By Ramtin Mesgari, Synthesis Software Engineer
Every year, hundreds of billions of dollars are sent across borders by emigrant workers who have moved away from their home countries. Global remittances in 2018 alone totalled over $600 billion and the number of migrant workers continues to increase every year. And yet, migrant workers who leave their homes are never able to send the full amount to their families – or even close to the full amount. The estimated transfer charges to facilitate cross-border payments amounts to 7%, with many African countries charging fees over 30%.
Crypto assets, however, are not restrained by country borders and can allow for money to be transferred with minimal costs. In the case of the Bitcoin network, the less congested it is, the cheaper it is to send money to another party (regardless of geography). The fee in this case does not depend on how much is being sent, rather on the data size of a transaction and the network conditions at the time.
This isn’t an attempt to posit Bitcoin as a solution to remittances, because it – along with most crypto assets – is extremely volatile; and with its volatility comes unexpected spikes and drops in transaction fees as well. Rather, the attempt is to highlight the potential in the future of remittances.
Using traditional methods of making cross-border payments are extremely costly, especially for lower-income migrant workers. The average cost of sending money from the US to Mexico is $8.91, from Germany to Turkey it’s $12.83, and from South Africa to Botswana it’s $36.60. But if you were to use the Bitcoin network as it currently stands, the transaction fee, regardless of location, is under $3.
At the very least, if the blockchain revolution doesn’t solve this issue, it will yield enough competition in the industry that will result in the indirect disruption of remittances.
Blockchain as a Solution
Blockchain is often presented as a solution to the traditional banking process because it cuts out the intermediary stages in a value transfer. The best implementation of what a blockchain can truly achieve is in the form of smart contracts. A smart contract self-executes an agreement between two parties without the need for a central authority while still complying with regulatory processes.
This is precisely how the traditional remittance payments can benefit from blockchain technology. Traditionally, remittances are not transferred directly from remitter to the beneficiary in a single-step process. Rather, remittance payments tend to follow a multi-step process like this:
- The remitter communicates with the local bank that they wish to make a cross-border payment,
- The local bank transfers the money to an intermediary bank,
- The intermediary bank transfers the money to the beneficiary’s bank,
- The beneficiary’s bank finally transfers the money into the beneficiary’s account.
At every step of this process, the intermediaries will all charge a service fee for processing the transaction. If one were to conduct the same process through a blockchain, the money would be transferred directly from the remitter to the beneficiary in a single-step process—thus greatly reducing fees.
Blockchain versus Traditional Banking
Once crypto assets become interoperable and integrated into the traditional banking world, we can expect their prices to stabilise and their usages to provide a viable solution to remittances.
With smart contacts, the existing financial systems can be simplified by embedding banking protocols, validation processes, and data verifications to enforce the legitimacy of a transaction. On top of this, banks and financial institutions must comply with regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML). In this regard, smart contracts again prove they can be a benefit to banks.
As a result of its implementation, blockchain technology can make banking faster, cheaper, and more automated as fewer intermediary steps will be needed. Therefore, remitters and beneficiaries can utilise a more streamlined platform for making and receiving cross-border payments.
Ripple’s Partnership with Banks
Ripple (XRP) is a crypto asset that can be used for making rapid payments. Using the RippleNet platform, one can send and receive money across borders with low fees and fast transaction times.
There are currently hundreds of banks and financial institutions across the globe that have partnered with Ripple. The Society for Worldwide Interbank Financial Communication (SWIFT), which facilitates international money transfers between banks, is responding strongly to the RippleNet platform by innovating its own existing system. As a result of this direct competition, SWIFT has already improved its transaction speeds and is working on better facilitating low-value transactions.
Ripple is only one of many systems that are trying to streamline the current payment system. Whether or not they succeed, they are all paving the way for improvement in the industry. As stated before, even if the advancement does not come directly from a blockchain solution, it will indirectly lead to the innovation of existing systems. Ripple’s partnership with numerous banks and financial institutions has already made this evident.
Challenges in the Space
Both internet and technology characterise the 21st century, but the requirement for these very things is what poses a challenge for many migrant workers. In the remittance process, there’s a need for internet access and a digital identity, without which one will be excluded from this part of the financial world.
Although crypto assets could potentially provide a solution to the high remittance fees, they bring with them a third challenge: that of its volatile value. But even without its volatility, there still exists two major challenges which are common to both crypto assets and the traditional remittance process.
The banking system currently relies on internet access to facilitate transactions. But most of the countries which receive remittance payments – and need it the most – do not have fully-fledged internet access. Furthermore, cross-border payments, despite their necessity to these countries, tend to play a large role money laundering. Hence the reason for heavy regulations in the space – such as KYC and AML – which are designed to verify and validate the digital identity of any person making payments. What further complicates these matters is not only the need for internet access, but the need for information that a migrant worker might not necessarily have: such as their own date of birth, identity number, or residential address.
Although blockchain technologies do not provide a solution to the need for internet access, there are alternative mechanisms starting to emerge in this space. There are companies experimenting with utilising soundwaves to replace the need for internet access and other companies, like SpaceX, that aim to provide these countries directly with internet.
Blockchain technologies do, however, provide a potential solution to the second challenge that remittance processes face. Given that financial institutions are interested in knowing their customers and preventing fraud, they can utilise blockchain systems to assist them in this regard. As a result, banks can introduce decentralisation, transparency, and immutability to mitigate risks and improve cyber-security.
It’s evident that blockchain technologies have the potential to disrupt the traditional banking systems in the best possible way. Both existing and forthcoming blockchain platforms aim to address all the issues with the existing systems in their aim to facilitate cheaper, faster, and more effective transactions.
The inevitable synthesis between blockchain and banking will lead to an ecosystem that’s open to innovation, collaboration, and increased competition. Therefore, the blockchain ‘disruption’, which we are constantly hearing about, is a valuable way for banks and financial institutions to keep up with the times. It is only through reinventing and innovating that decaying legacy systems can be replaced with more streamlined ways of handling transfer of value.
Whether triggered by blockchain, or brought about directly from it, the future of banking is bound to change.