Journal of Systems Science and Information

Feb., 2021, Vol. 9, No. 1, pp. 1–15

DOI: 10.21078/JSSI-2021-001-15

Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail

Banking and Financial Inclusion

Christian Hugo HOFFMANN

University of Zurich, Deputy Director of the Swiss FinTech Innovation Lab, Head of Artificial
Intelligence (AI), Plattenstrasse 14, 8032 Zurich, Switzerland
E-mail: christian.hof f [email protected]

Abstract While blockchain technology is commonly considered potentially disruptive in various re-
gards, there is a lack of understanding where and how blockchain technology is effectively applicable
and where it has remarkable practical effects[1] . Against this background, we present and discuss a case
study at length on the impact of this technology in the concrete setting of small short-term loans in
retail banking. We propose to banks a robust and scalable blockchain technology with proof of stake
and limited energy consumption used to streamline their processes, resulting in lower transaction and
administration costs. This is made possible by smart contracts. Thereby, we facilitate small scale lend-
ing at high frequencies and short-term duration as well as an easier and more efficient way to connect
small borrowers and lenders.
Keywords design science; blockchain; smart contracts; asymmetric information; fintech; microfi-
nance

1 Introduction
In 2008, the Satoshi Nakamoto alias introduced the Bitcoin digital currency to the world
with the intent of enabling electronic cash payments directly between individuals without the
need for third-party intermediaries. Since then, blockchain, the technology behind Bitcoin, has
captured a substantial amount of interest from researchers and practitioners. While research
on some forms has rapidly developed, particularly in connection with cryptocurrencies, many
experts have realized that blockchain technology holds disruptive potential beyond its use in
cryptocurrencies[2−4] . Yet, a profound understanding regarding terms of application and use-
cases is generally missing[1] . In other words, to dismiss the concern that blockchain is an
innovative technology in search of use cases[5] or that few blockchain centric projects have gone
beyond their white paper or proofs-of-concept[6] , more knowledge has to be gained regarding
which (combinations of) features are relevant for particular industries or business processes
and how they need to be designed. These types of questions need to be addressed in order to
influentially deploy the technology to business cases[1] .
Following [1], we argue that research can help overcome this paucity by comprehensively
understanding the relevance and effects of unique blockchain properties (e.g., decentralization,
transaction speed, energy needs) and by investigating respectively appropriate use cases. The
Received August 24, 2020, accepted November 17, 2020
2 HOFFMANN C H.

use case we sketch in the subsequent case study is about lending practices at high frequencies
but very low in volume. It starts from the observation of a business problem in retail banking
where retail banks’ clients asking for small short-term loans to cover an unexpected expense are
left without finding a good answer to their needs. Retail banks usually do not offer such loans.
Friends, family (and fools) might feel uncomfortable or make the lender feel uncomfortable.
Credit cards are too expensive and loan sharks or private loan businesses all too often follow
predatory lending practices.
To address this problem, we design a blockchain- and smart contract-based solution for
retail banks which can be made available in a cost-effective, safe and scalable manner, unlike
the currently existing and oftentimes unlawful payday loans[7−9] .
The contribution of this study to existing research is threefold: First, it presents a concrete
use and potential business case by introducing a built-in mechanism to reduce transaction and
administrative costs resulting from an obsolete lending practice at banks. Second, it replaces a
trust-based, centralized, and bureaucratic register with a tamper-free and autonomous trans-
actional database system that comprises a secure registration and transaction process. Third,
it makes use of a novel design science approach to draw a strategy of how to mitigate adverse
selection effects in markets plagued by information asymmetries through the provision of a reli-
able, transparent, and complete record of each marketable asset’s history. In total, the findings
in this article illustrate the potential of blockchain/smart-contract-based systems for a core
business activity in banking, but also highlights technological shortcomings and challenges for
commercial applications, such as scalability or privacy issues.
The remainder of this paper is structured as follows. Subsequently, in Section 2, we first
elaborate on the problems that come with micro lending in retail banking, mainly high costs
and information asymmetries. Section 3 clarifies that this work follows a design science research
approach to guide the implementation of a blockchain-based prototype. Section 4 briefly anal-
yses the blockchain landscape in financial services, thereby emphasizing on the energy problem
as well as the proof of work vs. proof of stake mechanisms for mining. We propose and design a
workable application for a blockchain-based microlending platform in Section 5. It is discussed
thereafter at length, including a market description and a Business Model Canvas. Section 6
evaluates the proposal on the basis of a SWOT analysis. Section 7 concludes and derives lessons
for research and practice.

