June 09, 2016 by Karolina Walęcik
Take the total amount of international financial assistance that goes from developed to developing countries in a year. Multiply by three. This is how much international migrants remit to their home countries annually. As big as this number sounds, the total amount of money remitted is believed to be much higher due to the use of unrecorded informal financial transactions.
Now imagine a merchant in the United Kingdom, Lucy, who wants to send her hard-earned money to family in Kenya to ensure they have enough to live on from one day to another. Based on her access to financial services in the country where she works and financial infrastructure in her country of origin, she will likely choose one the three types of Remittance Service Providers (RSPs). If she has a bank account and can transfer money to another account she can go to a commercial bank. Alternatively, she can decide to use services offered by Money Transfer Operators (think: Western Union or MoneyGram) or go to a post office. These are all expensive options. On average, sending your remittance will have an attached fee of 7.37 percent. Going back to our figures, it amounts to over $44 billion. That’s a lot of money, especially when you think of people on the recipient end that often live on $2, $5 or $10 a day. And don’t forget that transaction time may be well over 5 days, making remittance services not a reliable solution in the case of emergencies.
Is it realistic to expect that the world will achieve the Sustainable Development Goals’ target of lowering the cost of remittances to less than 3 percent by 2030? I want to think so.
When I mentioned the three options Lucy can choose from when deciding on how to send her money, I was not completely accurate. Because she has family in Kenya, Lucy is able to use another service for international transfers – BitPesa. If she has access to a computer or a smartphone, she can send her money, including very small sums, for a 3 percent transfer fee, while her transactions will be settled within 30 minutes to an hour. Lucy’s relatives may receive transfers to their mobile phones either through a mobile money provider, Airtel Money, or to bank accounts. What makes BitPesa different and so much cheaper is the technology behind it and the ability to partner with financial service providers in Kenya (the latter has recently become a major challenge for BitPesa when the Kenyan High Court ruled against company’s request to provide them access to the country’s largest mobile money transfer provider, M-Pesa).
BitPesa is only one example of an innovative approach that looks at ways to lower costs and improve the remittance payments ecosystem. Other solutions include Rebit in the Philippines, or pilot projects by South Korea’s KB Kookmin Bank and Coinplug and Visa Europe Collab and Epiphyte. Powering all of these and many other initiatives is the (not so) new kid on the block, blockchain. The technology is commonly associated with a crypto-currency service, Bitcoin, and indeed, various new payments solutions that are interested in using blockchain aim at either taking advantage of Bitcoin currency or employ other virtual currencies.
In the case of remittances, virtual currencies such as Bitcoin serve as intermediaries for the transfer process between fiat currencies on both ends of the transaction chain. From the customer perspective, the solution can be applied seamlessly and does not have to involve any crypto-currency trading. But blockchain is much more than a way to use virtual currencies. It is technology that captures the attention of FinTech industry these days. Unlike the traditional payment system that uses a centrally maintained and validated ledger to record transactions, blockchain is a decentralized system where copies of transactions are recorded, then cryptographically attached in a chronological order to one another, and stored on servers around the world. They take the form of distributed ledgers that are synchronized in multiple copies across the whole network and use a range of verifications to impregnate the system against fraud and unauthorized tampering.
Thanks to real-time synchronization of the database among all ledger participants, blockchain enhances the speed of transaction settlement and allows for micro-sized transfers to be processed cost-effectively. There are no middlemen. For remittances, the distributed ledger technology has the potential of reducing the cost of an international money transfer by eliminating the need for correspondent banks that provide payment services on the recipient end. This may be especially important given recent trends of large international banks withdrawals from correspondent banking relationships that could hamper access to remittance services. From the perspective of a remittance-sending user, blockchain-supported peer-to-peer services can save money spent on fees and time spent in queues, and may improve the speed of response in the face of emergencies.
However, to be effective and truly cost-saving these new services will have to ensure that they can deliver solutions that are useful, efficient and welcomed at the last mile, also when cash is needed. This is where integration with existing financial services, especially mobile money networks, comes into play so that the existing agent structures are employed to reduce costs, while clients are offered familiar and tested solutions. By encouraging such partnerships and interoperability of services, governments can help spur innovation to advance financial inclusion. Naturally, also new regulatory approaches will be required as blockchain-powered services grow, to ensure their security. Beyond remittances, the distributed ledger technology carries a promise of improved public sector efficiency in how services to the poor and the general public are provided, and can result in greater transparency of all actors involved.
The distributed ledger technology for remittances is yet to be tested and seen on a larger scale. But if the analysts are right in their predictions -- that it’s not if but when blockchain will take over the scene of digital transactions -- let’s hope there is enough energy in the FinTech field to design and offer affordable, reliable solutions to those who need them most.
Editor's Note: Camilla Nestor, Grameen Foundation’s Senior Vice President of Institutional Development and Program Design, teaches a financial inclusion course at Columbia University’s School of International and Public Affairs. As part of her course, students submitted blog posts that were evaluated by professors and Grameen Foundation’s communications staff. The winning post by Karolina Walęcikis featured here.