In 2014, the Access to Financial Service Survey revealed that 36.9 million of Nigerian adults representing 39.5 percent of the adult population are excluded from financial services. In the 2016 survey, a further decline was recorded, with 40.1 million Nigerian adults, representing 41.6 percent of the adult population being financially excluded.
Financial inclusion, a social phenomenon that affects more than 2 billion individuals globally, is defined as the lack of access to financial services using the bank account as a proxy. Since the evolution of mobile communications systems and the high penetration rates amongst the underserved, financial inclusion rates have grown with the evolution of mobile money systems. Hence, as opposed to the ownership of a bank account, individuals that own and operate mobile wallets are also considered as financially included.
Financial Inclusion, the case for Blockchain
A major deterrent for many unbanked people is the cost of using the formal financial systems. However, several reports and applications of blockchain have suggested that transaction costs for banks can be lowered significantly, invariably incentivizing them to offer potential customers more reasons to be banked.
A widely quoted estimate from a Santander InnoVentures report predicts that the Blockchain could save global banks $15 to $20 billion per year by 2022 and this would stem from its ability to enable banks to streamline processes around reconciliation—that is, the labor-intensive procedure banks go through with their customers, trading partners, and securities exchanges.
The underbanked individuals nonetheless do conduct transactions, typically using cash. Their reluctance to using formal financial services offered by incumbent financial institutions such as banks include cost of account maintenance and transactions, distance to financial service points (FSPs), lack of trust in financial institutions, inability to meet the requirements of the financial institutions etc. Nonetheless, these underserved utilize informal and more expensive financial service providers for group savings and credit. Another inclusion constraint is their lack of government-issued or recognized identity documents required for mandatory Know Your Customer (KYC) or Customer Due Diligence (CDD) protocols. This is often the case with displaced persons (refugees) in temporary camps/settlements.
Finally, cash-based transactions that leave no footprint dominate the commercial world of under-banked and unbanked individuals and small businesses. The unrecorded nature of cash transactions reduces access to affordable credit from formal institutions that rely on risk-based credit scoring. The subsequent paragraphs illustrate blockchain-based applications that address these financial inclusion issues.
Blockchain and transactions
Remittances or Person-To-Person (P2P) payments are one of the most common adoptions of payment systems with monetary flow correlating with economic trends. For example, international inbound remittances from Europe and America as well as domestic remittances from urban to rural locations. In the case of international remittances or cross-border payments, the movement of funds through the banking infrastructure lengthens settlement time and cost. Domestic payments may also incur high costs, especially in the case of low-value transactions.
The use of blockchain-based payments systems such as Stellar’s and Oradian’s open source payments platform reduces the cost of remittances, improves the speed of settlement, eliminates errors and ensures the remittance process is secure and transparent. Several international remittance services are beginning integrate or switch completely to blockchain technologies for their operations .
Blockchain and identity
The lack of identity documentation has been one of the underlying inhibitors of financial inclusion.In Nigeria, while know your customer (KYC) rules have been reviewed and tiered to accommodate the informal sector, physical forms of identity are still required for the Bank Verification Numbering (BVN) scheme and mobile phone registration. These requirements are still a challenge for the informal sector, as they mostly have no valid form of physical identification relying more on informal means of identifications i.e. belonging to a community, third party attestations etc.
In order to truly bring financial inclusion to the broader base of the unbanked, it is important that the process of obtaining identification be made significantly easier and more adaptable to the lifestyle of the unbanked – this is an area that the blockchain can be of immense help.
Blockchain enables digital identities – electronic identities used by online properties which are more accessible. In an online environment, digital identities can either be independent (per online property) or shared (community-oriented). Using blockchain, digital identities can be created for individuals and accessible by pre-registered individuals or entities. BanQu, is one such application that records an unlimited number of transactions and key life events of diverse types (economic, health, education, etc.) on a blockchain and thus providing the financially excluded portable, secure digital economic identities. BanQu provides registered financial institutions access to the profiles for KYC compliance and other applications. The acceptability and acceptance of these profiles by third parties increases their value.
Blockchain and credit history
The application of digital identities to build credit risk profiles and enhance access to credit for the financially excluded is another use case of blockchain technology to addressing access to credit, another dimension of financial inclusion. For example, BanQu supports the record and validation of financial histories that can subsequently be used for credit scoring.
In conclusion, while financial inclusion remains a global agenda, constraints of access to formal financial services for the poor such as high transaction costs, lack of identity documentation and the likes are gradually being addressed using blockchain-based technology services. This distributed, decentralized and secure technology combined with product and service implementations developed by emerging financial technology (FinTech) institutions offer significant benefits to provide affordable financial services for all.
Contributors to this article are; Dr. Olayinka David-West, Lagos Business School, and Tunde Ladipo, a Blockchain enthusiast.
CALEB OJEWALE
