How Crypto and Blockchain Technology Could Threaten to Disrupt the $650 Billion Worldwide Remittances Industry
The latest report to surface from blockchain research firm Clovr suggests that the use of crypto technology as a channel for remitting international payments in on the rise.
Of the 707 respondents that were surveyed as part of the report, over 15% indicated that on at least one occasion they had used a cryptocurrency to facilitate an international payment either to a family member, close friend or acquaintance.
But perhaps that news may not come as much of a surprise for readers who are already familiar with the nature of how international money transfer agencies work, and the types of criticism that has been leveled at them in recent years.
In this article we’ll discuss some of the pros and cons associated with the current state of the global remittances industry, the companies looking to take a bite out of this rapidly growing market and what it all means for investors in crypto assets.
Understanding the Potential Opportunity for Crypto in the Worldwide/global remittances market
Historically serving those that lack sufficient access to traditional financial channels, money service businesses such as Western Union, MoneyGram and others in recent years have attracted widespread criticism for their allegedly predatory pricing strategies that have been guilty of gauging their clientele with what many view to be excessive and unnecessary surcharges and service fees.
Only making matters worse is that many of these networks most frequent customers have been identified as members of the population that are already at the greatest risk of falling victim to exploitative pricing schemes, including pay-day loans which in some cases charge borrowers interest rates upwards of 400% annually.
However the good news is that thanks to the advent of blockchain technology along with increasing mainstream acceptance of cryptocurrencies as alternative payment methods, more and more people are viewing the technology as a viable alternative – if not as an outright replacement – to traditional global remittance networks.
Source: World Bank/Techcrunch
According to the World Bank, overall global remittances reached upwards of US$689 billion 2018, with approximately three-quarters of that figure being attributing to recipients residing in developing nations.
Meanwhile it’s worth noting that estimates for the value of remittances being exchanged internationally are often grossly understated thanks in large part to the volume of transactions that escape the reach of international government agencies and the tax authorities that are responsible for tracking the payments.
Most experts in fact estimate that the actual size of global remittance market is at least 50% larger, if not twice the size of the official figure that gets reported by the World Bank.
Meanwhile as the world’s largest economy, it would stand to reason that the United States would lead the way as the world’s largest source of remittance payments.
And it does, with workers in the U.S. sending abroad more than an estimated US$130 million in 2018 according to official statistics.
Meanwhile countries that have historically found themselves as the largest beneficiaries of these international remittance payments include the likes of Mexico, China, and India, followed by the Philippines as the largest beneficiary within the southeast Asian region.
Together these four markets regularly account for close to half of the total worldwide remittance market.
Going from the macro scale to the micro scale for a moment, the research suggests that the typical migrant worker will remit on average around 10% of their household income to overseas family members, sending payments on around 6 occasions a year.
However, while funds remitted typically account for a relatively small percentage of the sender’s overall disposable income, the family members who are receiving the payments will rely on the remittances for anywhere between 50% to 80% of their annual household income.
Overseas remittances play a vital role as a complement to foreign direct investment
Having nearly doubled in size over the past ten years, the surge in growth taking place throughout the global remittances market means that today repatriated earnings in some cases account for over half of the total value of a nation’s foreign capital inflows, outstripping the level of foreign direct investment in those markets.
But not only do remittance payments help direct much-needed capital to smaller economies that don’t typically get the attention of larger markets like China, India and Brazil, overseas remittances have also proven to be more steady, and in some cases even counter-cyclical, compared to patterns in foreign direct investment that is committed on the part of foreign governments and multinational corporations.
Take for example the type of response that would typically follow in the wake of a natural disaster such as a flood or earthquake striking a less fortunate nation.
In these cases, the degree of uncertainty and risk present would more often than not prevent profit-motivated investors from being willing to commit significant sums of capital towards aiding recovery efforts.
Usually in these cases its will be overseas migrant workers who sacrifice their personal spending in order send more money back home to help out a family member or close friends.
But beyond just altruistic or emotional causes, global remittance transfer payments can also be effective in alleviating some of the pressure put on the governments of developing countries to bend to the will of larger governments seeking to gain political influence through capital spending and investments.
Case in point Mexico, which now takes in more annually from global remittances than it does in foreign direct investment from the United States, which some would argue has allowed it to push back harder against President Donald Trump’s demands that it pay the U.S. to build its border wall.
Traditional payment networks need updating
Because foreign transfer payments play such an important role not only in helping to fight global poverty but in accelerating the pace of socioeconomic development, its an issue that has been garnering increased attention among politicians in recent years, including the IMF, World Bank, and Canada’s own Liberal party.
