In an increasingly interconnected world, access to financial services is a fundamental necessity. For many, credit cards, bank accounts, and ATMs are mundane, everyday tools that enable the ease of financial transactions. However, we often take these services for granted, oblivious to the fact that not everyone enjoys the same level of financial inclusivity.
A startling statistic highlights the stark contrast in global financial inclusion:
The World Bank estimates that 1.7 billion people, constituting 31% of all adults, remain "unbanked." In some developing economies, this figure soars to as high as 61%. Moreover, women, who represent 55% of the unbanked population, face an even more considerable disadvantage.
The consequences of this financial exclusion are far-reaching. Those excluded from the traditional banking system find it challenging to send and receive money, establish savings accounts, access credit, or secure insurance. In the absence of a financial safety net, emergencies can be utterly devastating.
Blockchain technology, often associated with cryptocurrencies like Bitcoin and Dogecoin, has the potential to bridge this financial divide and promote global financial inclusion. Blockchain's core attributes of being global, open-sourced, and accessible to anyone with an internet connection, irrespective of nationality, ethnicity, race, gender, or socioeconomic class, make it a powerful tool for enhancing financial inclusivity.
Blockchain technology essentially serves as a decentralized ledger for recording transactions in a secure and transparent manner. It enables multiple untrusted parties to agree on the state of transactions without requiring an intermediary. This fundamental aspect of blockchain can revolutionize the role of banks, governments, and corporations, making financial transactions more secure, cost-effective, and efficient.
Blockchain's promise in financial inclusion is no longer theoretical; practical applications are now emerging, showing early signs of success in addressing humanitarian challenges. As part of UNICEF's Innovation Fund, we have invested approximately $2 million in blockchain projects, along with 2,000 ether and 1 bitcoin through our CryptoFund. This initiative was made possible through initial support from the Ethereum Foundation and subsequent partnerships with Animoca Brands, Chainlink, and Huobi Charity. In the last investment round, we emphasized solutions that pave the way for financial inclusion for marginalized populations. After reviewing more than 400 projects, we selected and invested in eight initiatives. While we are still in the process of validating the use of blockchain technology in humanitarian settings, these projects are already making a positive impact in countries like Kenya and Argentina.
Here are four significant ways in which blockchain is driving financial inclusion:
1. Payment Services: The Cost of Sending Money
The cost of sending money can be exorbitant, particularly for small transactions. For instance, Western Union charges up to 35% for transfers of less than $10. While this may be a minor inconvenience for someone in a developed economy, it can have devastating consequences for those living in impoverished regions. The unbanked population, comprising 1.7 billion individuals, not only faces challenges in sending and receiving money but also lacks the necessary documentation (such as a passport, proof of income, reliable internet access, and a smartphone) to open a traditional bank account.
In the past decade, mobile payments have made significant strides in addressing this issue. Mobile money services in Kenya, for example, have played a crucial role in lifting households above the poverty line. However, there is still room for improvement in making financial services more accessible to a broader demographic.
One project that UNICEF has invested in is Leaf, based in Rwanda. Leaf enables people to send and receive money directly from their mobile phones, even if they don't own a smartphone or have access to the internet. As of October 2021, Leaf had facilitated a total of 5,871 users in Kenya, Uganda, and Rwanda, who completed 97,819 transactions. The average person-to-person transfer through Leaf amounts to $4.97, a sum that would incur substantial fees with traditional money transfer services. Many users of Leaf are Rwandan refugees from the Democratic Republic of Congo, who can now receive funds from their families in other countries. Additionally, users leverage Leaf to purchase essential items like food and vegetables.
Another project, Kotani Pay, based in Kenya, offers a similar service. It allows Kenyan users to send and receive cryptocurrencies by dialing a short code on their mobile phones, even if they own basic, non-smartphones. Users can convert these cryptocurrencies into Kenyan shillings. As of October 2021, Kotani Pay had engaged 2,598 users in Kenya, Uganda, and Rwanda, facilitating 137,195 transactions. Users have transferred more than $400,000 to date, with an average person-to-person transfer amounting to $1.
Both Leaf and Kotani Pay leverage blockchain technology to enable more efficient money transfers, offering users the same benefits as mobile money services. However, they provide an added layer of security through secure peer-to-peer transactions with lower fees (free to operate and under 2% for cashing out) and quicker transaction times (3-5 seconds). Although these statistics may seem commonplace in developed countries where mobile payment apps like Venmo are widespread, access to such services remains a critical issue in low-income countries. The United Nations has set a goal to reduce the cost of international remittances to less than 3% by 2030. While mobile money was initially designed for domestic use, platforms like Leaf and Kotani Pay function on a borderless, decentralized application, with the only additional fee associated with international transfers being the currency conversion.
These blockchain applications are becoming increasingly appealing for remittances, especially for small money transfers. They enable instant, cost-effective, and traceable transactions supporting multiple currencies, across various national and international mobile networks.