2 Problem Statement: Cost-Intensive Micro Lending and Informa-

tion Asymmetry
Microfinance has been a buzzword in the realm of economic development ever since Dr.
Muhammad Yunus was awarded the Nobel Peace Prize 2006, in homage to his efforts in im-
proving the life of the poorest of the poor by the provision of micro-loans. With the further
expansion of microfinance institutions around the globe, the model started having multiple mu-
tations that have brought a mix of positive and negative outcomes, raising questions about the
feasibility and effectiveness of microfinance as an economic development tool[10,11] . In contrast
to this known and established, but also controversial application of microfinance, we propose
to embed it in general retail banking. Yet, in both forms, be it as a development aid tool
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 3

or a product in classical retail banking, microfinance comes with some peculiarities that have
hindered financial institutions from adopting it.
Transaction, loan, mortgage and payment services comprise the core of the banking reper-
toire but often rely on outdated, legacy processes of execution. Information verification, credit
scoring, loan processing, and the distribution of funds are all services that take time[12] . Clients
asking for small, short-term loans have historically been excluded due to the high fixed-costs as-
sociated with transaction fees and administrative costs. The cost of acquiring clients compared
to the size of the loan is drastically higher in microfinance compared to regular commercial
loans[13] . A survey performed by Lascelles and Mendelson (2008) spotted 20 risk factors that
could deter the growth in the microfinance sector. Among these factors, cost control is ranked
as the fourth most relevant. This indicates that efficiency in operations is vital for retail banks
and microfinance institutes[14] . Hence, the absence of microlending in retail banking as well
as the high interest rates for micro-loans in the developing world. Therefore, an efficient and
safe way to manage these transactions could significantly aid both the lenders, with higher
benefits by eliminating or transforming the nature of the middle men, and the loan holders,
by having access to small, short-term loans with less interests to pay and mechanisms that
can prevent over-leveraging[13] . In an economic perspective, decentralized ledgers are likely to
be more cost-efficient compared to the current centralized systems as blockchain goes through
three exponential cost curves: Moore’s law (cost of processing digital information decreases
exponentially), Kryder’s Law (cost of storing digital information decreases exponentially), and
Nielsen’s Law (the cost of transferring digital information decreases exponentially)[15] .
An important cost driver in the setting of microfinance are information asymmetries, and
thus their reduction would bear a positive impact in costs reduction[16] . Banks and microfinance
institutes often do not have enough information to make an informed credit decision — The
unbanked (estimated to be 40% of the global population), the underbanked, and the microen-
terprises often have not made enough non-cash payments for a sufficient risk assessment[17] .
Generally, information asymmetry means that one party lacks crucial information about
another party, impacting decision-making. We usually discuss this problem along two fronts:
Adverse selection and moral hazard. Adverse selection describes a situation in which interacting
parties attach value to the quality of a transacted object but at the same time possess different
levels of information about it[18] . Second, moral hazard refers to (some) beneficiaries’ tendency
to use their loans in projects that would deter their ability of repayment, or the propensity of
microfinance institutes to require collateral and loan policies disadvantageous for the borrowers.
The varied ownership structure and diversity of stakeholders in microfinance render the
information asymmetry the main source of risk for microfinance institutes[19] . Arguably, the
economic and regulatory environments in developing countries are more likely to give rise to
deeper asymmetries with negative pervasive effects[16] . In this regard of information asymme-
tries, the deployment of blockchain can bring relief too.

3 Methodology and Design Research

There is emerging recognition of design research in Information Systems as a natural evolu-
tion of our field as it matures[20] . Like others before[21] , this work follows design science research
4 HOFFMANN C H.

to guide the implementation of a block chain-based business concept. In terms of design science,
microlending in retail banking is a typical “wicked problem” since 1) it may only be possible
to find a solution to the problems of high costs and information asymmetries in micro-lending
that is “good enough”, rather than solving them completely; 2) the solution to the problem
will be good-or-bad rather than true-or-false; 3) testing the solution is complicated and de-
pends on several contributing actors; 4) the possibility to learn by trial-and-error is limited as
every attempt at testing the solution is complicated and resource-intensive; and 5) the problem
does not have an exhaustively describable set of potential solutions or a set of well-described
permissible operations. We therefore chose the ad hoc development approach by first learning
more about the twofold problem in the previous section and then designing a draft in Section 5,
which we concurrently and conclusively evaluated (Section 6). Therefore, our design process
follows the DSRM Process Model introduced by [22], see Figure 1.

