NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, January 11, 2016

The term “financial inclusion” is a new buzzword in the fintech space. With the rise of services like Abra and MPesa, we are convinced that bitcoin is the solution to the problems of the unbanked. With bitcoin, we say, the house cleaner in Dubai can get her money home and the refugee can get his money over the border into a safer place.

I’m even known to wax poetic about the topic. That’s fine. Optimism is a wonderful tonic for the soul. But we have entered an bubble made of cryptocurrency buzzwords and it’s important to assess what is going to happen over the next few years. In short, right now the bitcoin infrastructure is insufficient to support the unbanked. This must and will change.

Before we begin, a bit of disclosure: I’ve been researching this for my on project, Freemit, and I’ve been talking talking to startups in this space. There are many differing views and I absolutely want the unbanked to receive the help they deserve. But it’s up to the entire industry to shift its practices to help the neediest.

First, let’s discuss the unbanked the the US. Mehrsa Baradaran’s excellent book, How The Other Half Banks, tells of the fall of the rural bank and the growth of predatory and pernicious banking. During the early years of the banking industry, when the US was an agrarian society, each small town or community had its own bank. These multiple mini-banks served the community directly and were often the only place a farmer could get a loan before next year’s harvest. These mini-banks are what we think of when we imagine the nefarious landowner and banker in small town America – their whims could make or break a farm. The truth was that these small banks were the lifeblood of early America.

Regulatory changes created nationwide banks that slowly subsumed the smaller banks. These tiny banks fell or were bought and the resulting banking deserts further gutted the agrarian towns and led to the growth of industrial America and it’s various discontents. You could now sell your soul to the company store and, further, deal with a faceless bank that had no connection to your local community. You could also get a large mortgage that let you buy a home in the suburbs and, barring the occasional horrible crash, that has been said to hold us all in good stead.

Now, thanks to the hollowing out of bank branches, we have payday loans where a $600 loan can balloon to $2000 in fees and the only ATMs available feature a $3 fee. Once again, this is not always the case and this pessimistic view of the banking core but this same situation repeats itself in New York to Jakarta.