The industry for international payments has gone through a major transformation during the last couple of years.Technology has enabled new products and services in the fintech space to start challenging traditional banking solutions for sending money across the globe. One side of the payments industry, however, still lags behind in terms of costs, transaction speed, and availability. Remittances, or the act of sending money as a payment or gift, is a huge market that moves capital across the globe. Yet, the costs are still high — at around seven percent. These international payments are vital to the livelihood of millions of people around the world. Many are primarily used for living expenses — such as food, transportation, and education.
The High Costs of Sending Remittance PaymentsWhenever someone sends money internationally, numerous third-party organizations are involved in the transaction. Each verification step adds a small fee to the total cost. Additionally, international conversion rates must be accounted for. The World Bank has averaged these costs to be around 7.45 percent of each transaction processed. Generally, at least one side of the journey still involves physical cash — either in the “first mile,” when a worker hands over the hard-earned money to the payment company or bank — or the “last mile” on the other side of the world, when the cash is handed over to their families, many of which lack bank accounts. These vast networks are expensive to maintain and contribute to the increased cost of remittances. With the emergence of cryptocurrencies, blockchain-based attempts to improve cross-border money transfers have garnered a great deal of attention. This is, in part, due to the significant size of the remittance market — which is estimated to be between $400 and $500 billion. The enthusiasm is also due to the potential to improve the economic livelihood of migrants by reducing remittance costs.
Many poor migrants must pay exorbitant fees to send money home to their families. It is time to drive these costs down https://t.co/yHHT1R6lEk— The Economist (@TheEconomist) April 27, 2019
Cryptocurrencies: Cheaper and FasterConsumer-focused start-ups are leveraging established blockchains like Bitcoin (BTC) or Ethereum (ETH) for the transfer of payments across borders. These provide quick settlement times and are permission-less networks. While Bitcoin can be used independently by tech-savvy users, its network usage by the masses still remains niche. Several cryptocurrency startups have been developing solutions to improve usability and are already operating financial corridors within Asia and Africa. There still are challenges that startups face in order to execute transactions seamlessly — namely the limited liquidity for fiat-Bitcoin pairs, the exposure to foreign exchange volatility, and the difficulty of finding local banking relationships. Alternatively, some projects attempt to facilitate cross-border payments at the protocol level. Projects such as Ripple (XRP) and Stellar (XLM) do not aim to replace or make irrelevant the many intermediary banks involved in correspondent banking. On the contrary, they are attempting to convert as many of the member banks of SWIFT to their new blockchain-based software solutions — which claim to provide more seamless and integrated communication when transferring funds from one country to another.
Mainstream Cryptocurrency Adoption is ImminentIn the long run, the answer to improving the remittance market will see the industry move away from expensive cash-based systems and avoid a long chain of banks or firms for transfer payments. Across developing countries, hundreds of millions of people are using e-commerce and various applications on mobile devices that typically have payment systems and digital wallets already. Cryptocurrency-centric remittance companies have the potential to take the industry to the next level by facilitating a frictionless experience for users. With a user-friendly approach, blockchain remittance companies can leverage the strengths distributed ledger technologies provide to offer instant money transfer services. What do you think of blockchain-based remittance services? What should be improved in order to kickstart the adoption process? Share your opinion in the comments!
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