Process iteration

Identify Define Design & Demons- Evaluation Communi-

problem objective developm. tration cation

Disciplinary
SWOT
How to knowledge

Metrics, analy-
sis, knowledge

knowledge
& of a sol.
Inference

Nominal motivate Biz Pitch of analysis This study

Theory

process Enable concept f. biz model (sect. 6)

sequence High profitable blockchain to jury at
costs micro-len. -based Trust
(sect. 2) micro-len. Square

Problem- Objective Design- Context-

centered -centered centered centered
initiation initiation initiation initiation

Possible research entry points

Figure 1 The design science research process

In our case, the research entry point was context initiated by my Master course on blockchain
at the University of Zurich in the spring term of 2020. During the course of that class, we
reviewed literature from various sources such as academic papers, industry leader reports, and
other publications (see Section 8) to construct a landscape of current digitalization trends in the
financial industry in general and specifically with regard to blockchain technology applications.
We researched the most pressing technical issues that need to be addressed to make sure our
solutions could be applied in practice. We interviewed blockchain experts at Trust Square in
Zurich and banks directly to validate our approach. When formulating ideas, we focused on
solutions that would leverage the existing financial institutions and structures, enhanced by
blockchain technology, to provide more value to the clients on the lower-end of the income
spectrum in the developed world in the short-term and underbanked in the developing world in
the long-run. Next, different ideas were researched and tested in student groups who prepared
a preliminary business plan for each one, finally narrowing down the number of solutions to
just the one we pursue in this paper. We then conducted a market analysis and attempted
to position our lending solution for maximum market penetration, the results of which are
presented in the following.
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 5

4 Analysis of Blockchain Features

4.1 Blockchain and Financial Services
Our discussion centers around blockchain technology in retail banking. It is independent
though of cryptocurrencies and their value as a portfolio asset which is currently also a promi-
nent topic in the financial services industry (see [23] for an overview).
The financial services were expected to lead blockchain spending in 2019 with $1.1 bil-
lion of the expected 2.9 billion across all sectors[24] . Spending is expected to grow exponen-
tially through 2022, hitting $12.4 billion across all sectors[24] . There are many ways in which
blockchain can improve upon the current financial system, with the most important being se-
curity, transparency, trust, and cost reductions[25] . Firstly, blockchain offers the possibility
of making the system more secure through its consensus-based architecture, which eliminates
single points of failure and reduces the need for intermediaries. Secondly, it can decrease in-
formation asymmetries, increase transparency and reliability in the system, acting as a single,
immutable shared data source for all participants. Thirdly, it has the potential to significantly
reduce costs by allowing financial institutions to eliminate a large number of intermediaries. As
a result, many people who were previously barred from participating in financial services due
to the high barrier of entry fees, can now participate and reap the benefits.
In particular, with regard to our use case, blockchain technology can be employed to stream-
line loan processes by enabling, for example, real-time verification of documents, streamlined
credit prediction and automated disbursement of funds through smart contracts[25] .

4.2 Blockchain Technology and Smart Contracts

In its generic form, blockchain technology refers to a fully distributed system for cryp-
tographically capturing and storing a consistent, immutable, linear event log of transactions
between networked actors[1] . It creates a decentralized record of transactions, known as the
distributed ledger, that allows the current proprietary databases to be substituted by a single,
immutable master database. Essentially, it means that any party can trust the data stored on
a blockchain. As current blockchain technology can not only process monetary transactions
but can also ensure that transactions comply with programmable rules in the form of “smart
contracts”[26] , it allows even parties who do not fully trust each other (like in our context of mi-
crolending) to conduct and reliably control mutual transactions without relying on the services
of any trusted middlemen.
To achieve a “democratisation” of finance, we need the tools made possible by a blockchain,
specifically smart contracts. A smart contract is a computer protocol which can verify and
execute the provisions of a contract without the need for trusted third-party intermediaries.
The terms of the agreement are written directly into the code and once the requirements are
fulfilled, the contract is executed. All transactions performed by means of a smart contract
are trackable and irreversible. They are the key ingredient for the performance speed and
trustlessness of blockchain lending applications as we envision it.
All of these applications, however, require the blockchain technology behind them to be
robust, energy efficient, and capable of processing thousands of transactions per day. In theory,
blockchain solutions ought to rival and overtake the processing capabilities of credit cards. Visa,
6 HOFFMANN C H.

for example, processes around 1,700 transactions per second, but claims to have the capacity to
process more than 65,000 per second as of March, 31st 2019[27] . Blockchains currently fall short
of that by a significant margin. In the next section, we look at the energy issue of blockchain
technology that is responsible for this shortfall and how it can be addressed.

4.3 The Energy Problem

Blockchain technology still faces a plethora of issues that hinder its large-scale adoption in
the financial services industry. Arguably, one of the larger hurdles right now is scalability due
to the prohibitive amounts of energy needed to add new blocks of information to the blockchain
(see Figure 2). At this point in time, blockchain technology is not available to most retail
clients.

