By Edward W. Mandel

One of the core use cases for cryptocurrency is to serve “the underbanked”. When you hear that term, however, you might get a skewed view of the people who might be most immediately helped by a decentralized financial system. Yes, crypto could be good news for subsistence farmers in developing countries who rely on outrageously expensive wire transfers from relatives sending remittances from wealthier nations. It could also benefit do-gooder organizations which want to get aid money directly to those for whom it’s intended without giving a taste to every two-bit warlord, crime boss and corrupt civil servant.

Certainly, those are the images that have the most appeal to the heartstrings and the shortest flash-to-bang when it comes to how quickly somebody sees an advantage to crypto. But it’s only half the story. There are entire industries that, for whatever reason, are underserved by the financial services sector.

The IOU.io team counts ecommerce merchants among that group. And we’re proud to offer one potential analgesic for their pain point.

When people find themselves suddenly unbanked. Credit: R. Brend’amour in Canadian Illustrated News, June 14, 1879

You don’t have to be a mobster

Let’s be honest: Some businesses can’t get money through traditional channels because they are illegal. I’m not advocating the establishment of The First Afghan Bank for the Poppy Trade, N.A. (Delaware). Also, I don’t believe anyone has the right to a bank account, regardless of how sustainable a business model they have. Community Bank for Zimbabwean Turd Farmers is not the place I’d put my money.

No, there are plenty of solid businesses in this world that are experiencing stunted growth because brick-and-mortar banks just don’t get them.

The classic example is the U.S. cannabis industry. As of this writing, active ingredient THC is legally available to the majority of U.S. citizens on a recreational or a medical or a “medical” basis. For many more, possession has been decriminalized to the point where you can blow smoke in a cop’s face and he’d have to think of some totally unrelated reason to break your jaw with his nightstick.

The reason why cannabis growers and dispensers can’t find places to deposit their take at the end of the day or to get business loans to expand their operations is that federal law hasn’t caught up to the reality on the ground. As far as Washington is concerned, marijuana — to use the sinister, faux-Spanish term popularized in the early 1900s by those seeking its prohibition — is a Schedule 1 drug like heroin or LSD, “with no currently acceptable medical use and a high potential for abuse,” according to the Drug Enforcement Administration’s unironically outdated website. That means it’s considered more dangerous than cocaine (Schedule 2) or ketamine (Schedule 3). That’s entirely an accident of history with little scientific basis. These schedules went into effect in 1971, during Richard Nixon’s first term, and are ranked in order of which drugs were preferred by McGovern voters as opposed to those hoovered off the desks at the field offices of the Committee to Re-elect the President.

What this means for banking is that no financial institution can use any federal resources for the benefit of clients who have anything to do with cannabis. Not only does that mean they have no recourse to the reserve banking system or deposit insurance, they can’t even use the FedWire and ACH clearance networks. So if you’re in the weed business in the U.S. then the people who hold your cash and your notes are probably the “cash advance” types — essentially the payday lenders of the business world. Even if you’re in the non-consumable hemp business — you make clothes or bags or rope out of material extracted from a similar plant — you might not be able to get a market-rate loan to upgrade your mill. Although legislation is making its way through the pipeline, there’s a president to impeach first.

But the U.S. cannabis business is hardly the only blind spot in the commercial banking world. That’s the mid-market business funders, as opposed to the investment banks that serve the large-caps and the retail banks that serve the average household.

Raconteur has an interesting infographic showing what the gap looks like on a geographic basis. On average, there are 11.7 commercial bank branches per 100,000 adults globally, according to World Bank statistics cited. As you won’t be surprised to learn, Myanmar and Chad are at the bottom of the list with 1.87 and 0.49 branches respectively. But you know who else are below average? Kazakhstan, Pakistan and South Africa. While these are hardly global economic superpowers, they’re at least solidly in the middle class of Acceptable Places to Travel Without Feeling Guilty for Eating. You know who else are below average? China, Qatar and Germany are barely above average. According to the infographic, there’s a $380 billion opportunity for banks in emerging markets. That includes retail banking and excludes, of course, Qatar and Germany. (Although Germany seems to have a blind spot around commercial banking, 98.7% of all German adults have a personal bank account. Go figure.)

I wish I could tell you what specific industries are especially underbanked in those blind spots, but I don’t have the data. I can take an educated guess, though.

First, I can tell you with some certainty that the one industry that isn’t underbanked is oil. There’s a well-established paradox that countries with the most natural resources often have the poorest economic outcomes. This was first observed in 1711, when Vivaldi was just getting started on his first opera and 65 years before Adam Smith formalized the new science of economics with his Wealth of Nations treatise. It took until 1993 until British economist Richard Auty thought up a name for the paradox, though. Since then, it’s been called “the resource curse”.

Essentially, the interests, economic and political, of the extractors crowd out the needs, economic and political, of everybody else with the misfortune of having been born nearby.

