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Using Cryptocurrency's Foundation to Create Financial Opportunity

Using Cryptocurrency's Foundation to Create Financial Opportunity

Mark Hay

Illustration by Eli Miller.

Illustration by Eli Miller.

According to the World Bank, about two billion adults worldwide do not have a bank account. Being bankless doesn’t just mean having nowhere safe to put savings (outside, perhaps, a lock box). It means savings can’t accrue reliable interest. And even if unbanked people can score small, communal loans, larger pools of credit are off limits, as are the means to build a verifiable credit history—not to mention access to other, more complex financial tools. Without that access, people can’t grow and leverage whatever wealth they may have. For unbanked populations, which often overlap with some of the most vulnerable communities on earth, that financial exclusion can be one of the greatest barriers to upward mobility, on both the individual and community levels, hampering essential development drivers like business growth and education.

Banks want the business of this huge unbanked population, many of whom would use their financial services if they could. But some live too far away from their nearest bank branch, in places where brick and mortar banks wouldn’t make logistical sense. Others who do live near a bank can’t afford the fees associated with its services, or lack access to required paperwork, like verifiable ID. The question of how to bridge these gaps has bedeviled financial inclusion advocates, as well as the wider banking industry, for years, even in our high-tech era.

But a South African startup hopes to finally bring cheap and accessible financial services to the unbanked. In development for about two years, Wala is a platform for mobile phones that connects users to a variety of services, with virtually no fees and no need to visit a brick and mortar bank at any stage. “Wala’s unique belief has always been that consumers’ best path to financial prosperity is through savings and free payments,” says Inge Lok of South African venture capital firm Newton Partners, and a recent equity partner in Wala. Lok now acts as a spokesperson for Wala. Initially focusing on Africa, where only about 20 percent of people have bank accounts but over 60 percent have mobile phones, it’s an ambitious project that, if successful, could substantially expand financial inclusion. And it’s all possible because it uses a blockchain system.

The startup does not provide financial services itself. Instead, it allows banks and other entities, like insurers, to access the platform’s Dala API and develop Wala apps, each of which provides individual financial amenities. Wala co-founder Samer Saab explains that customers can digitize their hard currency through the platform’s network of local stores, mobile money services, and banks, if one is nearby. The money is then kept in a digital wallet and from there can be sent to other users, used to make payments to businesses or utilities, or put into services, like an interest-yielding savings account, offered by partner apps on Wala. While each app has its own sign-up protocols for new customers, Wala tries to make that part at least a little easier, for instance by offering those without the official IDs you’d typically need to open an account the option of using their phone to scan their fingerprints or take a selfie that can be used to confirm their identity. The startup manages the platform and provides partner institutions with technical assistance. In turn, those partners pay Wala through revenue sharing agreements. Consumers pay nothing to access the platform.

Wala is slated to roll out in early 2018 to about 400,000 initial consumers in and around Kampala, Uganda. It will start by offering, via its partners, savings accounts, peer-to-peer loans and payments, digital bill-payment services, basic loans, and financial advice. No matter the service, users’ transactions will be tracked via blockchain.

Blockchain technology has been popularized through the recent flood of stories about digital currencies like bitcoin. Digital currencies can be a complex and often murky field, but the blockchain system they run on is a surprisingly elegant independent technology.

“A blockchain is an accounting ledger—an account of who owns what,” says Melanie Swan, a researcher who studies the system’s economic potential. But unlike physical or other digital ledgers, a blockchain does not exist in one place or belong to one person or organization. These systems were created in 2008, in the wake of the financial crisis, to offer a platform for human transactions that would not require faith in or access to centralized authorities like banks. Blockchains operate as a network distributed across thousands, if not more, of computers and controlled by algorithmic or systems rules. One can buy, sell, or move things on the blockchain and each system uses its own digital currency to make transactions. In Wala's case, that's the Dala token, which users can transfer their money into once it's in their digital wallet, and then send across the blockchain to other accounts or users. Each transaction is automatically recorded in the ledger with unique digital stamps. This record is all but impossible to alter; the reasons get complex, but here’s an explainer. Transactions are nearly instantaneous and anyone on the system can, in theory, access a record of assets’ transaction histories.

