The term “financial inclusion” is a new buzzword in the fintech space. With the rise of services like Abra and MPesa, we are convinced that bitcoin is the solution to the problems of the unbanked. With bitcoin, we say, the house cleaner in Dubai can get her money home and the refugee can get his money over the border into a safer place.
I’m even known to wax poetic about the topic. That’s fine. Optimism is a wonderful tonic for the soul. But we have entered a bubble made of cryptocurrency buzzwords and it’s important to assess what is going to happen over the next few years. In short, right now the bitcoin infrastructure is insufficient to support the unbanked. This must and will change.
Before we begin, a bit of disclosure: I’ve been researching this for my own project, Freemit, and I’ve been talking to startups in this space. There are many differing views and I absolutely want the unbanked to receive the help they deserve. But it’s up to the entire industry to shift its practices to help the neediest.
First, let’s discuss the unbanked in the US. Mehrsa Baradaran’s excellent book, How The Other Half Banks, tells of the fall of the rural bank and the growth of predatory and pernicious banking. During the early years of the banking industry, when the US was an agrarian society, each small town or community had its own bank. These multiple mini-banks served the community directly and were often the only place a farmer could get a loan before next year’s harvest. These mini-banks are what we think of when we imagine the nefarious landowner and banker in small town America – their whims could make or break a farm. The truth was that these small banks were the lifeblood of early America.
Regulatory changes created nationwide banks that slowly subsumed the smaller banks. These tiny banks fell or were bought and the resulting banking deserts further gutted the agrarian towns and led to the growth of industrial America and its various discontents. You could now sell your soul to the company store and, further, deal with a faceless bank that had no connection to your local community. You could also get a large mortgage that let you buy a home in the suburbs and, barring the occasional horrible crash, that has been said to hold us all in good stead.
Now, thanks to the hollowing out of bank branches, we have payday loans where a $600 loan can balloon to $2000 in fees and the only ATMs available feature a $3 fee. Once again, this is not always the case and this pessimistic view of the banking core but this same situation repeats itself in New York to Jakarta.
But how do you solve this? Bitcoin will be the solution, but not until the entrenched players open connectors to the entire blockchain network – which, obviously, goes against the big banks special “internal blockchain” efforts. The banks still think that the blockchain is like the Internet – there should exist special private networks that only they can use “for security’s sake.” This is evocative of companies, back in 1999 or so, who wanted special VPNs for their companies so the big bad Internet – a catalyst for change that remade the world – wouldn’t interfere with their TPS reports.
What the banks are really saying is they want to pull the jet engines off of the blockchain 747 but they don’t want to deal with all the smelly passengers and headstrong pilot. It’s folly that will soon be remedied.
Still, this doesn’t solve the problems of the unbanked. Here are some pressing issues.
The unbanked want to remain anonymous. A bank owner I spoke to noted that the primary problem in serving the unbanked is that they live in a cash economy. They want to remain anonymous for various reasons, be they immigration status, fear, or distrust of banks. The only way to solve this is to rewrite the onerous rules associated with closed networks like Western Union to allow the unbanked to use completely transparent networks. Regulations are scaring off money sending projects because they were written for a more barbaric age. This can only change but will take effort by the industry to move the perception that anonymous money sending is the tool of terrorists and drug dealers. By allowing $100 in cash to move anonymously you are helping a poor worker and not a gangster. The gangsters have their own ways to move money and $100 is a pittance.
The unbanked live in places where predatory banking is more convenient. New School professor Lisa Servon said in a PBS story that “having quick access to their money is one big reason low-income people choose not to use traditional banks”
“The South Bronx has only one bank per 20,000 residents,” she said. This means that check cashing and money changing spots, not to mention money sending kiosks that charge high rates, are the go to spots for transactions. New ideas like human ATMs are definitely interesting and work in places like Hong Kong where maids can visit a mall to send money home and where many small bitcoin remittance plays like are thriving.
But these are small markets and not interesting to the big banks or big investors. Like, say, the Netscape browser in the early days of the Internet, these services are the small strange outliers that will eventually grow enormous.
The unbanked are difficult to address. Acquiring unbanked customers that will trust your brand is difficult. That’s why the tools associated with Internet banking must first address the early adopter. The first mobile phones were found primarily inside expensive cars. Now they are found in every pocket around the world. This means the phone has moved from a tool for the rich (like bitcoin right now) to a tool for everyone.
The first Internet shops required contacts at a hedge fund to start and hundreds of engineers to understand (like bitcoin). Anyone now can can use the tools created by that company to build anything they want. The barrier to building an Internet startup is basically an understanding of a little code. The same thing will happen in banking. As these apps become more usable the banking deserts will be no more since we will soon have a bank in our pocket that can do more than pay a few bills.
Smaller countries do not have bitcoin liquidity. As I’ve explored our own project, I’ve heard again and again of startups that failed because bitcoin is illiquid in the poorest countries. That’s why the best startups are sending phone minutes over borders or releasing debit cards that can be topped up remotely. These are alternative forms of value that can land in a country without proper infrastructure or access to cryptocurrenies and help people immediately. It will take a long time before the truly poor will even know about bitcoin and even then there is no reason to even discuss it. Instead it should be the sharpest sword in the arsenal of banking inclusion and fintech should work hard to ensure that the policies created now will help everyone, not just the rich.
The bitcoin infrastructure is excellent, secure, and powerful in the abstract. In practice it is useless… but not for long. Fiat in and fiat out will become a real thing this year – hundreds of folks are working on the project – but to focus on the unbanked does nothing to interest big banks. They’ve already quite well ignored that subset of the world. I predict a number of exciting changes to this in the next year but it will take time for the true promise of bitcoin to express itself. When that happens we will see an engine of change that will rival the Internet in power and reach.
