How decentralized finances will empower the unbanked

Among the most important crypto and blockchain applications you’ll see in real life are these technologies’ ability to transform financial inclusion. Let’s explore how cryptocurrencies and blockchain-based financial services help to empower unbanked and underbanked populations worldwide.

For purposes of this article, by “unbanked,” we refer to individuals who do not have access to traditional banking services, such as savings or checking accounts. Often found in developing regions, these people might be excluded due to lack of proper documentation, low income, or simply living in areas underserved by banks. Without access to formal financial services, the unbanked often rely on cash transactions or informal lending systems, which can be less secure and more costly. Addressing the needs of the unbanked is crucial for promoting financial inclusion and economic growth.

However, thanks to access to digital wallets and decentralized financial platforms, people who lack a traditional banking infrastructure are increasingly able to participate in the global economy. In light of this fact, we’ll also talk a bit about the role that remittances and cross-border payments play, demonstrating how blockchain significantly reduces costs and processing times. 

Deciphering the unbanked phenomenon

If we look at the population all across the globe, we’ll quickly notice that nearly one-quarter of people don’t have a bank account to use. Unbanked individuals often experience insufficient funds or limited (or no) access to banks. 

If we continue to consider the global population, we also need to acknowledge that a staggering number of unbanked individuals forego a bank account due to the attached price tag — tons of people would love nothing more than to eagerly embrace banking if they didn’t have to contend with such a hefty sum. 

Certain parts of the world are home to populations of individuals who won’t get within spitting distance of the financial framework. This wariness makes it difficult to encourage unbanked individuals to foster a greater sense of trust in areas like Europe, Latin America, and parts of Central Asia.

Everything that’s wrong with centralized banks & financial institutions

The financial systems that are chugging along on a global as well as national scale are running into a whole host of problems that negatively impact the lives of unbanked and financially disadvantaged people. It’s no secret that these challenges are intimately intertwined with other systems at the national level. They also do no favors for vulnerable individuals without any sense of financial stability. 

It’s constantly tough for many people to access even the most basic of financial services, and traditional banking systems have repeatedly failed to step up and address the needs that financially disadvantaged people regularly struggle with. Traditional banking makes it difficult for lower-income people to feasibly save money and build credit, leading to a perpetuated cycle of poverty that continues to close doors to opportunities.

Invoice factoring is a financial practice where businesses sell their accounts receivable (invoices) to a third party (a factor) at a discount in exchange for immediate cash. This practice is more common among financially vulnerable individuals, who use the process to rapidly convert their outstanding invoices into immediate working capital. One of the main advantages of invoice factoring is that it can completely circumvent the hurdles involved in traditional lending processes. This peculiar infusion of funds promotes financial growth and cultivates greater economic mobility, pushing back against the unfortunate effects that financial exclusion has wrought. 

Even with the downsides, practices like invoice factoring challenge traditional banking systems that are riddled with inscrutable fee structures that make the lives of marginalized individuals more difficult; invoice factoring supplies the necessary avenue to secure funds without having to wade through a bog of complicated charges. With invoice factoring, entrepreneurs who may struggle with invoice processing can become more empowered and financially independent. 

How crypto can help the unbanked

Cryptocurrency offers a possible solution to tackle the financial struggles that unbanked individuals face. Originally introduced in a 2009 white paper, cryptocurrency has gone on to become recognized as one of the most innovative and dynamic tools of our time, functioning as a decentralized virtual currency whose inflation-proof and counterfeiting attributes make it a currency decidedly distinct from traditional currencies.

Cryptocurrency’s accessibility aligns with the perspective of the World Bank, which underscores the potential of mobile money services to enhance earning capabilities and alleviate poverty. The adoption of cryptocurrencies has witnessed rapid global growth, and it’s been underscored by certain nations recognizing Bitcoin as a legal tender. Moreover, organizations like UNICEF and the Red Cross accept cryptocurrency donations, reflecting the increasing acceptance of this digital asset as a viable medium of exchange.

A lot of people are counting on crypto to finally address the issue of financial exclusion. Experts emphasize crypto’s potential to serve millions of unbanked individuals who have been left by the wayside by traditional banking systems. Notably, the recent institutional-grade Digital Asset ESG Benchmark by CData and CCRI underscores the significance of crypto and blockchain, providing a compelling insight: Bitcoin accounts for 90% of the energy consumed by the top forty coins within the crypto industry. The appeal of cryptocurrencies for the unbanked seems to clearly lie in the multifaceted advantages that surmount the barriers imposed by centralized financial institutions, offering a decentralized and trustless alternative.

Will we all be unbanked one day?

Crypto’s borderless nature, minimal transaction fees, and absence of additional charges contribute to its appeal as an inclusive financial solution. By removing intermediaries, cryptocurrencies pave the way for accessible financial services, particularly benefiting those with limited resources or unfavorable credit scores. This dynamic fosters financial inclusion and supports migrant workers in sending funds to their families across geographical borders.

In essence, cryptocurrencies hold the promise of transforming the financial landscape for the unbanked, offering a viable alternative to traditional banking systems. The institutional-grade Digital Asset ESG Benchmark’s revelation underscores the significance of embracing sustainable and equitable financial solutions that can uplift the lives of marginalized individuals worldwide.

Now that you’ve learned about crypto’s and blockchain’s impact on underbanked and unbanked individuals and continue to delve into the tangible impact on the lives of the unbanked on your own, we hope you’ll visit us at Namecheap to see how we support initiatives that foster financial inclusivity through crypto and blockchain technology.