Article for the community - Author: Igor Davidov
In short, remittance is the sending of money to another location at a distance, usually between individuals in different countries. In most cases, this transfer takes the form of a person working abroad sending money back to his or her home country.
Today, remittances serve as the largest flow of money into developed countries, surpassing foreign direct investment and development aid. According to the World Bank Group, the remittance industry has grown strongly over the years, from 8.8% in 2017 and 9.6% in 2018.
Some developed economies rely heavily on foreign sources of money, making remittances an important component of the economy. Therefore, remittances from expatriate workers are now one of the main sources of income for many countries. For example, the foreign remittances Haiti received accounted for about 29% of the country's GDP in 2017. This number increased to 30.7% in 2018.
Background
According to World Bank estimates, the current cost to send a $200 deposit is about 7% of that amount (global average). With the total amount of money transferred globally reaching 689 billion USD in 2018, operating costs accounted for 7% of this amount, equivalent to 48 billion USD.
In addition to high sending fees, remittance solutions rely heavily on third-party services and financial institutions. The need for many intermediaries makes the current system very inefficient. This is not only because the services are expensive, but also because transferring money can take days or even weeks.
In this context, blockchain technology can provide more viable and efficient options for the remittance industry. This article will introduce some of the current capabilities and solutions, and some examples of companies working in this space.
Is Blockchain the solution?
The main goal of blockchain remittance companies is to simplify the entire process, removing unnecessary intermediaries. This will help provide easy and almost instant payment solutions. Unlike traditional services, blockchain networks do not need to rely on the slow transaction approval process that requires going through several intermediaries and requiring a lot of manual operations.
Instead, the blockchain system can carry out financial transactions around the world based on a distributed network of many computers. This means that several computers are involved in the process of checking and validating transactions - and this process can be done in a decentralized and secure manner. Compared to the traditional banking system, blockchain technology can bring faster and more reliable payment solutions at much lower costs.
In other words, blockchain technology can solve some of the major problems facing the remittance industry, which are high remittance fees and long transaction times. Operating costs can be significantly reduced simply by reducing the number of intermediaries.
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Application on mobile devices
Currently many companies are experimenting with blockchain technology to provide new payment solutions. Some mobile cryptocurrency wallets allow users to send and receive digital assets worldwide, and quickly convert between cryptocurrency and real money.
Coins.ph is an example of a mobile wallet app with many features. Users can transfer money internationally, pay bills, buy game credits, or simply trade Bitcoin and other cryptocurrencies. Additionally, some financial services do not require users to have a bank account.
Digital platforms
Some companies are operating an infrastructure that interacts directly with the traditional financial system. For example, BitPesa is an online platform implementing blockchain technology in Africa. Founded in 2013, this company provides payment and currency exchange solutions at lower costs and faster speeds.
Another example of a blockchain platform in the remittance industry is the Stellar protocol. Stellar was founded in 2014 with the goal of promoting financial inclusion, connecting people and banking institutions around the world.
The Stellar network depends on a distributed ledger with its own currency, named Stellar lumens (XLM). The network's native token can be used as an intermediary coin to conduct global trade transactions between real money and cryptocurrency. Like BitPesa, users and financial institutions can use the Stellar platform to send and receive funds with lower transaction costs.
Automated money transfer machine (ATM)
Along with mobile apps and online platforms, using ATMs can also be an interesting solution to send and receive money worldwide. This approach can be especially useful in undeveloped areas that do not yet have Internet connections or banking systems.
Companies such as Bit2Me and MoneyFi are developing new remittance systems that combine both blockchain and ATM technology. Their goal is to issue prepaid cards capable of supporting multiple features.
The combined use of blockchain ledgers and ATMs can significantly reduce the need for intermediaries. Users will not need a bank account, and ATM companies may collect a small fee from this process.
Current challenges and limitations
Although blockchain technology can clearly bring many advantages to the remittance industry, there are still many obstacles. Below are some potential obstacles and key limitations of this technology, as well as solutions.
Convert from cryptocurrency to paper money. The global economy is still based on paper money, and converting between cryptocurrency and paper money is not always easy. In many cases, users need a bank account to be able to make this conversion. Peer-to-peer (P2P) transactions may eliminate the role of banks, but users will likely need to convert from paper money to cryptocurrency to be able to use it.
Dependence on mobile devices and the Internet. Millions of people in less developed countries still do not have Internet access, and many do not have smartphones. As mentioned, blockchain-compatible ATMs could be part of the solution.
Statutory. Cryptocurrency regulation is still in its infancy. In some countries, these laws are unclear or non-existent, especially in places that rely on foreign currency. But the continued adoption of blockchain technology will certainly accelerate the enactment of regulations.
Complexity. Using cryptocurrency and blockchain technology requires users to have certain technical knowledge. Most users still rely on third-party service providers, as running and using blockchain automatically is not easy. Additionally, many cryptocurrency wallets and exchanges lack educational tutorials and easy-to-understand interfaces.
Volatility. The cryptocurrency market is still young and volatile. Therefore, they are not always suitable for everyday use, because the market value can change very quickly. Additionally, highly volatile currencies are not suitable for people who just want to move money from one place to another. However, this problem is not worth worrying about, and stable coins can be a viable solution.
Conclude
The money transfer industry has grown significantly over the past decade, and will likely continue to grow in the coming years, with one of the reasons for this growth being the pace of job migration. or increased educational opportunities. According to the 2018 World Migration Report, there were approximately 244 million international migrants in 2015 - 57% more than the estimated 155 million in 2000.
However, the remittance space still faces obstacles due to inefficiencies and limitations. As a result, more and more companies are using blockchain technology to provide more efficient alternatives, and we will likely see more use of the technology by offshore workers in the future. near future.