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As we think about financial inclusion this week, it’s important to remember that achieving global financial inclusion is a huge undertaking that will have an enormous positive social impact on the world.
But how will we get there? One way is by using blockchain technology, which has the potential to reduce poverty, boost prosperity, and make the world a more equitable place.
First, let me define financial inclusion. As the World Bank puts it, “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs? – ?transactions, payments, savings, credit and insurance? – ?delivered in a responsible and sustainable way.”
In the US alone, a 2015 FDIC survey estimated that 9 million households were unbanked and 24.5 million were underbanked (meaning they have access to a checking or savings account but resort to using alternative financial products because they cannot qualify for traditional financial instruments). And globally, the World Bank estimated in 2017 that approximately 1.7 billion people are unbanked.
In addition to not having access to a banking account, the unbanked are at higher risk of having their money stolen; have a more difficult time accessing wealth; and have less access to bank services such as loans, mortgages, and free check cashing.
Our bank accounts are part of our identities, a way for central institutions like the government and other businesses to check our financial reliability and citizenship status. On top of being unbanked, many struggle with saving enough money to purchase a government ID, paying for medical care, or accessing credit.
What does blockchain have to do with the unbanked? Blockchain has already made it easier for people to make international payments. Many are already dreaming of ways blockchain can be used to support the unbanked.
Specifically, I see blockchain providing three key elements to helping the unbanked: mobile access to decentralized financial tools; identity protection and access to credit and insurance.
Mobile access to a broad range of decentralized financial tools
The number of web users passed 4 billion this year, with over 51 percent of web traffic occurring over mobile. That’s over half of the world’s population that now has access to the internet, and yet there are still those without access to financial services.
As users gain access to the internet with more affordable mobile devices, it’s important to make sure that the financial services they need are also available on mobile devices and not just on desktop computers.
Mobile blockchain browsers like Trust Wallet and Cipher Browser and the HTC Exodus phone (which is blockchain and dApp enabled) are making progress on mobile solutions to interact with the blockchain, but we have a long way to go before everyone in the world has access to the financial tools they need to make the world a more equal place.
Identity is simply attaching a unique identifier to an individual which can then be used to track their movements, history, and finances. This can, theoretically, be done on the blockchain. In the future, we think it’s possible that many people will use their unique cryptographically secure key on the blockchain to identify themselves and their history. Instead of government issued ID numbers, you simply have a cryptographic key. No matter where you are in the world, this can be used to identify you and your history.
There are a few organizations that are beginning to work on this issue. There’s the ID2020 Alliance, which is working to make digital identity a reality through technology, the Jordanian refugee camp that’s operated entirely on the blockchain, and Civic, which is working to create a low cost identity verification option.
The blockchain and your own cryptographic hash could better protect your personal identity than a unique password on each website you visit. In 2016 alone, 15.4 million US consumers lost a total of $16 billion due to hacking. With digital identities on the blockchain, there’s no more changing passwords, credit cards, and email addresses after a business gets hacked.
This future will take time to realize and receive recognition by the wider market, but the advantages of identity protection on the blockchain will save consumers money, give them more peace of mind, and protect businesses from the loss of consumer respect when breaches do happen.
Access to credit and insurance
With the ease of identity checks comes the ability to examine someone’s financial history and offer them credit. One of the issues faced by the unbanked is their lack of access to credit because they’ve never held a bank account and are therefore unrecognized by financial institutions.
Someone who is unbanked and deals only in cash may take out loans from other vendors and reliably pay back those loans, but the financial establishment can’t track these transactions. If all transactions are completed on the blockchain with a person’s unique cryptographic key tied to their identity, tracking their financial history isn’t tied to establishment financial services but to the individual person.
The ability to track a person’s financial history makes it easier to assess their creditworthiness, even if they don’t have access to a bank account. Using a decentralized digital ledger, blockchain maintains a record of all the transactions a person makes, creating a digital credit history that can then be used by financial institutions to assess that person’s credit.
One blockchain company that’s already taken the dive into this space is Bloom. This company offers users the ability to create their own cryptographic key that will be tied to their identity. In addition, Bloom will assess their financial behavior and assign them a blockchain credit score.
Blockchain might also be able to disrupt and improve the insurance industry. Potential benefits include improved insurance fraud detection and protection, more secure sharing of medical records, easier valuation of property for insurance and damage payments, and equal access to insurance products.
Much of the underbanked population has limited access to insurance, which can leave them even more vulnerable if they find themselves in a health crisis or other emergency. For the underbanked, a natural disaster can signal the loss of their home, wealth, and ability to improve their lives. They’re left with no recourse towards rebuilding their lives because insurance was inaccessible to them.
Blockchain technology has the potential to change this. Between the ability to prove their identity and build a credit history on the blockchain without accessing legacy financial services, the underbanked would also have easier access to financial products such as home, life, and health insurance. The blockchain could also create risk-pooling products for collaborative saving and insurance.
The financially inclusive world that we envision isn’t yet a reality, but by using blockchain technology to implement identity protection, access to credit, and improving insurance standards, we can reduce the number of people who are financially underserved around the world.