How Blockchain is Driving Financial Inclusion

Financial transactions could soon be as straightforward as sending a text, thanks to the transformative power of blockchain technology. Both industry insiders and regulatory bodies are keenly exploring how blockchain can overhaul existing financial systems, and even replace traditional infrastructures that handle international payments and remittances.

Just consider the recent milestone in August 2023 when PayPal launched its own stablecoin, PayPal USD, pegged to the U.S. dollar. This move made them the first global payments company to take such a step. 

Today, billions are still without access to essential financial services, making financial inclusion more than just a catchphrase - it's a critical necessity. Blockchain is rising to the occasion, redefining our interactions with financial institutions and services in a meaningful way. 

We'll uncover how it's dismantling barriers set up by traditional financial institutions and creating new opportunities for those who've been left out of the financial equation. 

What Does Financial Inclusion Mean? 

Financial inclusion is a term that goes beyond just having a bank account. It's a holistic approach that aims to provide individuals with access to a full suite of financial tools they need to manage their financial lives effectively. 

According to the World Bank, a staggering 1.4 billion people globally are still without access to formal financial services. And let's be clear, reaching these underserved populations is no small feat. 

So, what exactly does financial inclusion entail? It's about creating financial systems that offer stability, resilience, and long-term financial security. It's not just about being able to deposit or withdraw money; it's about the beneficial usage of a range of financial products - be it banking, credit, insurance, or retirement savings - that can improve one's financial well-being. 

Financial inclusion is especially crucial for economic development in developing countries. It's about making financial services affordable and accessible, enabling individuals and communities to participate in economic growth. And here's where blockchain technology shines. With its potential to transform existing financial systems, blockchain is becoming a game-changer, particularly for those in developing nations. Countries like Vietnam, India, and Ukraine are already seeing rapid adoption of cryptocurrencies, signaling a shift towards more inclusive financial landscapes. 

As we strive to make existing financial systems more inclusive, it's imperative that we also focus on shaping the financial systems of the future to be inclusive right from the get-go. 

Limitations to Traditional Financial Systems 

The traditional financial systems, while sturdy and time-tested, come with certain limitations that are increasingly becoming apparent in the modern financial landscape. Here are some of the key limitations: 

Time-consuming and Difficult Loan Applications: 

Traditional financial institutions are known for their rigorous loan application processes. For small and medium-sized businesses (SMBs), these processes can be particularly draining due to their usually tight resources. The main issue here is the amount of time and paperwork required to qualify for a loan. 

Moreover, the approval times can also be quite lengthy, which isn’t ideal for SMBs in need of immediate funding. This bureaucratic red tape is one of the reasons why many are turning towards more modern, streamlined financial solutions like blockchain-based lending platforms. 

Weaknesses Exploited by Modern Fintech: 

Fintech companies have been capitalizing on the sluggish adaptation of traditional financial institutions to the digital revolution. Between 2013 and 2022, fintech bank assets grew by 105%, while traditional bank assets grew by 75%. 

In a 2015 study by Goldman Sachs, it was estimated that fintech could disrupt up to US$4.7 trillion of revenue that traditional financial services now make. 

Additionally, the fintech sector, which currently holds a mere 2% share of global financial services revenue, is estimated to reach $1.5 trillion in annual revenue by 2030, constituting almost 25% of all banking valuations worldwide. These statistics point to a significant shift in market dynamics and consumer preferences, which blockchain technology stands to benefit from significantly. 

Limitations of Traditional Credit Scoring: 

The traditional credit scoring model relies heavily on a narrow set of financial data. According to Experian, 19% of credit-eligible adults in the U.S. are left out of mainstream scoring systems, with 28 million considered credit invisible and another 21 million deemed unscorable due to insufficient credit history. 

This outdated model doesn’t account for various other financial indicators that could provide a more accurate representation of an individual’s creditworthiness. Blockchain, with its ability to securely and transparently handle diverse data, holds the potential to revolutionize credit scoring by creating more inclusive and accurate scoring models. 

Bank Failures: 

The recent bank failures in the first quarter of 2023 served as a stark reminder of the vulnerabilities inherent in the traditional financial system. These failures were the first significant test of the international resolution framework established post the Global Financial Crisis. The traditional financial system’s inability to adequately cope with such crises showcases the need for a more resilient, transparent, and efficient system. 

Inadequate Adaptation to Modern Demands: 

Traditional financial institutions and their infrastructures have recognized the need to evolve to accommodate the shift in customer demands, market conditions, and the speed and volume of transactions. The necessity for this change underscores the limitations of the current traditional systems in meeting modern financial demands. 

