Blockchain and Decentralization

Around the world, businesses are finding ways to overcome the negative effects of the coronavirus pandemic. With physical distancing policies and quarantines set up to slow down the spread of the disease, brick-and-mortar businesses have faced challenges in resuming operations, thus impacting their ability to generate cash flow and revenues.

Businesses with digital operations have proven to be more resilient against the economic downturn, however, since these can continue operations even amidst the physical limitations. However, one potential hurdle is the ability to reach customers who are unable to transact due to the lack of payment support.

Data from the World Bank’s Global Findex Database show that 31% of the world’s population, or around 1.7 billion people, are unbanked or underbanked, with China having the biggest underbanked population at 225 million. When asked why they lacked bank accounts, participants in a 2017 survey pointed to a host of reasons, ranging from challenges providing the needed documentation to financial institutions being prohibitively far away.

Of those without a bank account, almost two-thirds claimed they lacked the funds to use one. Another 30 percent of the unbanked taking part in the aforementioned poll simply stated they do not require a bank account.

Those citing distance as a factor preventing them from having a bank account made up 22 percent of survey participants, while 26% stated that it was prohibitively expensive to have one of these accounts.

Thus, the opportunity is there for providers of FinTech services that offer access to financing or, at the very least, digital payment solutions.

The need for digital and contactless payments

According to the World Economic Forum, governments around the world are promoting the use of digital payments to reduce physical contact and thus help minimize the spread of coronavirus. In response, digital payment providers are easing up on transaction fees and minimum requirements.

According to Bain & Co, this will accelerate the use of digital payments, increasing the number of transactions that are conducted electronically in 2015 by 5 to 10 percentage points. As a result, the company predicts that by 2025, 67 percent of these transactions will take place digitally, compared to its previous estimate of 57 percent before the COVID-19 pandemic.

The shift in global payment behavior also includes point-of-sale card payments, since “microorganisms can even transfer to credit cards when point-of-sale terminals serve multiple people,” says the Bain report.

By the same logic, other traditional methods of accessing funds could also experience a drastic shift. The Bank for International Settlements has found that ATM utilization in the U.K. has fallen.

The COVID-19 pandemic has made many people nervous about how the use of physical cash could contribute to spreading the virus, the Bank for International Settlements report noted, and this apprehension, whether legitimate or not, is helping spur interest in digital payments. However, the challenge is in addressing the fragmentation across payment platforms and solutions across the globe.

According to Felix Mago, Co-Founder of digital payments platform Dash NEXT, this should be considered an opportunity for the Decentralized Finance (DeFi) industry to introduce services to an otherwise unbanked or underbanked population, who will greatly benefit from increased financial inclusion. The key here will be to address the fragmentation. “There are so many countries, nationalities, and local differences that I currently do not see a one-fits-all solution,” he says.

Mago adds that the onus now falls upon digital solutions to be the unifying factor that address this fragmentation, with a focus on traditional businesses that need fiat money. “The first thing for us is to prove that we bring additional revenue to the businesses and industries we connect. Secondly, we must have solutions that enable instant fiat settlement if it is required.”

Addressing the trust factor in decentralized platforms

“For end-users, one potential drawback of decentralized platforms is the perception that there is a high learning curve involved in transacting through blockchain or cryptocurrency platforms. For instance, crypto wallets are found to have usability challenges for general users,” says Kenny Au, Founder at Elevate Ventures, a Hong Kong-based technology ventures firm.

Since decentralized payment systems are still relatively a new concept, users do not find these easy to use, and they need an easy way to keep track of transactions across a decentralized system. Au adds that users will become more comfortable with solutions that provide trust along with ease-of-use.

“Since blockchain solutions are decentralized and peer-to-peer trustless platforms, trust can be ensured by smart contracts, transparency in transactions and notifications, and also smarter insights into transactions, which will enhance confidence in the decentralized ecosystem,” he says.

“Active blockchain monitoring features can definitely provide additional security to users and ensure transparency of transactions,” says Hendrik Henrikson, Chief Business Development Officer at PARSIQ, a platform for automating blockchain intelligence and integration into business processes.

“Notifications and additional transaction information can be provided in real-time, allowing deeper insights during the transaction process and potentially allowing to react to certain transactions accordingly when time is of the essence.”

An opportunity for growth

Decentralized finance has significant potential to empower the unbanked and underbanked, and it does not necessarily come with a high learning curve. The added layer of trust can add confidence among businesses and end-users in transacting using decentralized solutions. It also makes decentralized payments easier to use and more accessible, compared to existing payment platforms that can be slow and expensive. Thus, even without the presence of centralized support, users are assured of the integrity of their transactions, and users will ideally have better visibility over their dealings.

Research from the Boston Consulting Group indicates that placing a greater emphasis on digital payments can bolster economic growth by as much as 3 percentage points. With the millions of underbanked around the world, decentralized finance offers an opportunity to improve financial inclusion through global payments and other decentralized services such as loans and investments.

Technology offers a way for businesses and individuals to sustain economic activity through contactless payments and digital transactions. Innovations in technology platforms now provide an accessible, safe, and secure platform for payment transactions.

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