… Increase financial inclusion
The term block chain has become synonymous with Bitcoin, a digital currency which is reported to have over 15 million units in circulation. A closer look at other possibilities in the block chain technology however reveals it holds more potential, even for addressing Nigeria’s financial inclusion gap.
According to the 2014 Access to Financial Service Survey, 36.9 million of Nigerian adults representing 39.5 percent of the adult population are excluded from financial services and cost effective platforms are expected to stimulate more financial service providers to extend their reach as cost of operations become cheaper.
One of these possibilities in lowering transaction costs for banks is Stellar, a revolutionary technology based on block chain, a protocol-driven method of exchanging value over the internet without an intermediary which its creators say will enable banks execute higher transaction volumes.
The technology is expected to eliminate third party involvement in transactions with the resultant reduction in the cost of doing business.
The Stellar platform has been created by a Not-For-Profit organization which intends to make the process of money transfers comparable to sending emails; free and fast.
Last year, at a gathering of chief executives of banks, regulators, non financial organizations, payment processing companies, among others, the participants were told that in a trial run, about 6 million transactions which would have cost $150 million in transaction costs if they had been processed using traditional wire transfer, ended up costing only $0.20 in total.
The expected end results are for banks’ transaction costs to reduce, encourage more people to transfer funds, which will spiral down to microfinance banking institutions and mobile money agents to cater for more people presently excluded from the financial system.
By eliminating middlemen and ensuring end-to-end connections, stellar is able to reduce the transaction cost of international funds transfer to near zero, making it possible for people to send and receive money safely at minimal costs.
“All the transactions are visible to people (on the network) so if a bank does a fraudulent transaction, it will be broadcast across the whole network and it will be very apparent that the bank did it because it will carry their signature or any person delegated such duties,” said Jed McCaleb, Co-founder and CTO of Stellar.org.
While acknowledging that Softwares always have bugs, McCaleb told BusinessDay that everything done on stellar is made public, so if there is any glitch or something goes wrong, it will be possible to still see who owes who, and what is owed since everything is already made public around the network, by synchronising all connected units on the network every 2-5 seconds through a mechanism called consensus.
A widely quoted estimate from a Santander InnoVentures report predicts that the Blockchain could save global banks $15 to $20 billion per year by 2022 and this would stem from its ability to enable banks to streamline processes around reconciliation—that is, the labor-intensive procedure banks go through with their customers, trading partners, and securities exchanges.
“Blockchain is inevitable. It is technology that has the potential of disrupting and changing not only the financial industry but several industries in the world today,” said Oluwole Oyeniran, Associate Director, West Africa Technology Consulting Leader at Deloitte.
“Today however, we are beginning to see a giant shift in how this technology is being utilised. A key feature which has made this shift possible is the core idea of digitally synching the Blockchain, which acts as a transaction database, between participants to the transaction with inbuilt encryption and safeguards to keep anyone from tampering with recorded data. In effect, all participants in a transaction have the same records at the same time with little or no need for periodic reconciliation. It thus provides a way for businesses to transact even when trust or a mutually reliable intermediary is absent,” said Oyeniran.
Taking a pause to ask, how do block-chains work generally? Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain; this is a rather apt illustration provided in a block geeks article.
Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.
For its operations, the Stellar platform uses a ledger system which records every transaction in the system; a complete version of which exists on each server on the stellar network.
The ledger records money deposited through anchors as credit which is then issued to a customer’s online account, which acts like a virtual wallet. Anchors act as bridge between customers who use a given currency and the stellar network. Banks and payment processors are good examples of anchors and they are trusted to accept deposits and honour withdrawals.
The platform if integrated in Nigeria’s financial system is expected to result in; cheaper costs- no middlemen involved in the transfer process; safe platform- industry certified security; facilitates financial inclusion for the poor; low cost of entry for prospective integrators; incorporates regulatory requirements – KYC, AML/CFT etc; and high transaction speed which enables transfers in less than 5 seconds.
While the conventional funds transfer system operates using a switch infrastructure for a fee, stellar is based on an open-source financial infrastructure that uses the internet for its operations. With the platform, banks can eliminate switching costs by establishing direct end-to-end links to the individual banks, thus processing local money transfers at near zero costs.
Despite 20 years of attempts, Stellar notes that micropayments have not been successfully implemented at scale because it is not cost effective to run small payments through the existing credit/debit card banking system. The fee structure of these systems makes that non-viable. This, they believe holds the Ace for Stellar’s adoption to bridge financial inclusion since most of the financial excluded are individuals who have to make small payments.
