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DEVELOPING NEW WAYS TO REACH THE UNDERBANKED. AN INITIATIVE FROM FIS.

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Blockchain to the rescue of people at the bottom of the pyramid

Blockchain is a word that has got a lot of press and attention lately. And rightly so, as it’s the technology behind the celebrated Bitcoin revolution.

 

Blockchain is an electronic public transaction record of integrity without a central authority. Besides cryptocurrencies and distributed payment systems, Blockchain applications could include areas of finance where a central, trusted third party has traditionally been used, for trade reporting, depository receipts, escrow accounts or trade finance. The technology was aimed at removing intermediaries from transactions of any sort and passes the responsibility of authenticity of the transaction to the community. Blockchains can contain sets of documents, record assets and help to manage interconnected devices.

 

Emerging applications, such as smart contracts, digital property records, may also have Blockchains acting as automated agents in the future. The power of Blockchain is in the linked history it contains along with the transactions.

 

Technically, intermediaries make a lot of money by simply validating the parties in the deal and also providing a book of records. The issue is with the proliferation of intermediaries; there is no single source of truth which leads to frauds, information hoarding and generally breed inefficiency. The intermediaries decide what is “profitable” for them to pursue which impacts a huge chunk of the world population.

 

What if intermediaries were not in the picture. What if every transaction involved minimal transaction fees and was guaranteed to be genuine and available for audit Blockchain can make that happen. It can help convert any asset into a digital asset and become a part of a large ecosystem which balances itself and decides the true price of the asset based on demand and supply. Another benefit of the digitization is how easily a large asset can be broken down into smaller components. Currently a bit coin is valued at about 670USD but it’s possible to trade in fractions of a bitcoin with ease.

 

Given the above, lets apply these facts to the following scenario. What are the options available to a  person from the bottom of the pyramid for wealth management? Ideally these people are most susceptible to wipe outs of wealth in case of health or property related exigencies. Yet there are hardly any products which are specifically designed for them. Why? Because of the intermediary over heads, cost of delivery, risk of multiple and small ticket frauds and  resulting low profitability. Additionally, the government claims to pay out a variety of subsidies to the needy. Currently there is a huge leakage from the point of fund allocation, to actual credit, to the beneficiary’s account. A distributed ledger – open for audit and transparent to the granting organization, as well as the beneficiary, is the solution to curb leakages and instill accountability. All government payments should ideally be linked to a distributed ledger, which can record movement of funds between government offices, record any and every intermediary and commissions paid if any, analysis of transactions and tracking against agreed SLA’s, etc.

 

Once the payments are made to the needy, automated wealth management should kick in, to offer them financial sustenance. I look at wealth management for them, to mean secure payments, in which his risk of corpus loss is minimal, a balanced portfolio which has investment instruments as well as micro insurance. Lending could also be an area which helps them bridge certain exigencies.

 

For people with very low deposits, it’s essential that they do not end up in fraudulent transactions. Their investments in small savings schemes, purchase of articles related to small scale agriculture and cottage industries should be linked to a block chain ledger. That way a “payments score” (Similar to credit score) can be calculated for individuals. Using the Blockchain enables payment score, through which one can actually see the level of trust a person, can lay on another person/institution before a transfer of funds is made. The “payments score” can be calculated based on analytics on the type, frequency, parties involved and value of transactions.

 

For his investments, using Blockchain, he can be provided various options to invest in fractions of very large assets e.g. investing in a large infrastructure project, in a large diamond, in a restaurant or in a very expensive MF Hussain painting! His stake will appreciate/ depreciate based on the demand and supply forces in the market, and he will be able to enjoy the risk rewards associated with it. The investment made by the person is absolutely safe and is auditable by anyone in the ecosystem. His share of the painting can be sold anytime and the proceeds can be stored in a wallet linked to the digital investment account, in either digital currencies or any currency of his choice. This will make investments easy for micro ticket investors, to invest in a mainstream asset opportunity and not in Ponzi schemes.

 

Similarly for insurance, smart contracts could manage the claims in an automated, transparent and low cost manner. Identities could also be managed on Blockchains which give confidence to insurers, to assume risk for genuine customers. Their complete claim history will be transparently available, for any scrutiny and actuarial calculations for risk. Contracts and claims could be recorded on a Blockchain and help reduce instances of dispute and fraud, as only genuine claims validated by the community will get paid out. Smart contracts could also have automated triggers for payout in case certain conditions for micro-insurance are met, thereby reducing overheads to a large extent.

 

P2P lending could take off in a big way for this segment. Wealthy individuals could directly lend to the needy, with full transaction history on a Blockchain and the complete credit history, identity of the person available on it . This will provide full transparency, and will dissuade a customer from committing fraud as he will then lose credibility on the Blockchain platform and be shunted out of the platform automatically.

 

Given the above possibilities discussed above, we need an inflection point in the financial services market, to make Blockchain mainstream. I think with payment banks, and small and medium sized banks having a mandate for penetrating the bottom of the pyramid, it’s a great opportunity for them to carry the baton of bringing Blockchain into the mainstream. Given that the regulation around this needs to be thought about, if new age intermediaries do not rise up to the challenge, I am sure fintech startups will take over from them, and bring in a revolution in how the non-affluent segments manage their finances.

 

By Rajdeep Choudhury, Director- Sales, FIS

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