The global remittances market is a great example of a legacy financial industry acting largely as a toll collector for the unbanked. However, cryptocurrencies and the blockchain have the potential to provide almost instant transfers of money from one country to another. With truly nominal fees, migrants who wish to send money home will no longer have to spend an average of 7% in commissions and fees.
To better understand the current situation and state of the global money transfer industry, let’s have a look at the facts:
- There are $4.8 trillion in transactions on foreign exchange markets daily
- According to World Bank statistics, global remittances will grow to $616 billion in 2018 ($601 billion in 2016)
- Remittances to low and middle-income countries are expected to grow to $466 billion in 2018 ($441 billion in 2016)
- The global average cost of sending $200 is 7.2% of the total
- A reduction of costs in cross-border payments by 5% will result in $16 billion in savings each year
Money transfer market problems
The three pressing problems of the global remittance market now are: a large number of intermediaries, high commissions and heavy regulatory pressure.
The price of remittances
According to the World Bank estimates, the overall amount of money that migrants sent back home to developing countries in 2017 was $450 billion. However, analysts believe that $32 billion in remittances is failing to reach recipients because of the high transaction costs of cross-border money transfers.
The multiple intermediaries involved in the global money transfer business all act as toll collectors, and each contributes to the exorbitant fees consumers are forced to pay without receiving any true value. Currently, there are two main ways of moving money; from bank account to bank account, and through private remittance channels such as Western Union, MoneyGram and others. Neither of these options offer a quick and inexpensive way for end users to transfer money.
The main problem: intermediaries
In the first case, when a person needs to initiate a money transfer from a country in North America or Europe to a developing part of the world like Africa, the money will go via a chain of different banks and services. From a person with local US bank account, the money will go from the local bank’s account to the national bank’s account, then to the corresponding bank working with the US market. After this, the wire will get to the SWIFT network, then on to a corresponding bank serving the market of a target country in Africa. Finally, money arrives at the local bank account.
The overall process takes at least several days and fees are charged every step of the way. Currency exchange costs are to be considered as well. Often local currency from one country will need to be changed into dollars before being changed into the final destination currency, which adds on additional fees.
Companies like Western Union have to develop a worldwide network of physical access points for sending and receiving money, alongside the necessary bank accounts from around the world. Supporting such a large amount of infrastructure is costly, and companies like Western Union are sure to pass these costs on to their customers.
Regulation adds costs
Regulatory pressure is a significant remittance market problem. Officials in different countries and global regulatory organisations have a mandate to fight money laundering (which is estimated to be approximately $2.2–3.7 trillion globally) and financing of terrorism.
For financial and money transfer companies, this means they’re required to perform additional audits, credit certifications, identity verifications, and so on. As a result, many companies prefer to “de-risk,” meaning they could just exit a relationship with certain customers and close their accounts if they are viewed as high risk, or otherwise fail to provide all of the necessary papers.
In the current situation where there are millions of refugees worldwide with little or no identity documentation which are isolated from traditional banking, which may divert remittance payments to so-called “informal” channels. This is where unrecorded and unregulated money transfer channels are used (for eg. hawala). Risks for users here are significantly higher.
Cryptocurrency and blockchain to the rescue
As noted above, the average cost for senders of traditional remittances in Q4 2017 was 7.09%. There’s currently a trend towards slightly declining costs on money transfers as a result of higher market competition, and pressure from the G20 and the UN. These organizations are targeting an average cost to the consumer of 5% and 3% respectively. However this is still too high for many, and there doesn’t seem to be any proposal to drive this number down farther.
Cryptocurrency=promises to provide an innovative solution to the current issues consumers face in today’s remittance market. For example, the BitPesa service — which is currently operating in Nigeria, Kenya, Uganda, Tanzania, Senegal, and the Democratic Republic of the Congo — developed a blockchain-based global payment network which allows fast (one day instead of one week) and much cheaper (1–3 percent costs) transactions. Another example is the Ethereum-based Monetha payment system, which is able to carry out transactions 5 times cheaper and 10,000 times faster than traditional payment systems.
Another interesting project is TenX, which allows cryptocurrency spending for the purchase of ordinary goods by using a mobile app that converts cryptocurrency into fiat money. SpectroCoin issues bitcoin debit cards that can be used in millions of shops worldwide and at ATMs for withdrawals.
According to the World Bank, an estimated 1.1 billion people worldwide cannot officially prove their identity. This means that they are completely excluded from the global financial system and cannot perform any remittance transfers either. Projects like World Identity Network and Humanized Internet attack this problem by creating tools for storing identifiers like birth certificates or driver licenses in a blockchain database.
It’s not just the banks that are highly inefficient. Stock markets are also crowded with intermediaries eating into cash flow. At the same time, they are charging high commissions while trying to keep these costs as opaque as possible from the end user. This also harms international remittance as this is very expensive and complicated for investors and traders to operate on exchanges in different countries simultaneously. Cryptocurrencies and blockchain can help to fix this, too.
For example, the Celsius project allows investment into cryptocurrencies under more favorable conditions than those offered by fiat stock exchanges. This Ethereum-based P2P lending and borrowing platform may replace big banks and futures exchanges like the CME and CBOT, with a cryptocurrency wallet that will earn returns through its innovative lending platform.
In its turn, the Spectre project is planning to exclude this intermediate link from the chain for better investments. It is a system of online trading with no brokers, and its liquidity pool is completely owned by ICO token investors.
According to recent statistics, almost 40% of people have no access to the global financial system. Its inefficiencies and costs are some of the most significant factors leading to this. High fees, armiesof intermediaries, and regulatory pressure are all enormous problems for the global remittance industry which could be solved thanks to cryptocurrencies and blockchain technology.
Remittances costs through a blockchain are thousands if not millions of times cheaper than the cost of remittances in the current market. On the other hand, there are now an estimated ~20M cryptocurrency users compared with hundreds of millions of customers for traditional banks.
This massive opportunity will lead to millions of people joining the cryptocurrency community to get access to global markets, all while avoiding fees and commissions for services that aren’t providing any real value.