BANKING THE UNBANKED

BANKING THE UNBANKED
INTRODUCTION
It is difficult to imagine going through life without relying on banks and the services they provide. We use such services every day. Our wages get wired to our accounts, we regularly use credit cards to buy things in stores and online. And then there are all those bills and loan offers that get sent to us. Yes, clearly, banking is interwoven into all our lives.
This, however, is not universally true. Around the world there are people- roughly 2.5 billion adults- that don’t have access to banks and the services they provide. Such people are unable to start savings accounts and they cannot get credit cards. While in countries like Canada, the U.K, and Germany around 96 percent of people above the age of fifteen have a bank account, in Pakistan only 27 percent of the population does. Nor is this a problem exclusive to developing countries. While in the USA some 88 percent of people have a bank account of some kind, some 30 percent must make do with nontraditional banking sources such as payday loans, and have insufficient access to the financial system. These people, who either live where there are no banks or who are unable to access all the services we have come to expect from the industry, are the ‘unbanked’.
OUT OF THE SYSTEM
So, how come there are people who don’t have access to such a crucial service? The two main reasons are: Lack of facilities and lack of documentation.
Starting with the former, there are people who live in places where traditional banks don’t want to go. This is partly because, being poor, they don’t offer the kind of profits that richer clients do. But, also, it is because these people live in places with insufficient infrastructure and security and that makes building bank branches in these areas difficult. As such, there is a distinct lack of services that we take for granted. For example, in Uganda circa 2005 there were one hundred ATM machines for 27 million people.
As well as lacking the infrastructure that banking requires, the unbanked have the problem of insufficient documentation. As Peruvian economist Hernando de Soto has shown, economic growth and the creation of wealth depend upon clearly defined and documented property rights. In the West we have documents attached to our assets- things like our cars and our homes- that can be presented as collateral to a bank to borrow money. But in developing countries people have assets but no documentation. Lacking documentation to prove their identity, put up collateral and create credit histories, the unbanked have a lack of the basic foundations for participating in the banking system, and are limited to cash transactions. In the absence of mainstream banking, a shadow banking system has emerged to meet the needs of the unbanked. But such organisations leave these vulnerable people open to corruption.
A PROBLEM THAT CAN AND SHOULD BE SOLVED
Fortunately, we have now developed, and are expanding, the technological capability to integrate the unbanked into the global financial system. This is being achieved not through building physical bank branches but by leapfrogging brick-and-mortar banks using mobile technology. The potential in bringing those 2.5 billion unbanked into the global economy is not to be sniffed at. According to the journalist Robert Neuwirth, in aggregate there is some $10 trillions-worth of assets owned by undocumented people around the world. Were they their own country, it would be a country whose economy is second only to the USA.
It is therefore no fool’s errand to find ways of overcoming the obstacles the unbanked face in becoming part of the global economy. Indeed, the work done so far proves how valuable this can be. Thanks to globalisation and digitisation, people in India with sufficient understanding of English and IT skills can work from home servicing computers in America and Europe. Multinational companies now source their goods from all over the world, bringing job prospects to areas that hitherto had only a hand-to-mouth existence. Of course, this is not without some negative consequences. It means jobs are lost in richer countries as they are outsourced to places where there is cheaper labour. But it helped drop the percentage of the world’s population living on less than $1.25 a day from 43.1% to 20.6%.
Perhaps the most important device for bringing the unbanked into the 21st century is the mobile phone, for it is this device, plus the wireless infrastructure and IT that support it, that more than anything have allowed people to move away from cash and opt for more secure and useful forms of money.
Developing countries may be most open to this kind of change for a couple of reasons. For one, in richer countries we are used to digital currencies that offer all the convenience of cashless currency, but hide quite a bit of expense from the end user; that expense eventually showing up as higher prices. In developing countries, corruption and excessive bureaucracy are more blatant. Workers in some African countries must pay their boss a bribe in order to receive their wages. In Cairo, acquiring and registering a plot of state-owned land involves wading through some 77 bureaucratic procedures across 33 agencies, and can take up to 14 years. So we should perhaps expect to see such people embrace blockchain 2.0 and cryptocurrency solutions faster than countries that have convenient credit-card payment schemes with hidden charges.
Secondly, in developing countries we find a greater proportion of self-employed people- rickshaw drivers, food-stall operators, small business owners- and for such people it is particularly important to save costs on financial transactions. A payment solution that is more secure, able to circumvent corruption and avoids hidden charges, has obvious benefits for people who have to look after every penny. 
I would add a third reason why mobile banking, cryptocurrency and blockchain 2.0 technology may develop in countries where there are the ‘unbanked’ and that is the ‘latecomer’s advantage’. There is no rule that says a country has to retread all the steps that lead to the modern world. They can leapfrog straight to the latest technologies and practices. Indeed, this leapfrogging makes a great deal of sense, because the most modern technologies often do the same job as predecessors, only more cost effectively and less wastefully. The cost of purchasing and burying copper wire for a communications infrastructure would be more than $100 million. Cell tower infrastructure would cost a relatively small tens of thousands of dollars. If a city like Zinder in South Niger were to adopt PCs, then by the time 10% of the population were using them, the power they consume- 1,500 KW- would exceed that of all households today. Mobile devices, on the other hand, would consume just 74KWs, and as they run off of batteries they would be more useful in areas where power outage is a common experience. It is for reasons such as these that countries like El Salvdore and Panama have adopted mobile communications faster than the USA.

