Remittance is the transfer of money from a migrant worker to someone back in their home country. People have always moved in search of better work prospects in high-income (or high currency value as compared to home) countries. Based on the World Migration Report 2018, there are currently an estimated 244 million international migrants living in other countries. This number has either directly or indirectly contributed to the global remittance’s $689 billion dollar industry with India being top of the pile, contributing $80 Billion or 11.6% of its entirety. The global remittance industry is expected to grow by more than 3% in 2019.
Traditional Remittance Market
Companies such as Western Union and MoneyGram come to mind when we talk about remittances or sending money back to families.
Traditional money transfers involve several steps including an agent and over-the-counter stores. Migrant workers typically come from developing countries with a less-developed financial infrastructure. This results in the physical transfer of cash. Families can receive the money transfer at brick-and-mortar pick-up locations such as pawn shops or local branches of remittance companies.
The advantages of using traditional remittance services include flexibility and accessibility. With their vast network and 500,000 agents worldwide, Western Union is able to send money into remote areas where there can be little to no internet access.
However, sending funds via traditional means can come at a high price.
- High Fees
Fees can go as high as 8–9% per transfer and for migrant families, it can be quite a sum.
- Slow Money Transfer
It can take weeks to reach its destination.
- Prone to Fraud and Embezzlement
Venmo, PayPal-owned digital money transfer service, lost around $40 million due to payment fraud.
The Rise of Online Money Transfer
The advancement of technology has provided us with a much better alternative to manual remittances. Online money transfer is much safer, secure, faster way of money transfer. Companies such as TransferWise and Revolut have taken the industry by storm and have been declared disruptors of the remittance industries.
One fact remains, however. These online money transfer platforms heavily rely on mobile phone penetration. In emerging economies, most people would own a mobile phone with access to some internet connectivity. In Cambodia, for example, is an emerging market with 96% of Cambodians owning a mobile phone. To build on that statistics, 1.5 million Cambodians are employed each year as a migrant worker overseas sending US$2 billion in remittances every year to their families in Cambodia.
A huge flaw or challenge presented by Online Money Transfers is the lack of internet connection in remote areas. Without a reliable internet connection, there is little that can be done unless the country itself sought to solve it. Maybe Elon Musk can solve that situation with his space internet with SpaceX.
Blockchain can be the future for remittance after online transfers
The most popular Cryptocurrency is Bitcoin. It has been labeled as the future of the global financial industry. Bitcoin certainly has great potential to be the digital currency of the world but before that, one of two things needs to happen:
- Bitcoin becomes less volatile
- Products and Services everywhere become priced in Bitcoin rather than fiat
We are still a long way from that and therefore, let us focus our attention on not Bitcoin but on its underlying technology: the Blockchain Technology
Let’s try to understand what Blockchain is and for that, here’s a video:
Now that you have a rough idea on what Blockchain is, let’s see how remittances work on the blockchain. Here’s an amazing article on Hackernoon.
The key proponents of blockchain technology suggest that it can reduce the costs for remittance services. Interesting things are happening behind the scenes where blockchain technology is attempting to replace the current financial services industry’s centralized business model. Financial institutions and banks are exploring ways to implement blockchain to reduce transaction costs, increase transaction speed, reduce fraud and eliminate third-parties.
By cutting out the traditional middlemen, blockchain technology can speed up and simplify cross-border payments, making remittances more affordable. Currency fluctuations can result in a loss when transactions are being made cross borders and blockchain can provide an almost guaranteed, real-time transaction.
Distributed Ledger Technology or DLT can serve as the backbone for a new cross-border payment infrastructure that can potentially solve inefficiencies and provide a faster, secure and more affordable service.