Figure 2 Country energy consumption vs. Bitcoin energy consumption

Blockchains require plenty of energy which may indeed be regarded as disproportionate

when compared to the currencies’ actual utility[28] and which could thus therefore inhibit or
delay the widespread adoption of blockchain technology[29] . Exactly how much is not a simple
question to answer. Key data about blockchains is hard to come by. Their activities can,
however, be proxied by the necessary coin needed to run them. The largest blockchain is
the one running on bitcoin1 and bitcoin mining (the process of writing transactions on the
blockchain) is energy expensive. Approximations place the energy consumption of Bitcoin at
around 75 TWh annually[30] . For comparison, that is more than what the country of Nigeria
consumes as a whole and more than the lowest 750 million electricity users (10%) worldwide.
As can be seen in Figure 2, electricity consumption of Bitcoin has overtaken most of Africa and
only 38 countries remain that definitely consume more in electricity[31] .
Figure 3 shows us that Bitcoin’s electricity consumption was fairly steady over the past year.
This is due to the fact that the electricity needed to run the bitcoin blockchain has become a
1 We use the bitcoin blockchain as an example due to data availability.
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 7

significant cost factor in the implementation of blockchain solutions in the financial industry,
slowing down the spread of large-scale blockchain solutions.

Figure 3 Energy consumption of the Bitcoin Blockchain.

Source: https://digiconomist.net/bitcoin-electronic-waste-monitor/

There are three reasons for this enormous usage of power:

1) Artificial scarcity of the coins leading to a large number of miners;
2) Increasing competition for the remaining coins, again increasing the number of miners;
3) And most importantly, the proof of work (PoW) mechanism[28] .
Points 1 and 2 are supply and demand interactions that are unlikely to change. The proof
of work mechanism in point 3, however, is the real energy2 culprit[32,33] . Simply put, PoW is
the game-theoretical mechanism by which blockchains guarantee the security and workability
of the “chain”. To work, it requires miners. Miners are machines competing to contribute to
the blockchain by solving complex prime number factorisation puzzles. These puzzles require
a brute force, energy intensive approach, but the real issue is in the duplication of work[28,33] .
As the mining process is a winner takes all scenario, thousands compete for the same reward
every minute of every day. More than 99% of the participants will not claim the prize but
still compete and do the work because the expected rewards are worth the efforts. By this
duplication, the energy consumed to confirm a simple transaction on blockchains can be hundred
to ten-thousand times higher than needed. In short, widespread implementation of blockchain,
for example in retail banking, is not sustainable[33,34] . It is due to this energy consumption
issue that blockchains did not yet see widespread implementation and scalability in the retail
financial services industry.

4.4 Proof of Work vs. Proof of Stake

We established the PoW mechanism and its energy consumption to be a massive obstacle to
widespread adoption of PoW-based blockchain solutions. Many alternatives are currently being
explored, most common of which is the proof of stake (PoS) mechanism[33] . The second largest
blockchain in the world, Ethereum (in terms of market capitalization), has already announced
plans to adopt this mechanism in the future.
2 Energy is largely electricity but hardware manufacturing and expensive commodities needed, such as rare
earths, are part of the issue as well.
8 HOFFMANN C H.

PoS requires an investment (a stake meaning an amount of currency) by the miner before
they can participate to ensure they are still incentivized to uphold the security aspects that are
key to the blockchain technology. In essence, a miner needs to pay to participate.

Figure 4 Consensus algorithm of blockchain platforms. Source: Sutherland, 20193

PoW is essential to the security of the blockchain as it allows trustless and distributed
consensus which means we no longer need a bank or a trusted intermediary. Instead, PoW relies
on a game-theoretical, self-enforcing mechanism to make sure everything is done accurately. PoS
replicates the process but instead of it being a free-for-all competition, one miner is awarded
the job. The idea is to reduce the number of miners from many hundreds or even thousands
down to a single actor per transaction, thereby slashing energy consumption by 99% or more.
Having discussed the current trends of blockchain in finance and some of the issues that still
lie ahead, we narrow our focus on the lending sector and propose our blockchain-based solution.

Figure 5 Proof of work vs. Proof of stake, Source: Blockgeeks.com, 2020

4.5 Current Landscape and Proposed Solution

Currently, there are multiple ways for people, mainly in the developed countries, to access
short-term consumer credit. Firstly, credit card debt is by far the most widespread. It consists
3 This
figure shows how many blockchains use different transaction confirming mechanisms. It does not show
the market share of each blockchain. PoW remains by far the largest.
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 9

