Opinion: Decentralization Shifts the Power to the User was written by Sydney Lai, developer advocate and venture capitalist, and it’s included in issue #10 of 21Cryptos Magazine. To read more articles like this subscribe today. To read other free articles check out our Magazine category. Follow us on Instagram, Facebook and LinkedIn.
This article is from an earlier date and as such can contain figures that were actual at time of writing but have since changed.
When banks began issuing high-risk mortgages to consumers with poor credit scores, borrowers were unable to make payments, mortgages went into default, and the market opened to investment firms who turned these mortgage loans into investable securities and new products.
However, this story was different because these borrowers should have never been given loans as these were consumers with poor credit. Banks gave mortgage offers to consumers who typically would have never been able to qualify due to their weak credit history. There was even a push for the “NINJA loan: no income, no job, no asset – no problem”.
Nonetheless, as it came time to pay the mortgages, the adjustable rates skyrocketed and many borrowers were unable to pay. Remember, these borrowers were atypical consumers in the financial markets. The borrowers that ended up in an inability to pay were those who historically had a poor credit score and access to finances. As wealth is generational, so is passing along the knowledge of financial education.
This population we talk about typically describes the unbanked, those who do not use any banking services as well as the underbanked, those 67 million Americans who may not optimize on all of their banking services because they do not financially qualify to do so.
This inability to access basic banking needs seems like a simple push that the big banks have forgotten. They realize that it is not profitable for banks to spend the budget and provide banking solutions for those who do not financially qualify. Banks have costly overheads such as their staff, real estate and compliance reviews to cover. Only consumers who deposit profitable amounts make it worth the effort.
Pure online banking solutions are also unwilling to provide options for the unbanked because how do you trust someone who does not have a history with money? This catch 22 is solved with a guarantor who can vouch for you, however, guarantors are usually your closest family unit but as mentioned before, being not “rich”, is typically generational.
It sounds like a crack in the social system, but a Turkey-based startup called Colendi is creating a global financial passport with a blockchain-based credit score evaluation. A global financial passport is needed because the unbanked are not only in America, but 38.5% of the global population does not have a bank account.
Often we think the case is because of poverty, as the percentage of the unbanked are relatively high in low-income countries at 71%.
A more relatable perspective is the case of your colleague who switched offices and immigrated to America to start a new adult life. So while he is from Sweden, 35 and a homeowner, he comes to America as a financial baby with no translatable credit score. As an immigrant who just switched corporate offices to New York City, he barely qualifies for a bank account, has limited options to apply for a credit card, he becomes unbanked or underbanked and cannot participate as a consumer in our financial marketplace.
Credibility thus becomes banking oriented, your legitimacy is needed for participating in the daily economy. Difficulties that spring up for the unbanked but educated and employed includes an inability to buy a car and get to work. Inability to rent the new apartment to the new city the Swede just moved to.
Most of these economic activities occur and a ranking mechanism such as a FICO score alters the way players in the marketplace can participate. Colendi introduces a new method to evaluate a proof of creditworthiness, where the FICO score from the 1950s is as outdated as texting your friend on a Nokia brick.
Credit bureaus formulated a credit assessment where the power is held in the firm, rather than the credit score holder himself. This monopoly and dominance diminish the opportunity for fairness in credit repair or building as the cycle of paying down debt is really the repayment of the interest itself.
To shift this control of power, Colendi creates a decentralized credibility network on the blockchain with all industry stakeholders, participants, and users, and distributes its designed credibility scoring algorithms to each node to identify and evaluate a person in all specific nodes privately.
Trust is an uphill battle
This approach consolidates the evaluation results of segregated and private data segments through its decentralized intelligence. The credibility score is clearly stated for each user rather than only considering the consumer’s financial history as is the current traditional approach. Like the banking system today, this new credit assessment system is its own platform and ecosystem and in this example becomes your ColendiID. Your user activity and merchant loyalty are drained through both a Credit Decision Engine and Fraud Engine to produce your unique identity and score.
