Many of us living in developed countries take having a bank account for granted. However, did you know there are over 2 billion people in the world who are excluded from the traditional banking system and prevented from accessing basic financial services? Step back for a moment and consider what being unbanked would mean for you? Life would certainly be more difficult. Even in the US, around 6.5% of households are unbanked and 25% of Americans are underbanked. That’s a huge number of people who are unbanked in such a developed country and, needless to say, the proportion of people and households facing unbanked status increases significantly in the developing world. The stat of two billion unbanked people means that 25% of humanity lacks access to even basic financial services.
What’s The Problem With Being Unbanked?
In the West, we have got used to credit fuelled economies. Take your mobile phone bill; chances are that you have a pay monthly contract and you have only been able to get that shiny new iPhone for $50 per month due to your credit score. The point is that credit fuels the lifestyles of most people in the developed world and we leverage it for mortgages, car leases, phone bills, furniture and more.
What this credit enables the banked to do, is to bring future cash-flows forward to today and empower the individual to make lifestyle and financial decisions. This can be particularly advantageous when it comes to housing, with banked people being empowered to avoid renting and instead acquire equity. In contrast, the unbanked person must pay rent and save the full amount to buy a house outright. Both paths can lead to the same destination, it is just that being banked makes things significantly easier and this logic can be extended to even smaller ticket items like modes of transport or mobile phones.
Being unbanked also makes basic tasks more difficult and time-consuming, such as paying bills and receiving salary payments. People who enjoy full access to banking services simply do not have these time pressures and their methods to settle life admin can literally take seconds. For the unbanked, this life admin often consumes an inordinate amount of time and imposes an opportunity cost. Put simply, the time that an unbanked person spends to settle basic bills in cash, could be better spent learning new skills to increase the value of their labour or even start new business ventures.
The cost of being unbanked is not only the opportunity cost of a person's time, but also makes basic things in life more expensive. With energy bills, the fully banked person can just set up a direct debit and get access to the cheapest energy rates available. However, the unbanked person is likely forced into using an expensive pre-paid meter. In regards to electricity, the service that the unbanked and banked recieve is the same, however, one paid more for the same service and the other needed to invest more time in getting it. The disadvantages spoken about in this article tend to compound and are one of the key drivers behind the economic inequality between the banked and the unbanked.
If we think about the ceiling of economic prosperity for banked and unbanked people, the picture varies drastically. Open up the Forbes top 100 rich list and you will see that almost every person listed either started their own business or inherited that wealth. The truth of the matter is that the most wealthy and successful people on the planet usually own and run their own business empires. However, in order to run a business and accept payment, you need to have a business bank account and many entrepreneurs take out business loans to kick-start their ventures. This state of affairs effectively excludes the unbanked from building and scaling business and places an artificial limit on success. One of the saddest things about being unbanked is that it tends to place limits on people's ability to realize their ambitions.
The Solution To Being Unbanked Is To Get A Bank Account
There are many reasons why people are unbanked. In many developing nations it can be as simple as there not being a bank branch for hundreds of miles to allow a person to open up an account in the first place. In other cases, people do not possess the required documentation or ID to open up an account and comply with the processes of banks and their regulators. Banks can also turn away people wanting to open up an account simply because they don’t believe they will make enough money from the individual.
In short, most of the time the unbanked do not choose to opt out of the traditional banking system and are instead excluded from it. The solution is simply not as easy as walking down to a local bank branch and opening up an account. It will be interesting to see whether cryptocurrency will change this process in the future, particularly banks which are crypto friendly.
Why Cryptocurrency Can Provide A Viable Alternative?
Although many of the unbanked are excluded from accessing basic financial services by the banks, things are very different when it comes to cryptocurrencies. After all, the most basic function of a bank account is to enable people to easily store and transfer value. Although cryptocurrency markets are highly volatile, they do enable anyone with a smartphone to store value and process transactions to anyone in the world. At a basic level, cryptocurrencies empower the unbanked to become their own bank.
Sure, you probably cannot directly settle an electricity bill with crypto. However, many cryptocurrency platforms and wallets do empower users to get Visa cards attached to their crypto accounts and enable users to spend crypto wherever Visa is accepted. Undoubtedly, access to such a basic banking service would change the lives of millions of unbanked people for the better and help close the gap between the banked and unbanked.
That’s not all. The cryptocurrency space has recently seen the rise of decentralized financial products. These enable people holding cryptocurrency to get loans based on cryptocurrency collateral. The ability to bypass the systems and processes imposed by the traditional banking sector can open up additional opportunities and access to financial services.
The Issue Of Cryptocurrency Price Volatility
One key argument against the utility of cryptocurrencies for the unbanked is their price volatility. It is true that the basics in life are all priced in USD, EUR or another fiat currency and that the ups and downs of crypto markets could positively or negatively impact on unbanked people using cryptocurrency as an alternative to traditional banking.
However, the arguments against this price volatility being a problem are:
- The existence of stable coins which attempt to mirror the value of popular fiat currencies like the USD.
- Some fiat currencies like the Venezuelan Bolivar are more volatile than cryptocurrencies themselves.
The main thing to take away here is that within the cryptocurrency ecosystem there are solutions to preserve a users purchasing power in USD to help people overcome the potential issue of cryptocurrency price volatility.