2. Savings: Providing Financial Security
Traditional banks have long acted as intermediaries for individuals with varying financial surpluses or shortages. These institutions earn a profit by capitalizing on the spread between the interest rate charged to borrowers and the interest rate paid to depositors. While the banking system has been successful in achieving this, it is characterized by complexity and high operational costs, which create barriers to entry, leaving many people excluded. Moreover, a substantial portion of the global population lacks access to savings accounts, which means that if they do manage to save, it is often in the form of physical assets, such as livestock. These assets are not readily convertible in emergencies, and hoarding cash can leave individuals vulnerable to inflation.
Xcapit, based in Argentina, utilizes blockchain's decentralized ledger to provide an alternative platform that simplifies and demystifies saving and investing for individuals who lack access to traditional bank accounts, credit, or financial literacy. The process is simple and user-friendly. Anyone can open an account by downloading the Xcapit app and activating their wallet. To begin investing, all users need is cryptocurrency, which they can transfer from another platform or purchase through Xcapit's app partners. Users complete a basic screening process, including personal information (which can be as simple as a name and phone number) and make decisions regarding the amount they wish to invest and the risk level they are comfortable with. The app even offers a self-assessment test for users to determine their investor profile. Xcapit has developed various financial products, each offering different returns. Users can monitor the performance of their investments through the app and can withdraw their funds at any time. Notably, even while invested, their funds remain in their wallet, easily accessible.
Blockchain technology empowers Xcapit to provide a straightforward investment interface where users can trust in the network's security, simplicity, and cost-effectiveness. Over the past two years, Xcapit has attracted 3,590 users from Argentina, Mexico, Brazil, and Colombia, with average investments of $1,500, managing a total of approximately 3.6 million. From January 2021 to October 19, Xcapit's active strategies delivered returns of up to 15.36% in Bitcoin units and up to 8.83% in dollars.
3. Credit: A Safety Net in Times of Crisis
Imagine facing a genuine emergency—your home is on fire, your savings have been exhausted, and you have no means of borrowing money. Credit scores, traditionally employed by banks to determine credit eligibility, play a pivotal role in economic development. They facilitate access to housing, consumer credit for families, capital for businesses, and assist nations in managing consumption levels during crises. Shockingly, more than one-third of the global population has no credit history, leaving them without a financial safety net during difficult times. The International Finance Corporation estimates that nearly half of micro, small, and medium enterprises in developing countries face an unmet credit gap of $5.2 trillion annually.
One of UNICEF's blockchain initiatives, Grassroots Economics, based in Kenya, strives to close the credit gap in low-income communities. The concept is revolutionary: in times of crisis, villagers may not have access to lines of credit or cash reserves, but they do possess tangible goods and services, such as crops, clothing, or even the labor of local professionals like cooks or teachers. Grassroots Economics has introduced Community Inclusion Currencies (CICs), which allow them to issue tokens backed by the tangible goods and services within a specific community. These tokens are linked to assets such as a town's water supply, food resources, or the services of local carpenters and babysitters. Kenyan villagers can use these tokens to secure lines of credit, backed by the resources within their own community, which can be used in emergencies.
CICs empower individuals to monetize their resources, facilitating the exchange of goods and services without relying on Kenyan shillings or a traditional bank. Based on historical trade data, individuals can access up to 10% of their past annual revenue as credit for future production, enabling them to continue trading even when faced with limited liquidity. As users transact tokens through feature phones, all exchanges are recorded on a blockchain, enhancing the security and trust among users. Similar to the conventional banking system, individuals who build a good credit history can extend loans within the community. In 2020, Grassroots Economics had 58,400 users who conducted almost half a million transactions using tokens equivalent to $3 million. Impressively, over 95% of users redeemed their CICs.
4. Insurance: Preparing for the Unpredictable
Insurance policies typically require proof of identification, financial solvency, and a significant amount of paperwork, presenting a substantial barrier to entry. Furthermore, for those fortunate enough to possess insurance, the process of claiming damages and determining coverage can often be opaque.
Although there are fewer blockchain projects focused on insurance compared to other aspects of financial inclusion, the technology holds immense potential in this field. ETHERISC and ACRE Africa, with support from the Ethereum Foundation, have partnered to develop a decentralized insurance policy designed to protect small-scale farmers in Africa. This innovative application offers farmers weather index insurance that utilizes smart contracts on a blockchain to trigger payouts in response to extreme weather events affecting their crops.
The beauty of these smart contracts lies in their simplicity; they operate based on predefined conditions. For instance, if a specific area receives 5 inches of rain within 24 hours, the insured farmer immediately receives a payout in accordance with the agreed-upon contract to cover flood-related damages. These smart contracts are linked to real-time weather data, including temperature, rainfall, wind speed, hours of sunshine, and extreme weather phenomena like hurricanes and hail. This automated system enhances operational efficiency for insurance companies and ensures fair and transparent payouts for farmers when faced with climate-related risks.