The fact that the rich nations have well-established systems and infrastructures could be an impediment to progress. W. Brian Arthur, External Professor at the Santa Fe Institute and author of ‘The Nature of Technology’ has written about how established technologies and practices can delay the adoption of new methods, even though those new methods are superior. In 1955, the economist Marvin Frankel noticed that cotton mills in Lancashire were not using the more modern and efficient machinery. This was because the old brick structures that housed the old machinery would have to be torn down before the new machinery could be installed. As Arthur wrote, “The outer assemblies thus locked in the inner machinery and thus the Lancashire mills did not change”. To this day, whenever a technology is so interwoven with the fabric of everyday life or business practice that replacing it seems too much bother, we say it has become ‘locked-in’.
There is also a psychological aspect to consider. Established technologies and practices can lead people to adopting certain ways of doing things, and upstart technologies that obsolete the old ways can be threatening. Sociologist Diane Vaughan called this ‘Psychological Dissonance’ and wrote:
“(We use) a frame of reference constructed from integrated sets of assumptions, expectations, and experiences…This frame of reference is not easily altered or dismantled, because the way we tend to see the world is intimately linked to how we see and define ourselves in relation to the world. Thus, we have a vested interest in maintaining consistency because our own identity is at risk”.
Therefore, established technologies, infrastructures and methods can create hysteresis- a delayed response to change- that holds the new at bay, at least until the old ways simply cannot be stretched any further. So, it could be that developing countries which lack many of these established infrastructures and technologies, would adopt the new and accommodate themselves more quickly to the methods and practices they make possible.
As a digital communications infrastructure is established and made accessible, the unbanked have the opportunity to pursue specialisation and exchange, building services that reduce problems in economic activity, match underused resources with unmet needs, and generally follow a proven path to prosperity. Through a combination of the Internet, mobile telephony and micro-financing, websites like Kiva allow individuals in the West to lend to African entrepreneurs who are able to deposit receipts and pay bills without having to handle cash. Zambian farmers have boosted profits by 20 percent by using their mobile phones to buy seeds and fertiliser.

M-PESA
Perhaps the most successful mobile banking scheme (in terms of helping the unbanked, at least) is M-Pesa. M-Pesa came into existence in 2007, when Safaricom began a pilot program that turned prepaid calling minutes into a form of currency. In order to use M-Pesa, people sign up for an account and their phone gets an E-Wallet. They can then go to a local Safaricom agent and pay cash for “e-float”. As Paul Vigna and Michael. J. Casey explained in “Cryptocurrency”, “this money isn’t actually held in the form of Kenyan shillings but as a separate claim on the overall M-Pesa e-float, all of which is backed by depositors in the banks with which Safaricom has accounts”. This currency can then be sent to other phone users who also have M-Pesa accounts, or a user can withdraw cash by going to an agent who will hand over money provided the user has an equivalent amount of e-float in their account.

Today, two-thirds of Kenyans use M-Pesa and 25 percent of the country’s GDP flows through it. Vodaphone, who own 40 percent of Safaricom, have brought M-Pesa to Tanzania, South Africa, Fiji, India, Romania and others. The relief group, Concern worldwide, used M-Pesa to help bring aid to Kenya’s remote Kerio valley. With the nation’s institutions frozen after violence broke out after a hotly contested election, this form of digital currency provided a means of moving money around, and the transaction fee that Safaricom charged was far less than the cost of transporting food and material. In Tansania, people who neither live near a hospital or can afford to travel to one are helped by an organisation called Comprehensive Community-Based Rehabilitation, which uses M-Pesa to cover their travel expenses.
PROBLEMS WITH M-PESA

As a form of digital money, M-Pesa is not without its drawbacks. To the end user it may appear automatic, but lurking in the background there is an infrastructure that is unwieldy and expensive. Agents still have to handle cash-indeed, large amounts of cash-which can leave the vulnerable to criminals. And, as Vigna and Casey explained, “when agents run out of money, they have to either stop what they are doing, close the shop and go to a bank, or stop what they are doing and send somebody on their behalf”. Also, Vodaphone has partnerships with other payment networks that all charge the usual fees and banking-system-dependent costs we have unfortunately come to expect from such a middleman-heavy service.

