Approximately three billion unbanked adults all around the world in today’s world, or in other words a vast range of people, potential entrepreneurs, small enterprises and all sorts of professionals have little or no access to the financial services delivered by formal financial institutions. Therefore, they mostly face a threat of economic and social marginalization in the traditional markets, which only creates higher risks and higher costs for the population with the most needs. However, it should be kept in mind that such a lack of opportunity for these people to grow and prosper through participating in the financial system is not only a problem for the welfare of these citizens by themselves but also for faster economic growth rates of nascent countries.
Before getting involved in a debate on the importance of financial inclusion and alternative ways to increase the percentage of people that can be incorporated through traditional banking methods, we should focus on the side of the coin, exactly the opposite of financial inclusion, i.e., financial exclusion. Broadly speaking, financial exclusion refers to the lack of access to financial products and services such as bank accounts, affordable and accessible savings, payments, remittances, credit, insurance, and investments. Financial exclusion results in more costly and challenging options for operating a micro/ small enterprise because of the lacking services that may connect the population to mainstream financial services. Furthermore, limited access to financial products can exacerbate the existing economic and social exclusion of economically disadvantageous people and communities, particularly in rural areas of developing countries.
Thanks to the merge of services of technology and finance sectors under the name of “fintech,” we can now talk about many exciting promises of this sector promising to provide financial services for many worldwide. According to the World Bank report published in 2017, with the help of innovative technologies, there can be a reduction of costs for those accessing financial services, which means that rather than being a part of the traditional banking system, digital inclusion can now be considered a prerequisite or rather a vital element for financial inclusion.
The most prominent tool of this promise is the mobile financial services. Given the mobile services’ unique features such as personalized small devices and mobility, mobile phones can be considered the new tool for eliminating geographical and socio-economic barriers for financial inclusion. For example, mobility enables phone users to access services regardless of their physical location while reducing the cost of communication and transportation. Furthermore, mobile phone-based financial inclusion provides financial services such as mobile banking, mobile payment, mobile money transfer, and mobile international remittance services.
As underlined by the World Bank ID4D database, the lack of a legally recognized form of identification is one of the most important reasons of financial exclusion. Especially, women lack identification disproportionately in low-income countries, which in turn contributes to their social exclusion. For example, 45% of women over the age of 15 lack identification in low-income countries, compared to only 30% of men. The surge of digital identities now can make it a possibility for an extensive inclusion of large masses of previously underprivileged populations.
Provided by mainly by the digital identity system precisely on this matter, and along with the help of additional pursuing services such as high-assurance authentication and verification, including biometrics, passwords, and smart devices; gaining access to financial goods will become a possibility.
Financial inclusion by Blockchain technology
Because of decentralized network and distributed ledger system of the blockchain technology, the records of various kinds of monetary and non-monetary transactions are kept at all times without any deformation, eliminating completely the need for a third party, which in turn help reduce the costs of account ownership and eliminate trust and inefficiency problems caused by corrupt or incompetent third parties such as traditional banks and central institutions.
To better comprehend the impact of Blockchain technology on financial inclusion, let’s look at the remittances of the last decade since they are one of the most important problems for un/ underbanked people. The current model of the remittance systems are driven by electronic transfers over a traditional banking infrastructure, which means that money transfers are still more expensive for fragmented and inefficient payment systems in many developing countries. At this stage, Blockchain technology can be an accelerator for financial inclusion as a more transparent, efficient and frictionless distributed ledger technology, since the Blockchain tech can enable near-real-time and accurate payment, thus reducing the cost of any transaction process. Furthermore, Blockchain-based cryptocurrencies promise to enable the un/underbanked people to send payments, which frees people from paying currency fees in money transfer process on a global scale.
Another opportunity provided by the Blockchain technology in the context of financial inclusion is that it can provide a digital identity to individuals with enhanced privacy, restricting their new ID to their devices as well as allowing other individuals to gain access only with the consent of the ID owner.
With the help of Blockchain-based digital identity system, people who have no sufficient access to the formal financial system can enable higher independence and better chances for their welfare. For example, for the homeless population, Blockchain-powered identities can lift the burden of maintaining physical copies of IDs which are easily lost, stolen or kept as a pawn in emergency and inhumane areas.
However, as stated by BanQu founder Ashish Gadnis, “Identity on the blockchain is old news. The real value of blockchain is its unmatched ability to create and secure an economic identity for the world’s billions living in extreme poverty today. This is truly a revolutionary opportunity.”
Colendi: Cradle of Digital and Financial Inclusion
As a Blockchain-based microcredit platform and credit scoring mechanism, Colendi uses a wide range of data such as smartphones, social media, transaction histories of users to get reliable information about borrowers, while measuring their creditworthiness in a more fair and transparent way. In this sense, Colendi platform aims to provide alternative financial services for the un/underbanked people and businesses in a more inclusive fashion through its two main products which are: Colendi ID and Colendi Score.
With the promise of financial inclusion and “true sharing economy”, Colendi Project can enable to recreate a financial score for each user through various tools such as Colendi ID. Its decentralized data storing methods including transaction logs, smartphone, and social media data, user inputs and Colendi credit history enables the creation of a financial reputation score. After users create a Colendi ID by providing their identity parameters and information in Colendi ecosystem, all network-related events are recorded step by step on the Ethereum Blockchain to update the Colendi Score of the user. Via a fairer financial scoring system, an un/underbanked person is envisioned to become the new economic actors in new digital markets of tomorrow.