing world where vast swathes of the population are locked out of the financial system.

Today, around 1.7 billion adults do not have access to financial services such as a simple bank account, according to the latest estimate provided by the World Bank. Virtually all of these so-called unbanked people reside in developing economies and around half belong to the poorest 40%.

Game Changer

“Blockchain holds the promise of potentially being a game changer for these countries,” said Dr Garrick Hileman,  co-founder of Mosaic and a research associate at the University of Cambridge. “Many people that are currently shut out of the financial system could use cryptocurrency.”

For many of the lower-income countries, the problems start with poor infrastructure where countries have suffered from institutions de-risking after the global financial crisis. The reasons for people not having a savings account, according to the World Bank, range from having too little money, high costs, distance to travel, a lack of documentation or a distrust in the financial system.

Proponents of cryptocurrency, including some within institutions like the International Finance Corporation, or IFC, believe that blockchain could potentially address all of those concerns.

Kenya’s Case Study

Financial inclusion has been a long standing development goal of the World Bank, because of the direct correlation between people having access to savings and payments services and a reduction in poverty. Research funded by the Bill and Melinda Gates Foundation in 2016 found that mobile money services, for example, have lifted 194,000 people in Kenya out of extreme poverty.

Mobile payment companies have also already helped reduce the number of unbanked people in countries like China where there is a high penetration of smartphone use. Between 2014 and 2017, 515 million adults around the world have opened a bank account via a mobile money provider, according to the Global Findex database.

So Why Do We Need Blockchain?

The IFC says mobile-based services across the developed world provide an “easy avenue” for a blockchain-based system to extend its services. That also applies to lower income countries, where mobile penetration is extremely high.

“Blockchain could be a game changer for financial inclusion,” said James Strickland, CEO of Veridium, a technology security firm.  “It should enhance what has already occurred within developing economies, and has the potential to expedite the process in three to five-year’s time.”

Money Spinner

Global payments and trade finance are two areas that may be ripe for disruption in the developed world because of the high transaction and verification costs. Blockchain, according to the IFC, could reduce those costs, improve the speed of transactions and help with transparency.

Remittances in particular are a key source of income for millions of families in developing economies, yet the associated fees means that it’s also a huge money spinner for the companies such as Western Union as well as banks. The fees, a percentage of the amount sent, range from 5.2% in South Asia to 9.4% in Sub-Saharan Africa. If money is transferred via a bank, the average cost is more than 10%.

The World Bank estimates that if fees were reduced by at least 5 percentage points it could save up to $16 billion a year.

“It doesn’t make any sense to me that sending money should be any more expensive than sending an email,’’ said Dr Hileman.  Blockchain “potentially offers lower cost and faster transfers.”

Other potential benefits could include a reduction in paperwork. There is no formal application process to start using cryptocurrency nor is there a requirement to have a financial history, according to Hileman. Setting aside the obvious regulatory concerns, it means that in theory those who lack the appropriate documentation to open a traditional bank account, could use the alternative financial system instead.

No Censorship

For Dr Hileman, the most compelling reason to roll out blockchain in developing countries is because the technology is permissionless, meaning that much like the internet, there is no “gate keeper” to prevent a person from participating and there is no censorship.

“It’s a really important part of the story,” he said. “The permissionless nature of blockchain can be very powerful for people who are quite restricted in their own countries. It can give people an alternative means to save and to try and protect their money.”

Despite predictions that blockchain will become the “beating heart” of the global financial system, not everyone is as bullish when it comes developing economies. The technology is still at an early stage and there are a number of potential setbacks that range from technological to regulatory.

Ned Naylor-Leyland, a fund manager at Old Mutual Global Investors in London who owns some bitcoin, says blockchain won’t have as big an impact on the developing world as people might think.

“The mobile payment system is more practical than people realize,” he said. “Blockchain is most likely to resolve existing issues in developed nation financial services, in my opinion, before rolling out elsewhere.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.