The Unbanked, Explained

Unbanked, as defined by the Federal Deposit Insurance Corporation (FDIC), are adults who don’t have an account at a formal financial institution, such as a bank.

They are thus unable to access formal financial services such as credit, deposit accounts and money transfers and have to rely on informal providers of financial services, i.e. mostly friends and family.

According to recent reports, there are over two bln adults - more than a third of the total world population - who don’t have any access to formal financial services.

The vast majority of them are located in the developing economies of Sub-Saharan Africa, the Middle East, East Asia, and the Pacific region.

Underdeveloped banking infrastructure, the high cost of financial services and travel- to and from the bank outlets, lack of IDs, low income and literacy rates, frequent civil conflicts, and even wars are all contributing factors to the low level of banks present outside major urban centers in those economies.

Having so many people cut off from international capital presents a huge missed opportunity both for those people and for the international community.

The countries with the highest percentage of unbanked citizens tend to also have the fastest-growing economies. For example, Africa is reported to be the poorest of the inhabited continents. However, it also has one of the fastest economic growth rates in the world, with the majority of the countries displaying annual GDP increases of four to six percent and higher. Although East Asia is still outpacing Africa, many experts predict that the Dark Continent’s growth rates may explode in the coming years, as its economy reaches a critical point in its development.

That growth, albeit fast, is still severely hampered by a lack of access to formal financial services. People looking to start their own business or, for example, to start saving money, are unable to get credit or a deposit account, respectively. Without banks, money transfers are also hindered, in most cases requiring the physical presence of both counterparties - a pain that is alleviated to a degree by mobile payment services, such as M-Pesa.

Moreover, businesses operating outside Africa want to tap into the huge population on the continent. But they have little to no means of doing so due to the difficulty of creating financial interactions with the unbanked people.

This is an incredible opportunity to all parties involved: after gaining access to international capital, the countries of Africa would be able to grow faster than they do now. Likewise, companies outside of the continent would be enabled to do business with vast numbers of people, who up until now have been virtually unexposed to foreign financial products and services.

The opportunities are immense.

The African middle class, for instance, has tripled over the past 30 years and now consists of over 300 mln people. The overall spending on goods and services in African countries amounted to around $860 bln in 2008, and that number is expected to increase to $1.4 tln by 2020 at the current growth pace.

These are all signs of tremendous economic growth and it’s currently not fully capitalized on. The entire continent is one huge blue ocean of potential customers and the lack of proper financial infrastructure is one of the very few factors that prevents the growth rates from exploding. Whoever finds the solution to this issue is positioned to make massive profits enabling millions of people to improve their lives in the process.

The development of financial infrastructure in remote regions is a gradual process. There is, however, room for breakthroughs.

Social and physical infrastructures of the region are gradually improving year-by-year, and so is the presence of banking services. However, both the current level of formal financial institutional presence and the rate of its growth are disappointing in Africa.

Banks seem to be too rigid and unable to keep up with the rapid growth of other industries. It may be a conscious choice: maybe they are simply biding their time, waiting for a period of actual exponential growth to go all in. The result is still the same, however: vast markets are up for grabs for more agile companies seeking to provide maximum value to specific user groups.

One example is M-Pesa, a money transfer, finance and microfinance service, based entirely on users’ mobile phones. Despite the majority of African households being low-income, in 2015, the level of mobile phone penetration was 67 percent and is likely higher today.

Focusing on low-income phone owners, M-Pesa has been able to bring the much-needed freedom of financial operations to the market and is now considered the most successful mobile-phone-based financial service provider in developing economies of the world. This is the kind of rapid progress banks have failed to produce so far.

Cryptocurrencies, such as Bitcoin or Ethereum, may offer good opportunities to improve the financial inclusion in unbanked and underbanked regions.

Cryptocurrencies offer a simple way of transferring value. They can be sent anywhere at very low costs. You don’t need an ID or banking infrastructure to use them: all you need is a smartphone with internet access to send money across the continent and the world.

Even more promising than the cryptocurrencies themselves are the various projects built on top of them. While cryptocurrencies themselves are useful, they have some disadvantages, such as high price volatility, sometimes unintuitive user interfaces and lack of focus on the specific needs of unbanked communities, such as the lack of paper IDs and underdeveloped physical infrastructure. All these can be addressed by creating targeted solutions based on the technologies of Blockchain and cryptocurrencies.

A good example of one such solution is Humaniq, a decentralized Blockchain bank currently in development by an international team based in Europe, Africa and Asia. It seeks to create a comprehensive bank-like environment inside a user’s smartphone, with money transfers, loans and insurance powered by the app’s own digital crypto-token, HMQ.

Understanding the issues of an unbanked customer, the developers have put features in place which ensure that the product remains accessible to the people in the growing economies of the developing world. A simple facial and voice identification system gives a method of authorization for people with no paper IDs. Also, an egalitarian system of token emission, that is not based on expensive hardware, allows for the inclusion of low-income households.

It is companies like that, focusing on the particular needs of the unbanked communities and offering solutions to their specific problems, which may have the most potential in these emerging markets.