Without the transparency and automation provided by blockchain applications, farmers would have to undergo a lengthy and often cumbersome process to prove the damage, potentially delaying their recovery from the calamity. To date, 17,000 Kenyan farmers have benefited from this insurance system, taking advantage of its agility.
Accelerating the Learning Curve: Five Key Lessons
While these projects are actively making a difference in the lives of countless individuals by enabling them to feed their families, deal with emergencies, and access previously unattainable financial tools, blockchain technology for social good, particularly in terms of financial inclusion, is still in its infancy. The promise of blockchain is no longer theoretical, but it's evident that the sector requires more players who are willing to explore, prototype, invest, and support applications in this domain. Below are five crucial lessons that can accelerate the learning curve in blockchain's role in achieving financial inclusion:
1. User-Centric Approach:
The impact of a blockchain solution primarily hinges on user adoption. End-users are typically indifferent to the technology itself; instead, they focus on ease of access, the benefits offered, and the overall user experience. Solutions must prioritize user-friendliness, placing the user at the core. For instance, the main advantage of Leaf is its ability to facilitate cross-border transfers at a reduced cost, regardless of the technology and processes working behind the scenes.
2. Local Engagement:
Success in this field is closely linked to local expertise. What works in Silicon Valley might not necessarily work in rural Kenya due to differences in connectivity, infrastructure, and local policies. Teams that have an in-depth understanding of the local context, public policies, assets, and challenges are crucial to a project's success. Teams working on initiatives like Kotani Pay understand the constraints of middle-range feature phones, limited internet access, and interoperability across various mobile providers, thanks to their local perspective and experience.
3. Choice of Blockchain Platform:
There are multiple blockchain platforms available, each with distinct characteristics such as size, security level, speed, transaction fees, and energy consumption. These factors significantly impact the user experience. Xcapit, for example, has developed a multi-chain wallet, allowing users to choose their preferred platform, giving them flexibility.
Blockchain applications should be adaptable to changes and technological updates, as the underlying infrastructure is constantly evolving. Projects like Grassroots Economics faced the challenge of changing the blockchain platform multiple times to reduce user fees. Each modification demands time and a budget. Startups must anticipate these factors to prevent running out of resources before they can demonstrate the effectiveness of their solutions.
5. Outcome-Based Measurement:
Although the number of users reached is essential, it is equally important to assess the impact of these solutions comprehensively. Metrics such as the speed at which insured farmers receive payouts and the resources saved by insurance companies due to self-executing contracts provide a more accurate understanding of the value these innovations offer. Evidence is crucial in determining whether these innovations deserve further support.
These blockchain projects are a testament to how this technology, as a secure and immutable ledger of information, can bring together multiple parties who might not trust one another, enabling them to agree on financial transactions while extending the benefits of financial inclusion. Advancing this sector requires developers to enhance the efficiency and environmental sustainability of blockchain infrastructure, governments to establish the legislation necessary to regulate and stabilize the market, entrepreneurs to pilot blockchain solutions and share their results, and funders to provide capital to promising applications. The imperative is to explore solutions that guarantee equal access to opportunities, even if blockchain is only part of the answer.
As we strive to bridge the financial divide and make financial inclusion a reality for all, blockchain technology is emerging as a potent force for positive change, offering a pathway to a more inclusive and equitable global financial system. The challenge now is to foster the continued development and implementation of blockchain solutions that can have a tangible, lasting impact on the lives of those who have long been excluded from the benefits of modern financial services.
The projects discussed here exemplify how blockchain can empower users, particularly the unbanked and underbanked, by enabling secure, efficient, and cost-effective financial transactions. Moving forward, the blockchain industry must continue its efforts to enhance the technology's efficiency and environmental sustainability, governments should develop supportive legislation, entrepreneurs should explore and develop blockchain solutions, and funders should provide capital to promising projects. This collective effort is crucial to ensure that blockchain plays a significant role in achieving global financial inclusion. Even though blockchain is just one part of the solution, its potential merits further exploration.
When it comes to implementing blockchain solutions for financial inclusion, choosing the right technology partner is critical. Seven Bits Technologies is a trusted blockchain development company that can provide the expertise and support needed to make your blockchain projects a success.
With a proven track record of delivering innovative blockchain solutions, Seven Bits Technologies offers end-to-end services, including blockchain development, smart contract development, and decentralized application (DApp) development. Our team of experts is dedicated to creating secure, scalable, and user-friendly blockchain solutions that align with your specific goals and requirements.
Partner with Seven Bits Technologies to harness the power of Blockchain Technology and drive financial inclusion on a global scale. Together, we can empower the unbanked and underbanked populations, providing them with the tools they need to access financial services, save, obtain credit, and secure insurance. Join us in the journey to make the financial world more inclusive, efficient, and accessible for all.
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