Many articles are written about how blockchain technology makes transfers, payments and other types of transactions possible without contacting banks. Lending outside the banking system is another product that can be developed based on this innovation.
Microcredit market in advanced countries is small. Due to high-interest rates, most people avoid small loans that are received outside of banking. Professor of Babson College, economist John C. Edmunds assures that in developed countries and countries with poorly developed economies an utterly different alignment. Issuing microloans thrive there. And in some states, the turnover of the microcredit market is greater than that of the bank lending sphere.
John Edmunds is considered the leading world economist who spent years travelling around the developing countries of different continents. As the professor explains:
In some countries, only 5% of the high-income families can get access to financial services for various reasons (sometimes even less). I believe that blockchain technology is able to include large consumer segments in the financial space if we evaluate the situation on a global scale. These will be people who have never before actively participated in it.
Do so many people live without bank accounts and credit cards in 2018? Yes. The reasons may be the vast distances between the settlements or poor development of the banking system in the country or its provinces. According to Edmunds:
People live very far from banks. In other situations, not only logistics prevents access; such factors can be a specific place of birth and appearance. In some parts of South America, people of a clearly native nation may, of course, come to the bank. But they will not be tolerated there for long. It’s not just that they don’t have access to a bank account. The real problem is that they have no access to credit for life. This is terrible, even detrimental to their fate.
Microcredit itself is not a new concept, and it has an ambiguous reputation. The reason is the increased attention of regulators; the activity of the sharks of microloans often raises questions in the police. It especially concerns doubtful, even rigid, methods of collecting unpaid debts.
In the microcredit system, staff remuneration is the most significant part of costs. On average, one full-time manager is required to issue 50 credits for $700 per month. He/she spends the large share of time on filling in papers because such companies not really do a credit check. If we shift the system of issuing microloans to the blockchain, administrative costs will be reduced by 90-99%, thinks Edmunds.
Moreover, the development of the microcredit system based on the blockchain will not become a competition for the banking sector. They work in different niches: microloans are issued to the people the banks can’t service without a loss for themselves. Loan volumes are too small, and the risks are enormous.
Do you know why most people take microloans? To maintain the existing small trade business. If they have access to cheap loans, that can be obtained quickly, their business will only win and activate.
A farmer and a private trader in the market are a whole niche of a small business, which feeds on the working capital from microcredit firms. If the number of intermediaries between them and the available money decreases, it will give them a head start for development. It will be good for the economy of any country.
Closing the cash gap, increase supply with an unplanned growth in demand: there are many goals for small businesses that can be easily reached with microloans. Getting $200-300 for three days is not the reason why it is beneficial for an entrepreneur to go to the bank and fill a pile of papers.
John Edmunds is sure that blockchain-based microcredit systems will find their way to small business consumers. But he doubts that the main cryptocurrency in such transactions will be Bitcoin or Ethereum. The speed of operations in these networks is still low, and the commissions remain high. The expert believes that other currencies will most likely prevail in the system of microloans on the blockchain. It is possible that they are still not available on the market, so the economist refuses to name a specific type of coin. Though some fintech companies are already interested in the development of cryptocurrency of this kind.