If there is one phrase that deserves to be left behind with the rest of 2020, it is “banking the unbanked.” This has become a consistent talking point of cryptocurrency advocates who argue that blockchain technology will solve the problem of insufficient financial access among poorer populations. “Unbanked” and “underbanked” are pithy descriptors. They describe a real set of circumstances that would concern anyone who wants to alleviate poverty. The sentiment behind this popular parlance is well-meaning. But it is misplaced. Unchecked assumptions about financial inclusion are causing some government and business leaders to pursue strategies that are likely to give poorer people access to new technology without helping them generate income needed to improve their financial situation. With rising public and private attention on digital currencies, either in the context of decentralized protocols or central banks, the strategy of banking the unbanked through financial technology deserves more scrutiny.
The main assumption to check around banking the unbanked is around the cause of peoples’ unbanked status. It is assumed that those who lack financial services primarily need a better way to access them. Technology is perceived as an ideal solution. But in the Philippines, a country with a high proportion of unbanked individuals (barely 23 percent of adult Filipinos have a bank account), a 2017 central bank study on financial inclusion shed light on the main problem around financial access. Of all those surveyed who lacked a bank account, the majority (60 percent) said the key reason was that they simply did not have enough money. Twenty-one percent said they felt they did not need a bank account. Eighteen percent said they did not have the proper documentation to open a bank account. Critics of anti-money laundering regulations and know-your-customer requirements often cite this last reason as the main problem facing the unbanked. While it is clearly a hurdle for some, it appears not to be the top issue to solve to get people financial services.
This hierarchy of factors is not unknown in the international development community. A 2015 World Bank report looking at financial inclusion globally noted that 59 percent of survey respondents cited lack of money as the main reason for not having a bank account. Interestingly, a second reason was that people depended on a family member who already had an account. This indicates that cultural and familial factors greatly influence whether one wants or can get banking services.
People mainly lack financial services because they lack income and not the other way around. So, to effectively bank the unbanked, the key problem to solve is how to help people generate more income. This prime factor is ignored by many technologists because when it comes to helping people gain wealth, there is no singular app for that.
Much of the conversation around how financial technology tools could help with global financial inclusion focuses on decreasing the high cost of remittances. This is a seemingly noble goal, but it is really a first world problem. Remittance transaction fees charged by money service businesses certainly eat into the funds that emigrants in high income countries send to their unbanked relatives back home. But alleviating that cross-border pain point does little to address the local earning capacity of the recipient. And although many cryptocurrency advocates argue that cryptocurrencies can greatly reduce the friction of remittance payments, there is not much business evidence yet that crypto remittances have much demand. In Africa, some early cryptocurrency companies that attempted to capture the remittances market quickly pivoted, either shifting to other payment methods besides crypto or focusing more on business-to-business transactions where digital currencies are used to settle cross-border payments. None of this is to dismiss the importance of remittance payments to Africa, Asia, and Latin America. However, it shows that one should not let their fondness for an innovative technology and its theoretical benefits drive their overarching business strategy.
I learned this directly a few years ago. Once, an associate of mine who was working in an east African country with a significant unbanked population and ubiquitous government corruption approached me for help. The person was looking for ways to bring transparency and accountability to the spending of donor funds. I thought that perhaps a blockchain solution could help. So, I met with an entrepreneur with years of experience working in Africa, both in conventional finance and with cryptocurrencies. When I explained the problem, the entrepreneur remarked, “Why don’t they just focus on using mobile money instead of crypto? It would be so much easier.” I was a bit embarrassed. In seeking a blockchain solution, I had put the technological cart before the horse. This impulse is all too common in the crypto space, where some advocates promote the solutions in their minds instead of solutions derived from an objective assessment of local needs and input from the target population to rank the factors impacting their economic situation.
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The banking the unbanked mantra is influencing new, idealistic ventures in the crypto industry. In 2020, some blockchain entrepreneurs began arguing that the underbanked would benefit from greater access to Decentralized Finance (DeFi), a niche market of cryptocurrency-based financial services. DeFi platforms offer lending, trading, speculation, and various profit-making opportunities all based on digital tokens, smart contracts, and no regulated financial institutions. Some blockchain projects based in the U.S. and Asia are positioning themselves to promote DeFi services in Africa and there is a small group of local, African DeFi enthusiasts. Although DeFi is likely to face great regulatory challenges as it grows globally, there is nothing inherently wrong with offering alternative financial products in environments with minimal banking access. But despite DeFi’s innovation, its technology is much more difficult for the layman to use than traditional money services. And it is not designed to remove the main cause of being unbanked or underbanked in the first place: not having enough income.
As financial inclusion studies show, being unbanked is not the problem. It is the effect of a problem. In 2021, a shift is needed from describing lower income populations as unbanked, which only emphasizes one’s status as a potential customer of financial institutions. A better term to convey the economic dynamics at play for the poor would be unmarketed. Income level is usually a function of one’s participation in a market, whether it is the labor market or the business market. Participants with no employment, low wages, or who can not find enough buyers of their business production are less likely to have the income needed to save money, repay loans, and invest in financial products. This is a market problem, not a banking problem.
A 2016 study at a South African university illustrates this point. Researchers looked at the factors hindering subsistence farmers from success in commercial agriculture. The study found that access to markets was key. Poor farmers tended to have bad transportation infrastructure for delivering goods, lacked adequate business management and promotion skills, and had little insight into market developments and pricing. Markets for their produce existed, but farmers were unable to take advantage of them. These individuals are the types of economic actors who would be less likely to have bank accounts. Giving them access to Bitcoin and Ethereum is not enough to solve their problem.
The new year offers a time to reflect on both the successes and failures of public policies and business strategies. It also is a time to check the assumptions guiding our endeavors. For those who want to assist people in poverty, we should not overemphasize their status as banking customers. Instead, we should help them gain success in markets that will allow them to generate more income and become financially empowered to access better financial services. Our aim should be to bring the unmarketed to the marketplace.
Cryptocurrencies and blockchain tech might have a role in this aim. And they might not. To find out, it is best to study the main factors that hinder poorer communities’ financial outcomes and then see where—or if—technology can help improve that situation.