Blockchain and financial inclusion

This short article outlines how the blockchain affects financial inclusion and “putting money into a bankless account”. This chapter has two parts:

1. Financial Pratt: Who is considered to have no bank account? (This is not just the poor)

2. How to use the distributed ledger ("blockchain") technology?

Financial Pratt: Who is a bank account?

Poor people. Yes, the poor are economically excluded from the formal financial system and may not be able to participate in digital finance like everyone else. They may not be able to get a well-priced loan, or they may not be able to open a current account.

But they are not the only segment with no bank accounts.

SMEs. SMEs are often economically excluded - this situation varies from country to country, but not limited to developing countries. In rich countries, companies may be excluded from the formal banking infrastructure because of their industry or ownership structure.

How are SMEs economically excluded? In the worst case, they may be legitimate businesses, but even basic bank accounts are not accessible, such as bitcoin exchanges or legitimate companies in those industries, but in ethically extreme industries such as marijuana , gambling and adults.

Matt Levine's comments on Bank of America's bank that refused to trade bitcoin transactions in banks are worth reading - here's my favorite point:

The concern here is that JP Morgan Chase may transfer money to another bank, while another bank may transfer funds to the Bitcoin exchange, and the Bitcoin exchange may transfer funds to a drug dealer. In the eyes of the law, this means that JP Morgan Chase may be dealing with the drug problem itself. I sometimes think of an analogy between a bank and an airline: if a drug dealer uses a bank transfer, the bank is responsible, but if he just took a bag of money on the plane, no one thought that the airline would be responsible. But this is further removed. It's like a taxi driver flying from New York to Miami. In Miami, he brought a man with a boat, took him to the dock, and then took the person with the boat to deliver cash for the drug dealer, you Will be jointly and severally liable. If you punish the bank because the bank accepts the business dealing with the offender, then a large number of legitimate financial transactions will be cut off.

Even companies in traditional industries may find it difficult to obtain loans, especially for new companies that require most of the loans, or those that are not traditional industries (for example, new industries that do not have easy-to-understand models or metrics).

The basic current account is vital to any business, and the loan is the lifeblood of SMEs, for working capital (purchasing raw materials to make products) and expansion (buying more operating equipment, opening new offices, factories or lines of business) important. .

However, this is not just the people and companies that can be economically excluded.

Bank. Perhaps surprisingly, banks are increasingly economically excluded, especially in poor countries.

You can imagine a community bank in Papua New Guinea whose clients are planters who want to export their goods and get a dollar return. In order to send and receive dollars electronically, community banks need to be part of the dollar network. (If the payment is made purely on physical banknotes, then the banking business is simple, you can use the bank's vault or locked box, but digital payments work differently.)

Note: You may ask why you can't do all the work in Kina (the currency of Papua New Guinea)? Perhaps foreign companies will not hold Kina, and foreign exchange charges will cost the US dollar to become too high. Perhaps exporters find the dollar more useful - maybe they need it to buy agricultural machinery from abroad. Perhaps the relative stability of the dollar and the local currency is attractive.

So how does digital payment work? Typically, community banks need to open a US dollar account in one of the larger banks in the United States (preferably in the US) and use that account to retain their digital dollars. This is called their 'nostro' or 'agent bank account', and this American bank is called 'agent bank'.

However, these smaller banks are increasingly closing their accounts – a process that big banks call a risk reduction.

Why don't they use the bank?

Cost and risk.

Any bank that provides a bank account, whether it is for the poor, small or medium-sized enterprises or other banks, uses two calculation methods to determine whether the customer uses the bank:

Cost: Will my income exceed my cost?

Risk: What are the customer risks and what damage will they cause to me, finances and my reputation?

Poor without a bank account

This is mainly about the cost of the bank, not the income or risk. The cost is mainly in the job: around the process of understanding who the customer is, where they live, how they make money and whether they are on a low trust list. The cost of joining a customer and maintenance account needs to be lower than the customer's income. If the customer does not do too much activity, the account is unprofitable for the bank.

