An article in American Banker questions the notion that decentralized finance (Defi) is a boon for the underbanked, a claim that has been widely promoted by industry evangelists. The contention goes as follows: legacy financial institutions have long neglected to serve the needs of low-income individuals and Defi companies are on a mission to democratize financial services by reducing costs and expanding accessibility. While the first part of the statement may be true, Defi’s self-proclaimed role as the savior of the underbanked is dubious.
Decentralized finance is an umbrella term for a host of fintech products that function in a decentralized manner, without the need for an intermediary. The most known example of this is a cryptocurrency, with transactions recorded into a digital ledger called the blockchain, validated by a decentralized network of computers.
The article attempts to debunk this claim by citing the demographics of cryptocurrency users as predominantly upper-middle-class, male and white, with a median income of $111,000. It’s hard to imagine a person of this demographic without a bank account unless they are intentionally off the grid or generating this income from illicit activities. Mercator’s 2021 Buyer Payments Insights survey similarly shows that those with an annual income above $75K are twice as likely to own cryptocurrency than those with earnings below that figure. Furthermore, the article cites research showing that institutions accounted for over 70% of Defi transactions.
This is wholly unsurprising as trading cryptocurrencies and using other Defi products requires access to a computer and an internet connection, as well as an awareness of the technology. The internet requirement immediately excludes the 23 million Americans that lack access to broadband internet from becoming users of the technology. A deficit of widespread awareness and understanding of defi products makes adoption by the underbanked even more unlikely.
This leads one to assume that the proclamations by the Defi industry of their mission-driven intentions are an attempt at corporate virtue signaling rather than a reflection of their true values. That said, Defi technology does have the potential to democratize financial services if it becomes more user-friendly, and industry players make a true effort to reach wider swaths of consumers. Then perhaps we will see Bitcoin wallets replacing checking accounts and smart legal contracts taking the place of costly legal professionals. Until that happens, cash and prepaid cards can remain the most accessible options that truly serve the needs (if imperfectly) of the un- and underbanked.
Overview by Sam Klebanov, Research Analyst at Mercator Advisory Group
