Blockchain

What It Means To be Unbanked + How Digital Wallets Can Help

In 2021, 5.9 million U.S. households didn’t have a bank account. That figure equated to 4.5% of the nation’s population at the time. 

For governments and financial institutions that want to combat poverty and increase the accessibility of banking services worldwide, it’s been a growing concern to bring these unbanked people into our modern financial system

While this emphasis on financial inclusion has increased the availability of financial services in developing countries, more work still needs to be done to help these unbanked communities.

In this guide, we’ll discuss the issue of unbanked individuals and why digital wallets may be the answer.

Understanding the Unbanked

Unbanked and underbanked people simply lack access to traditional and modern banking solutions. Generally speaking, unbanked people typically don’t have bank accounts or access to credit cards, debit cards, and prepaid debit cards.

For them, it’s difficult to pay for everyday goods and services and participate in an evolving world market. This is a major problem since many businesses have already embraced digital payment solutions that render cash payments useless.

Unbanked and underbanked households are unable to buy online products, make investments, improve their financial situations, and take control of their finances. 

Causes of Being Unbanked

The lack of financial resources is endemic to both advanced and developing countries. Here are the main causes of being unbanked in today’s world:

Limited Access to Traditional Banking Services

Individuals living in remote or underserved areas may not have easy access to physical bank branches or ATMs, making it difficult to open an account, start check cashing, deposit money during payday, take out money orders, or withdraw cash.

This lack of physical access can hinder financial inclusion and limit opportunities for financial management. This is a common occurrence in developing countries. In many cases, bank branches and ATMs are too far from people living in rural areas.

As a result, they cannot maintain appropriate control over their finances and participate in traditional banking services

Lack of Financial Literacy

The lack of financial literacy plays a role in maintaining unbanked households. When people don’t know about (or understand) finances, they can’t make meaningful, positive personal finance decisions. 

According to the Resolution Foundation think-tank, there is a strong correlation with income, with 327,000 unbanked people in the lowest household income decile compared to 33,000 in the highest. 

Distrust in Banks

Some unbanked people have had negative experiences with traditional banks, leading to a lack of trust and reluctance to engage with financial institutions. This mistrust can stem from high fees, overdraft fees, and discriminatory practices.

This leeriness isn’t limited to third-world countries. Many Americans have trust issues with banking institutions, despite the protections offered by agencies like the Federal Deposit Insurance Corporation (FDIC).

When unbanked people distrust the traditional banking system, they may resort to storing physical currency unsecurely at home instead where it can’t accumulate interest or value via investments. 

Income and Financial Instability

Those with low incomes or unstable employment may struggle to maintain a bank account due to minimum balance requirements, monthly fees, and the inability to afford overdraft protection. 

These financial challenges can create a barrier to entry and perpetuate the cycle of unbanked status. Fortunately, neobanks often offer fee-free checking accounts. This makes it possible for anyone to store their money without a minimum balance or monthly account fees

The Rise of Digital Wallets and How They Can Provide Banking Access to the Unbanked

Digital wallets may be the answer to expanding financial inclusivity across the globe. Digital wallets allow people to hold cryptocurrencies or any other digital assets, and individuals can purchase these wallets without any kind of bank involvement. 

With the growing popularity of crypto and digital assets, such as NFTs and stablecoins, more businesses are starting to accept them for purchases. 

Countries with a high ratio of unbanked people can sponsor their own digital wallets and issue them to their citizens. This way, more people can participate in modern commerce and make informed financial decisions. 

El Salvador is already following this blueprint.

El Salvador’s lawmakers have officially made Bitcoin legal tender. On top of that, they have created the Chivo Wallet, a proprietary digital wallet for Bitcoin purchases, something the El Salvador population has massively adopted.

This may be a sign of what other financially challenged populations need for their own financial security. 

Benefits of Digital Wallets for the Unbanked

Digital wallets offer substantial benefits for the unbanked population. To begin, they provide a secure alternative to cash, reducing the risks associated with carrying physical currency. Additionally, digital wallets cut costs by eliminating the need for physical infrastructure, making financial services more affordable.

Digital wallets offer access to additional financial services such as credit, insurance, and investments. These services were previously unavailable to individuals without bank accounts.

Here are some more benefits of implementing the use of digital wallets on a wider scale:

Increased Financial Inclusion

Digital wallets provide convenient and accessible alternative financial services to traditional bank accounts, enabling individuals without formal banking access to store, send, and receive money electronically. 

This increased financial inclusion promotes economic participation and reduces reliance on informal financial systems. It’s easier to set up a digital wallet than a bank account

Digital wallets also come in different forms, hot and cold. Hot wallets are always connected to the Internet and store your funds in a secure cloud network. On the other hand, cold wallets are physical devices that can store your digital assets.

Ultimately, digital wallets give people a wide range of options to choose from to store and spend their money. 

