Banking the Unbanked: How Crypto Can Help?

A report from World Bank reveals nearly 1.4 billion people don’t have access to banking services. They are often forced to work illegally and have to rely on cash to carry out their day-to-day transactions. 

Cryptocurrency can be a potential solution. When Satoshi Nakamoto published the Bitcoin whitepaper, his primary goal was to eliminate the need for a third party. He wanted to build a robust system that allows two parties to transact directly without an intermediary (like a bank).

Let’s understand why banks and other financial institutions cannot be trusted, the problems with our existing financial system, and how crypto can help unbanked citizens across the globe.

• Banks are not failproof

Despite the assurances from the government and banks, we’ve seen banks go down every now and then: first in China, then in the US. Bad management decisions, poor risk controls, and over-reliance on uninsured deposits have made banks untrustworthy and unreliable.

First Republic Bank, one of the prominent banks that failed in 2023, had a 111% loan-to-deposit ratio. This means they gave out more money than they had.

Due to rising interest rates, a lot of US banks have massive unrealized losses — making them more susceptible to bank runs. Recently, two prominent academic papers estimated the total unrealized losses on US bank balance sheets between $1.7 trillion and $2 trillion by 2022. Moreover, the total amount of uninsured deposits is approximately $9 trillion in bank liabilities. In the event of a bank run, all the depositors will lose their money.

What this means is that banks nowadays are unreliable and cannot be trusted with our hard-earned money.

• Ridiculously expensive global transfers

If you have ever transferred money from one country to another, you know how painful the process is and the fees associated with it.

First, you pay foreign exchange rates — which are not the same as interbank exchange rates, as most banks and other financial institutions use different rates when trading currencies to make profits. So essentially, you are paying currency conversion charges on top of interbank exchange rates. It could be a flat fee or a percentage of the total amount you’re sending.

SWIFT fee is another common fee often levied on international wire transfers. You might have to pay transfer and recipient fees for SWIFT wire transfers. Beyond that, some banks may also impose additional charges such as processing fees, bank overheads, etc.

As if that was not enough, some countries also levy taxes on international transfers which can go up to 20% of the total amount. If you add everything up, international bank transfers can consume up to 30% of your money.

• Banking charges

Every year, banks make over $15 billion in overdraft fees, according to research by CFPB (Consumer Financial Protection Bureau). An overdraft occurs when your account doesn’t have enough money to cover a transaction or a withdrawal, yet the bank allows it anyway. Overdraft fees may cost you up to $35 per transaction and can quickly compound into a huge sum of unpaid debt.

And that’s not the only fee levied by banks. They can charge late penalties and impose additional fees for using a different bank ATM, money transfers, inactivity, and even for renewing your debit/credit cards.

Some banks even charge for availing customer service and monthly maintenance/service fees to keep your account up and running. While there are ways of avoiding certain bank fees, most of the time, it’s the bank who wins, and consumers have to pay the said charges.

• Transaction time

International bank transfers can take days or weeks to go through. While this might seem okay if you’re not in a hurry. But imagine you’re in the middle of a global pandemic or want to send money to your kid in Ukraine amidst a war. You cannot wait for days or weeks. You would want the money to be transferred almost immediately.

Even when transferring funds domestically, your transaction will go through only when the bank is operational. All the transactions occurring during public holidays or weekends will have to wait until the next working day to go through.

Usually, it takes up to 3 business days for bank transfers between different banks as they have to go through multiple intermediaries for completing the transaction. Moreover, banks may levy extra charges if you want expedited money transfers.

• Security & privacy concerns

Financial institutions are 300 times more likely to experience cyber attacks than any other organizations/companies. In February 2016, hackers stole $81 million from Bangladesh Bank in just a few hours. That’s not all. During the last quarter of 2015 and early 2016, the Russian central bank revealed that hackers took away over $31 million (approximately 2 billion rubles) from the country’s central and commercial banks.

Banks have to endure 85 serious cyber attacks every year on average, one-third of which are successful, according to a survey by Accenture. Due to security loopholes and vulnerabilities, people not only lose their hard-earned money but also risk their data.

Some banks even voluntarily share your data with other third-party buyers, their affiliates, and partners. Now imagine eCommerce companies and other giant corporations having all your critical information like passport number, address, employment information, etc. Thus, banks cannot be trusted with your money and personal information.

• Crypto is for everyone

Doesn’t matter where you live, have a lot of money, or earn a little every day — you can use crypto. Simply sign up with a crypto payment processor, and you can start accepting crypto from across the globe. You don’t need a high credit score or verify your identity to use crypto.

Worldwide accessibility, easy signup, and low entry barriers make crypto an ideal alternative to banks for the unbanked. 

• Crypto is trustless & decentralized

Lack of trust was one of the major reasons so many people didn’t have a bank account. Crypto can solve that. It is a trustless system built such that all the participants involved in a transaction don’t have to trust each other or any third party. Because there’s no single entity that can control the system, the consensus is achieved by all the participants, even if they don’t know or trust each other.

Trustlessness was first introduced by Bitcoin as it allowed users to verify and store all transactional data on a public blockchain. This way, anyone from the network can verify a transaction through Blockchain Explorer. 

Bitcoin and other cryptocurrencies achieve trustlessness by incentivizing honest behavior. Here, trust is distributed among all the participants, making the blockchain resilient to dictatorship and attacks.

• Instant international transfers

One of the most popular use cases of cryptocurrencies is for international payments. You can transfer any amount of money in minutes — without paying hefty payment processing fees to banks and financial institutions.

In January 2020, 1 billion dollars worth of Bitcoins were transferred to another wallet in a few minutes for a total fee of 0.00001%. That is just $100 for facilitating the entire transaction.

If you were to transfer the same amount through banks, it’d cost you at least 20 million dollars in fees paid to banks. Moreover, the transfer might take at least a few days or weeks until the funds reach the recipient. And this is just when you’re transferring funds in the US. If you’re sending money somewhere else, additional fees may be levied.

Unlike banks, crypto is borderless. Thus, users can use crypto to transact any amount of money anywhere globally. 

• Lowest transaction fees & no additional charges

Banking charges are again a significant factor why so many people don’t have a bank account. With crypto, you don’t have to pay any additional charges except for a nominal network fee which goes to the miners and validators of the network.

You can sign up with a crypto payment processor for free. There are no monthly fees or account maintenance charges. You can conduct as many transactions as you want through your wallet.

Crypto can serve the poor and needy who cannot afford expensive banking services. It is easily accessible and widely accepted. Anyone with a smartphone or a personal computer and the internet can start using crypto in just a few clicks.

• Crypto cuts all the intermediaries

Crypto simplifies finance by cutting off all the intermediaries from a transaction. There are no banks, credit/debit card companies, or big financial institutions moderating the transactions. It is transferred directly to the receiver almost instantaneously.

Eliminating intermediaries removes the key barriers to accessing financial services, especially for people who have limited resources and poor credit scores. That’s not all. It also helps migrant workers, enabling them to send money to their families living in their hometowns.