Banking the Unbanked
Blockchain technology is changing how people, governments, companies, and other institutions think about banking and financial services. As 1.4 billion adults globally remain unbanked – representing almost one-quarter of our world’s population – blockchain technology is on the rise to become an alternative solution for people to participate in our global economy.
“Unbanked” individuals are defined as those who do not have access to traditional banking services such as savings and checking accounts, loans, and other financial products. Currently, most of the unbanked population is concentrated in developing countries, particularly in Sub-Sahara Africa and Asia, with China and Pakistan holding the largest population of unbanked citizens. That is not to say that developed nations don’t experience their fair share of people without traditional bank accounts; in the U.S. over 7 million households find themselves unbanked.
The most common reasons people do not open a bank account are:
- Not having capital
- High or unpredictable fees
- Lack of access to financial institutions
- Lack of trust.
This is a significant hindrance to economic growth and development, as individuals without access to essential financial services cannot spend, save, invest, and as a result, start businesses.
Decentralization paving the way for the unbanked
Blockchain technology solves the above-mentioned problems by offering decentralized financial (DeFi) services accessible to almost anyone with a smartphone and an internet connection. Unlike traditional financial services, which act as gatekeepers to approve credit lines and essentially allow people to open accounts, decentralized financial services operate via a peer-to-peer (P2P) model, with a non-intermediary system governed by public, transparent, and secure networks. Even though DeFi has become a billion-dollar industry, it is estimated to grow from $9.4 billion in 2021 to $70.3 billion in 2027, at a CAGR of 39.5% during the forecasted period – we are still in the early stages of reaching mass adoption.
Championing the road to mass adoption are all the projects that came to fruition in the last year. For example, DeFi applications such as Aave and Compound allow individuals to earn interest on their crypto holdings, while others offer loans. These services can be accessed with a smartphone and an internet connection, making it possible for individuals who were previously unbanked to access financial services without having to go through traditional financial institutions. Similarly, Jambo, a cryptocurrency project based in Africa, aims to help unbanked people access financial services using blockchain technology. The project provides services at lower costs and financial education resources to help individuals take control of their finances and better manage their finances.
The rapid adoption of cryptocurrencies, specifically altcoins, is another way blockchain technology is “banking the unbanked.” For example, altcoins like Ethereum also allow peer-to-peer transactions, storage in digital wallets, and global accessibility. Individuals can therefore participate in financial systems by sending and receiving forms of payments. According to a study done by Chainanalysis, global adoption grew by over 2300% in Q2 2021.
The reasons for increased cryptocurrency adoption in emerging markets, specifically in Nigeria, Kenya, El Salvador, and Vietnam, were the need to preserve savings due to currency devaluation, sending and receiving remittances, and carrying out business transactions. Comparatively, adoption in Western Europe, Eastern Asia, and North America was powered by institutional investment.
All roads lead to a decentralized financial system
In conclusion, blockchain technology can revolutionize how financial services are provided and make it possible to reach previously unbanked individuals. With its ability to provide secure, decentralized financial services, blockchain technology has the potential to help promote economic growth and financial inclusion around the world.