Cryptocurrency – Banking the Unbanked is now closer than ever
Banking the poorest 40% household in developing countries might now be possible through the adoption of cryptocurrency. This article was first published at Cryptartica Blog on December 2017.
The cryptocurrency community was currently caught in a heated debate whether Bitcoin is a store of value or a medium of exchange. I believe in medium of exchange first, and store of value as its secondary effect. Why? Because a huge economic value of banking the unbanked – approximately valued at $380 billion – will be missed, if cryptocurrency is to mainly become a store of value [3].
This article will explain the history of the term ‘bank the unbanked’, assess the opportunity related to the phenomenon, and finally, suggest action-of-plan for Bitcoin Cash to successfully promote financial inclusion whilst capturing the $380 billion opportunity in a near future.
What does banking the unbanked actually mean?
Banking the unbanked simply means the action to include the unbanked into a financial system, and to enable them to fully participate in economic activities. The unbanked or the underbanked is defined as people who do not have a bank account, either through a financial institution or through a mobile money provider. As of 2017, there are still 2 billion adults – or 38% of the global population – that remain unbanked. Out of those unbanked, only 4% said that they do not need financial services. Yet, the most alarming fact is that more than half of the adults within the poorest 40% household in developing countries remain unbanked.
The benefits of banking the unbanked go beyond the individuals themselves. Greater access to financial services help reduce inequality, increase standard of living, and accelerate economic growth
Furthermore, moving cash-based payments to digital is especially important for developing countries. It increases speed, security, and transparency of payments between senders and receivers; it is also a first entry point into an inclusive financial system – allowing the participants to increase savings and economic productivity.
Although the unbanked was not explicitly mentioned in the Bitcoin whitepaper, Satoshi clearly stated that financial inclusion is the vision for Bitcoin. Bitcoin was to become a trustless and decentralized electronic cash for anyone to transact without payment uncertainties and control from financial institutions. This is why the term “bank the unbanked” has become a mission for some of cryptocurrency pioneers.
Opportunity for Bitcoin Cash, following development over the years
From 2011 to 2014, the number of the unbanked has dropped by 20% to 2 billion adults. This number was driven by a growth in account penetration and innovation in technology – such as mobile banking. South Asia, Latin America, and Sub-Saharan Africa experience the highest growth in account ownership, but the region that is most notable affected is Sub-Saharan Africa. Sub-Saharan Africa experienced the highest growth in mobile banking: almost a third of account holders have mobile money account, and 5% of these account holders only have mobile banking. From financial inclusion of lower income households to easier and more secure cross-border payments and remittances, the impact of mobile banking on the lives of people in Sub-Saharan Africa is irrefutably enormous.
Source: Global Findex Database (2014)
Nonetheless, while mobile banking does not require account holders to register under a financial institution, users still need to pay and rely on centralized providers for their services. This is where Bitcoin Cash can be a game changer. Staying true to the vision of Bitcoin, Bitcoin Cash is a decentralized electronic cash that could be seamlessly used peer-to-peer transactions. A decentralized system gives full control to users – essentially anyone who joins the network, without the scrutiny from any governing institutions.
Most of the unbanked remain so due to the barriers of banking enforced by financial institutions, such as high joining costs and cumbersome documentation requirements. The financial institutions themselves, have no economic incentives to lower its barriers, due to their own economic interests. Globally, we thus see formal economic systems that exclude those who could benefit most from financial inclusion, especially in developing countries. The 2 billion unbanked, the 460 million who currently have dormant accounts, and the 50 million in Sub-Saharan Africa who only have mobile banking clearly reflect the failures of financial institutions to establish suitable services.
Thus, within a global economy where exclusion severely penalizes one’s opportunity, Bitcoin Cash – even more than mobile banking – provides a leapfrog opportunity for the unbanked to join in quickly, painlessly, and securely.
Bitcoin Cash to penetrate developing economies
Financial inclusion can be measured and broken down into the inclusion in two main financial activities: Account Ownership and Payment. We analyse the key obstacles that the unbanked face during each activity in order to suggest executable action-of-plan and entry opportunity for Bitcoin Cash.
