The above map outlines where the estimated 2.5 Billion of the world’s unbanked adults reside. We can see the bulk of them are located in Africa, Asia, Latin America the Middle East. The report from research and consulting firm McKinsey & Company states, ‘Half the world is unbanked’. Furthermore, according to Banktech.com, 1 in 5 households in the United States are underbanked.
Over the last few decades there has been a proliferation of companies targeting the 'unbanked' through microfinance, or microcredit. According to Forbes, there are approximately 641 establishments offering microfinance solutions, across more than 60 countries, with the top 50 companies servicing an approximate 800 million customers.
Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and banking related services.
The history of microfinance can be traced back as far as the 18th century. The theorist Lysander Spooner wrote about the benefits of small loans to entrepreneurs as a way of alleviating poverty. The modern microfinance movement started in the 1970s. Its foundation is widely accredited to the Nobel laureate Muhammad Yunus and The Grameen Bank. The United Nations declared 2005 'The International Year of Microcredit'.
Modern microfinance is presented as having enormous potential as a tool for poverty alleviation. The common misconception here is that nonprofit agencies are the one’s servicing the microfinance market in a battle against poverty. However, Banks and Financial Firms actually make up the majority of microfinance arrangements.
Critics argue that microcredit has not had a positive impact on gender relationships, does not alleviate poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare"
The argument that microfinance or microcredit can constitute a debt trap is supported by looking at the associated fees. The global average for interest and fees, as reported by the New York Times, is 37%. Rates reach as high as 70% in some markets, with Mexican Lender Te Creemos having a whopping 125% percent average annual rate. We recently reported on the remittance issues facing parts of the world, and how Bitcoin compares, here.
The funding of microfinance is facilitated by the international financial network. Funds are borrowed by microcredit lenders from larger banks. They in turn are borrowing off central Banks. To remit funds from country to country, or even inter-country, results in transaction costs at every level. This friction is present in every financial transaction involved, and results from both internal and external transaction costs along the way.
Kenya to Rwanda has an average bank fee for remittance of 9.96%
Technology has proven to be the catalyst of change in many industries. Bitcoin in particular is driving change in ways that financial institutions and banks didn’t foresee a decade ago. Jeffery Tucker, a published economist, commented on the progress of banking innovation at the Toronto Bitcoin Conference back in April, ‘There has been no technological advancement in money for over 200 years’.
In 2002, researchers at Gamos and the Commonwealth Telecommunications Organisation, funded by the Department for International Development UK, documented that in Uganda, Botswana and Ghana, people had started using airtime credit as a tool for transferring value. Airtime credit is something that holds value and is easily transferred from user to user. Arguably, overnight a new currency was established. One reason for the fast up-take in using airtime credit as a type of currency was the lack of associated fees. Other environmental factors were also ideal, such as high saturation in mobile phone adoption, and the ability to transfer credit via simple SMS technology. In a sens, this currency was a side-effect of the technological innovation.
A rare example of regulated institutions finally catching up and offering innovation is the popular m-pesa (m for mobile, pesa is Swahili for money). Launched in 2007 by Vodafone for Safaricom and Vodacom. It has expanded from Kenya and Tanzania through to Afghanistan, South Africa, India and on to Eastern Europe. m-pesa allows users to deposit, withdraw, and transfer money easily with a mobile device. By 2012, about 17 million m-pesa accounts had been registered in Kenya alone.
However, there has been the usual middleman problems with using this platform, ranging from political to Business and Security. Just yesterday, Safaricom along with the Kenyan Central Bank and Communications authority sounded a warning to users of Equity’s Thin SIM chipcard. Safaricom warned merchants and customers it refuse to bear any risks for m-pesa transactions conducted on a dual SIM phone. Thin SIM threatens Safaricom's dominance in the region by overlaying an existing SIM card, allowing 19 million Safaricom subscribers to use two mobile networks with one phone.