Banks have been captivated by the potential of blockchains for years. Reports on their potential uses in financial services started cropping up left and right around 2015. Experts have made heady predictions, like that by 2020 two-thirds of major banks will use blockchains for commercial transactions. Using these ledgers, the thinking goes, would eliminate laborious processing steps that can cause even a digital bank transfer to funnel through several financial institutions, take days, incur fees, and somehow still get screwed up. Some banks, mostly in South and Southeast Asia, have recently developed blockchains for sending remittances abroad without the massive fees associated with wiring money through multi-bank chains. But despite the hype, so far, most banks haven’t taken real steps to act on their interest in blockchains or the technology’s potential to widen financial inclusion.

Wala bridges the gap from financial interest to action by providing a fully realized blockchain system for banks to jump onto, and offering them the assistance they need to make the leap. The platform has already partnered with rural banking and micro loan leader Finca and mobile payments service Mvendr. Given their longstanding interest in new unbanked consumers and blockchains, it’s not hard to see why financial institutions would be willing to jump onboard. “We give [partner institutions] the opportunity to test new, innovative account and loan approaches by providing new levels of consumer data,” collected through transactions visible across the blockchain, says Saab.

But it might be harder to imagine why marginalized populations with low financial literacy or experience would put their trust in Wala, a novel system running on this blockchain thing. “Convincing someone to put their savings into a financial system that they have never trusted before is not an easy feat,” admits Lok.

Wala takes on the trust challenge by building community engagement before rolling out their services. The platform will debut in Uganda, for instance, because founder Tricia Martinez developed a community of trust there when working on a prior digital money transfer venture with Ugandan subsistence farmers. Martinez wound up creating a Facebook group to field their financial questions, which evolved into digital forums with one million users from over 100 countries, primarily those who are unbanked or underbanked. Wala was developed with input from this community, especially in Uganda, providing a round of initial adopters to bring their friends and families into the system.

Consumers will also likely be attracted by the prospect of zero-fee financial services, Lok predicts as well as periodic rewards, in the form of Dala tokens, for creating accounts, engaging with the platform regularly, or reaching financial goals like a loan repayment.

“A consumer doesn’t care if you use the blockchain, a database, APIs, cloud, or any other technical, architectural, or infrastructural element,” says Lok. “They care about the experience and the cost of the solution. We should never be in a position where we need to explain how the blockchain works.” This position is clear on Wala’s website, which eschews any explanation for how it works upfront, instead focusing on the services that it offers.

If all goes well, Wala hopes to expand to over 45 other countries in the next five or so years, following in the footprints of partners like Finca. For now, in each new market, Wala will work ahead of its launch to start developing a community, like it did in Uganda. Saab says the company has already begun building a Wala forum for South Africa, which is growing even faster than its Ugandan community, while conceding that as they expand, “We will need to supplement this with other activities like ambassador programs, which we have already piloted in Uganda. It will certainly give us a stronger on-the-ground presence.”

As Wala rolls out, a number of other blockchain-based financial inclusion platforms and apps offering a similar suite of bank-partnered services have started to pop up in other nations, each with their own tweaks and variations. MicroMoney of Singapore, for instance, focuses on how to create credit scores for people with no official financial history. It does this by using data from customers’ blockchain-tracked transactions and phone apps. Humaniq, which is now testing in Ghana, is playing with biometric ID tools and a user interface that favors of universal symbols over written language to serve low-literacy populations.

But while Wala and similar apps may bring financial services to wide new swathes of the economically marginalized, allowing them to secure, grow, and leverage their wealth, these platforms do have limitations. Consumers without phones are still iced out. So are consumers who live in communities where there are no Wala-enabled businesses they can use to upload their money into the system. Also excluded are people who have no liquid capital and have all of their wealth locked up in assets like livestock that they use to trade.

Still, Wala and its kin stand to provide a major step in bringing vital services to those who need them most. These startups are taking a plunge that’s been talked about for some time, actualizing blockchain-based banking, and attempting to bridge the gap between finance and the unbanked. They may not be perfect platforms yet, or capable of bringing all two billion unbanked adults into the global financial system on their own terms. But it’ll be fascinating to watch how they grow, and hopefully heartening to see the progress they make in advancing financial inclusion.

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