Blockchain brings underbanked regions into the global economy

Many banks and financial institutions predict that blockchain can enable clients to move money at lower costs, with faster money transfers and simpler processes. Less talked about, but more dramatic, is the transformative impact blockchain could have on underserved parts of the world.

Initially, blockchain was criticized for being the underlying technology for the internet-based cryptocurrency Bitcoin. Through this distributed network of computers, users can record and maintain transaction data in near real time. Blockchain has the potential to avoid reliance on correspondent banks and other intermediaries for international money transfers. But for people who lack the most basic financial services, blockchain's scalability and accessibility make it an effective way to enter the global economy.

GSMA noted that mobile wallets and digital finance together have enabled innovations and services such as M-Pesa, which have enabled more than 400 million people living in cash-dominated areas to access formal financial services.

While service providers have made significant progress in recent years, opening up previously unserved regions, more than 2 billion potential financial services customers remain trapped. The industry is characterized by large regional disparities, and mobile wallet providers have not yet found a way to achieve significant scale and realize viable long-term network effects.

Blockchain has many benefits, such as becoming the backbone of the closed loop of mobile wallet services to advance these efforts. Currently, some payment services are limited to situations where both parties have an account. Similarly, mobile wallet services developed by mobile operators themselves often do not allow customers to easily complete payments on their respective mobile networks. But blockchain can expand their interoperability and connect these decentralized closed loop services domestically and globally.

In addition to enabling people in underserved areas to send remittances to each other, this pillar can also connect regions with uneven banking service levels, such as realizing cross-border remittances and cross-border B2B payments.

Given the interoperability value proposition and blockchain’s ability to drastically improve the cost structure of inefficient cross-border payments, financial institutions recognize a salient fact: existing industry players can no longer ignore the potential of blockchain to serve underserved regions. This means that the disintermediation brought about by competition will serve the next billions of participants in the global economy.

The trend toward smartphone applications further drives this possibility. As banking customers in developed markets embrace smartphones, people in emerging markets are expected to replace their existing mobile devices with them as costs decrease, especially as China and India produce low-cost, open-platform Android devices. These inexpensive devices provide access to data-rich, user-friendly financial services applications.

The underlying technology for these applications will certainly be blockchain; it will provide the infrastructure to significantly reduce operating costs and support new business models, with the goal of serving the poor in a lasting way. The combination of blockchain technology and Android smartphones can revolutionize the speed of open innovation and bring Silicon Valley and remote areas of Africa closer together.

The potential of blockchain extends well beyond financial services; into adjacent verticals such as healthcare and land ownership. The common medium that will connect all digital services is likely to be a blockchain-based digital identity system, securely stored and managed by distributed ledger technology.

Cryptographically protected IDs can be obtained through a unique combination of private and public keys, without the cumbersome biometrics; this may allow users to control their own data and decide how much to share. We can also foresee that unbanked refugees will need blockchain to issue them IDs so that they can restart their lives and live away from the threat of corrupt governments depriving them of their right to survive. Similarly, these refugees or other people in similar situations may be able to store land ownership and facts on an immutable blockchain so that they can prove their ownership when they return to their homeland. These ownership and facts can be securitized as credit.

However, the tug-of-war to demonstrate its value has just begun and is still in the experimental stage.

As the race to develop public and private blockchains intensifies, not to mention the combination of the two, best practices must be implemented. While blockchain may eventually reshape many transaction-related practices, the technology faces significant hurdles; from legal and regulatory issues to concerns about system stability. Security concerns have once again come to the fore in the wake of The DAO, an investment fund for Ethereum smart contracts that exposed dangerous software vulnerabilities.

But blockchain’s potential to become the connective tissue between underserved regions of the world is sure to break through this long-standing barrier. Blockchain can make it practical for financial services companies to serve the world’s poor.