Rethinking financial inclusion with digital assets

“Innovation is the ability to see change as an opportunity not as a threat” a well-known quote which means that the driving force in nature is innovation which we all need for the betterment of our lives. One significant example of this is the growth and potential scope of new digital assets where firms are getting ready to evolve from the traditional model of exchanging securities for cash to a digital environment.

Access to bank accounts, ATMs, timely credit, fund transfer services, insurance, and even digital wallets are all things that many of us take for granted, thanks to the wide array of financial tools available at our disposal. Sadly, this does not hold for a significant section of India’s population.

World Bank data suggests that around 190 million people in India are not associated with a formal financial institution, making us the second-largest nation in terms of the unbanked population. In sheer numbers, this poses a huge barrier to financial inclusion as these people lack access to the full stack of services that can help them protect, transact and grow their wealth.

While schemes like the PMJDY have been moderately successful in fulfilling its objective of providing every adult in India with a bank account, a large part of these accounts remain underutilized – a sign telling of the fact that a glaring majority of the population is not completely integrated into the banking system.

In April 2021, the RBI announced that it constructed an annual composite Financial Inclusion Index (FI-Index) to assess the extent of financial inclusion in the country. Broadly defined, it refers to the widespread access and use of a range of financial services including banking products, insurance, credit, and equity products. The index is a key indicator of inclusive and sustainable economic development. India’s annual FI-Index for the period ending March 2021 stood at 53.9 against 43.4 for the period ending March 2017.

Undoubtedly, we’ve made significant strides in our journey towards financial inclusion fuelled by the proliferation of high-speed internet, digital payment systems, and UPI. However, we cannot disregard the fact that there is still a discernible digital divide and barriers to financial literacy between various income groups in the country. The most common barriers include cumbersome documentation and enrolment procedures, misconceptions about financial services due to lack of awareness, and infrastructure issues that inhibit users from leveraging the benefits of digital financial services.

Providing financial infrastructure to the unbanked and underbanked is risky for many financial institutions. The costs associated with maintaining and operating zero balance and inactive accounts are not financially viable in the long run, and there is no guarantee that there will ever be a return on investment. On the flip side, while a sizeable number of low-income and rural consumers have the intent to access financial services, they are simply excluded because they lack the requisite documentation, savings, and credit history.

Tackling the challenges with blockchain, crypto

Blockchain technology, and crypto assets offer tremendous potential in fostering financial inclusion, especially for developing economies. It democratizes access to financial systems by providing an alternative financing infrastructure that is global, open-source, secure, and accessible to everyone with internet access. With mobile phone and internet penetration poised to grow in India, financial services can be provided to the unbanked through their mobile devices, without the need to be attached to a bank or a financial institution

Blockchain is a decentralized ledger and negates the need for a central authority as transactions are verified through the consensus of multiple participants, thereby creating an unalterable transaction log. This single attribute, immutability, has the power and potential to revolutionize financial services, as it offers greater transparency, enhanced security, lower transfer fees, and overall cost savings.

Another big factor hindering low-income groups from accessing financial services is the lack of valid identity proof. Blockchain helps consumers circumvent some of these challenges associated with documentation, account opening, and maintenance.

Despite several benefits for developing economies, the perceived risks, misinformation, lack of regulatory framework, and scepticism around crypto assets have not yet allowed us to tap into its potential fully. Many first-time crypto investors ventured into this space due to the fear of missing out or the lure of making quick money, however, it is encouraging to note that once they are a part of this ecosystem, they can realize and appreciate the benefits of this disruptive technology.

While we may be only just beginning to scratch the surface when it comes to leveraging digital assets to foster financial inclusion, crypto assets, and the applications of blockchain technology will have a profound impact on how we conduct business, manage our wealth, and restructure our society. History tells us that paradigm shifts made possible by innovations like these take a while to be understood and become mainstream.

As crypto assets and blockchain become more mainstream, the second order impacts we may see playing out over the next few decades include the decentralization of our monetary systems and more autonomy for consumers. But, to get there, several challenges need to be dealt with including increased internet accessibility, financial literacy, as well as intense debates around wealth concentration, the role of government oversight, data privacy, and the impact of crypto mining on our environment.

In today’s economic environment it may not be irrational to see blockchain as our current best hope for accelerating financial inclusivity in economies where the notion of financial inclusion seems like a far-fetched goal.