Community generated content - Author: Igor Davidov


Simply put, a remittance can be defined as a transfer of money to a distant place, which generally occurs between individuals living in different countries. In most cases, one of them is usually a migrant worker sending money to their home country.

Currently, remittances represent the main flow of funds to developing countries, surpassing foreign direct investment and official development aid. According to the World Bank Group, the remittance sector has experienced significant growth in recent years, with increases of 8.8% in 2017, and 9.6% in 2018.

Some developing countries are heavily dependent on cash coming in from abroad, making remittances a substantial part of their economy. Which means that transfers from migrant workers are currently one of the main sources of income for many countries. To give an example, international remittances received by Haiti in 2017 accounted for almost 29% of its Gross Domestic Product. In 2018, this percentage increased to 30.7%.


The problem

The World Bank estimates that the current cost of sending a $200 remittance is around 7% (international average). Assuming that the global remittance market reached 689 billion dollars in 2018, 7% would represent close to 48 billion dollars allocated to operational costs.

Apart from high fees, most solutions in the remittance sector depend on services offered by third parties and financial institutions. The necessary intervention of multiple intermediaries makes the current system very inefficient. Not only because the services are expensive, but also because transfers can take days or even weeks.

In this context, blockchain technology can provide viable and more efficient alternatives for the remittance industry. In this article, we will introduce some of these possibilities and existing solutions, along with a series of examples from companies working in the sector.


Is blockchain the solution?

The main objective of blockchain-based remittance companies is to simplify the entire process, eliminating unnecessary intermediaries. The idea is to offer frictionless and practically instant payment solutions. Unlike traditional services, blockchain networks do not depend on slow transaction approval processes, which generally involve several intermediaries and require a lot of manual work.

Instead, a blockchain system can execute international financial transactions based on a distributed network of computers. This means that multiple computers participate in the process of verifying and validating transactions - a process that can be carried out in a decentralized and secure way. Compared to the traditional banking system, blockchain technology can provide faster and more reliable payment solutions, at a lower cost.

In other words, blockchain technology can solve some of the main problems facing the remittance industry - among which are high fees and long transaction processes. Simply by cutting the number of intermediaries, operating costs can be drastically reduced.


Use cases

Mobile app

Many companies are currently experimenting with blockchain technology with the idea of ​​providing new payment solutions. Some mobile crypto wallets allow users to send and receive digital assets around the world, as well as make exchanges between cryptocurrencies and fiat currencies very quickly.

Coins.ph is an example of a mobile wallet type app, which provides multiple features. With it, users can send international remittances, pay bills, buy game credits, or simply trade Bitcoin and other cryptocurrencies. Additionally, some of the financial services do not require a bank account.


Digital platforms

Some companies operate infrastructures that interact directly with the traditional financial system. To give an example, BitPesa is an online platform that implements blockchain technology in Africa. Founded in 2013, they are providers of payment and currency exchange solutions, with lower exchange rates and greater speed.

The Stellar protocol is another example of a blockchain platform that serves the remittance industry. Stellar was founded in 2014 with the purported goal of promoting financial access, connecting people and financial institutions around the world.

The Stellar network has a distributed ledger that has its own currency, called Stellar lumens (XLM). Its native token can be used as a bridge currency, facilitating global exchanges between fiat assets and cryptocurrencies. Like BitPesa, users and financial institutions can use the Stellar platform to send and receive money with low transaction costs.


ATMs

Along with mobile apps and online platforms, the use of ATMs can provide an interesting solution for sending and receiving money around the world. Such an approach can be especially useful in underdeveloped areas that still lack a good Internet connection or banking system.

Companies like Bit2Me and MoneyFi are developing new remittance systems that combine blockchain technology with ATMs. Its goal is to issue prepaid cards that support multiple functionalities.

The combined use of blockchain ledgers with ATMs has the potential to greatly reduce the need for intermediaries. Users won't 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 industry, there is still a long way to go. Below are some of the main potential barriers and limitations, along with possible solutions.

  • Crypto-fiat conversion. The global economy is still based on fiat currencies, and converting between crypto 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 from fiat to crypto to use the money.

  • Mobile and internet dependence. Millions of people living in underdeveloped countries still lack access to the Internet, and many do not have a smartphone. As mentioned, blockchain-enabled ATMs can be part of the solution.

  • Regulation. Cryptocurrency regulation is still in very early stages. It is unclear or non-existent in several countries, especially those that depend on foreign cash inflows. But greater adoption of blockchain technology will certainly push regulation forward.

  • Complexity. The use of cryptocurrencies and blockchain technology requires certain technical knowledge. Most users still rely on third-party service providers because running and using blockchain autonomously is not an easy task. Additionally, many crypto wallets and exchanges still lack educational guides and intuitive interfaces.

  • Volatility. Cryptocurrency markets are still immature and subject to high volatility. As such, they are not always suitable for everyday use, as their market value can change very quickly. Aside from that, highly volatile currencies are not ideal for people who just want to transfer money from one place to another. However, this problem is less of a concern and stablecoins may offer a viable solution.


In conclusion

The remittance industry has seen significant growth over the past decade, and will likely continue to expand in the years ahead. The increasing rate of immigration of people seeking work or educational opportunities is probably one of the main causes. According to the 2018 World Migration Report, there were an estimated 244 million international migrants in 2015, approximately 57% more than the estimated 155 million in 2000.

However, the remittance space is still troubled by inefficiencies and limitations. As a result, more companies are leveraging blockchain technology to provide more efficient alternatives, and we will likely see greater adoption by migrant workers in the near future.