In short, remittance can be defined as the transfer of money to a distant location, usually between individuals that live in different countries. In most cases, it consists of an immigrant worker sending money to their home country. Today, remittances represent the largest flow of funds into the developing world, surpassing foreign direct investments and official development assistance. According to the World Bank Group, the remittance industry experienced significant growth in the past years, up 8.8% in 2017 and 9.6% in 2018.
Some developing economies are heavily dependent on cash that comes from abroad, making remittances a substantial component of their economy. As such, migrant workers’ transfers are now one of the main sources of income for many countries. For example, Haiti received international remittances that accounted for roughly 29% of its GDP in 2017. The percentage raised to 30.7% in 2018.
The World Bank estimates that the current cost for sending a $200 remittance is around 7% (global average). Considering that worldwide remittances made up to $689 billion in 2018, 7% would count for roughly \$48 billion paid in operational costs.
In addition to the high fees, most remittance solutions rely on third-party services and financial institutions. The need for multiple intermediaries makes the current system highly inefficient. Not only because the services are expensive but also because transfers may take days or even weeks.
In this context, blockchain technology may provide viable and more efficient alternatives to the remittance industry. This article introduces some of the possibilities and existing solutions, along with a few examples of companies working in the space.
Is blockchain the solution?
The main goal of blockchain remittance companies is to simplify the entire process, removing unnecessary intermediaries. The idea is to provide frictionless and nearly instant payment solutions. Unlike traditional services, a blockchain network doesn’t rely on a slow process of approving transactions, which usually goes through several mediators and requires a lot of manual work.
Instead, a blockchain system can perform worldwide financial transactions based on a distributed network of computers. This means that several 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 and more reliable payment solutions at a much lower cost.
In other words, blockchain technology may solve some of the major problems faced by the remittance industry, such as high fees and long transaction times. The operational costs can drop substantially simply by reducing the number of intermediaries.
Many companies are now experimenting with blockchain technology to deliver new payment solutions. Some mobile crypto wallets allow users to send and receive digital assets worldwide and to quick exchange between crypto and fiat currencies.
Coins.ph is one example of a mobile wallet app that provides multiple features. Users are able to do international remittances, pay bills, buy game credits, or simply trade Bitcoin and other cryptocurrencies. Also, some financial services don’t require a bank account.
Some companies are operating an infrastructure that interacts directly with the traditional financial system. For instance, BitPesa is an online platform that deploys blockchain technology in Africa. Founded in 2013, they are providing payment solutions and currency exchange at lower rates and increased speed.
The Stellar protocol is another example of a blockchain platform serving the remittance industry. Stellar was founded in 2014 with the alleged goal of promoting financial access, connecting people and financial institutions worldwide.
The Stellar network counts with a distributed ledger that has its own currency, named Stellar lumens (XLM). Their native token can be used as a bridge currency, facilitating global trades between fiat and cryptocurrency assets. Similar to BitPesa, users and financial institutions can use the Stellar platform to send and receive money with reduced transaction costs.
Along with mobile applications and online platforms, the use of ATMs may provide an interesting solution for sending and receiving money worldwide. Such an approach may 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. Their 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’s clear that blockchain technology can bring many advantages to the remittance industry, there is still a long way to go. The following are some of the potential barriers and major limitations, along with possible solutions.
Crypto-fiat conversion. The worldwide 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 can remove the need for a bank, but users will likely need to convert from crypto to fiat in order to use the money.
Mobile and Internet dependence. Millions of people living in underdeveloped countries still lack access to the Internet, and many don’t have a smartphone. As mentioned, blockchain-compatible ATMs may be part of the solution.
Regulation. Cryptocurrency regulation is still in its very early stages. It is either unclear or inexistent in several countries, especially the ones that rely on foreign cash inflow. But further adoption of blockchain technology will certainly push regulation forward.
Complexity. Using 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. Also, 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 may change very quickly. Other than that, highly-volatile currencies are not ideal for people that just want to transfer money from one place to another. This problem is less concerning, though, and stablecoins may offer a viable solution.
The remittance industry experienced significant growth in the past decade and will probably continue to expand in the following years. The increased immigration rate of people in search of work or educational opportunities is likely one of the main causes. According to the World Migration Report 2018, there were an estimated 244 million international migrants in 2015 - about 57% more than the 155 million estimated in 2000.
However, the remittance space is still troubled by inefficiencies and limitations. As a consequence, more companies are harnessing blockchain technology to provide more efficient alternatives, and we will likely see greater adoption by immigrant workers in the near future.