Stop saying you want to bank the unbanked
If there’s one phrase that deserves to be left behind with the rest of 2020, it’s “banking the unbanked”. It has become a constant talking point among cryptocurrency advocates who argue that blockchain technology will solve the problem of insufficient financial access among the poorest populations. “Unbanked” and “unbanked” are concise descriptors. They describe a real set of circumstances that would concern anyone who wants to reduce poverty. The sentiment behind this popular language is well intentioned. But it is inappropriate. Uncontrolled assumptions about financial inclusion are pushing some government and business leaders to pursue strategies that can give the poorest people access to new technologies without helping them generate the income needed to improve their financial situation. With the increasing public and private attention to digital currencies, whether in the context of decentralized protocols Where central banksThe strategy of banking the unbanked through financial technology deserves further consideration.
The main hypothesis to be verified around the banking of the unbanked concerns the cause of the unbanked status of people. It is assumed that those who lack financial services first and foremost need a better means of accessing them. Technology is seen as an ideal solution. But in the Philippines, a country with a high proportion of unbanked people (just 23% of adult Filipinos have a bank account), a 2017 central bank study on financial inclusion highlighted the main issue around financial access. Of all those surveyed who did not have a bank account, the majority (60%) said the main reason was that they simply did not have enough money. Twenty-one percent said they felt they didn’t need a bank account. Eighteen percent said they did not have the proper documents to open a bank account. Critics of anti-money laundering regulations and know-your-customer requirements often cite the latter reason as the main problem facing the unbanked. While this is clearly a barrier for some, it does not appear to be the main problem to be addressed in obtaining financial services.
This hierarchy of factors is not unknown in the international development community. A 2015 World Bank Report The Global Financial Inclusion Review noted that 59 percent of respondents cited lack of money as the main reason for not having a bank account. Interestingly, a second reason was that people depended on a family member who already had an account. This indicates that cultural and family factors greatly influence whether or not you want or can get banking services.
People mainly lack financial services because they lack income and not the other way around. So, in order to effectively bank the unbanked, the key problem to be addressed is how to help people generate more income. This all-important factor is overlooked by many technologists, because when it comes to helping people get rich, there is no single app for it.
Much of the conversation about how fintech tools could help global financial inclusion centers on reducing the high cost of remittances. It’s a seemingly lofty goal, but it’s really a first world problem. Money transfer fees charged by money-service companies certainly eat away at the funds that emigrants from high-income countries send to their unbanked relatives in their country. But alleviating this painful cross-border point does not add much to the beneficiary’s local earning capacity. And although many cryptocurrency advocates argue that cryptocurrencies can greatly reduce friction of remittances, there isn’t much commercial evidence yet that crypto remittances are in high demand. In Africa, some leading cryptocurrency companies that was trying to capture the remittances market quickly pivoted, moving either to Other payment methods in addition to crypto or focusing more on business-to-business transactions where digital currencies are used to settle cross-border payments. None of this negates the importance of remittances to Africa, Asia and Latin America. However, it shows that they shouldn’t let their penchant for innovative technology and its theoretical advantages guide their overall business strategy.
I learned this directly a few years ago. Once, an associate of mine who worked in an East African country with a large unbanked population and pervasive government corruption approached me for help. The person was looking for ways to bring transparency and accountability to the spending of donor funds. I thought maybe a blockchain solution could help. So I met an entrepreneur with years of experience working in Africa, both in conventional finance and with cryptocurrencies. When I explained the problem, the entrepreneur remarked, “Why don’t they just focus on using mobile money instead of crypto? It would be so much easier. “I was a little embarrassed. In seeking a blockchain solution, I had put the technological cart before the horse. This impulse is all too common in the crypto space, where some advocates promote solutions in their spirit instead of solutions derived from an objective assessment of local needs and the contribution of the target population to rank the factors affecting their economic situation.
The unbanked banking mantra is influencing idealistic new companies in the crypto industry. In 2020, some blockchain entrepreneurs started arguing that under-banked people would benefit from better access to Decentralized finance (DeFi), a niche market for cryptocurrency-based financial services. DeFi platforms offer lending, trading, speculation, and various lucrative opportunities, all based on digital tokens, smart contracts, and no regulated financial institutions. Some blockchain projects based in United States and Asia are to position yourself to promote DeFi services in Africa and there is a small group of locals, African DeFi lovers. Although DeFi is likely to face large regulatory challenges as it expands globally, there is nothing inherently wrong with offering alternative financial products in environments with minimal banking access. But despite DeFi’s innovation, its technology is much more difficult for the layman to use only traditional money services. And it’s not designed to eliminate the main cause of unbanked or underbanked in the first place: not having enough income.
As studies on financial inclusion show, not being banked is not the problem. It’s the effect of a problem. In 2021, it is necessary to abandon the description of low-income populations as unbanked, which only underscores its status as a potential client of financial institutions. A better term to express the economic dynamics at play for the poor would be not marketed. Income level is generally a function of participation in a market, whether it is the labor market or the business market. Participants who are unemployed, low-paid, or who cannot find enough buyers for their firm’s output are less likely to have the income needed to save money, repay loans, and invest in financial products. It is a market problem, not a banking problem.
A 2016 study at a South African university illustrates this point. The researchers looked at the factors that prevent subsistence farmers from succeeding in commercial farming. The study found that market access was essential. Poor farmers tended to have poor transport infrastructure for delivering goods, lacked adequate management and business promotion skills, and had little knowledge of market developments and prices. Markets for their products existed, but farmers were unable to take advantage of them. These individuals are the types of economic actors who would be the least likely to have bank accounts. Giving them access to Bitcoin and Ethereum is not enough to solve their problem.
The New Year offers a time to reflect on both the successes and failures of public policies and corporate strategies. This is also the time to test the assumptions that guide our efforts. For those who want to help people living in poverty, one should not over-emphasize their status as bank customers. Instead, we need to help them succeed in markets that will allow them to generate more income and become financially self-sufficient to access better financial services. Our goal should be to bring the unmarketed ones to the market.
Cryptocurrencies and blockchain technology could play a role in this goal. And they might not. To find out, it is best to study the main factors that hamper the bottom line of the poorest communities, and then see where – or if – technology can help improve this situation.