As smaller agile companies race along to find solutions, why have banks like Wells Fargo missed market opportunities like this? One could say that Wells Fargo leads the way in providing services to the underbanked by approving home loans by those who would not have traditionally qualified.
The bank led the charge on providing these financial products by participating in FHA loan programs, telling the federal government that its loans were reliable enough to qualify for FHA insurance.
Wells Fargo continues to hit the bad press page as internal teams opened fake accounts to meet aggressive sales goals, which is ironic because you may as well use those empty accounts for the unbanked.
Banks do learn the error of their ways, but the attempt for redemption is an uphill battle. In the pursuit of brand recovery or brand building, the industry adopts emerging technology to showcase growth or relevance.
Time and execution will show who was putting up smoke and mirrors. The financial industry sees enterprises taking calculated risks to adopting blockchain.
JPMorgan Chase incubated the Quorum project as an enterprise-ready distributed smart contract platform. American Express deployed Hyperledger for its rewards loyalty program. Common financial services like ATMs could utilize FOAM. Space’s proof of location. ATM’s and credit card transactions require location data. Loose ATM’s you find at convenience stores are smashed and dragged away but can be recovered with their built-in GPS tracking. The entire global financial system depends on GPS. The New York Stock Exchange uses GPS to time automated computer trades. Yet the system is susceptible to fraud and cyberattack.
Reflecting on fraud and corruption, how did society allow traditional financial institutions to impact markets? Is our frustration showcased with the rise of alternative financial consumer products like Robinhood and Simple Bank? This is not the platform to blame banks but rather to understand our behaviors as a society.
Occupy Wall Street?
Did we forget that Bitcoin was a previous alignment to the ethos of Occupy Wall Street? The Libertarian drive to cryptocurrency is the idea that we create our own riches and no bureaucracy should regulate us from doing so. As the big banks have failed us during the recession, we had failed ourselves in advocating for a more balanced distribution of income.
As access to the internet and information has become more ubiquitous, could our access to cryptocurrency give us the financial access that the 99% have been advocating for? Many would say that the 99% still don’t know of the blockchain bubble and those Bitcoin Millionaires are still of the upwardly mobile or what sociologists deem as the ingroups.
This still draws us back to why the Occupy Movement failed. As we know today, movements do not catch on unless influencers are involved. You can be a musician and fans can advocate for you, however, you will be unlikely to hit the mainstream attention until an influencer like Beyonce has given you a shout-out. So then why did influencers not speak up, especially where a movement required momentum from a whole class of people that were affected? The 99% is too general, and while they are not the 1%, it is the upwardly mobile or the “influencers” that dare not defy the aspirations that they work so hard to achieve.
If the upwardly mobile were the MBAs and lead engineers, what is the incentive in the marketplace for them to fight against what they are striving to financially become? If we view the Occupy Wall Street movement as a form of marketplace design, you have several players in this multisided marketplace. The incentive mechanism for blue-collar workers (working class), white-collar employees and the 1% are misaligned. We take this trend of market incentive misalignment and we apply this back to enterprise and consumer engagements and we see the discontent of us as buyers in the marketplace.
The mortgage crisis was misaligned incentives with home loan borrowers wanting to fulfill a dream and banks wanting to fulfill profit, not their customers actually getting a home.
Where blockchain projects with a tokenized model are moving towards today is creating solutions where the power is stripped from a centralized entity and the incentive model goes in favor of the consumers themselves. This new movement is no longer the campouts of the Occupy Movement, rather the rejection of equity investments from funds and asking for a democratized contribution to support initiatives built for the people by the people.
While we may not have forgotten how lucrative the crypto market was in 2017, we should also remember the financial state that came before it, where the imbalance of power allowed entities to rate your identity, and how emerging solutions give that control of identity and destination back into the hands of the consumers.
As enterprises eventually no longer control the consumers, we see them changing their own incentive models. The control shifts towards influencers and the people who become even louder than monopoly entities themselves. The success or failure of marketplaces will ultimately rely on the incentives of those in power.