Cost-Saving for Remittance Companies
The average transaction cost of remitting money currently is more or less 4–5% per transfer. This cost includes exchange rate margins, charges from both the sender and recipient intermediaries, agents, overheads etc in remitting USD500, USD20–25 will go into transaction fees. Online Money Transfer Platforms like TransferWise was able to reduce the cost to 1%. Blockchain can reduce the cost from 5% to a fraction of a percentage. This will drastically reduce the USD30 billion dollars in the cost of sending remittances to an absurd amount in the thousands and thus, be an effective cost-saving method.
Godlike speed as compared to current systems
Typically, remittances can take anywhere from days to weeks with TransferWise boasting a quicker time since it uses an online platform. Again, referencing Ripple being able to send USD50 million dollars at an astonishing speed of 3 seconds is an incredible feat.
Another example would be Hong Kong-based blockchain remittance platform, Bitspark which is utilizing the blockchain protocol from Bitshares. They are able to achieve 100,000 transactions per second with a few cents as fees.
Innovations Need Time
Currently, most remittance clients are satisfied with the service of existing providers. Western Union’s revenue has been increasing, albeit slightly, over the past few years. This suggests that despite the rise of Blockchain technology and smart contracts (and even new players like TransferWise entering the space), traditional remittance service providers are still in demand.
Based on statistics provided by Macrotrend, Western Union’s gross profit has been on a decline after peaking in late 2012 (incidentally, TransferWise was founded in 2011 but maybe just a coincidence?). It is also interesting to note that WU profits started rising in early 2018 and they achieved that by increasing their foreign exchange rate and focus on SMEs by offering hedging and marketplace for customers to connect.
Despite the revolutionizing potential of the blockchain, the technology will require time to fully mature and become implemented by the majority. The current financial industry is attempting to overhaul its system to accommodate and experiment with this emerging technology, as well as educating current remitters.
Mobile Penetration Essential To Online Money Transfers
Currently, mobile phone internet penetration worldwide is expected to grow to more than 60% in 2019. As such soon the world can be online and sending money back to families can be as easy as making a phone call.
We can expect companies such as TransferWise and Revolut to make huge progress as the world becomes more connected. As they progress, Blockchain will too.
But there is another player entering the marketing, itching to disrupt the global remittance market using Blockchain Technology:
Hybrid ATMs & Blockchain Technology
In a confirmed press release, Singapore-based Blockchain Consultancy, Moonwhale Ventures announced their next major business client, Odyssey Financial Group. Together, they will develop a new remittance system utilizing hybrid ATMs and blockchain technology under the name MoneyFi.
MoneyFi will essentially be an app that consists of a wallet and an exchange for the ease of currency conversion. The transfer of money will be processed through blockchain technology.
Odyssey Financial Group specializes in the deploying of ATMs and Bitcoin ATMs worldwide. Odyssey’s vast network of ATMs can be hugely advantageous in the remittance game, with its potential financial solution to the lack of internet connectivity in under-developed regions. This will, no doubt, eliminate the need for third-party agents delivering money to receivers. Adding on the application of Blockchain, the money transfers can be near-instant.
Sebastian Ponceliz, CEO of Odyssey Group commented on a local media in Spanish:
“They are not going to be just cashiers for people to get money, they are also going to issue prepaid cards, they can be used for e-commerce, transfers through blockchain, cryptocurrencies and microscoring linkeo for microcredits.”
Odyssey Financial Group has pre-agreements to install 4,000 ATMs over the next two years. Their ATMs are one of the very few that serves Ethereum and Litecoin. Odyssey is primed to tackle the huge global remittance industry with their innovative ATM solution.
The future is bright for new innovative modes of remittance.
Innovation tends to be customer-focused, providing a new product or an alternative way of doing value-added things. Throughout the history of Mankind, we have always been upgrading or improving any existing methods. It is the only ‘currency’ that has been empirically proven to increase over time.
Blockchain can certainly be an asset to remittance companies. It is important to remember that the technology itself requires time to put theory into actual practical use. I believe the time for that is closer than we may think. Remittance and blockchain, could not be a better match.
Thank you very much for your attention. Appreciate any claps given for the article, please also leave a comment!