Approximately 28% of Americans and Canadians are underbanked. That means a large chunk of the population only has limited access to standard banking services. How large a chunk is that really? In America, that’s 89.3 million people, and in Canada, that’s an estimated 9.8 million.
Almost all financial services are provided by brick-and-mortar locations like bank branches, payday loan stores, and anywhere with a “checks cashed here” sign out front. The problem is even if you have access to these institutions, you’re likely to be negatively affected by high interest rates, like those normally associated with payday loans. The average interest rate for a payday loan with a 14-21 day timeframe is about 21%, mainly due to the operational costs of running brick-and-mortar locations. There are roughly 1,200 payday loan and check cashing outlets in Canada alone, which keeps those fees high, due to their operational costs.
That’s why Digital Escrow Services has created Branche, a financial services platform powered by Ethereum’s smart contract technology. Branche is a mobile app designed to provide basic financial services, such as check cashing and short term loans. A client only needs a valid government ID, proof of their current address, and a cell phone capable of SMS text messaging. Regardless of their situation, if someone is underbanked, or simply looking for a cost effective alternative to traditional financial services, Branche aims to ease their financial woes.
The heart of the service is the Branche Vendor, who can be any legal entity: such as an individual or small business. They simply need a mobile device and an internet connection. These Vendors are able to receive compensation on every transaction they process. What makes Branche different is that its fees are about half of what you’d pay at a normal bank (10% compared to the average 21%). They also have a timeframe of 14-62 days, instead of a maximum of 21 days. While baseline check cashing is standard at 5%, Branche only charges 2.5%. Certain fees could reach lower levels, because Vendors and Lenders effectively bid on providing their liquidity to a client’s needs, based on what fee they’re willing to charge. This would combat any predatory lending issues; since Lenders and Vendors that price themselves too high, won’t get any volume directed toward them.
John From, a founder of Branche and CEO of Digital Escrow Services, said:
“Ultimately we are not changing the fundamental rules of the industry, just the process of how the services are delivered. In the end, the process is very similar to how it is done now. You still have to submit an order to a vendor and go and meet them, only our way is faster, cheaper and better for everyone involved.”
Branche plans to incentivize its users through Branche Loyalty Tokens (BLT). These tokens will be acquired through constructive contribution to the service, and they are meant to encourage app usage, specifically in a positive and responsible manner. While other microcredit banks have relied on community encouragement and assistance, Branche appears to have partially digitized those aspects into the BLT. Though they also employ the use of Community Reps as a liaison between the different types of Branche users.
But what about loan collateral? What’s to stop a client from defaulting on their loan?
“All payday loans are secured using their paycheck, later on we will be exploring other loan options, micro-credit lending and debt recovery solutions. Since we can tokenize a client's debt, the marginal cost of being flexible is almost nothing compared to the existing industry costs.
When a client defaults a number of different things can happen, the first is it will automatically convert to a multi-payment loan and be broken up over the full legal time (62 days for payday loans) and if they have a minimum payment in BLT’s, those will be sold to cover the payment. The Vendor, Client and Community Reps will be notified and the client will be contacted to work out a payment schedule.”
Even if they've fallen behind on a payment, the customer still has the ability to sign new personal checks and submit them to update their order. If they do end up defaulting on the loan, like if their check bounces, their Community Rep will contact them to work out a yearly installment for repayment. Unlike with traditional banking, fees and fines aren’t layered on top of this; the client will end up losing Trust and Loyalty points, making it harder for them to use the service in the future. Bad debt would eventually be sold to a debt recovery specialist.
When it comes to initially funding a client, the Vendor is mainly an intermediary, who can provide a portion of the funds. This represents layer 1 of the Branche Liquidity Pools, wherein funds are generated. The Vendor can personally fill up to 10% of a Client’s order. Layer 2 of funding is the Vendor Group Level. This is where, through Community Reps, Vendors are able to create a group liquidity pool, from which they can fill an additional 15% of the order. When this layer of funding is utilized, each Vendor would be paid out an amount proportional to their overall percentage of value put into the pool.
Layer 3 is the City Level Liquidity Pool. This is where Lenders enter the picture. The City Level Liquidity Pool can fund up to 25% of an order. Branche Lenders are private individuals and investors who have the ability to invest in Vendor Groups, providing additional liquidity for Vendors to fill orders. Through Community Reps, Lenders will be able to socially interact with Vendors, and invest in them directly.
The bulk of funding comes from Regional Liquidity Pools, which can fund 50% of an order. These pools are accessible to accredited investors. Along with the City Level Pool, this lender pool is similar to a traditional private equity fund, but the amount of time their liquidity is locked up is only 5-62 days, and they’re able to enter and exit the pool at any time.
Branche plans to attract Lenders due to its greater return on investments than is typically seen with more traditional opportunities, as well as offering more control over the terms of their investment. The Branche philosophy is “All Transactions Require Human Interactions”. Branche Community Reps are attached to each Vendor and are “responsible for facilitating the interactions between the Vendor and Lender customer types” through the Vendor network.
With different parties coming together without a centralized, trustworthy authority, how does Branche actually work? The secret is through Ethereum and smart contracts. Using smart contracts, ironclad terms can be set, and assets can be transferred almost instantly. Through cryptocoin value transfers, and by using payment gateways, it’s possible to get the fiat currency you need, without having to go through a physical bank. This would happen through their partnership with Shake Visa, which allows bitcoins to be loaded to a card that a person could use at an ATM. Future plans indicate leveraging ether cards, a physical card that can be loaded with Ether (ETH), to provide additional endpoints for users to transfer their value.
A concern with a service like the one Branche is offering is the potential for money laundering activity. This has been an active concern regarding the very nature of digital currency, but Branche has a solution:
This is specifically the primary job we are offloading onto our Vendor network and a major component to their community reviews and ratings. The core rule of the Branche network is ‘all transactions require human interactions’, nothing is happening until a vendor has signed off on a customer's documentation in person, with our Community Reps providing oversight to the Vendors. Eyeball mk1 is still one of the best tools for combating money laundering and fraudulent activity.
On top of that our current planning involves bringing the regulators to the table and developing API driven solutions that we can then delegate access to the judiciary. This will allow us to align our platform to the existing judicial process while providing an auditable record of any access for information requests they engage in.
Branche is currently based in Canada, and plans to initially go through alpha to open beta over the next year in the Ottawa market. Once Branche has proven itself, it probably won’t be long before this technology is disrupting the way normal banks operate across North America. John From said:
“The goal is to provide an even playing fields for everyone, while at the same time keep optimizing the business processes until we can offload the operation side of Branche into a DAO and continue to roll those savings to our customers.”