Bank service charges or fees make a compelling for the mass
adoption of crypto-currencies, particularly in developing countries, where
these fixed costs remain disproportionately high. In fact, in some lands, it is
these high bank charges that actually discourage people from using financial services
offered by banks. The overall cost of accessing banking services increases when
costs like transport to and from the physical offices of the bank are factored
in!
In addition, the very low wages earned, suggest many
families that survive at or just above the poverty datum line, will be very
sensitive to extra costs like bank fees.
Zimbabwean banks demand their clients to maintain a balance
that makes it possible for the bank to deduct $5 in fees every month,
irrespective of whether the account is accessed during the month or not. For the
majority of workers who earn less than $400 per month, such a fixed monthly
cost only drives people away from the traditional banking system and there is
documentary evidence to support this.
To illustrate, the Reserve Bank of Zimbabwe’s October 2018
monetary policy statement reveal that depositors are not very keen on keeping their
funds inside the banking system. According to the statement, demand deposits—customer
bank deposits that can be withdrawn any time without notice—comprise 65% of all
bank deposits, a clear indication of an unwillingness to fully use the banking
system.
In any case, a number of Zimbabweans lost out at the end of
the hyperinflation period in 2009, when bank account holders’ balances simply
disappeared without explanation. Subsequently confidence in banks tanked.
The same happened to the insurance industry and to this day,
pension rights groups are still fighting for a fair compensation after some
pensioners received payouts not exceeding $5 despite making contributions for
years.
Why many remain
unbanked
Weak consumer protection laws and inept regulatory bodies in
some developing countries mean banks can connive to levy high charges, without
facing significant risks of being penalized. When the same banks fail, deposit
insurance is inconsequential, only a maximum of $100 per depositor is paid regardless
of the level of losses.
This reinforces distrust of the financial system, a fact
supported by a World Bank Global Findex Database of 2017, which also revealed
that 1.7 billion people around the world remain unbanked. According to the Global Findex Database, a lack
of documentation and distrust in the financial system were both cited by
roughly a fifth of adults without a financial institution account.
Interestingly, banks
cannot carry on the same way in developed countries like the United States as
they normally do in developing nations. The United States has applicable laws and
institutions to deal with banks’ malpractices with respect to depositing taking
as well as lending. For instance, the Truth In Lending Act (TILA) passed in
1968 compelled banks to be more truthful when advertising or informing potential
clients about the cost of borrowing.
While such laws do not offer 100% protection, the legal threat
the Act poses ultimately forces banks to toe the line something that cannot be
said of developing countries like Zimbabwe, which is yet to pass a consumer
protection law, some 39 years after gaining independence.
Inversely, banks’ refusal
to set up in rural areas amplifies the extent of global financial exclusion.
Apparently, banks cannot establish a branch in areas not dominated by regular
income earners as this denies them the opportunity to earn fixed service
income, enough to cover overhead costs. Areas dominated by smallholder farmers
are ignored by banks because such farmers do not regularly receive an income,
which banks use to fund part of their operations.
The case for
crypto-currencies
Given this whole background, it is easy to see why
crypto-currencies could see a mass adoption in the coming few years. Whereas
potential bank customers have to contend with transport costs when accessing
banking services, with crypto-currencies, it is simply getting internet access
via a mobile phone or a computer, there is no costly long distance travelling.
In certain instances, people might be compelled to open an
account but the centralized nature of the banking system means many will remain
under-banked despite possessing a bank account.
To illustrate, Zimbabwe is a major tobacco producing country
with the multi-million dollar industry now dominated by tens of thousands of
smallholder farmers. A few years ago, the Zimbabwe government made it a mandatory
requirement for all tobacco farmers to open a bank account while suspending payments
of tobacco proceeds in cash.
Farmers duly obliged by opening bank accounts with different
financial institutions, which are mostly based in Harare and many were issued
with credit cards to facilitate payments. Herein lies the problem, tobacco
farmers reside in farming towns outside Harare and with a few banks having
branches in such remote places, this meant that for the majority of new account
holders, they would have to travel to Harare or any other town to access
banking services.
Even worse, if a tobacco farmer has a major query with their
bank account or they lost credit card, then only a visit to the head office in
Harare will suffice, a costly exercise! If
the tobacco farmer were to opt for crypto-currencies instead, a similar
scenario will be resolved without the need for an account holder to incur
transport costs. Blockchain technology, which underpins crypto-currencies,
eliminates the very query to begin with.
A complex verification and validation of records means there
is a remote chance of a encountering a typo error or any other problem, which
might necessitate the need to travel more than 100 kilometres to get the
problem fixed.
Crypto-currencies will potentially solve the confidence
issues that presently beset the financial system, particularly where the
unbanked are concerned. Transparency has been one key to the success of
crypto-currencies like Bitcoin thus far because Blockchain technology, which is
essentially a publicly distributed ledger, allows to anyone to verify or
authenticate transactions.
This level of transparency has not existed within financial
systems before, especially with regards to large businesses.
Lower costs
Of course, crypto-currencies have small inbuilt transactions
costs but these are significantly lower than what is obtaining within
traditional banking system.
The other appealing aspect of crypto-currencies has to be
the ability of two or more people to transact without having to go through
intermediaries, a process which normally comes with high costs. Going back to
the example of tobacco farmers, further problems are experienced when two
neighbors who are new account holders, want to perform a transaction with funds
in the banking system.
The buyer will have to travel to the nearest town or
business centre to withdraw funds or transfer money to an account of his
neighbor, the seller. This might seem ridiculous but it has been happening for
years and it is the only way the seller can be assured that the buyer has an
adequate balance to fund the transaction.
A mobile phone company, Econet Wireless has since stepped in,
allowing people to transfer fiat money with more ease via mobile phones. The mobile
phone application, Ecocash, which now enjoys a virtual monopoly, can only go as
far facilitating the ease of moving funds inside national borders.
Cross border payments are only possible after one pays a
visit to a banking institution to make the deposit of the appropriate foreign
currency deposit. The intermediaries involved here include the public transport
operator, the resident bank plus a clearing bank and all demand a fee for their
services.
Crypto-currencies payments or funds transfer are normally
seamless inside borders just like they are seamless outside borders and the
cost is much smaller than the conventional route. There are no intermediaries
and this lowers the cost of the entire transaction.
Crypto-currencies surpass the mobile money transfer app by a
wide a margin and once the ignorant population becomes aware of this, more people
will abandon the banking system.
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