Digging deeper it is easy to see a range of battles between Telecom Providers, Bank Regulators and ultimately a fight for customers and users. It seems that with the mass adoption of this low transaction cost remittance comes the classic issue of too many fingers in too many pies.
A more fundamental issue is trust. Users of the m-pesa platform, or those similar, put trust in the telecommunications providers to stay honest, maintain the technology with security updates, and to ultimately honour the settlement of any financial agreements. This is the same issue faced by users of any centralized network, including the traditional banking system.
This is where Bitcoin comes in. Being completely decentralized, with no central point of failure, and no requirement of trust to participate. Bitcoin offers the ability to micro transact, through a low friction network, using existing technology.
“Bitcoin is Nerd-Money. Nerds brought you the internet, Banks brought you the recession. Who you going to trust?”
One company, bitSIM Holdings Limited, based out of Hong Kong, is offering the next logical step in the evolution of ‘Banking the Unbanked’.
Utilizing Bitcoin’s trustless technology, bitSIM has created another SIM overlay solutions that acts as a fully encrypted Bitcoin Wallet. With the globally adopted use of SMS technology, BitSIM can literally Bank the Unbanked overnight by giving power back to users, effectively allowing anybody with a cellphone to be their own bank. BNC News had a chance to catch up with Leon-Gerard Vandenberg, Co-Founder of bitSIM for a Q&A
Do you see the ‘unbanked’ space as being a catalyst for Bitcoin’s mass adoption?
Yes of course – But it’s not only us. Tim Draper, the winning bidder of the recent FBI bitcoin auction is planning on using 30,000 BTC as the treasury pool for refactoring banking relationships and bootstrapping a Bitcoin community in developing countries.
Are you focusing on developing countries as they have already embraced the likes of m-pesa?
The area of our focus is in developing countries in order to utilize the mobile technology and adoption already used there.
How does the remittance work on bitSIM?
There’s an embedded JavaCard app on the bitSIM chipcard. It uses the SIM menu to send an encrypted SMS message, forming a bitcoin transaction. It's pre programmed on the actual bitSIM, which is easily overlaid on any existing SIM.
Giving the battles currently fought between Telecom providers against the use of Thin-SIM or overlay SIM technology – do you see a barrier to market in countries like Kenya where m-pesa operates?
No. Our technology stack includes consideration for ENUM enabled capability to route SMS's anywhere. This is not a point solution for any one carrier or one country, by design and implementation, it will be global.
How far along is bitSIM as a company?
We are currently fundraising, for the first bitSIM production run, via crowd-sale. This is done privately with the aid of Seedco.in. We are focusing on the release of a ‘gift-SIM’ by Christmas.
What else is possible with your BitSIM technology?
Anything running on top of the Bitcoin protocol is also within the reach of bitSIM users, such as Counterparty assets or via ChromaWallet. On a smartphone bitSIM would cooperate with the HIVE wallet and their full Hive app store as well, which expands services. So bitSIM is a platform play it will be possible for a bitSIM developer community to evolve, supporting that ecosystem.
Where will be the area of focus to start with?
We're starting with Australia, then China and Africa. We'll be moving on to India, Canada, the Philippines and Mexico via key partnerships. We will not be offering our services to the USA because of NY State’s pending Bit-license and its sheer stupidity. The potential use of long arm statutes for piercing jurisdictional boundaries, that bitSIM may operate within, makes not only NY State a no go, but other states too.
Thank you Leon-Gerard
It very much looks as if Technology is finally breaking through with innovations in finance and money. With Crypto-Currencies, due to the lack of fees involved and trust required, microfinance is cheaper and easier than ever before. Entire Industries are starting to emerge and evolve. In the future we will not only see the empowerment of those in developing nations, but new and novel means of doing commerce in developed nations as well. For months now Bitcoin users have been speculating at what point Bitcoin’s mass adoption or ‘tipping point’ will occur. I’m banking on it being when we bank the unbanked.