of unsecured, revolving loans which consumers can accumulate by opening credit card accounts
with various institutions that offer different terms and credit limits. While very popular, credit
card debt carries some of the highest interest rates in the industry, which it thus has in common
with micro-loans in the developing countries (see Section 2). According to the Federal Reserve,
the average credit card interest rate in the United States was around 16.5% in the first quarter
of 2020[35] . A second short-term financing option are payday loans. Payday loans are short-
term loans which can range anywhere from $50 to $1,000 but come with very steep fees —
Around $15 per $100 borrowed and interest rates exceeding 100%. These loans are extremely
short-term and determined by local regulation and the applicant’s pay check. They must be
paid back on the borrower’s next payday, unless they are extended, at which point additional
charges apply and interest can skyrocket making payday loans a business often compared to
loan sharking.
We propose a blockchain-based micro-lending platform which allows clients of partnered
retail banks to dedicate a portion of their account balance to funding short-term, unsecured
loans which carry much higher interest rates than simple savings accounts allowing higher profits
for both bank and investors. On the other side, borrowers in need of short-term financing can
sign-up for the platform and request small loans between $50∼$2,000 at interest rates between
5%∼10%, which are significantly lower than interest rates on credit cards and payday loans. As
the borrower repays his/her loans, his/her upper limit on loan volume increases. Transactions
are fully automated by the use of smart contracts and recorded on a blockchain, which also
allows for credit scoring in domains outside the platform — Punctually repaying clients will
benefit from an improved credit history.

5 Design
5.1 Business Concept
In 2020, most retail banking transactions, such as acquiring a loan, still require inten-
sive manual processing and documentation. They involve costly intermediaries and are time-
consuming as the transactions need to be validated by various bank parties at different points
in time. Our platform aims to accomplish the task of connecting clients in need of small loans
with clients of partnered retail banks with surplus wealth in a fast and easy way by employing
smart contracts. Our aim is to facilitate small scale lending at high frequencies and short-
term duration ranging from a few days to weeks. Once a borrower requests a loan, he/she is
automatically matched with a lender at a partnered bank that opted into a short-term loan
program and the loan is executed expeditiously without the need for additional transaction fees
and administrative effort.

5.2 Mission
Our mission is to enable an easier and more efficient way to connect small borrowers and
lenders on a short-term basis. Banks usually prefer large loans to small ones since the latter
generate fewer profits (if any at all, see Section 2) than the former simply due to the fixed costs
associated with a loan application[36] . The unsecured, short-term loans they offer come with
high interest rates. Clients in need of small, short-term loans would be able to get them at a
10 HOFFMANN C H.

reasonable cost and existing bank clients, which would like a low-effort way of earning interest
without tying up their money for longer periods of time, would be able to do just that.

5.3 Market Description

The customer segment of interest are borrowers in need of short-term, small-sum loans
and people looking to invest their excess wealth. Excess wealth are any funds deemed rife for
investment in the short-term which also frees up significant amounts of money that people have
previously been anxious to invest long term.
The initial market of focus is the United States where, in Q1 of 2020, revolving consumer
debt reached $1.06 trillion. More than 189 million Americans own credit cards, with an average
of 4 per credit card holder. On average, each household with a credit card carries around
$8,400 in credit card debt[37] . According to a survey by the Federal Reserve, 4 in 10 American
adults cannot afford to finance a hypothetical unexpected financial expense of $400, using cash,
savings, or a credit card paid off at the next statement[38] . The USA has two characteristics
that make our solution well-suited to it (in the short run)4 in terms of an entry market: A large
network of retail banks and a significant proportion of the population that relies on short-term
credit for their unexpected expenses. Moreover, the personal savings rate, calculated as the
ratio of personal savings to disposable personal income, has seen a steady positive trend in the
past 5 years, moving between 6% and 13%, recently though skyrocketing to 20 to 32% in the
wake of economic uncertainty due to the COVID-19 pandemic[39] . In the same time span or
even over the last ten years, the interest rate broke 2% only once, with an average of about
1%[40] . We believe our solution can improve upon the current options, such as credit card
debt, borrowing from friends and family, and payday loans. Considering the low interest rate
environment, our solution helps banks and lenders achieve higher returns on loan investments.
Our lending platform would enable this kind of quick, and especially, short-term lending
not only in times of crisis but also on a daily basis. Thinking long-term, our service would see
the highest benefits in countries where small, short-term loans were most necessary and which
have an established retail banking sector.

5.4 Value Proposition

Our value proposition is multi-pronged and changes for different actors on our platform.
To the borrowers, we enable fast and simple access to short-term financing with rates lower
than those of existing forms of consumer debt. Due to the transactions being stored on the
blockchain, upon the borrower’s request his/her records could be sent to financial institutions
and authorities as an influencing factor for their credit score. Borrowers would be limited to
the number of loans they can take both by a fixed number and the amount they can borrow
based on their credit history on the platform and outside it. For example, a borrower that can
borrow a maximum of USD 1,500 can split this amount into a maximum of five loans.
To lenders, we enable a low-effort way of investing their excess wealth directly from their
bank account, without it being tied up for long periods of time. The returns are significantly
higher than on regular savings accounts.
4 In
the long run, an expansion to developing countries is indicated and required given the strong need for
micro-loans there.
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 11

For partnered banks, the main value proposition is the commission they take on additional
loans as well as the reduction in credit risk (comparing many small loans to one big one with
equal volume). A key aspect of loans is the credit default risk banks carry. In our solution,
credits will be small and hence diversified, thus lowering the risk proportional to the volume,
allowing banks to lend more money whilst still conforming to the Basel III standard of risk
weighted assets. This risk is also significantly less correlated with macro-economic trends, for
example a recession, reducing the institutional risk accordingly. These short-term loans could
be dynamically adjusted to address credit risk and macroeconomic changes such as a recession.
They would further, be an excellent way to distribute money to people in order to offset some
of the financial pressure on families by COVID-19 whilst still conforming to risk regulations.

