Can blockchain technology really help developing countries to move towards what is called financial inclusion?

In a 2017 report, the World Bank stated that about 1.7 billion people in the world do not have access to banks or other financial services. In percentage, this represents almost a quarter of the world’s population. Most of these people reside in developing countries, with a shocking percentage of women, now accounting for as much as 56% of the total of the unbanked, i.e those who do not have access to a bank account.

The lack of access to financial services is often due to the lack of physical infrastructure and the high cost of banking transactions. In its 2017 report, the World Bank stressed the importance of technological innovations to reduce the costs and shortens the distances that could allow this part of the population to access financial services. In other words, digital technology could increase the so-called financial inclusion.

Although most of the unbanked people reside in developing countries (China, India, Pakistan and Indonesia in the top four), we should not just consider financial inclusion as a problem for emerging economies. In fact, even in more developed countries such as the United States, the problem of financial inclusion cannot be considered solved. A survey conducted by the FDIC reports that in the US, Hispanics and African-Americans are highly discriminated against and have limited access to financial services.

As a result, financial inclusion is now a particularly relevant issue even among supranational organizations. For instance, financial inclusion was the focus of debate in a recent OECD Blockchain Policy Forum in September. Also, in October the World Bank held a summit in Bali where the future of the blockchain technology and its potential to improve financial inclusion for developing economies was one of the major topics of discussion.

What could the blockchain technology do to promote financial inclusion in concrete?

First, we must consider the so-called “leapfrog effect” that new technologies such as the blockchain could bring to developing countries. Leapfrog effect could be described as the phenomenon through which technological improvements allow shortcuts when building infrastructures in developing countries. For example, today a country like Kenya has a 4G network that is faster and more efficient than the one in the United States.

Just like old copper wires and landlines are no longer needed to develop an effective communication network, the blockchain technology can also help people around the world spend and exchange money in a cheaper and faster way.

Modern cryptocurrencies could help reduce transaction costs for remittances from workers abroad and eliminate intermediaries such as Western Union or Ria.

Remittances, which are money sent to residents of a country by workers abroad, are a significant revenue for some countries.

For countries such as El Salvador, for example, remittances from workers abroad constitute a substantial part of the country’s GDP.

Latin America is currently the most important market for remittance services. From this point of view, cryptocurrencies anchored to the US dollar such as Tether and USDC, could be very useful for those who live and work abroad and want to transfer funds to their families living in their country of origin.

In addition, the adoption of a blockchain system by governments could be relevant to help transparency in public spending. This could create greater legitimacy and accountability in those countries where institutions do not have sufficient trust and credibility and taxpayers lack confidence in the government.

Is technological innovation without risk?

Technological innovation is often disruptive and causes a shift in the balance of power in society. Already in the past, technological innovations such as mobile network used in some African countries to send and receive money via mobile phones through text messages, has been more or less successful depending on the support received from local governments.

Emblematic is the case of M-Pesa, an SMS payment system that has become very popular in Kenya,and that has helped to increase the financial inclusion of the country. However, similar systems have not been successful in other countries such as Nigeria, where they have been blocked by the obstructionism of local banks and the government.

This reminds us that technologies such as the blockchain can certainly be valid to increase financial inclusion in the world, but it also tells us that they must find a point of agreement with the local power to be truly effective. From this perspective, it is encouraging to see that very influential international organizations, such as the World Bank and the OECD, have been positively supporting the idea of financial inclusion through blockchain technology.