A New Milestone For The Unbanked Using Blockchain For Not-For-Profit Banking
DeFi is giving the financial banking and savings system a run for its money. It proposes new ways to engage with your holdings, by removing the middle...
DeFi is giving the financial banking and savings system a run for its money. It proposes new ways to engage with your holdings, by removing the middleman, making transactions faster, safer and more anonymous. It also provides investors with access to unparalleled returns through staking, yield farming and lending, and all this without having to sign a single document or meet a broker face-to-face.
Moreover, decentralized finance is inclusive. With 1.7 billion unbanked people in the world, this represents a massive missed opportunity. These same people still engage with money, but often use niche forms of financial services, which may include check-cashing outlets, payday lenders, and money orders. It is these poorest of people who are paying the heftiest fees for their monetary transactions.
Alternative financial services run much like traditional banks, with one big difference – these services come with a higher price tag. On the other hand, the unbanked and underbanked almost always have mobile phones, so the availability of alternative financial services represents a real opportunity for them to move money using their phones, even if it means they pay more.
Using Blockchain to Broaden Inclusivity
This is where the blockchain stands out. No matter where you are, or who you are, you can use the blockchain and more specifically decentralized finance to make payments, to invest, to borrow money and even lend it out. You never need to sign paperwork as all transactions are conducted and authenticated over the blockchain, which makes this activity tamper-proof and fully automated.
As such, the vision of many blockchain-based DeFi apps and projects is inclusivity, a way to democratize banking for everyone. One such company is hi. It strives to be a catalyst for financial inclusion and aims to serve unbanked and underbanked communities.
We spoke to the co-founder of hi, Sean Rach, to learn more about how the industry is addressing the financial inclusion challenge. Rach is an ex-naval officer who has experience with cryptographic custody, as he was responsible for some of the communications codes used by the US Navy. He’s also the former CMO of Crypto.com.
The concept of DeFi may seem new, but Rach believes it has roots in the concept of “microfinance.” He opens the discussion by explaining what’s changed.
“Muhammad Yunus noteworthy work in founding Grammen Bank in 1983 and the concept of microlending, authoring the book “Banker to the Poor” in 2003 and being recognized with the Nobel Peace Prize in 2006, has made a huge contribution to the world.
The biggest thing that has changed since he pioneered his ideas is the rise of telecommunications and, in particular, the smartphone. Even with a basic feature phone (3G) connection, a banking customer has access to information, services and opportunities that would have otherwise been unavailable to them. This, I believe, is the root of DeFi.”
Assessing the Existing DeFi Landscape
Currently, the DeFi market plays host to a variety of apps and platforms, which allow users to save money by staking ro farming in return for generous yields. These can be anywhere from 6% APY and up. This is unparalleled with any saving product in the traditional marketplace. Products on the blockchain are not necessarily tied to the traditional money markets, which makes certain assets inflation-proof and often a good way to hedge against the risks associated with traditional savings or investments.
Rach explains that: “While alternative financial services (AFS) and even banks seek to make money on behalf of their clients, DeFi is proving that users can make money directly using the various protocols. With no central authority seeking to take profit, there are significantly greater opportunities to redistribute the value in blockchain-based financial services back to users.”
However, the DeFi landscape as it stands today isn’t necessarily ready to meet this challenge. While users have poured over $170 billion into DeFi applications over the last year or two, it’s still a relatively niche segment catering to a small group of investors.
Sizing the Gap
Rach expands on the current state of affairs, pointing out that: “DeFi has gained such rapid traction, but there’s still plenty of room for development for it to gain mass appeal. The decentralized nature of DeFi solves several critical issues with the current banking system – trust being among the most important, but also by making protocols open and community-governed, they become truly accessible.”
He elaborates further on the status quo:
“We have to be honest with ourselves about the state of play of DeFi. We are just at the beginning. Currently, DeFi platforms reach around 3-5 million people – a far cry from the estimated two billion people that are unbanked.
DeFi does offer a great deal of promise with the opportunity to bring ways to help these people grow their money reliably over time given their lack of access to the traditional banking system. The potential to earn interest on deposits versus stashing cash in a coffee can or being able to get a loan with competitive rates versus dealing with loan sharks preying on those most in need, can be a game changer for the world.”
Does he believe that this is only applicable for emerging markets or also the unbanked in the developed world?
“Studying the remittance industry (a $440 Billion industry in 2020), there is often a connection between the two - with people sending money to their home country. Both can benefit but the form this takes may be different based on the need and this is where the appropriate user experience will be a key to adoption.”
Making DeFi More Inclusive
The point about user experience is one that’s close to Rach’s heart. Poor user experience is a problem that’s been pervasive in crypto since the beginning, and it goes deeper than just clunky interfaces and a lack of customer support.
Rach explains: “We’ve made vast progress in crypto over recent years, but we still ask too much of users. Navigating wallets and exchanges, high transaction fees, slow block times, the need to pay transaction fees in the native platform token – these are all blockers to adoption, and by extension, to financial inclusion.”
Rach and his co-founder launched hi in the belief that global, open, instant, and low/no cost movement of money will create immense economic opportunity. They believe that sending money should be as easy as sending a text and hi is the result of their efforts to bring this vision to reality.
Users of hi can hold money, including in digital currencies, they can earn yield on deposits at much higher rates than elsewhere, and they can get rewarded for using the native token, called hi dollar. They can also spend using a virtual debit card and convert money at interbank rates. Ultimately, hi aims to provide a full-featured, open and accessible suite of banking services. However, from the user’s perspective, they can manage all this from within an existing chat app on their phone.
Rach explains, “With 3.8 Billion smartphones in the world and every one of these connected to a chat messenger, we think it makes sense to skip the app download step and get members onboard right away through Telegram and WhatsApp. We also offer a web app (web.hi.com) and will soon release our mobile app (for iOS and Android) which has a graphical user interface.”
Turning the banking system on its head
According to Rach, products like hi are turning the banking system on its head, by “bringing the concept of a credit union/community bank into the digital age. Our members are our key stakeholders, never just “users.” The current financial system is broken. Banks charge hefty fees, and make money FROM their members, not FOR them. “
But isn’t borrowing money using decentralized applications inherently more risky than using a bank? Rach believes not.
“Risk, like beauty, is in the eye of the beholder. With the risk of robbery of physical cash, extortionate rates for loans, and physical threat for repayment, the traditional system is not without its issues. Loans in DeFi currently tend to be collateralized loans meaning a loan based on a deposit and thus, less risky to a lender.”
The Path to 3.8 Billion Users
So the question as old as cryptocurrency itself – when can we expect mass adoption?
“Even at 5 million today, DeFi is very niche. Therein lies the opportunity for firms like hi, that leverage blockchain and other technologies, to not only offer next-generation financial services but to make them available to the 3.8 Billion smartphones globally. Saturation is quite a long way off and would be found when there is a majority of people benefiting from the reduced fees, increased speed and instant access to funds that DeFi (especially on mobile) offers.”
Rach concludes: “Thanks to a diminishing dependency on Ethereum, DeFi services are becoming virtually feeless and seamless. Crypto and fiat banking for the masses is becoming a reality as we take the best of both worlds and create the most intuitive user experience. Ultimately, we believe this is the path to true financial inclusivity.”
The blockchain is making the impossible possible by offering a new system of interacting with funds that can democratize payments, savings and even offer investments to those that currently don't have access to them. It can give options to those who fall foul to unrealistic fees for services that we should all naturally have access to, based on where they live. Not-for-profit banking is a real milestone for the blockchain and for the banking industry itself.