5.5 Customer Relationships

Trust, reliability, and transparency, which are in line with key blockchain features, are the
main three pillars of our approach to customer relationships. The main contact channel for
customers is an online platform, where borrowers sign up for our services. This would be inte-
grated into the bank’s online presence. Once a borrower is registered, he/she can immediately
request a small loan. Lenders would sign up for our services through their local bank (due to
regulatory requirements) but would receive support with regards to our services directly from
our platform.

5.6 Revenue Streams

We have multiple revenue streams available to us. One option is that borrowers and lenders
would pay the bank fixed percentage of the loan value as a transaction fee. We would then
commission a secondary fee of the bank fee. We could also sell our solution as a finished
product and leave the implementation to the banks. The problem with this approach is that
patenting such a solution will be difficult. We believe to be in a strong negotiating position
on the commission fees once we secure some patent, either on the blockchain solution side or
the lending-transaction side. Ultimately, especially to diversify revenue streams, we suggest a
very low commission transaction as well as a one-time fee per retail bank. We assume that to
finance the technical implementation a strong relationship to a bank will be key. As a result,
it is likely that the bank will acquire equity in our venture in the first place. The degree to
which equity in the solution is controlled by the bank will largely determine the margins on
transactions and revenues for the future.

6 Evaluation: SWOT Analysis

To test our idea and evaluate it from a more objective standpoint, we performed a SWOT
analysis.

6.1 Strengths
Firstly, by using blockchain technology and smart contracts, we significantly improve the
speed and reliability of transactions, as well as reduce information asymmetries and costs by
eliminating the need for intermediaries and processes that usually take place before a person
is granted a loan. For example, in contrast to often paper-based processes where account
12 HOFFMANN C H.

representatives fill in forms together with the customer applying for a loan, our proposal makes
it lean and redesigns it from scratch: No more paper or front (for consulting) and back (for
execution) office are required. Secondly, to the borrowers we enable simple access to short-
term financing. Thirdly, to lenders we offer an attractive, low-effort way of investing their
surplus wealth at higher returns than simple savings accounts. Fourthly, partner banks receive
a commission for each loan granted and get the opportunity to lend more money while still
conforming to the Basel III standard. Lastly, the immutability of blockchain ensures transaction
security.

6.2 Weaknesses
Under weaknesses, we identified our reliance on the acceptance of retail banks as the main
supply issue, since our business model would have to be adapted should we not find enough
partnered banks. For example, in case that bad scenario materializes, then we might need to
move from the B2B to the B2C realm which would come with high marketing expenses and
customer acquisition costs. On the demand side, a lack of credit constrained consumers would
be a weakness. We offer our solution with the intent of replacing other ways of short-term
financing. Borrowers, however, could simply see our solution as an additional source of credit,
thus indebting themselves more. Thirdly, our solution relies on a robust blockchain that utilizes
the proof of stake mechanism. As of now, these blockchains are not yet robust enough.

6.3 Opportunities
First and foremost, expansion to markets other than the US is the main opportunity. For
example, adapting our solution to make it applicable also in countries with less-established
banking systems would allow us to enter massive underbanked markets where micro-lending
is particularly needed, but often not working well (see Section 2). Secondly, developing the
system to reach high loan volumes would give us a first-mover advantage and a possibility of
automating bigger loan markets. We believe our solution is infinitely scalable and can replace
the traditional lending activities entirely if we also adapt credit risk assessments for larger
per-person volumes accordingly.

6.4 Threats
We identified two main threats. Firstly, our solution can be cloned by the banks themselves
and integrated into their services. It is therefore necessary for us to protect our IP, for instance,
by developing patentable blockchain solutions. Secondly, since we are dealing with very sensitive
financial information, privacy concerns regarding user data can cause issues to arise quickly.
Due to this reason, and because we rely heavily on the acceptance of banks, we assume that
our service and idea will need to be integrated into the bank as well. This will limit our ability
to scale to other retail banks accordingly.

