Poor people in Nicaragua and many other developing countries can’t afford to save money in bank accounts. Instead, they’re forced to save in livestock. It makes withdrawing small amounts of money to pay for essential items, such as medicine for a sick child, impossible.

“Payments haven't kept up with the way the internet works,” says Jed McCaleb, co-founder and CTO of non-profit payment platform Stellar. “It’s easy, free and instant to send an email to anywhere in the world but that's not true of a payment.”

A transaction fee of just 50c represents more than one-quarter of the daily income for almost 2.8 billion people forced to survive on less than $US2 a day. It is a relic of the way the financial system has evolved, which takes money through a labyrinthine closed system connecting major institutions and payment systems.

“This is hitting the poorest of the poor – it's really material for them if they're spending a significant amount of their money on this remittance fee,” he says. “We're hoping to fix all that.”

A new solution

Stellar, designed by Stanford professor David Mazières, is an open-platform based on a decentralized worldwide financial network. It aims to remove the high-cost barriers to entry which keep many of the worlds’ poorest out of the financial system (read the white paper here).

Creating an open SWIFT-like network, which has no need for a central counterparty, remains the number one priority for the organisation and pilot programs to help microfinance institutions with domestic transfers are currently underway in countries such as South Africa and Nigeria. As the network supports regular currencies like Dollars and Euros, as well as the Nigerian Naira or the South African Rand, it would allow non-financial institutions to easily send money to each other and their customers at ultra-low cost.

“Our challenge is to narrow down the focus and make it work in one small region before we tackle the world,” McCaleb says. “It's permission-less so once it's working in one region in Africa, other regions can join in seamlessly in the same way that the internet grew organically.”

In a recent speech, Stellar’s other co-founder, Joyce Kim, pointed to the success of a pilot which processed 6 million transactions using the Stellar network for just 20c in total fees. By comparison, those same transactions would have accrued $US150 million in fees through traditional wire services or $US2 million through mobile phone money transfer service M-Pesa.

A future with blockchain

The rise of new services using open source protocols built on blockchain technology has forced the established financial services industry to question what it means for their businesses and, at a deeper level, their role in society.

While the debate about blockchain continues, McCaleb says the industry should not view such open networks as a threat.

“It just increases the reach of their organisation,” he says, pointing to a company like PayPal, which could potentially build services on top of Stellar to reach even more people around the world.

“The internet disrupted some businesses but increased the overall amount of information and connectivity in the world and increased overall economic activity which is what we're hoping for Stellar.”

Banks will still have a major role to play over the next decade even as blockchain becomes established.

“It's going to change the landscape but the world will be more similar than we think,” McCaleb says.

Thirty banks from around the world, including the Commonwealth Bank of Australia, National Australia Bank and Macquarie Bank, are working together through the R3 distributed ledger initiative to explore potential uses for blockchain, including an open-sourced shared ledger to reduce reconciliation costs.

Meanwhile, Westpac recently held a blockchain design challenge at Sydney-based innovation hub Stone & Chalk to explore potential uses for the technology.
 This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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