CRYPTOCURRENCY TO THE RESCUE
Little wonder, then, that many cryptocurrency enthusiasts see bitcoin as a solution to the problems M-Pesa and other banking-system-dependent forms of digital money cannot resolve. After all, bitcoin makes possible the direct transfer of money between two parties, entirely bypassing the cumbersome and expensive system for international transfers. Because bitcoins are essentially nothing but lines of code, it does not even necessarily require a smartphone to participate in this form of currency. A project called 37Coins uses people who have Android smartphones as ‘gateways’ to transmit messages, and this allows others to use cheaper, more rudimentary phones to send money via SMS. Mozilla, the company perhaps best known for the Firefox browser, sells a suitable phone for just $25.

Cryptocurrency also deals with the documentation. As Vigna and Casey pointed out, “you, your identity and your credit history are irrelevant. You do need an electronic platform with which to connect to the Internet. But if you are able to get that, bitcoin allows you to send or receive money from anywhere”. With smartphones becoming cheaper, and bitcoin wallets becoming easier to use, this can only help decentralised, peer-to-peer cryptocurrency spread further.
Eliminating the need for middlemen who all take their cut lowers the costs of transactions. But this is only the beginning of the benefits that the technology behind bitcoin could bring about. The blockchain provides a middleman-free way to exchange any asset. Not just money but intellectual property, contracts, and so on. It creates an irrefutable public record not controlled from any one central institution. According to Vigna and Casey, “the Blockchain’s groundbreaking model for authenticating information could liberate the poor from the incompetence and corruption of bureacrats and judges. Digitised registers of real-estate deeds, all fully administered by a cryptocurrency computer network without the engagement of a central government agency, could be created to cheaply and reliably manage people’s rights to property”.

THE FUTURE

Looking further into the future, we can foresee a time when your money is truly your money. This is not the case with cash. Anybody who gains access to your purse or wallet can spend the money it contains. But if your smartphone will not unlock without biometric data unique to you, then it’s useless to anyone else. The science-fiction author Charles Stross imagined a scenario in which a thief snatches a bag, only for the bag to start screaming in distress at being handled by a stranger. With a combination of sensors and artificial intelligence that can distinguish between property’s rightful owner and everybody else, and GPS tracking, our personal devices could behave just like that bag, immediately alerting authorities and providing incriminating evidence.

As for people who have permission to access our property, intelligent devices could allow for more precise control over the extent of that access. No more having to carry different loyalty cards; the phone would track your position, know you are in a certain store and allow you to use its customer reward scheme. People who rent out their homes on AirBnB and other such services could rely on smartphones that provide access to the home for a set period, or which permit entry to some rooms but not others. And, seeing as how bitcoin does no care who you are, anything smart enough to begin using the service could do so. As Mike Hearn, a former Google employee, pointed out, “bitcoin has no intermediaries. Therefore, there’s really nothing to stop a computer from connecting to the Internet and taking part”. Indeed, any suitably smart AI could, and Hearn has envisaged driverless taxis that connect to an automated, electronic marketplace he has dubbed ‘Tradenet’. The car (or, rather, the AI that controls it) would own itself, paying its costs and receiving its own revenue. If it were programmed to provide as cheap and efficient a service as possible, it would be focused on maximising its productivity, with no interest whatsoever on bling and other signs of material wealth. 
THE END OF MONEY?
The issue of robots taking over tasks traditionally the preserve of wage-earning humans has lead some to suppose that money won’t be necessary in the future. It seems a reasonable argument to make: the robots don’t work for wages, humans can’t compete against them for jobs, so goods and services might as well be provided free by our tireless AI servants. 

But this argument assumes that money is merely a commodity recognised as a unit of exchange in order to overcome what would otherwise be cumbersome barter exchanges. However, if we look past the physical manifestations of money (be that gold coins, paper notes or lines of code) and focus instead on the credit and trust relationships between the individual and society at large, we discover money is not so much an intrinsically-valuable commodity but rather akin to a social contract whose value depends entirely on everybody agreeing it can be redeemed for an agreed-upon measure of goods and services. Even if robots completely take over the economy and do all jobs, it is still an economy and there would still be resources and services whose relative value has to be measured, somehow. So it seems likely that robots and AI would rely on some way of measuring the relative value of the resources they are using, the goods they are creating, and the services they are offering. So long as there is a society, there will be obligations between debtors and creditors. And that, ultimately, is what money is.

CONCLUSION
The unbanked are a reminder that scarcity often has little to do with resources being scarce, but rather because we lack the ability to access them. There is a tremendous reserve of human potential unfortunately constrained by cumbersome bureaucracy, corruption, and unengaging work. By finding solutions to these problems, we can make the future brighter. The Mobile technology, cryptocurrency and Blockchain are doing their part to make that happen.

REFERENCES
“Rational Optimist” by Matt Ridley.
“Accelerando” by Charles Stross
“Cryptocurrency” by Paul Vigna and Michael J. Casey
“Rethinking Money” by Bernard Lietaer and Jacqui Dunne.
“Technology: What It Is And How It Evolves” by W. Brian Arthur.

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