It’s a new day for how we interact with money. You can pay for your morning latte without reaching for a credit card, let alone cash. Most of the recent buzz around financial technology focuses on power players such as Square and Venmo — fintech products that allow users to accept payments or exchange money easily, smoothing the pain points of everyday commerce. These services are designed for banked consumers: Tap to add a credit card. Click to connect your bank account.
Innovative as they are, financial solutions often overlook a key market: the 2 billion people worldwide who don’t have credit cards or bank accounts or don’t have ways to get them. What would the fintech landscape look like if the unbanked had access to these and other financial services?
Formal financial institutions are exclusive for a reason. In the U.S., it costs between $250 and $400 per year for a bank to maintain a checking account. Banks around the world generally can’t afford the maintenance costs to serve low-income people and aren’t incentivized to design products for small savers.
But digital currency protocols have the potential to make pervasive change by expanding services to people who are financially excluded — without relying exclusively on traditional banks. Unlike reimbursing a friend for brunch using a checking account and emoji on Venmo, the infrastructure supplied by a digital currency protocol isn’t sleek or user-friendly. It could, however, create a massive group of new fintech users.
This massive group of new users could come through microfinance institutions (MFIs). MFIs provide banking services to those who don’t have access to traditional financial services — particularly the world’s poorest, many of whom survive on less than $2 a day and don’t qualify for traditional banking. There are currently 10,000 MFIs globally (as many as 100,000 when you add credit unions, co-ops and other informal institutions to the mix), serving 150 million people worldwide.
Most fintech services are designed for online consumers, but companies are beginning to create products that rely on technology available to a broader market — including MFI customers. According to the International Telecommunications Union, an estimated 95.5 percent of the world’s population has access to a cell phone. The reach of SMS, then, far exceeds that of the Internet, to which approximately 40 percent of the world has access.
If it can reach offline users, bitcoin is one digital currency protocol that has the potential to serve the world’s unbanked and underbanked. Many new companies are already using blockchain technology to build more inclusive solutions. 37coins, for example, allows users to send bitcoin via SMS, removing the barrier to entry posed by Internet access and leveraging feature phone penetration. Unlike other bitcoin wallets, 37coins focuses solely on SMS, a choice that makes the currency more accessible for people and organizations in developing regions.
Another mobile platform, Beam, which focuses on the remittance market, was founded to address payments problems in Ghana. Approximately 3 million Ghanaians live outside of their home country. In 2013, this population sent $120 million home. (Estimates put the annual remittance total for all of Africa at close to $40 billion.) Beam accepts bitcoin from the sender and delivers Ghanaian cedis to the recipient for a lower-than-average 3 percent fee. The process takes just minutes.
By contrast, traditional money transfer services, heavily patronized by people who don’t have bank accounts, charge transaction fees in the double digits for remittances that take days to fulfill.
Digital currency applications like Beam and 37coins can cheaply perform the kinds of microtransactions that MFIs often provide low-income customers because banks aren’t incentivized to provide them. Rather than slow, expensive transfer services, money moves safely between customers in minutes via widely available technology.
But person-to-person transfers are just one part of the solution. Because MFIs serve their customers without the infrastructure used by traditional banks, they face similar obstacles at an institutional level.
The thousands of discrete MFIs working all over the globe have painstakingly cultivated human networks, but they remain primarily local and often don’t have ways to talk to each other. In Nigeria, for example, it takes 12 hours and a bus to move bags of cash from an MFI in Lagos to an MFI in the north of the country.
MFIs that have built local networks know their clients better than those of us who worry about paying easily for lattes ever will.
Digital currency protocols aren’t just alternatives to fiat currencies like dollars or euros, and they aren’t just about new apps and products. They could also help solve the problem of those long, precarious bus rides that manually transfer MFI cash. For the communities served by MFIs, protocols can serve as infrastructure for sending and receiving money, converting currency and maintaining credit history. They can lay the groundwork for several important features not currently available for transactions between MFIs:
- Immediate clearing. Many MFI customers require immediate access to funds for sudden personal emergencies: sickness; catastrophic weather; and injury. With digital currency protocols, money can be sent anywhere in the world almost instantaneously.
- Microtransactions. Low-income people rely on flexibility to manage money, making daily financial decisions that often require small transactions to stretch their budgets and cover immediate needs. Digital currency protocols could eliminate transaction fees.
- Digital financial history. Lack of credit history is a huge challenge for both lenders who don’t have enough data and borrowers who would love to prove their reliability. With the public ledger systems of digital currency protocols, lenders and borrowers would both have more accountability.
- Low-cost or no-cost transfers. The developing world is mobile. If someone leaves home to find work at $5 a day, they might pay $1 just to send that money back. Solid infrastructure could do away with the large remittance fees that pose an obstacle to families pulling themselves out of poverty.
It takes patience and persistence — something we don’t always have the luxury of with new apps and products — to build the human networks on which successful microfinance hinges. Trust is won or lost one transaction at a time.
MFIs that have built local networks know their clients better than those of us who worry about paying easily for lattes ever will. These institutions have the potential to act as experimentation hubs around financial services, especially if we start linking those hubs so MFIs can share information, connect their own customers, and work together.
Services such as M-Pesa indicate that the developing world is already embracing digital money much faster than the developed world. With infrastructure powered by digital currency protocols connecting MFIs, more apps and services can come in at the local level, designed by developing communities and optimized for interoperability.
MFIs just might be the newest fintech sandbox. Their infrastructure experiments could pave the way for payment solutions in previously untapped markets. After all, who knows where the next version of Venmo — or Venmo’s next 2 billion users — might come from?