The Unbanked In Economically Challenged Countries
The largest market segment of unbanked people in the world can be found in developing countries. In many of these locations it is common for some locals to become economic migrants and relocate to another country with better employment opportunities and wage levels. Needless to say, many take this risk to provide for their families and send money back to their country of origin. This process is called remittance payments. According to the United Nations there are around 258 million economic migrants in the world and remittance payments sent to developed countries total around $444 billion per year. Now that's a huge market and has led to the rise of a dominant remittance market which imposes beefs of between 5% to 10% to process a cross-border transaction.
Many people sending remittance payments to developing countries continue to use the service due to recipient being unbanked. What remittance companies like Western Money Union offer is the ability for people to collect the payment in cash from a Western Money Union branch. No bank account is required at all to receive the payment and this is why many people accept these high remittance fees.
Cryptocurrencies however provide an alternative solution with low-fee cross-border transactions which can be less then one cent. This is one of the reasons why advocates of cryptocurrencies see the remittance market and developing countries as one of the key drivers to wider crypto adoption. Quite simply, cryptocurrencies can provide a significantly cheaper solution to a pre-existing problem that impacts a huge number of people around the globe.
Are Developing Countries The Most Likely Places To Adopt Crypto First?
It's no secret that many developing countries are often characterized by:
- Poor payment infrastructure.
- High numbers of unbanked people.
- Local fiat currencies are more likely to be unstable.
- Low levels of desktop and laptop ownership.
- Growing levels of smartphone ownership.
- Mobile data is likely expensive.
- Many communities have a high reliance on remittance payments.
On paper, many locations in developing countries display characteristics or are subjected to pain points that could be solved by actual adoption of cryptocurrencies. Furthermore, the adoption of cryptocurrencies is actually feasible due to rapidly growing smartphone ownership. This has resulted in some cryptocurrency projects investing significant efforts in crypto adoption in emerging markets. One of the most notable are Dash in Venezuela who have focused on increasing merchant adoption to provide locals an alternative means of exchange other than their hyper inflating native currency.
Other cryptocurrency projects like Nimiq are taking a different approach to crypto adoption efforts in economically challenged countries. Instead of attempting to go into a country at scale, Nimiq is currently considering a case study approach to crypto adoption. This proposed plan takes an entirely different approach from Dash, by outlining a detailed plan to:
- Show that cryptocurrency can be adopted by a community in real-life.
- Focusing on increasing the levels of wealth in a local community by supporting locals with learning opportunities and resources to build and scale online businesses.
- The promotion of academic research in the field of cryptocurrency adoption.
- Create a repeatable and scalable process for cryptocurrency-powered human development and adoption, which can be leveraged to deploy further crypto adoption case studies.
- Challenge the notion that cryptocurrencies do not produce anything useful and showing how the technology can be used for practical impact and purpose.
What Does The Crypto Adoption Plan Entail?
The crypto adoption blueprint currently under consideration recommends the onboarding of charitable, academic and entrepreneurial communities to aid with the execution and refinement of the plan. The proposed plan aims to generate the necessary data for academics to study crypto adoption in more detail and play a key role in shaping the case studies methodology. It is suggested that such research would provide a firm foundation for future academic research on crypto adoption and enable the wider crypto community to better understand the implications and methods for wider adoption.
The crypto adoption plan is a living document which is still under consideration. However, it currently outlines three core building blocks:
- A local exchange: To enable locals to swap crypto for local currency and visa versa. The exchange is envisioned to also serve as a crypto information centre for the local community.
- A real-world airdrop: The importance of sowing the seeds of free enterprise has been highlighted in the plan and an airdrop empowers locals to choose how they spend their crypto. The proposed airdrop could be viewed as a one-time local stimulus package.
- Incubator: Focused on promoting local economic growth by supporting locals with the ‘know how’, tools and resources to build and scale online businesses. The idea is to empower locals to complete in the global economy. It’s proposed that deeper crypto adoption can be encouraged by using crypto as a base currency for these businesses and that incubee salaries could be paid in crypto.
Many people in cryptocurrency like to talk about emerging market adoption and solving the problems of the unbanked. However, a limited number of cryptocurrency projects appear to be taking steps to explore this new potential frontier for crypto. Nimiq has taken a proactive and different approach to wider adoption efforts and it will certainly be interesting to see if these substantial planning efforts are made a reality. Success and deepening the academic knowledge surrounding crypto adoption could play a key role in truly understanding how cryptocurrency can help the world’s unbanked population.
What Is Nimiq?
Nimiq is a decentralized and censorship-resistant crypto payment system which is home to a diverse ecosystem of apps. The NIM token is used as a store and transfer of value within this system and cross-border transactions can be sent for less than a cent.
The project has taken a different native-to-web blockchain approach and this means that users can connect to the blockchain using nothing more than a web-browser and without depending on any intermediaries. This methodology gives Nimiq users a ‘it just works’ feel, with no installations and this is further enhanced with a focus on providing a very simple user experience. In a nutshell, Nimiq is a cryptocurrency designed for use by the masses and has focused significant efforts in addressing the key problem of complexity which is all too common in the cryptocurrency world. Nimiq aims to enable barrier-free and frictionless value exchange for everyone.
Cryptocurrency could help alleviate many of the problems faced by the unbanked by empowering them to become their own banks. Being unbanked is a problem that plagues one in four people on the planet and there is little doubt that a crypto-powered solution could generate value for 2 billion people on the planet. That’s why if crypto can succeed in helping the unbanked, it could be one of the biggest and fastest adoption events ever seen in human history.
Disclaimer: The author holds some NIM in their portfolio and is compensated in a long-term independent consulting capacity by Nimiq. This article must not be construed as investment advice. Always do your own research.
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