These limitations highlight the growing need for modernization and innovation within traditional financial systems to ensure they remain relevant and effective in the current fast-evolving financial landscape. 

How Blockchain and Cryptocurrency Promote Financial Inclusion 

Blockchain technology and cryptocurrencies like stablecoins, Bitcoin and altcoins hold the promise to transform the financial ecosystem, especially for individuals in emerging economies. 

Financial Inclusion Enabled by Cryptocurrencies 

Cryptocurrencies are more than just digital assets; they're financial game-changers. They're leveling the playing field, making it easier for people to participate in the global economy, regardless of their location or access to traditional banking systems. 

Remittances: Reducing Costs and Increasing Speed 

Traditional remittance services can be a hassle. They're often slow, expensive, and not always reliable. According to the World Bank, Remittances to low-and middle-income countries are set to grow by 1.4% to $656 billion in 2023. This comes after an 8% increase in 2022 and a 10.6% increase in 2021.  

Imagine the impact if we could make these transactions faster and more affordable. That's where cryptocurrencies come in.  

By leveraging blockchain technology, companies like BitPesa and Abra are already offering low-cost, speedy remittance services, especially in regions like Africa and Southeast Asia. 

Real-time and Cross-border Payments and Payroll 

Stablecoins, which are cryptocurrencies pegged to traditional currencies like the U.S. dollar, offer a safe haven for savings, especially in countries experiencing economic instability or currency depreciation. With a market capitalization exceeding $123 billion as of October 2023, stablecoins are becoming a go-to solution for people in countries like Turkey, India, Ghana, Nigeria, and Brazil. 

Traditional payment systems are often inadequate due to their slow processing times and dependence on multiple middlemen, resulting in delayed transfers and high transaction fees. Stablecoins offer a solution by enabling quick, or almost immediate, fund settlement and transfers, bridging any geographical gaps.  

This capability is a boon for cross-border payments, which are usually burdened with high fees, averaging 6.24% of the transferred funds globally, and long processing times stretching over several days. Moreover, conventional cross-border payment systems often remain out of reach for individuals in underserved areas or those without a traditional bank account.  

Operating on blockchain networks, stablecoins provide an open and accessible platform for anyone with internet access. This is particularly beneficial for those financially marginalized by the limitations of traditional systems. 

Digital Verification: Enabling Personal Empowerment Through Secure Identification 

The absence of proper identification is a major roadblock to financial inclusion, especially in developing nations. Imagine not being able to open a bank account, secure a loan, or even cast a vote because you lack formal ID. It's a reality for millions of people. 

Blockchain technology offers a groundbreaking solution to this issue by establishing secure, unforgeable digital identities. Platforms like uPort and Civic are already harnessing the decentralized power of blockchain to manage digital IDs, giving people a portable and verifiable form of identification. This not only opens doors to financial services but also allows participation in the formal economy. 

Now, let's talk about public benefits. Traditional identity verification methods for these programs are often riddled with inefficiencies, errors, and delays. Plus, there's the issue of people lacking official IDs or having outdated records, making it even harder for them to access essential services. 

Blockchain-based identity systems could be the game-changer here. They can securely store personal information, making it easier and more reliable to verify eligibility for public benefits, all while safeguarding user privacy. Imagine streamlining the Know Your Customer (KYC) process and enrollment for various federal and state benefits through blockchain. Smart contracts could even be employed to tackle real-time assessments for eligibility criteria like income, employment status, and child custody. 

However, implementing blockchain in public benefits isn't a plug-and-play affair. It would require the expertise of administrators and policymakers to ensure these tools meet the intricate demands of public benefits policy and offer adequate protections, especially for the most financially vulnerable populations. 

Wrapping Up 

Cryptocurrencies and blockchain technology hold the promise of reshaping financial access in developing nations, offering secure, affordable, and readily available financial services to underserved communities. From making remittances more cost-effective to broadening the scope of banking services and safeguarding digital identities, the applications of blockchain in enhancing financial inclusion are both varied and impactful. 

That said, it's crucial to understand that tech solutions alone can't tackle every financial inclusion challenge. A collective approach involving governments, organizations, and the private sector is vital for amplifying the benefits of blockchain and cryptocurrencies. By focusing on financial education, boosting digital literacy, and creating a conducive regulatory environment, we can ensure that these technologies serve as powerful tools for financial empowerment and sustainable growth in developing nations.