Community Submitted Content - Author: Igor Davidov
Briefly, remittance can be defined as the transfer of money to a distant location, usually between individuals living in different countries. In most cases, it is a transfer made by an immigrant worker who sends money to their home country.
Today, remittances represent the largest flow of money in the developing world, surpassing foreign and official investments. According to the World Bank, the remittance sector has seen significant growth in recent years, having increased from 8.8% in 2017 to 9.6% in 2018.
Some developing economies are relying heavily on financial incentives from abroad, making remittances a substantial component of their economy. Transfers made by migrant workers are now one of the main sources of income for many countries; Haiti, for example, received international remittances representing around 29% of its GDP in 2017, and the percentage increased to 30.7% in 2018.
The problem
The World Bank estimates that the current cost of sending a $200 remittance is around 7% (global average). Considering that global remittances reached a value of 689 billion dollars in 2018, 7% corresponds to around 48 billion dollars paid in operational costs.
In addition to high fees, most remittance transactions rely on third-party services and financial institutions. The need for multiple intermediaries makes the current system very ineffective, not only because of the expensive services, but also because transfers can take days or even weeks.
In this context, blockchain technology can provide viable and more efficient alternatives to the remittance sector. This article presents some of the existing possibilities and solutions, along with some examples of companies working in the sector.
Is Blockchain the Solution?
The main objective of shipping companies using blockchain is to simplify the entire process by removing unnecessary intermediaries. The idea is to provide simplified and almost instantaneous payment solutions. Unlike traditional services, a blockchain network does not rely on a slow process for approving transactions, which usually goes through multiple mediators and requires a lot of manual work.
Instead, a blockchain system can carry out worldwide financial transactions based on a distributed network of computers. This means that multiple computers participate in the process of verifying and validating transactions - and this can be done in a decentralized and secure way. When compared to the traditional banking system, blockchain technology can provide faster, more reliable and much lower cost payment solutions.
In other words, blockchain technology can solve some of the main problems faced by the remittance industry, such as high fees and slow transactions. Operating costs can be reduced substantially simply by reducing the number of intermediaries in the process.
Use cases
Mobile apps
Many companies are testing blockchain technology to provide new payment solutions. Some mobile cryptocurrency wallets allow users to send and receive digital assets around the world and quickly exchange between cryptocurrencies and cash (fiat).
Coins.ph is an example of a mobile wallet app that offers several features. Users can make international remittance transfers, pay bills, buy game credits or simply trade Bitcoin and other cryptocurrencies. Additionally, some services do not require a bank account.
Digital platforms
Some companies are operating infrastructure that interacts directly with the traditional financial system. For example, BitPesa is an online platform that implements blockchain technology in Africa. Created in 2013, the platform offers payment and currency exchange solutions with lower fees and faster.
The Stellar protocol is another example of a blockchain platform serving the remittance industry. Stellar was founded in 2014 with the aim of promoting financial accessibility by connecting people and financial institutions around the world.
The Stellar network has a distributed ledger that has its own currency, Stellar lumens (XLM). Its native token can be used as a bridge currency, facilitating the exchange between cryptocurrencies and money (fiat). Just like BitPesa, users and financial institutions can use the Stellar platform to send and receive money at reduced costs.
ATMs
Coupled with mobile apps and online platforms, the use of ATMs can provide an interesting solution for sending and receiving money across the world. This option can be especially useful in underdeveloped areas that do not yet have a good internet connection or banking system.
Companies like Bit2Me and MoneyFi are developing new remittance systems that combine blockchain technology and ATMs. Its objective is to provide prepaid cards that support multiple functionalities.
The combined use of blockchain ledgers with ATMs has the potential to significantly reduce the need for intermediaries. Users do not need a bank account and ATM companies will likely charge a small fee in the process.
Current challenges and limitations
While it is clear that blockchain technology can bring many advantages to the remittance sector, there is still a long way to go. Below are some of the potential barriers and main limitations, along with some possible solutions.
Crypto-fiat conversion. The world economy is still based on fiat currencies and converting between cryptocurrencies and fiat is not always an easy task. In many cases, a bank account is required. Peer to peer (P2P) transactions may eliminate the need for a bank, but users will likely need to convert fiat to crypto to use the money.
Dependence on cell phones and the internet. Millions of people living in underdeveloped countries still do not have access to the internet and many of them do not have a smartphone. As mentioned, ATMs compatible with blockchain technology could be part of the solution.
Regulation Regulation of cryptocurrencies is still in its early stages. In many countries it is still non-existent or not well defined. Especially in countries that depend on the inflow of foreign money. However, with the increased adoption of blockchain technology, we will certainly see progress in terms of regulation.
Complexity. Using cryptocurrencies and blockchain technology requires certain technical knowledge. Most users still depend on third-party services because running and using blockchain autonomously is not an easy task. Additionally, many cryptocurrency wallets and exchanges still lack educational guides and intuitive interfaces.
Volatility. Cryptocurrency markets are still immature and subject to high volatility. In other words, they are not always suitable markets for daily use, as values can change very quickly. Additionally, highly volatile currencies are not ideal for people who just want to transfer money from one location to another. However, this problem is less of a concern as stablecoins can offer a viable solution.
Final considerations
The remittance sector has seen significant growth over the past decade and will likely continue to expand in the coming years. The increased rate of immigration of people seeking work or educational opportunities is probably one of the main reasons. According to the 2018 World Migration Report, there were around 244 million international migrants in 2015 – around 57% more than the 155 million estimated in 2000.
However, the shipping industry continues to struggle with inefficiencies and limitations. Consequently, more companies are using blockchain technology to provide more efficient alternatives that will likely see greater adoption among immigrant workers in the near future.