Company without a bank account

Companies are more complex than people, so it takes more time and cost to conduct due diligence on a company. There are many legal entities that may be relevant to the company. There are also owners and directors conducting background checks. There are many files that need to be manually understood manually. This process is called "know your customer" (KYC) and draws the attention of banker officials.

Bank officials must understand what the company is, what it does, what it does, who owns it, and how to make money. As the company grows, bank officials need to see this as the most important thing if the company does anything that could expose the bank to reputational or economic losses. This is just a current account.

Most importantly, for banks to lend to companies, banks need to understand the risks they face and how banks can get capital and interest. This means understanding the company's business model and risks. The interest on the loan needs to compensate for the bank’s efforts and the risks the bank is taking. As a result, many excellent companies are priced out of loans.

Other banks without bank deposits

The reason for closing bank accounts of other banks is that the income from opening and maintaining these accounts does not include the increase in costs of compliance with customer (KYC) and anti-money laundering (AML) rules. In addition, there are reputational and financial risks for large banks to provide accounts to small banks: large banks may be fined if they find money laundering customers or getting involved in political scandals.

The Economist wrote an excellent article on agency banks giving up risk, summarizing that “charity and poor immigrants are among the most vulnerable.”

So how can distributed ledger technology (DLT) help?

(See the difference between blockchain and DLT)

Cut costs

For individuals and small businesses, there are many initiatives around the digital banking and streamlined onboarding and KYC processes in personal banking and across the industry. Using DLT for self-sovereignty identification can make KYC's data capture part cheaper and simpler. Of course, another part of the cost is for banks to streamline their internal systems. After all, KYC is an internal process. Banks have never really faced the pressure to reduce operating costs, just as they are now squeezed, so we will see if banks can and how to make internal operations more efficient. The internal blockchain may work, especially if a bank is fragmented (mostly decentralized) and the department does not want to rely on each other or trust each other, or want to be able to prove the authenticity of the data to the regulator.

Increase income

Can DLT increase the bank income of SMEs? With regard to SMEs, there are some interesting ideas to use DLT to demonstrate the transparency of their supply chain and financial balance. This allows banks to provide cheaper working capital (short-term loans) as banks will have a better insight into the risks they face with SMEs and better insight into the ability of SMEs to repay short-term loans.

How does this work? Suppose a bank's customers want a loan, and the bank wants some comfort, that is, the business is healthy and the loan will be repaid. If the customer is part of a widget supply chain and records of widgets, logistics, invoices, and related payments are recorded in a distributed ledger, some data can optionally be shared with the bank to prove activity. Data that uses digital signatures and hash chains of transactions or sources are more convincing evidence than "checking in posts" or send an easy-to-use Excel file.

Reduce risk

By better understanding SMEs, banks can more accurately price risk, so they can offer loans at more attractive rates or provide loans that would never have been done before.

Of course, this is not just DLT, it is digital, API and direct processing - but the digital signature and hash data chain used in DLT can provide some guarantee that existing frameworks are currently unavailable.

Finally - new business model

This is the most difficult to predict. How will the industry develop when certain roles of traditional third parties are replaced by technology? What is the new business model? Bitcoin and digital currencies are maturing, and banks are approaching to regulate these coins (or private keys). Some people even want their ICO tokens to remain secure. Digital lock boxes will become more popular. What other digital assets are token game objects? Proud owners of unique digital assets will want third-party signatures to make them more difficult to steal.

In most DLT networks, "Oracles" (data providers for automating business to business workflows) (so-called smart contracts) play an important role. In some DLT networks, “Orderers” or “Notary Services” will add valuable services that can be monetized. Can banks play these roles? Maybe, but it is unclear whether the income opportunity will directly lead to no bank account becoming a loan.

Conclusion

This article is about no bank accounts. Not only poor people without bank deposits, but also businesses and other banks. How can DLT (according to link terminal) help? Any technology can help: Make previously profitable customers profitable by reducing costs and increasing revenue. Two related features of DLT are:

• DLT serves as a repository of selectable, accessible authentication documents and evidence.

• DLT creates a new business-to-business agreement that is efficient, auditable, and can be used for information and digital asset exchange and management.