Banking the unbanked

A lack of access to lending and banking lead people to use predatory lenders. Payday loans promise to provide money to address problems needing attention in the immediate term—an impounded car, a bond for release from jail, a mortgage near to foreclosure.

The loans are expensive to the borrower, and to the lender too—it's thought that 25% of principal is lost to default. The right to collect on those defaulted loans is then sold to collection agencies, which enjoy a largely deserved reputation for being nasty and abusive.

Loans paid back on time are likewise not subjected to treatment that could be considered fair or equitable. Rates of interest range from 50% to over 3000% annualized, with some lenders treating each payment as a refinance and writing a new loan, allowing them to again to charge the maximum rate of interest.

Some are said to be altogether unbanked—aside from lending, the fractional reserve model of banking provides the option for the lender to avoid charging fees for some services. People without checking accounts because of prior overdrafts, geographic isolation, or high costs are cut off from this system, and generally have to resort to using check-cashing services and prepaid debit cards. This is another product that is not cheap, with services charging between one and four percent—a hefty sum if a worker is forced to cash his paycheck this way. For the poorest of the poor, after all credits, it is not unusual to pay more in check-cashing fees than in income tax, however hard those same people may rail against taxes.

Some firms are already using alternatives to traditional banking, for better or worse. It is now regrettably not unusual for firms to pitch prepaid debit cards to their employees as a convenient alternative to banking, at substantially greater cost for lesser service.

Another alternative, however, exists in the form of various electronic tenders. DHL now pays its contractors in Kenya with Safaricom, M-PESA, a sort of mobile phone wallet pegged to the Kenyan shilling. This represents a huge leap forward in the case of people for whom the nearest bank may be 50 or 60 miles away.

This is less security than having cryptocurrency—the properties of cryptocurrency, specifically decentralization, ensures that there is no central authority easily able to seize or revoke ownership of funds. This is not the case with what is essentially a bank account used exclusively through an app.

Likewise, a very large part of the promise of cryptocurrency is cash that is free from such specters as asset forfeiture, in which law enforcement agencies may seize property in so-called rem proceedings, in which the onus is on the owner of the property to show that the ownership thereof is legitimate. Blockchain provides not only a means by which ownership can be shown but also that property's chain of title—stretching back, in most instances, to the date at which the asset was created.