Ensuring that all citizens have access to reasonably priced and readily available financial services, like depository and savings accounts or loans, should be of primary concern to anyone in the industry. Improved participation in regulated, centralized financial activities offers benefits to all stakeholders and new technologies are being applied to solving the problem of wholesale financial inclusion which brings us to bitcoin.
During a recent conference held at MIT called “The Business of Blockchain”, Simon Johnson (a MIT professor) opined that bitcoin could be the best answer to solving the problem of financial inclusion. I interpreted the article and short video clip as presenting the argument that eliminating the middleman would remove many of the hurdles presented to poorer individuals that need financial services.
With the acknowledgement that I did not hear Professor Johnson’s entire presentation, let’s take a closer look at this argument which frankly puzzles me. I’m just not clear on why allowing individuals to conduct financial transactions across a decentralized network would have a material impact on access to financial services. Perhaps my confusion has to do with the definition of financial services.
If cost reduction is the priority, than bitcoin or some other digital currency might, in the near term, provide an answer for providing efficient access to digital payments but individuals first need access to some funding source (which arguably could be delivered via bitcoin). If deregulation or a more egalitarian financial eco-system is the priority than individuals have to trust that the code they are dependent upon is to be trusted (see this article from HBR for an interesting discussion of trust in the blockchain).
Further, it seems to me that bitcoin does little to improve issues like:
- Access to affordable short term capital
- Accelerated savings rates
- Improved management over everyday funds (budgeting)
- Micro loans for small business creation
Where I think the blockchain can serve to help the financial underclass is in the areas of authentication and KYC. Verifying ones identity can be a major impediment for gaining access to financial services whether it is due to incompatibility of existing identification sources with local laws or factors such as illiteracy. The creation of a global standard of personal identification would support a more seamless point of entry into any country’s financial system and also act as a bulwark in the event of national calamities.
The land of fintech is an exciting place to be these days and offers an endless and fast-moving stream of opportunities, but technology is one component of a large, complicated financial services environment. Imagining a world where inter-operability is the standard and equal access the de facto starting point will not make it so. Further, I believe that eco-systems like WeChat, Facebook and Alipay will do more in the short term to bring outlying pools of users into the financial services mainstream than any no cost checking account can hope to accomplish. In a recent United Nation’s study, it was noted that “…Alibaba’s Alipay and Tencent’s Wechat Pay together enabled US$2.9 trillion in Chinese digital payments in 2016.”.
They’re achieving this by making payments a required component for participation in the network, effectively forcing individuals to establish an electronic funding source if they want to fully participate. In much the same way, governments have used mandated electronic benefits disbursements as the carrot/stick to get citizens to adopt electronic depository accounts, as we’ve done in the United States with social security payments for example.
Once individuals have an electronic funding source, they can access alternative sources of capital, like loans or savings accounts that are either incorporated into the environment or offered as add-ons. They can also better manage their money through budgeting tools and spending information. In other words, I think one of the first steps in building a financial inclusion value chain is to establish an electronic source of funds and in that respect, I will agree with Professor Johnson – these may not be domiciled in a traditional financial institution.