As the name suggests, unbanked is a person who doesn’t own a bank account to save assets. Such people are unable to use the facilities provided by the banks because they find themselves in a no man’s land when it comes to convenience, fund security and bank schemes.
For the unbanked, it is next to impossible to save and transfer money securely as they don’t have access to formal and safe financial services. When they need urgent money, they usually depend on other informal ways for financial requirements like borrowing from friends and family, or random moneylenders. Many people have a bank account but still have limited access to the facilities provided by banks, these people fall under the underbanked category.
In third-world countries, large corporations and banks don’t want to extend loan to the underbanked. Even when they allow, they charge very high interest rates to balance the risk. For a short span of time, microfinance institutions paved a way for the underbanked to access loans, however, the interest rates being imposed by the the institutions have increased substantially with time and became a major concern for the unbanked.
Why are people unbanked?
The reasons behind such a huge chunk of population still staying unbanked are:
– They can’t afford the cost of opening a bank account
– Time needed for the same
– Tedious paperwork involved in the process
– Low income levels & Financial literacy
– Inability to comply with strict KYC norms
– Suspicions surrounding the traditional banking system
- Many people might be unaware of the fact that around 39% of the World’s Population is unbanked
- In the US alone, 7% of households are unbanked according to the latest data by the FDIC
- According to a 2015 World Bank report, about 50% of Caribbean residents do not even have a bank account
- A recent World Economic Forum report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain-related technology.
- Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomson Reuters Survey.
Need of Blockchain in Banking
Finance and Banking industry need two key elements to function smoothly- one is trust and another is the speed. By implementing blockchain technology in the banking sector, the flaws prevailing in the current banking systems can be eliminated. The immutable nature of the blockchain will make the transactions and records more safer than before. Along with this, Blockchain will also remove the role of third-party services from the overall picture thus, making the transactions faster.
What is Blockchain?
According to Wikipedia, a Blockchain is a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. In simpler terms, Blockchain is a simple chain of blocks that record information.
This information stored in the blockchain database is immutable, tamper-proof and is distributed publicly on the network. The dominance of blockchain is getting more in finance sector is because of its reliable, unhackable, decentralized nature.
How Blockchain can rescue the unbanked/underbanked :
Blockchain will work as a boom for the underbanked because of it’s fast and easy to use process. Let’s have a look at the three ways how blockchain can help the unbanked:
1. Simple access to Financial System
In order to process any loan in a bank, it is mandatory to go through the burdensome process of KYC which requires submission of different documents for customer verification. Going through this process consumes a lot of time which in turn, leads to disappointed customers.
With Blockchain, there is no need to wait for submitting KYC documents as the process is quick and efficient. Moreover, it also assures zero chance of fraud during the process. This makes it easier for the customers to adopt the system while maintaining a high level security.
2. Fast and Economical Remittance
As Blockchain is removing the dependency of third-party bodies for transferring money peer-to-peer all over the world, the process time is drastically reduced. Not everyone in this world may have a bank account but yes, most of the people do own a mobile phone. Blockchain technology facilitates crypto payments as a medium for easy fund transfer via mobile phones.
In terms of economy, if we compare this to a non-blockchain world, it requires human involvement in order to function properly thus resulting in financial mismanagement, extra time consumption etc. With Blockchain, rare human involvement is needed as most of the process is automatic.
3. Trustless Financial Ecosystem
The whole system is decentralized which means that it is monitored by millions of users rather than a single centralized authority. Every transaction needs the authorization of multiple parties before execution which makes it difficult for anyone to corrupt the network.
The information stored in a Blockchain is transparent and immutable as it stores the data in a huge distributed digital ledger which is visible to everyone in the stream. For the unbanked people, Blockchain will help to store every transaction made by them as a proof for future reference.
The problem of the unbanked people has been ignored by financial institutions so far as the basic needs such as saving money in banks, doing transactions, earning interest etc were being ignored. Blockchain would be able to reduce the number of unbanked people and help them to access the financial services easily. Moreover, Blockchain applications will finally be able to remove the dependency of manpower without affecting the efficiency and transparency of the system that everybody have been waiting for long time to see in the financial marketplace.