Removing Barriers to Finance
Lack of access to basic financial services can create crippling financial problems for people. They may have no way to receive certain payments, have to pay higher amounts for basic services such as electricity, and are prevented from making purchases due to having no easy means of submitting payments.
Having access to financial services is important to both individuals and companies, as it provides a means of storing money, managing payments and cash flows, accumulating savings, accessing credit, and making investments. Such access is also key to acquiring assets and building financial security.
A recent report found that 75% of the global population below the poverty line are unable to have access to banking institutions or some form of basic fi
nancial service. (World Bank 2012a, 2012b). That is over 2 billion people worldwide who are unable to plan for their future because they didn’t have the luxury to be born in a first world country. These people that are already financially disadvantaged have no choice but to resort to doubtful and dangerous lending practices.
The interest rate of these practices is anything but fair, which consequently leads to more instability. One of the leading causes for individuals being unable to access financial services is due to traditional banking making it hard for people to apply for accounts. All financial institutions require their customers to have documentation to be able to have access to services that they desperately need.
However, being below the poverty line makes it very hard and unlikely that they will have the necessary documentation needed to open these accounts. People should not be locked out of financial services just because they can’t afford or are unable to get valid documentation.
Lack of access to financial services is not only an issue faced by people in third world countries but also those that are living in economically developed countries. Many individuals in these developed nations rely on some form of credit or loan for their day to day life, people who get declined for these financial instruments find it a lot harder to improve their standard of living. The reason it is difficult for people to get loans is because traditional banks and lenders underwrite loans based on a system of credit reporting.
When you fill out an application for a bank loan, the bank has to evaluate the risk that you won’t pay them back. They do this by looking at factors like your credit score, debt-to-income ratio, and home ownership status. To get this information, they have to access your credit report provided by one of three major credit agencies: Experian, TransUnion, and Equifax.
This centralized system can be hostile to consumers. The Federal Trade Commission (FTC) estimates that one in five Americans have a “potentially material error” in their credit score that negatively impacts their ability to get a loan.
Further, concentrating this sensitive information within three institutions creates a lot of vulnerability. The September 2017 Equifax hack exposed the credit information of nearly 150M Americans.
Alternative lending using blockchain technology offers a cheaper, more efficient, and more secure way of making personal loans to a broader pool of consumers. With a cryptographically secure, decentralized registry of historical payments, consumers could apply for loans based on a global credit score.
To allow all individuals to have access to inexpensive and more secure credit, innovators have developed decentralised finance that allows users to borrow money using a blockchain. This means that loans and credit are not approved based on a user's credit score, but on the value of the collateral. This will make it easier and cheaper for individuals to borrow the money they need.
DISCLOSURE - This is an opinion piece and not financial advice. Please do your own research before investing into any projects. -
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