Enhanced Security and Protection

Digital wallets offer robust security features, such as encryption, multi-factor authentication (MFA), and fraud prevention mechanisms, to safeguard users’ funds and personal information. 

This enhanced security provides peace of mind for unbanked individuals who may have concerns about traditional cash management methods. 

For example, if someone somehow gains access to a user’s wallet key, the device can trigger an MFA security protocol. This protocol makes it more difficult for an unauthorized person to gain entry to a digital wallet. 

Reduced Transaction Costs

Digital wallets often offer lower transaction fees than traditional cash-based transactions, such as remittances or payments.

This reduction in costs can save unbanked individuals money and make financial transactions more affordable. For example, the Bitcoin Lightning Network allows users to seamlessly make and receive transactions in Bitcoin for free.

Improved Financial Management

Digital wallets provide users with tools to track their spending, set budgets, and receive personalized financial insights. 

As a result, unbanked individuals can make informed decisions, manage their finances responsibly, and achieve their financial goals. Countries with their own sponsored wallets can even add additional financial management tools to help users navigate filing taxes.

Access to Additional Financial Services

Digital wallets can serve as a gateway to additional financial services, such as microloans, insurance products, and investment opportunities. 

This expansion of access can empower unbanked individuals to build their financial well-being and improve their livelihoods. 

For example, digital wallets can integrate with third-party affiliates that provide competitive and affordable financial services that would have otherwise been inaccessible to unbanked people

Promotion of Digital Literacy

The use of digital wallets encourages familiarity with technology and digital financial services

Because of this, financial providers can promote digital literacy among unbanked individuals, equipping them with the skills to navigate the digital economy and access a wider range of opportunities.

In today’s world, encouraging digital literacy helps unbanked people keep up with individuals with higher incomes and better opportunities. 

More than 53% of U.S. households prefer to use a digital wallet. By promoting digital literacy, governments can stimulate their economy with a better-informed marketplace.

Facilitating Cross-Border Transactions

Digital wallets can also facilitate cross-border transactions with lower fees and faster processing times, making it easier for unbanked individuals to send and receive money internationally. 

This improved connectivity can strengthen social ties and support economic opportunities for unbanked communities with global connections. This is beneficial for countries that process a high number of remittances.

In fact, one of the reasons why El Salvador has embraced Bitcoin is because its blockchain network helps to process remittances faster than relying on foreign currencies. 

Overcoming Barriers to Digital Wallet Adoption Among the Unbanked

As an emerging solution, there are some unique considerations regarding digital wallets and the unbanked that warrant discussion:

  • Literacy: Digital wallets can help people access technology, but not knowing how to use them can still be a problem. Stakeholders should invest in digital literacy programs to empower unbanked groups to use mobile financial services. User experience design should assume limited tech fluency.
  • Building trust: Those without online banking experience may distrust digital financial services. To drive adoption, providers must prioritize building trust through transparency, consumer protection, and fraud prevention. Many unbanked have relied on informal financial networks that digital wallets should complement, not aim to replace outright.
  • Addressing identity hurdles: Digital wallets require ID verification, which many unbanked people lack. We must explore creative solutions like proxy IDs to circumvent this barrier. Offline workarounds also need to be in place in areas with limited connectivity.
  • Supporting grassroots organizations: Local non-profits, co-ops, and informal community groups are key partners for digital wallet adoption. They can provide crucial literacy training and resources to underserved groups. Their community connections and cultural/linguistic expertise can enhance adoption efforts.
  • Empowering women: Enabling financial inclusion for unbanked women confers benefits across families and communities. Stakeholders should engage women’s groups and design access initiatives targeting female economic empowerment in America and beyond. 

AlphaPoint Wallet and Merchant Ecosystem 

We’ve already highlighted how unbanked populations can benefit from using cryptocurrency in their everyday lives. AlphaPoint makes it possible to engage in the world of crypto without a difficult barrier to entry with our Wallet and Merchant Ecosystem

The Ecosystem offers an excellent opportunity to serve unbanked populations on a national level, promoting access and financial literacy and improving economic effectiveness. AlphaPoint’s Wallet and Merchant Ecosystem is the only proven technology solution for establishing country-wide cryptocurrency adoption — as demonstrated through our role in the launch of El Salvador’s Chivo Wallet. 

The AlphaPoint mobile app combines the functionality of a crypto exchange with the ease of use and accessibility of a mobile wallet. This makes it easy for users (at scale) to send and receive and send fiat and cryptocurrencies to other users on the app’s network — letting them use Bitcoin just as easily as any other legal tender. 

Find out How AlphaPoint’s Solution Banks the Unbanked

Digital wallets make it possible for the unbanked to access financial resources and financial products, no longer restricting them to traditional banks and credit unions

If you’re focused on creating social good and want to make a difference, you’ll need the right technology to get started. With AlphaPoint, you can receive access to white-label, turnkey financial solutions to build on top of your tech stack. 

See how AlphaPoint can help you accelerate your financial venture. Request a demo today.

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