7 Conclusion
Blockchain technology is among the most trending technologies[41] and its features are ar-
gued to disrupt various businesses processes, industries and intermediary services[42] . Despite
the great expectations though, there is currently a paucity of knowledge regarding where and
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 13

how, i.e., regarding which (combinations of) features are relevant for particular industries, busi-
ness processes and how they need to be designed[1] . These types of questions need to be tackled
in order to influentially deploy the technology to business cases.
To sketch a blockchain use case in more detail, we looked at the current situation and trends
in the retail banking and lending sector, with and without respect to blockchain technology. We
identified energy consumption as the main culprit behind the limited spread of blockchain for
lending solutions and concluded that a proof of stake blockchain incorporating smart contracts
is currently the best available solution. Through this, we can automate and vehemently reduce
lending fixed costs allowing more retail clients to participate in the market. As a consequence,
clients in need are able to receive short-term low volume loans and other clients are able to profit
from superior returns. Finally, we identified a potential entry market, the US. We developed
a proposed solution to address it as well as antecedents for a business plan, which is currently
tested with experts from the business practice and can thus serve as a starting point for what
would arguably be a lucrative business filling a consumer need.
Except for its practical relevance detailed in the previous sections (accounting for a dif-
ferentiation between different stakeholders), our study’s contribution to academic research is
threefold: First, we extend the knowledge on blockchain-based financial products and provide a
sound business concept for micro-lending in retail banking, building on smart contracts, which
drastically diminishes transaction and administration costs, hitherto inherent to microfinance.
Second, we adopt the concept of trust-free economic systems[43] to the use case of small short-
term loans in retail banks and introduce a novel way to replace trust-based and centralized
bureaucratic registries with a trust-free, cost-efficient transaction system. Third, we alleviate
adverse selection effects and dismantle information asymmetries between borrowers and lenders
by sharing and assessing a transparent, reliable, and complete record of credit and repayment
history. Nonetheless, we realize that much more work would be needed, especially on the
technical and regulatory sides, to turn our idea into veritable impact.

References
[1] Risius M, Spohrer K. A blockchain research framework. What we (don’t) know, where we go from here,
and how we will get there. Business & Information Systems Engineering, 2017, 59(6): 385–409.
[2] Beck R. Beyond bitcoin: The rise of blockchain world. Computer, 2018, 51(2): 54–58.
[3] Fridgen G, Lockl J, Radszuwill S, et al. A solution in search of a problem: A method for the development
of blockchain use cases. 24th Americas Conference on Information Systems, 2018: 1–10.
[4] Labazova O, Dehling T, Sunyaev A. From hype to reality: A taxonomy of blockchain applications. Pro-
ceedings of the 52nd Hawaii International Conference on System Sciences, 2019.
[5] Glaser F. Pervasive decentralisation of digital infrastructures: A framework for blockchain enabled system
and use case analysis. 50th Hawaii international conference on system sciences (HICSS 2017), Waikoloa,
2017.
[6] Lee D K C, Lim C. Blockchain use cases for inclusive FinTech: Scalability, privacy, and trust distribution.
2019, https://ssrn.com/abstract=3629135.
[7] Johnson C. Payday loans: Shrewd business or predatory lending. Minnesota Law Review, 2002, 87: 1.
[8] Skiba P M, Tobacman J. Payday loans, uncertainty and discounting: Explaining patterns of borrowing,
repayment, and default. Van-derbilt Law and Economics Research Paper, 2008.
[9] Skiba P M, Tobacman J. Do payday loans cause bankruptcy? The Journal of Law and Economics, 2019,
62(3): 485–519.
14 HOFFMANN C H.

