No this is not a typical crypto blogpost by a half baked evangelist. Unlike the majority of the community, it is unfair to believe in the ideologies like “screw government“, “shut down banks” etc. On similar lines, this post would try to approach the flaws in traditional banking system from a neutral standpoint.
But before we start, I wanted to acknowledge the giant strides Indian financial ecosystem has been making lately. With the launch of UPI, clubbed with Jio revolution, we have ignited fintech space for real. Don’t take my word for it. Here are a few numbers that will prove my point:
- India is world’s biggest hub of fintech startups with 2655 startups operating currently. This number was only 714 in 2014
- All Indian startups combined raised a total of $11.5bn out of which $2.1bn was raised by startups playing in fintech industry
- FinTech in India is expected to increase at a CAGR of 20.2% during 2017-21 to reach $92 bn
- India will contribute 2.2% to the world’s digital payments market by 2023, and the value of such transactions is expected to reach $12.4tn globally by 2025.
You can read more about Indian Fintech space here.
But if we have such a vibrant system at hand, why are people suddenly talking about cryptocurrencies? Has traditional banking failed us the way it is often portrayed by crypto community? Let’s find out the rationale behind these claims by exploring some inefficiencies of traditional banking system:
A. Financial Inclusion:
Financial inclusion refers to the fact that basic financial services like bank accounts, ATMs, loans are accessible by everyone in the country equally irrespective of financial status, gender etc. Do we have financial inclusion? In India, women are often asked to stay out of financial matters. Most women invest passively through their husband or father.
Globally, 1.7 billion people do not have access to banks. Worst part? About 2/3rd of them have phone which runs an internet connection. In this online era, if these people aren’t leveraging the banking sector, something is horribly wrong with the system itself. Key reasons cited behind this are high fees, distance from a local bank, banker’s discretion.
Cryptocurrencies can solve this problem. All you need is a mobile phone and internet connection to start. A lot of DeFi applications allow you to take loans against your crypto assets with no documentation. Since there are no intermediaries involved in your transaction, the fees is also relatively low.
B. Financial Literacy:
While infrastructure aspect of financial ecosystem was taken sorted out by the banking industry, no one really paid serious attention to educating people on how to use them. In fact, as per a survey done by a private body on 25 Indian colleges, only 1 in 3 students could explain the basic banking concepts such as interest, compounding and inflation.
How does crypto solve for this? If you start diving deeper into cryptoverse, not only you get a hang of basic personal finance, but also get a perspective on history of money, economics etc. Cryptocurrencies push you into this forced inadvertent learning mode.
C. Remittance Time:
While we get more used to Unified Payment Interface or UPI in India, let’s acknowledge the fact overseas transactions are still a huge problem. Since sending payments overseas involves the buy in of multiple intermediary parties, it takes well over 24-48 hours if you want to send/receive a substantial amount. In a recent example, our company had to transfer money to one of our vendors based in US. I was given a TAT of 7 days for the completion of the payment. This is after all the approvals and processes were completed.
Cryptocurrencies are a giant step in the right direction when it comes to faster settlement. All crypto P2P transfers happen almost instantaneously depending on the blockchain. Some faster blockchains like Solana are capable of processing 50,000 transactions per second against 2,000 being processed by VISA currently.
D. Financial Censorship and Manipulation:
Currently, financial institutions across the world have the power to freeze accounts, remove funds from the accounts and even deny the retrieval of funds to certain individuals. A real life example of this would be levying a penalty on falling below a average minimum balance. Banks are using your money to lend it to other people and earn interest over it. While that is a questionable business model in itself, they also have the authority to punish you for not giving them enough money for lending.
On a larger scale, countries have the power to manipulate and devalue currencies, leading to hyperinflation.
With cryptocurrencies in picture, it would be difficult for any single individual, organization or country to take control. In a decentralized ecosystem, the power would lie in the hands of the end user and the people involved in that transaction. Cryptocurrencies like Bitcoin cannot be printed (created) at anyone’s discretion and is limited in number hence making the deflationary and immune from inflation.
E. Trust in the Government and Financial Institutions:
A recent survey reveals that only 57% of the citizens trust the financial institutions, financial services in their respective countries. The trust in the government also hit rock bottom with polarization reaching it’s prime. In such a scenario, it would be really hard to run a system where people abide to the norms laid down by the authorities.
In cryptocurrency landscape, code is the law. You may not need conformance from anyone and system itself is capable of shunting out people who don’t comply.
As a famous saying quotes, with great power, comes great responsibility. We are standing on the edge of paradigm shift. This would impact all our lives irrespective of our personal opinions. In my opinion, both of these ecosystems co-exist with each other. But power is a zero sum game, therefore, you would see a radical power shift in coming times.
Have you experienced banking inefficiencies ever?
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Until next time..
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