"The Unbanked". How could digital currency help developing countries?

Access to banks is privilege that most people in the world enjoy and take for granted. It enables the use of facilities such as current accounts, credit cards, savings accounts. However, according to the World Bank, approximately two-and-a-half billion people globally do not have such access and are, in effect, disconnected from the global economy and formal financial systems. For these people, referred to as the “unbanked”, accumulating and maintaining any significant wealth is difficult.

Those unable to access bank accounts often are reliant on receiving money from family members in other countries. Remittances totalling nearly $600 billion were sent globally in 2015, according to the World Bank; of this sum, it is estimated that the destination of approximately 75% was developing countries. Such cross-border payments represent one application of cryptocurrency – a means of currency exchange in which transactions are made securely. While there is much still to be investigated about cryptocurrency, it is undoubtedly an application of crypto technology that is generating significant interest.

A recent Wired headline read ‘Bitcoin dead? It goes big in 2016’. The explanation given for this statement was that Bitcoin enabled a more straightforward and cost-effective means of transferring money between locations than traditional methods. This, the article continued, was true both for businesses when accepting payments from customers on the internet and for consumers when moving money between countries.

At London School of Economics (LSE), an expert in cryptocurrencies and their impact on world finance, Dr. Garrick Hileman and colleagues conducted a research concluding that the countries showing the greatest potential for the implementation of cryptocurrencies are to be found in the former Soviet Union, Latin America and Sub-Saharan Africa. The nature of cryptocurrencies makes them particularly suited for such areas. Requiring no credit checks or maintaining balance, being able to potentially grow over time and being resistant to both political and financial corruption, many users in these countries could not reasonably expect to be eligible for other forms of financial services.

The cost-effectiveness of cryptocurrencies is due in part to their not requiring expensive institutions and having negligible costs associated with them. It follows that they may be a catalyst for aid distribution. For example, the transfer of cash by electronic means such as SMS has increased in popularity over the past few years, while Bitcoin services have the potential for changing the ways in which the transfer of money between and to those in need is performed. The benefits of such means of transfer are highlighted by the fact that one third of the food assistance provided by the World Food Programme (WFP) takes the form of vouchers or cash rather than actual food.

One negative aspect of cash transfers is that they are vulnerable to fraud and other difficulties. This is true whatever the nature of the transaction, be it between any combination of individuals, governments, people, etc., as they involve bodies or institutions that may have their own interests at heart more than those of the people with whom they are transacting. Financial inclusion in developing countries can be broadened, according to a Gates Foundation report of 2014, by the fast growth and development of systems for digital payments, as they enable the required transparency, security and rapidity at an affordable price previously described.

Bitcoin services are becoming increasingly widespread across the world. Five examples of the implementation of its developing popularity are given below:

• Philippines: While most of the population of the Philippines own of have access to a mobile phone and the internet, online shopping is far from easy as nearly three-quarters are unbanked and only one in fifty people uses a credit card. A system named Coins.ph is designed to overcome this problem by enabling transactions with Bitcoin and subsequent cashing out with the local currency. The result is a more straightforward online selling and purchasing process that aims to reduce time delays and transportation expenses.

• India: A lower proportion of India’s population is unbanked, with around two in five people having no access to traditional financial services and so relying mostly on cash. However, while smaller businesses are dependent on physical currency, larger retailers such as Flipkart and Amazon are driving forward online commerce. The Bitcoin system in use in India is Unocoin, which enables digital payments for smaller companies, thereby allowing them to eradicate chargebacks and to reduce the costs of transactions significantly.  

• Kenya: BitPesa, provides benefits to the Kenyan population in terms of reduced fees and increased financial protection. Money transfers are free of charge with a guaranteed exchange rate of three per cent – this ensures that both receiver and the sender is protected from the risk of loss from fluctuation in the rate. The system allows shillings to be sent for a three per cent fee between mobile accounts utilising Bitcoin; this is one-third the fee that is more typical of physical currency. The BitPesa system is typically used by clientele such as entrepreneurs, expatriates and migrants.

• South Africa: In South Africa, there is convenient integration of Bitcoin with the conventional banking system. In Johannesburg, a Bitcoin ATM (the first of its kind on the continent) allows customers to convert physical money into Bitcoin; cash deposited is instantly transferred to their digital wallets. A local company, PayFast, processes payments for online companies in a way that protects them from volatility in the digital currency market. When a Bitcoin transaction is made to one of the 30,000 companies using the system accepting the digital currency, the payment is instantly converted into the local currency.

• Argentina: BitPagos, provides a means of overcoming many problems associated with the Argentinian financial system for many residents. These include high inflation (which is approaching forty per cent), strict controls on capital and a restricted payment options. The electronic system offers more cost effective finance than the local system in that Bitcoin transactions are free and credit card transactions are made for a fee of just five per cent.

Digital currency technology such as Bitcoin is being implemented in pilots such as these as a means of bringing cheap financial services to regions of the developing world in which the incidence of the underbanked is high. Businesses operating Bitcoin can exploit the ability to transfer money using such decentralized networks in order to benefit from reduced costs in the knowledge that transactions are both secure and instantaneous. For customers, the digital systems provide the opportunity for money management and the convenience that is afforded by the use of mobile phones to access banking facilities.