In Myanmar, for instance, natural gas accounts for 43% of exports. If you add timber to that, then more than half of the Burmese economy is raw materials. Chad is, for all intents and purposes, an Exxon Mobil field office. You may have heard there was oil in and around Qatar too and, if it weren’t for the diamond mines, the Dutch and British wouldn’t have fought two wars over South Africa. Kazakhstan floats on a sea of oil but it has managed to avoid the resource curse. Pakistan’s economy is actually fairly diverse, although it’s hard to determine what the typical Pakistani actually does for a living because more than a third of local trade is in the “informal” sector. And Germany … Germany? Why is the world’s fourth-largest economy on the list?

But all these nations have other business beside pumping crude or chipping out shiny rocks. Most the populations of Chad and Myanmar are farmers. Fishing and textiles are also part of the mix. In Pakistan, you can add basic materials and meatpacking. South Africa and Kazakhstan are also known for other heavy industries and for having robust services sectors. Germany, of course, has all this and more; its Number 1 export is resentment.

So I think it’s safe to say that the agriculture, fishing, textiles, basic materials and meatpacking industries are experiencing the same issues in their home countries that cannabis is experiencing — for entirely different reasons — in America.

And, as we can see from the results in Germany, Kazakhstan and South Africa, the fact that some businesses are underbanked does not mean that the overall economy is in the trash. It does suggest, though, that these strong economies might be doing even better if their small- and medium-sized businesses were adequately funded for expansion. After all, U.S. gross domestic product continues to grow despite the treatment of cannabis-adjacent businesses.

The problem with ecommerce

The experience of a typical ecommerce merchant viz. the financial industry isn’t unique. It’s like being any other kind of SMB. They’re not covered by credit bureaus, so their perceived risk — and thus their cost of capital — is high, and is predicated on algorithms as unreliable as those behind FICO scores. It doesn’t help that, as with any retailers, cash flow is hard to predict. The circle becomes vicious because reputable, well-capitalized banks often don’t see the upside to investing in distribution channels that would serve online vendors. Instead, ecommerce merchants might hear, “You’re the online experts, so you set up the infrastructure and maybe we’ll do lend you money.”

These are the findings of an ASEAN-focused Deloitte team led by Mohit Mehrotra. Their study calls out a couple initiatives that offer signs of hope. One is Santander UK’s partnership with online alternative lender Funding Circle, which seeks to help SMB irrespective of industry. Another, more focused option comes out of Italy. Intesa San Paolo, UniCredit and Tmall Global have teamed up to create the “E-Marco Polo” initiative to support their national exports into China, which became inevitable once Beijing unveiled its Belt and Road program. That this kind of end-to-end, cross-border support would accrue to ecommerce is just emblematic of the wired world in which we live.

So it’s possible for banks to support ecommerce. They just don’t as a matter of habit.

Amazon must be loving this

Even Amazon realizes that ecommerce merchants are underserved by the banking industry. That’s why Jeff Bezos’s wannabe monopoly has already invested a reported $3 billion to more than 20,000 vendors on its platform.

And this is nothing new. This goes back to 2011 or, in bitcoin terms, when 1 BTC went for about $3.

Regular readers of this space know how skeptical I am of Amazon’s stated desire to succeed as its third-party stakeholders succeed. I’ve written about this topic several times over the past couple years, but I’ll draw your attention today to something I put up here in October 2018.

A “peek into the Amazon Seller Forums shows deep and growing discontent among third-party sellers,” I quote Public Market CEO KJ Erickson as saying. “The first concern is that growing fees are cutting into margins. The second is that, in many categories, Amazon is competing directly with third-party sellers through private label offerings. Indeed, some 40 percent of Amazon sellers list ‘competition from Amazon’ as their top concern.”

So you can bet that these vendors are every bit as excited about having Amazon as a creditor as they are about sharing their customer data and product specifications with it.

What’s to be done

“It’s not just Amazon though,” according to a post on the blog of digital lender Mirador. “PayPal, Square and other merchant gateways are able to offer cash advance like loans — they just don’t have the same access to robust data and predictive analytics.”

But how robust does your data have to be? The IOU.io proposition is that the only data that matters is the faith that others in the community have about your ability to pay. Although, as we founded this project, we were focused on this benefit accruing to the consumer, maybe it’s time to rethink this in the wake of E-Marco Polo’s efforts.

If vendors need working capital just as much as their customers need consumer credit, it stands to reason that IOUX can be dual-purposed. Although I’m not making any promises about this prospect, it’s certainly something we’ve started thinking about.

Edward W. Mandel is a strategic advisor for IOU.io, an Ernst and Young Entrepreneur of the Year finalist, blockchain enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful blockchain technology projects.

IOU is a blockchain-based peer-to-peer platform designed to unify ecommerce transaction and customer retention processes, incorporating tradeable IOUs.. The platform can be found online at IOU.io and its community on Telegram at https://t.me/IOUCommunity.