Why Blockchains Make Sense for Financial Inclusion

According to Santander, their analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.

This is important because banks are cutting back on costs and going branchless but want reach at the edge of wireless. There is a massive customer base to connect to via mobile. Blockchains can cut operational costs yet allow for reach of the whole customer experience not just bank accounts. Bank accounts become the gateway to all types of asset transfers and allow for capturing the customer within an ecosystem.

International payments remain slow and expensive. Significant savings can be made by banks and end users by bypassing existing international payment networks. Storing transactions in one automatically shared, tamper-proof database could eliminate the need for complicated procedures and clearinghouses now used to make sure banks have their records in sync, saving time and money and reducing the risk of error. Without middlemen, payments and settlement can happen rapidly allowing people access to their capital when they need it. Think of how this can impact villages and entrepeneurs in the developing world. The allowance of frictionless savings and investment gives people more control over their financial destiny. Settlement times and costs can be reduced dramatically and a distributed could support large amounts of small transactions (microtransactions) within a trusted network.

For banks, blockchains will allow for the most efficient uses of capital in history. They can lower the amount of capital they are required to hold. Let's call it "Just In Time Cash". Right now banks have to hold a capital requirement as insurance for incoming and outgoing payments that are "in process" from other banks and existing infrastructure. This is driven by an inability to see in real time the liquidity position of an organization and its upcoming commitments, its inflows and outflows, especially from a risk scoring perspective. This inability results in need to hold more funds in reserve. Blockchains provide an opportunity in providing greater transparency to enable regulators to be convinced that higher reserves are not required, and an institution that has this insight may be able to operate with lower reserves, especially if it can switch its portfolio rapidly.

Distributed ledgers support "smart transactions". These include smart contracts, transactions that include multiple assets, transactions that include multiple parties and 2 way transactions. Think about this when thinking of financial inclusion. This will cause an explosion in tradeable assets globally and allow the unbanked not only bank accounts but access to global capital markets by allowing for all types of value transfers. It also allows for better property records in emerging markets, where these are essentially non existent right now. Dispute settlement on all types of assets through contracts and legal services increasingly tied to code can be linked by a blockchain. Trade will go up exponentially locally and over distances because of unbreakable escrow or programmatically designed smart contracts. Local economies can become more dynamic and flourish.

The Reasons For Not Having An Account

This section will discuss the hurdles that are faced today in trying to get a bank account and how blockchain + mobile tackles these problems.

Reasons for not having an account:

Identity: A mobile phone can provide this through an independent token or security element or biometric. Regulations: This is jurisdiction dependent, but flexible strategies are being used to help the cause of financial inclusion. Tiered AML/KYC schemes that rely on digital. Changing some of the prerequisites for credit history and microtransfers for low income individuals. No Banks: Mobile + Blockchains with an identity element allow for banks to reach where there are no branches. Cash instead of digital payments: Governments and NGO's and the private sector are working to digitize money. The trend is heading in this direction. High costs and fees: Using a blockchain and getting rid of middlemen should mitigate these fees dramatically. Fintech companies are already slashing the cost of payments and remittances as well as the traditional players. This should leak into all assets as the technology is built out.

Distributed Ledgers as part of the Infrastructure for Financial Inclusion

Distributed ledger technology as the underlying infrastructure in a mobile, digital world is compelling. It also allows for customization depending on the region and their unique ways of transacting and settlement. It also becomes a two way street where efficiencies with the banks becomes wins for the end customer and vice versa. Ultimately this allows banks to become technology companies where automated, paperless and super fast systems provide the backbone to getting customer reach, without all the traditional man power and departments/divisions needed for permissions.