Account Ownership
Source: Let’s Talk Payment (2017)
While account ownership has increased to 700 million since 2011, 38% of adults – or 2 billion adults – still remain unbanked worldwide today. Additionally, although account ownership has increased, 460 million accounts are dormant. Accounts are considered dormant if it has no deposit or withdrawal in the past 12 months. In some countries, dormant accounts could account for the majority of the newly banked. For example, out of the new 125 million accounts opened in India in 2015, 72% of the accounts show zero balances.
Source: Global Findex Database (2014)
400 million unbanked receive payments solely in cash, and more than 370 million unbanked in developing countries send or receive domestic remittances only in cash. Furthermore, 32% of adults reported having received at least one wage payment from an employer within the past year globally. On high-income OECD economics, only about 6% reported receiving wages in cash, while 59% of those in developing economics reported of having done so. Among those receiving payments into an account, the overwhelming majority indicated that they use accounts for cash management, safe storage, and monetary transfer purposes. They choose to withdraw and transfer their money over time as needed, as opposed to choosing immediate and complete withdrawal.
These numbers reflect that the unbanked economic activities are heavily limited by physical interactions to transfer cash. According to surveys of 150,000 unbanked adults in 40 countries, the top reasons for the unbanked and dormant accounts are:
1. Unaffordable fee to open and maintain an account (59%)
2. Cumbersome Documentation Requirements (18%)
3. High fixed transaction costs for money transfer (23%)
4. Lack of trust in financial institutions (30%)
5. No need for an account as relatives already have one (30%)
6. Distance to financial institutions (27%)
Entry Points for Bitcoin Cash
Financial institutions are unwilling to take the risks to serve the unbanked. While mobile money transfer offers a better alternative than financial institutions, it needs physical over-the-counter venues to operate; users need to set-up and charge their accounts in-person. This is a serious barrier to usage for 27% of the unbanked who consider proximity of services as a priority. Moreover, mobile money transfer does not offer a safer alternative to store a medium of exchange, as users are required to carry cash around. Last but not least, the fixed fee imposed by mobile money transfer could take a high percentage of the transfer for smaller value transactions.
Thus, Bitcoin Cash could offer financial inclusion to the unbanked by allowing for:
1. Easy access to P2P transactions.
No cumbersome documentation or prior infrastructure is required to receive Bitcoin Cash. The only requirement is for a user to have a Bitcoin Cash wallet, which could be easily be stored within anything from a piece of paper to a mobile device. To send Bitcoin Cash however, an internet connection is needed – for now. While internet connection might not be accessible to some of the unbanked, Bitcoin Cash is a more readily accessible solution than financial institutions or mobile money transfer. Internet penetration steadily grows by 3% since year 2000, and as of today, there is 3.8 billion internet users. There is a bigger possibility of internet reaching the unbanked than financial institutions.
2. Cheap money transfers.
With low transaction fees and fast confirmation, Bitcoin Cash essentially eliminates all the major obstacles that unbanked face for remittance. As a comparison, Bitcoin Cash can easily accommodate transactions less than $1.00 for no fee as shown below.
Source: Blockchair (2017)
Meanwhile, the transaction fee of mobile money transfers for smaller transaction could be as high as 75% of total transaction amount. Below is the tariff table for M-Pesa, the largest mobile money transfer service in Kenya and Tanzania.
3. Secure storage of value.
Bitcoin Cash could be easily and safely stored in a cold storage. As it is run within a decentralised network, anyone that owns Bitcoin Cash is in control of their money – as long as they hold it in their own wallet.
Action of Plan
1. Education is an important part of mass adoption, especially if we are to on-board the unbanked. We need to educate them on how Bitcoin Cash works and the potential fraud issues that could occur when adopting the technology.
2. Abstract bitcoin, making it easier for the masses to grasp (this does not mean offchain).
3. Develop applications that are adapted [5] to local needs and technology limitations of the deployment area.
4. Make entry points into Bitcoin easy, and get merchants on board, in order to make it less appealing to leave.
References
[1] Central Intelligence Agency (CIA)., 2017. The World Factbook: Internet Users
[2] Demirguc-Kunt, A., Klapper, L., Singer, D. & Van Oudheusden, P., 2014. The Global Findex Database 2014 Measuring Financial Inclusion around the World, Washington: World Bank.
[3] Raconteur, 2017. Finance: Banking the Unbanked
[4] Stats, I. L., 2017. Internet Users Count
[5] Triki, T. & Faye, I., 2013. Financial Inclusion in Africa, Ghana: African Development Bank (AfDB)
