How does the Bitcoin Lightning Network help tackle financial exclusion?

Financial inclusion—the idea that everyone should have access to essential financial services and products—is a global goal. Unfortunately, billions of people worldwide still lack access to traditional banking systems and secure means of conducting financial transactions. 

Thankfully, with an evolving financial system that has introduced revolutionary cryptocurrencies like Bitcoin and its accompanying Lightning Network, financial inclusion could become a reality for everyone.  

What is getting in the way of financial freedom?

People from financially excluded regions might not have a chance to open a bank account due to a lack of financial institutions in their area. Some may have access to banking systems but are only being offered accounts in a local currency which does not accept cross-border payments. And when accounts do accept cross-border payments, the incoming transfers are often automatically exchanged for local currency at an unfavourable rate, or the fees are so high that they consume most of the revenues, making it harder for individuals and small businesses. 

Exclusion from financial systems hinders entrepreneurship and economic development. Small business owners may struggle to access capital and payment solutions, limiting their ability to grow their enterprises and contribute to the local economy. They cannot take advantage of a wide range of services and products offered only to those who can pay for them through existing financial systems. Individuals cannot offer their products and services in e-commerce markets since they cannot accept online payments. As a result, financially isolated groups can’t effectively reach potential markets and grow their businesses. 

Bitcoin’s scalability problem

Introducing cryptocurrencies, especially Bitcoin, was supposed to solve that issue, allowing everyone to access a democratic, decentralised, instant payment network that allows easy cross-border payments. However, in 2022, there were 678 billion card transactions and only 93 million Bitcoin transactions. The main reason is the limitation of Bitcoin architecture capable of processing up to seven transactions per second. When compared to VISA—which can process up to 24,000 transactions per second—Bitcoin falls behind.

Additionally, the settlement, or rather confirmation, of Bitcoin transactions takes at least 10 minutes, while card transactions happen almost instantly (at least from the customer's perspective). Regarding the costs, things get even more challenging for users since card providers charge anywhere between 1.5% and 3.5% of transaction value, while a Bitcoin transaction fee can fluctuate depending on certain factors. 

When the Bitcoin network experiences congestion, transaction costs tend to rise. Conversely, during periods of lower demand, transaction costs can decrease. Users can choose their transaction fees based on urgency and the prevailing network conditions, but they may need to balance costs with confirmation speed. On average, the Bitcoin transaction cost was around $3 in the last 12 months, and the time it takes to send Bitcoin can vary based on several factors. On average, a Bitcoin transaction can take 10 to 30 minutes to be confirmed. However, it might take longer, sometimes even hours, during high network congestion. That makes Bitcoin a less convenient choice for microtransactions – nobody wants to wait 10 minutes to get payment confirmation for a three-dollar cup of coffee. Therefore, Bitcoin is only used for more significant purchases, like when Tesla was selling its cars for bitcoins, or as a store of value (digital gold) rather than as a way to handle microtransactions. 

The Lightning Network solution

Fortunately, a solution— the Lightning Network—overcomes the above-mentioned limitations and makes Bitcoin usable for everyone. It enables individuals to transact without the requirements and barriers associated with traditional banking services. The Lightning Network allows for direct peer-to-peer micropayments made possible by near-instant transactions. It is designed to be open and accessible to anyone, regardless of their location or identity, and operates as a decentralised network built on top of the Bitcoin blockchain. This revolutionary payment rail can be accessed through smartphones with an appropriate FinTech application installed, like the Xapo Bank app.

Moreover, the transaction fees are significantly lower than traditional banking and on-chain cryptocurrency transactions. This affordability allows people with limited financial means to participate in digital transactions without incurring substantial costs. The speed of transactions is near-instantaneous, making it suitable for fast-paced, everyday transactions, like paying for that coffee. Individuals relying on quick access to their funds for daily expenses will benefit the most. Additionally, the Lightning Network emphasises privacy by conducting transactions off-chain and not broadcasting them to the whole network. This can appeal to individuals concerned about the discretion of their financial transactions and the exposure of their financial information. 

The Lightning Network allows people worldwide to exchange products and services freely and pay for them almost instantly using the most popular cryptocurrency ever. It offers users a faster, cheaper way to conduct transactions, enabling access to digital content, services, products, and markets, making it an attractive choice for everyday payments no matter where and who you are. ‍

That’s financial inclusion. 

The average daily amount of Bitcoin transactions

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