[10] Banerjee A. Micro-credit under the microscope: What have we learned in the past two decades, and what
do we need to know? Annual Review of Economics, 2013, 5(1): 487–519.
[11] Duggan C S. Doing bad by doing good? Theft and abuse by lenders in the microfinance markets of Uganda.
Studies in Comparative International Development, 2016, 51(2): 189–208.
[12] Chatterjee S, Singla V, Lam M. How blockchain can reshape trade finance. (2020-05-06) [2020-05-21].
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/grid/trade-finance-placemat.pdf.
[13] Cuellar Benavides J P. Blockchain: Decentralization as the future of microfinance and financial inclusion.
HEC Paris, 2019.
[14] Kringlen M. The relationship between default on loans and operating costs in microfinance institutions.
University of Agder, 2016.
[15] Wild J, Arnold M, Stafford P. Technology: Banks seek the key to blockchain. Financial Times, 2015, 1:
2015.
[16] Garmaise M J, Natividad G. Information, the cost of credit, and operational efficiency: An empirical study
of microfinance. The Review of Financial Studies, 2010, 23(6): 2560–2590.
[17] Higginson M, Hilal A, Yugac E. Blockchain and retail banking: Making the connection. (2019)
[2020-05-12]. https://www.mckinsey.com/industries/financial-services/our-insights/blockchain-and-retail-
banking-making-the-connection.
[18] Notheisen B, Cholewa J B, Shanmugam A P. Trading real-world assets on blockchain. Business & Infor-
mation Systems Engineering, 2017, 59: 425–440.
[19] Chikalipah S. Credit risk in microfinance industry: Evidence from sub-Saharan Africa. Review of Develop-
ment Finance, 2018, 8: 38–48.
[20] Winter R. Interview mit Alan R. Hevner zum Thema, Design Science. Wirtsch. Inform., 2009, 51: 148–151.
[21] Hyvärinen H, Risius M, Friis G. A blockchain-based approach towards overcoming financial fraud in public
sector services. Business & Information Systems Engineering, 2017, 59: 441–456.
[22] Peffers K, Tuunanen T, Rothenberger M A, et al. A design science research methodology for information
systems research. Journal of Management Information Systems, 2007, 24(3): 45–77.
[23] Angerer M, Hoffmann C H, Neitzert F, et al. Objective and subjective risks of investing into cryptocurren-
cies. Finance Research Letters, 2020. https://doi.org/10.1016/j.frl.2020.101737.
[24] IDC. Worldwide Semiannual Blockchain Spending Guide. 2019. https://www.idc.com/getdoc.jsp?containerId
=IDC P37345.
[25] Consensys. Blockchain in Financial Services. [2020-05-05]. https://consensys.net/blockchain-use-cases/fina-
nce/.
[26] Tschorsch F, Scheuermann B. Bitcoin and beyond: A technical survey on decentralized digital currencies.
IEEE Commun. Surv. Tutor., 2016, 18(3): 2084–2123.
[27] Visa. Visa Fact Sheet. (2019) [2020-05-12]. https://usa.visa.com/dam/VCOM/global/about-visa/docu-
ments/visa-fact-sheet-april-2019.pdf.
[28] Sedlmeir J, Buhl H U, Fridgen G, et al. The energy consumption of blockchain technology: Beyond myth.
Business & Information Systems Engineering. 2020. https://doi.org/10.1007/s12599-020-00656-x.
[29] Beck R, Müller-Bloch C, King J L. Governance in the blockchain economy: A framework and research
agenda. Journal of the Association for Information Systems, 2018, 19(10): 1020–1034.
[30] Bitcoin Electronic Waste Monitor. [2020-05-05]. https://digiconomist.net/bitcoin-electronic-waste-moni-
tor/.
[31] Powercompare. (2018) [2020-05-10]. https://powercompare.co.uk/bitcoin/on 10.05.2020.
[32] Xue T, Yuan Y, Ahmed Z, et al. Proof of contribution: A modification of proof of work to increase mining
efficiency. Proceedings of the 2018 IEEE 42nd Annual Computer Software and Applications Conference
(COMPSAC), 2018, 1: 636–644.
[33] Sutherland B R. Blockchain’s first consensus implementation is unsustainable. Joule, 2019, 3(4): 917–919.
[34] De Vries A. Renewable energy will not solve bitcoin’s sustainability problem. Joule, 2019, 3(4): 893–898.
[35] Federal Reserve. Consumer Credit report. (2020-05-07) [2020-05-19]. https://www.federalreserve.gov/re-
leases/g19/current/.
[36] Eichengreen B, Mody A. Lending booms, reserves, and the sustainability of short-term debt: Inferences
from the pricing of syndicated bank loans. The World Bank, 1999.
[37] Fay B. Key figures behind America’s credit card debt. (2019) [2020-05-19]. https://www.debt.org/
Blockchain Use Cases Revisited: Micro-Lending Solutions for Retail Banking and Financial Inclusion 15

faqs/americans-in-debt/.
[38] Federal Reserve. Report on the Economic Well-Being of U.S. Households in 2018–May 2019. (2019)
[2020-05-19]. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-
2018-dealing-with-unexpected-expenses.htm.
[39] Statista. Personal saving rate in the United States from June 2015 to May 2020. [2020-07-07].
https://www.statista.com/statistics/246268/personal-savings-rate-in-the-united-states-by-month/.
[40] Statista. Monthly Federal funds effective rate in the United States from January 2000 to June 2020. [2020-
07-07]. https://www.statista.com/statistics/187616/effective-rateof-us-federal-funds-monthly/.
[41] Gartner. Gartner’s 2018 hype cycle for emerging technologies identifies five key trends that orga-
nizations must track to gain competitive advantage. (2018) [2020-07-03]. https://www.gartner.com/
smarterwithgartner/5-trends-emerge-in-gartner-hype-cycle-for-emerging-technologies-2018.
[42] Tapscott D, Tapscott A. The impact of the blockchain goes beyond financial services. Harvard business
review. 2016. https://hbr. org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services.
[43] Beck R, Stenum Czepluch J, Lollike N, et al. Blockchain — The gateway to trustfree cryptographic trans-
actions. 24th European Conference on Information Systems (ECIS), 2016.