Can Digital Assets Solve the Struggle of the Unbanked?

Can Digital Assets Solve the Struggle of the Unbanked?

Can Digital Assets Solve the Struggle of the Unbanked?

Since inception, cryptocurrencies have been on a drive towards wider acceptance and adoption around the globe. Bitcoin has been leading that charge, along with a growing list of prominent altcoins such as Ethereum (ETH), Litecoin (LTC), Tether (USDT), and more recently, Cardano (ADA). They offer new means for financial transactions that can bypass the rigors of physical meetings, currency exchange, and other conventional processes.

Digital assets have brought newfound ease and efficiency to diverse industries beyond just financial services. In that vein, the sports world claimed its fair share of attention when crypto tokens made their way into football (soccer) superstar Lionel Messi’s financial package with his new club Paris Saint-Germain. Part of his $41 million-a-year deal, along with a $30 million signing-on fee, was paid in the club’s own PSG Fan Token.

But in a broader perspective, cryptocurrencies and blockchain as a whole have the capability and capacity to help the world become better — with better access to money. As we speak, there are more than 1.7 billion people who do not have any link to any bank account, credit card, or financial institution — they are the ”unbanked”.

Those without access to financial services — thus, without access to the financial system — are not just in developing countries but also developed countries like the US. There may be any number of reasons they are unbanked; in the case of Venezuela, the financial system’s collapse and hyperinflation of its currency, the Venezuelan bolivar, left many looking for alternatives.

The struggles of the unbanked can be daunting, with the inability to pay bills, access loans, and build credit to obtain credit cards. That’s where blockchain technology and cryptocurrencies can begin to solve that problem, leveraging decentralization to foster better financial equality.

Who Are the Unbanked?

The unbanked, as we have explained, are people without access to a bank account. Instead, they use cash to pay for goods and services, or other financial services to replace the banks. Examples include pawn shops loans, payday loans, and prepaid debit cards, among others. 

Similar challenges are faced by those who are underbanked. The underbanked people may have a bank account, but it cannot perform all the banking services they require. As a result, they also need to employ alternatives to support their financial needs. Having a bank account is a fine distinction between the unbanked and the underbanked, but the problems both groups face are similar, centered on access to financial services.

As much as 62% of the unbanked population have a primary school education or less, according to research done by Findex in 2017. Only 38% of them have a high school or post-secondary degree; 47% of them are outside the labor force, and 53% are employed or actively searching for a job.

The overall profile shows a broad correlation between low-to-average education and financial difficulties. That may help explain a range of outcomes, such as low financial education or just minimal funds, or a mix of those factors that lead them to see banking services as extraneous. For those with slightly higher levels of education, there may also be a distrust in banking services closest to their location. 

Beyond those reasons, not having a bank account aggravates a range of struggles stemming from the inability to access basic financial services, such as savings, payments, insurance, and credit. The unbanked may even have a hard time accessing poverty alleviation schemes. On the whole, they are excluded from any monetary security or management measures available.

Can Crypto Help Bridge the Wealth Gap?

On a wider scale, not having a bank account contributes to the widening gap between the rich and poor. The harsh irony is that the unbanked are also deprived of the very tool that can help them manage, even scale up, their income level. Just think how bank loans or mortgages help people, for example, to start a business, buy a home, or plan for the future. The unbanked can resort to a prepaid card as one of few alternatives, if any at all, to pay for goods or services.

With their growing adoption, digital assets offer a more viable solution, ultimately providing a way to alter the financial path of the unbanked. Cryptocurrencies can be accessed with minimal funds and a mobile phone. On a global basis, more people own a smartphone (over 80%) than those holding a bank account (less than 70%), according to reports by Ericsson and Radicati Group (2021), and The World Bank (2017, latest figures available), respectively.

In most cases, having a bank account requires a phone, but merely having a phone does not qualify one for a bank account. The highest number of those unbanked come from Sub-Saharan Africa, the Middle East, and Latin America. Providing banking services to these regions means large investments for banks with little promise of returns. However, with a mobile phone and Web access, people almost anywhere can register for a crypto wallet, gaining access to financial services. 

Blockchain technology provides them with quick, safe, and transparent financial services. For instance, for one to send money through banks to another continent, it may take time to perform such transactions. Imagine millions of transactions of this kind happen in a bank; you would expect the bank to struggle. However, with blockchains, millions of transactions would never be a problem. 

A country already leading the pack in testing the solutions of crypto is El Salvador. With nearly 80% of the unbanked population in the country, El Salvador has become the first in the world to officially adopt Bitcoin as legal tender in September 2021. Buying groceries or getting a haircut with Bitcoin has become an option for 6.5 million people in the country. As of today, more people have a Bitcoin wallet than a bank account in El Salvador. Cryptocurrency is an avenue for the unbanked to make cashless transactions within and outside the country from the comfort of their homes – without the need for a bank account. 

Another reason why some of the unbanked don’t fancy banks is the charges for banking services. For almost every bank transaction, there’s a charge you pay. Sometimes you even have to pay extra cumulatively, not to mention cross-border transactions. However, in the cryptocurrency world, you may not need any extra fees apart from those to the platform, and you won’t need any third party to confirm the transaction. 

Equalization Payments and Crypto

In a bid to alleviate poverty and look for financial equality amongst citizens, governments from across the globe give out equalization payments. As the name implies, equalization payments transfer wealth from the rich to the poor to foster financial equalization. It’s still a new development underway in countries like Canada, Switzerland, and Australia. In these countries, equalization payments are used to find a financial balance between rich provinces and poorer regions. 

While this is a helpful initiative, it is difficult for the unbanked to feel the effect of the equalization payments because it is dealt directly with financial services. Since they don’t have any bank accounts, the policies do not apply to them. On the other hand, if everyone owns a crypto wallet, the government can equalize finances through blockchain technologies with no one left behind.

Bitcoin and cryptocurrency may need time for wider adoption to come. The unbanked are still the left-out citizens who the government can’t identify without a bank account. However, it’s Bitcoin o’clock. With a smartphone, you have access to a Bitcoin wallet. This crypto wallet will give the unbanked financial services, and hopefully, financial equalization. 

 

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