Blockchain technology has so far largely been associated with cryptocurrencies. However, more and more businesses are realizing the potential of this technology and looking for new applications for it. And a prominent application of blockchain’s distributed ledger system could be in the banking arena, where efforts are ongoing to bank the unbanked by using this technology. Let’s find out how.
Salient Features of Blockchain
Blockchain technology involves the maintenance of a chronological record of transactions in a distributed ledger, shared across a business network, with rules embedded in the ledger that can be triggered on fulfillment of certain conditions. Now, all participants agree to a network verified transaction by consensus. The cryptography feature of this technology ensures that the technology is secure and authentic. The benefits of this system include higher security, lower costs, greater transparency and faster settlement.
The recognition of the multiple advantages offered by blockchain technology and its distributed ledger are attracting businesses and bankers to incorporate this technology to improve their scale of operations, besides reducing the costs. According to a 2016 Cognizant study, more than 90 central banks of various countries are engaged in discussions regarding investing in blockchain, with 24 countries having already announced massive investments in the sector.
Although the awareness of the technology and its benefits is increasing, several hurdles, such as inadequate regulatory control and nascent standardization efforts, have restricted its adoption so far.
Banking the Unbanked via Increased Financial Inclusion
We are so used to banking transactions that the fact that two billion people in the world still do not have a bank account seems unbelievable. But this is the reality, millions of people living in the low and middle-income segments of emerging economies and even in some developed countries are unable to use banking facilities to carry out their daily financial transactions. Then there are the millions of refuges world-wide that are without national identification documents. These people either do not have a bank account or are unable to access the various financial services. This is why they are considered unbanked or underbanked. This means they are unable to participate in the financial growth of their country and instead are relying on costlier alternatives like payday loans, pawn brokers or unorganized money lenders.
This is where the adoption of blockchain technology can help. The technology can be used to create financial alternatives for the unbanked, who often do not have clear identifying information and are unable to satisfy the “Know Your Customer” practices of banks.
The adoption of blockchain can allow individuals to have a digital identity that can be used for banking, property records and other purposes. This will allow the unbanked to enter the formal information networks of a country and become a part of the system. The building of a digital identity can also help people gain appropriate access to various welfare schemes, without falling prey to any kind of fraud.
How Can Blockchain Help?
As mentioned earlier, blockchain not only supports smart transactions and reduces cost and settlement time, it also does away with the need for third party intermediaries. So, banking solutions incorporating this technology can not only expand reach but also diminish error potential. And, the countdown to this has already started with Ethereum-based blockchain projects already serving the people through digital wallet platforms and rotating savings and credit associations.
Some other areas where blockchain-based projects have already started helping are in the field of remittances by workers in other countries and cryptocurrency-based platforms that allow users to add money directly into their phones and use for payments at brick and mortar stores. Such systems do away with banking fees for various services.
Adoption of blockchain to expand banking access means millions of people, who have so far been denied access to simple things like building savings or receiving a loan, can now benefit. But this will take time. Blockchain-based solutions provide a secure and scalable way to serve the needs of the unbanked and a large number of technology companies are leveraging this opportunity to bank the unbanked, while working out ways to cross the various hurdles facing them.
Although the unbanked are still a long way from having easy and cost-effective access to a wide range of financial services, blockchain technology does hold promise in terms of empowering them.