The statics couldn’t paint a grimmer picture. According to the World Bank’s findex report of 2017, up to 1.7 Billion people are either unbanked or underbanked. They, for the most part, cannot access financial services. Where they do, it is inadequate for their needs. As access to financial services impacts poverty reduction, this statistic makes for sad reading. We need urgent interventions to remedy the situation.
So how then do we increase this access? The financial space continues to pursue interventions that’ll expand the reach of its services. One such intervention is Decentralized finance (Defi), a product that promises to disrupt the financial landscape. In this article, we discuss the role of Defi in enhancing financial inclusion. First off, though, a look at the global state of the unbanked.
Banking the Unbanked is more than a third world issue
Banking the unbanked is a problem for the LDCs, right? Well, not exactly. It is easy to assume that underdevelopment confines it to developing nations. Statistics do, however, tell a different story. Ironical as it sounds, a significant population in the developed world suffers the same problem. In the US, for instance, up to 25% of its households do not have access to banking fàcilities. To effectively tackle the issue, there’s a need for a broader perspective.
How is Defi a Solution to the Challenges of Realising Financial Inclusion?
Defi exploits gaps in the traditional financial system. Chiefly it seems to expand access to financial services. It does so in the following ways.
i) Eliminates the Need for Brick and Mortar Facilities
Despite the adoption of tech, legacy financial institutions still depend on brick and mortar premises. Setting up a physical branch network is expensive. Banks may, therefore, not feel compelled to establish these everywhere.
Furthermore, some regions are far-flung. Banks might, therefore, deem it unprofitable to invest in them. These reasons and others prevent many from enjoying financial services. Defi could be the remedy for such.
Digitalization of Transactions Expands Access
As stated earlier, Defi dispenses off with the need for physical premises. It runs on the Blockchain. Consequently, it digitalizes every financial function.
This way, it expands financial services to the remotest of places. Hence it allows the hitherto unserved segments the enjoyment of these services.
A good Internet Connection is all One Needs
A reliable internet connection is all one requires to get set. Using devices such as phones, customers can:
- Open accounts
- Deposit and withdraw funds from their accounts
- Make payments for goods and services
- Make P2P funds transfers
There are solutions for every income segment. High-end customers may use in-phone apps, offline codes, and QR codes to transact. The lower segments can use SMS.
ii) Lowers the transaction Costs
High transaction costs discourage entry into the financial sector. The decentralization of finance allows P2P trading. Deploying dApps and smart contracts eliminate intermediaries. These attract transaction fees per transaction. Their removal significantly lowers or eliminates costs. As such, it spurs demand and use of financial services.
iii) Enhances Access to Credit Through P2P lending and Non-collateralized loans
Many of the Unbanked find it difficult to attract credit. Normally, banks consider them a high-risk refusing to lend them. They require them to put up collateral that is often not available. Their perceived high-risk profile means that the banks price their loans higher than their peers.
Defi programs provide ways out for them. They incorporate crowdfunding and P2P lending. Anyone can easily get credit in these ways.
Additionally, repayment rates are affordable. Again, lending proceeds regardless of one’s credit score.
iv) Allows the Entry of Undocumented Person’s
Banks require documentation for one to open an account. These may not be readily available for one reason or another. Inability to produce them leads to denial of service.
Defi, on the other hand, insists on the autonomy and privacy of users. As such, they have relaxed KYC requirements. This is in keeping with the true nature of distributed ledger technologies. Less stringent KYC requirements enable a higher uptake of financial services.
v) Round The Clock Transactions
Using the Blockchain, one can transact at any time from anywhere. You needn’t worry that the bank is closed for the day, weekend, or holiday. Even with the incorporation of tech, legacy financial institutions run by the workweek and hours. Certain transactions cannot go on past the work hours or days. This feature is a drawback, especially in emergency cases. Defi provides customers with the convenience to transact at the times of their choice.
vi) Interoperability of Functions
Defi allows cross-platform convergence. Through Cross-chain composability, two or more Blockchains can communicate with each other. The convergence enables seamless transfer of digital assets between them.
Significance of Cross-chain Composability
Cross-chain composability is significant in that:
- Users needn’t migrate from their networks to other compatible one’s to execute transactions
- It cuts down on transaction costs
- Enables near-instant transfers
On the flip side, banks tend to have differentiated products. Often this differentiation prevents convergence. It is, at times, impossible to carry out certain transactions across networks. Even when this is possible, the process is lengthy and costly.
The financial sector evolves rapidly. Players within the space continue to innovate to improve customer experiences. Some of these inventions aim at easing the accessibility of services offered. That said, the current financial systems are inadequate. To date, a significant portion of the global population remains unserved. Considering the correlation between poverty reduction and financial access, this reality is telling. We need solutions to expanding financial inclusion, and on this score, Decentralized finance offers much promise. Increased adoption will radically alter the financial landscape bringing financial services to more people.