The Race for Financial Inclusion is Speeding Up, But Is the Foundation Solid?
By John Powers, Co-founder and Chief Strategy Officer of Findora, a cryptographically advanced public blockchain for building financial applications, and former head of Stanford’s $25 billion endowment fund.
Imagine losing the ease of cashless payments, medical insurance, access to loans, even the ability to conveniently receive wages, pay bills, or save money. Some 1.7 billion people worldwide are excluded from formal financial services: no access to savings, payments, insurance, or credit. In developing economies across the world, 37% of adults don’t even have a bank account, primarily due to inaccessibility by cost or distance.
Exclusion from the financial system is crippling. Affecting women and poor households to a greater degree, many are forced to operate almost entirely through a cash economy. Wealth is saved in physical assets like jewelry or livestock that can be lost or stolen and lose value over time.
Sending money without a bank account requires couriers or traditional remittance services, which are expensive, insecure and slow. Borrowing money in an emergency requires resorting to alternative money lenders who charge predatorily high interest rates.
Altogether, this makes it extraordinarily difficult for the unbanked to escape the cycle of poverty.
Financial exclusion is a complex and thorny problem to solve. There’s no one-size-fits-all solution to this fundamental challenge that encompasses a diverse range of economic, political, and cultural contexts. Nonetheless, the unprecedented opportunity offered by the ubiquity of mobile phones and internet access in recent years is a powerful tool.
Financial Services for the Poor, funded by The Bill & Melinda Gates Foundation, names two of the most crucial catalysts for driving inclusion: developing interoperable digital payment systems and supporting tailored regional and national strategies. This means expanding access for customers to buy, sell, and remit to any other customer regardless of financial service provider, and encouraging regional markets to determine the financial products and channels that are most effective for the particular needs of their economies and citizens.
Today’s global financial infrastructure is incapable of stepping up to this challenge. In fact, the so called “global financial infrastructure” does not really exist. Traditional financial institutions hold various fractions of consumer data in isolated data silos that cannot directly communicate. They rely on slow and costly intermediaries for transactions. The services they provide are laden with minimum requirements and hidden fees that are cost prohibitive to the poor. The innovation, interoperability and access necessary to bring about financial inclusion are sorely lacking.
This is where blockchain technology can step in. A performant confidential global blockchain would be able to serve as the general ledger for all financial transactions. Sensitive financial information would be kept secure and private through cryptographic technology, while one common financial ledger would eliminate the need for and costs associated with transaction intermediaries. Zero knowledge proofs would still allow auditability and regulatory compliance even with complete data encryption.
Interoperability, confidentiality, and auditability: these attributes are the foundation for a truly global financial infrastructure.
These properties also substantially lower the costs and complexity of digital financial services and payment platforms. Reducing the barrier to entry will allow upstarts and newcomers to join the space and compete with traditional financial organizations to build products for banking, remittances, lending, bill payment and insurance.
Not only will costs for financial services drop across the board, an explosion of competing services will eventually reach the last-mile customers.
The end result: even a poor rural farmer will be able to store, access and transfer his financial assets digitally from his mobile device to anywhere else in the world.
This may sound too good to be true, but large strides in financial inclusion have already come from unlikely sources. Telecom giant Vodafone’s M-PESA has found resounding success in Kenya. Founded in 2007, it has increased the proportion of mobile banking access to 93%.
Also offering remittance, bill payment, microfinancing, and mobile top-off services, the total transaction amount passing through the network is equivalent to 44% of the total Kenyan GDP.
Social media and e-commerce titans Alibaba and Wechat created Alipay and WeChat Pay, which have also transformed the payments landscape in China. Customers of these nonbank digital payment providers can transfer money into their e-wallets and make payments at no cost, thanks to their integration into the existing e-commerce and social platforms.
Even street vendors and taxicabs easily accept payments via QR codes on mobile devices.
While impressive, these small revolutions in financial inclusion are just a start. M-PESA and Alipay’s customers are still limited to the confines of their respective financial service providers. Our financial system must systematically empower new entrants to the financial services space and build a global financial infrastructure with access, interoperability, and inclusion in mind.
Without a complete overhaul, initiatives to bank the unbanked will be piecemeal at best. In the quest for universal financial inclusion, the creation of a robust global financial platform is at the heart of long-term success.