The Cost of Being Unbanked
Estimates for the world’s unbanked population vary between 1.7 billion and 2.2 billion. Not having access to banking and financial services has serious and long-term implications, from forcing people to use more expensive alternatives to traditional finance and limiting their access to credit lines, to preventing them from building emergency funds and making important payments on time. A lack of financial access can also limit people’s ability to invest in the opportunities that are available to them and can compel them to use non-standard and often complex forms of non-traditional finance, such as borrowing from friends or giving their possessions as collateral for loans at great personal risk.
There are many reasons why there are so many unbanked people around the world. Some of the biggest drivers of financial exclusion today include the high costs of opening an account, exorbitant remittance fees, a lack of proper identification documentation, restricted access to physical banks, and living in a country or operating in markets that still largely rely on cash.
Blockchain, Cryptocurrencies, and Digital Payments Solutions
Across developing economies, particularly in Africa, digital payments have gained considerable traction as a safe, fast, reliable, and cost-effective way to send and receive money. Driven by performant and user-friendly mobile technologies, new digital payment solutions can quickly and effectively reach unbanked and underbanked individuals who have been long excluded from the traditional financial system.
Digital payments in Africa grew 11-fold over the last 10 years and have empowered millions of people by breaking access barriers for a wide range of goods and services. Since approximately two-thirds of adults in Sub-Saharan Africa are currently unbanked, providing these users with access to digital financial services can be nothing short of extraordinarily transformative for the entire continent.
Alongside digital payments, crypto-based payments have also seen tremendous growth in Africa over the last few years, up over 1,000% since June 2020. By merging the trustless and permissionless nature of blockchain and its underlying Distributed Ledger Technology (DLT) with mobile banking offerings, we can make existing money infrastructures even more efficient while reducing costs, increasing security, providing financially inclusive products and services, and simplifying local and international funds remittances for businesses and consumers alike.
An important prerequisite for this is internet access, but with many companies such as 3air working on fast and cost-effective large-scale internet connectivity solutions for millions across Africa, now is the perfect time for digital adoption in the financial services sector. The 3air network can help get people online and connected to Web3 services, and can even help them enter the fold of newer technologies such as blockchain and cryptocurrencies that promise a permissionless alternative to today’s bank-focused financial services.
How Mobile Money and Crypto-Based Funds Transfers Work
Mobile money facilitates funds transfers between the SIM cards of mobile devices. It works with both smartphones and non-smartphones and has been successfully used to reach millions across Africa; today, about half of all mobile money users around the world are in Africa.
With mobile money, however, payments are still processed through third-party providers. If Person A sends money to Person B using a certain service, the funds must still be released by Person A’s financial institution and then accepted by Person B’s financial institution. Both institutions may have fees of their own, as will the service provider.
DLT can be used to bypass all these middlemen. Cryptocurrency-based payment solutions use smart contracts to manage platform operations in an automated fashion. Smart contracts are bits of computer code that can automatically approve or reject transactions or perform other actions based on whether a given scenario or transaction meets specific criteria. In this way, users such as Persons A and B can bypass all the traditional middlemen without paying exorbitant processing fees, relying instead on the fair and low-cost processing of transaction data to easily send and receive funds and avail services of other types. In many cases, such solutions can deliver real-time global payments in seconds – not days – making locked-up capital in destination markets a thing of the past.
Use Cases and Opportunities
DLT-based cryptocurrency payment technology can be used for everything from global remittances and SME payments to disbursements and treasury flows. In Africa, where financial markets between countries are not only complex but highly competitive, crypto and blockchain technologies can be used in conjunction with the 300+ mobile money systems currently in operation on the continent to open up closed-loop systems and provide financial access in wider use cases.
For example, fundraising via an Initial Coin Offering (ICO), raising charitable donations, paying worker salaries, fulfilling procurement/supply orders, and executing regional/international transactions can all be conducted using cryptocurrencies and the blockchain-based smart contracts that run them. If, for example, a shipping parameter or requirement is not met, a worker does not complete their tasks on time, or a fundraising goal is not reached, all transactions can be effortlessly reversed – without the overdraft fees, arrears, and late-payment interest charges associated with bank-based payments in such scenarios.
In this way, crypto-based solutions offer a robust alternative to many current options – including mobile and digital solutions – as well as those offered by regional banks and payment processors. This includes large players such as Western Union (which processes $5 billion worth of funds in Africa every year but can charge fees as high as 15% for certain transactions) and new fintech startups such as PAYDEK that are focused on small businesses and freelancers.
Looking Ahead
What’s needed now are better legal, compliance, KYC, and AML systems that can help grow crypto-based financial services across Africa. What’s also needed is internet connectivity, something companies such as 3air are working on in some of Africa’s most heavily populated yet underserved markets.
Use cases like those outlined above will provide new opportunities for both traditional banking services providers and non-banking institutions to serve the unbanked at scale. As such, we are currently in the midst of a financial revolution that is seeing traditional systems and centralized silos being challenged and broken down by decentralized alternatives, and it is the unbanked, underbanked, underserved, and excluded private end-users and consumers who will finally benefit from this changing of the guard.