Of particular interest to these politicians is the “slippage” in transaction costs that are being siphoned away from the intended recipient families and redirected towards the pockets of large financial intermediaries and middle-men collecting agent commissions.
According to the International Monetary Fund (IMF), for the type of smaller remittances which are typical of poor migrants sending funds overseas these fees often end up being equal to 10% of the money being remitted and in some cases can be as high as 15% or even 20%.
In order to address the problem, the IMF recommends that agents should charge their users a flat fee on transfers rather than fees that are based on a percentage of the principal value being sent.
This is a theory grounded in the fact that the cost of providing remittance services is not dependant on the amount of the principal being transferred and that underlying costs for these types of transactions is actually far below what is being charged to customers.
The IMF is also in support of encouraging greater competition in the marketplace which should only help to bring prices down.
In this respect, you could certainly make the case that cryptocurrencies and blockchain technology have already begun to step in and fill this void.
Mobile technology and blockchain is affording greater access to members of the under-banked population
Beyond being forced to pay exorbitant services fees on what should in theory be straightforward electronic bank transfers, another major concern facing the overseas migrant worker community and their families is the lack of access to traditional banking channels.
This is partly because many overseas workers don’t have the either the accumulation of savings that would justify opening an investment account, nor do they often have reliable credit histories.
As a result, many financial institutions (FI’s) simply come to the conclusion that these customers don’t justify the time and effort associated with the account opening process.
Yet without access to traditional banking services, these individuals are often left with no choice but to resort black markets and less developed channels which of course carry with them their own set of risks and uncertainties.
Thankfully however, more and more start-up ventures have been taking it upon themselves to target the opportunity of providing fintech services to world’s under-banked population.
For example, the Toast app, a blockchain-powered remittance service, has been successful in obtaining remittance licenses for the Hong Kong, Singapore, the United Kingdom and Philippines markets.
Toast asks its users to complete their transaction details online using the company’s app, complete with personal details and the necessary identification documents, at which point they then take their completed form to one of the company’s physical locations in order to execute the transfer.
The company says that using the Toast app usually takes less than 2 minutes – much less than it takes to send a money transfer using the channels – and at a fraction of the cost.
But not only is the service it offers faster and cheaper and cheaper for its users, but the company is also able to collect invaluable data on the spending and saving patterns of its users which it hopes to be able to leverage over time in providing additional financial services to its userbase.
Coins.ph meanwhile is another fintech company that has identified what it feels like has the potential to be a multi-billion dollar opportunity.
Focusing on the Filipino market, which is estimated to receive remittances upwards of US$26 billion annually, Coins.ph offers a mobile-first platform (also using blockchain technology) that allows its users to make bill payments, purchase airtime top-ups for their mobile devices in addition to giving users the ability to send and remit money overseas to family members and among friends.
Designed with the aim of providing a more seamless transaction experience for its users, Coins.ph already boasts more than 5 million users and a network of more than 33,000 vendor partners.
Mobile tech is also facilitating the remittance of cryptocurrencies abroad
In addition to giving its users the ability to make bill payments and transfer money among friends and family, Coins.ph also allows its users to be able to buy, sell and transfer the cryptocurrencies they purchase online in Canada including Bitcoin, Bitcoin Cash, Litecoin and Ethereum through their secure digital wallets. Investors looking to buy bitcoin in Canada in other ways can also use Coins.ph services to send value internationally.
Transferring funds between users via crypto wallets can not only save owners the time and hassle from having to travel back and forth from physical sites but can often be done more quickly and at a lower price point than traditional payment networks.
But while transferring funds to family members and friends by way of cryptocurrencies and blockchain technology certainly has its advantages it does carry new types of risks as well.
For example, prices of cryptocurrencies can from time to time exhibit extreme levels of volatility, which means that if owners aren’t careful, the dollar amount that they had intended to send a recipient may end up being much different than what their recipient ends up getting.
However Japanese-based fintech company Atom Solutions has set out to address just this risk.
The firm has devised its own proprietary technology EVOR (Equivalent Value Overseas Remittance System) that it says it hopes will advance the capability of international crypto remittance markets by decades.
Using the firm’s own multicurrency wallet, users are able to buy digital assets in their domestic currency while simultaneously converting the digital asset into the recipient’s local fiat currency, alleviating the potential pitfalls that could arise from large short-term deviations in the prices of crypto assets.
Challenges / Trends
Yet the truth remains that blockchain technology and cryptocurrencies still have a long way to go before they ascend to the throne of dominant channel of providing international remittance payments.
Despite the recent surge in popularity, cryptocurrency still sits in fourth place on the list of money-sending technologies, behind the likes of online services such as PayPal, money transfer services like Western Union and even behind wire transfers, ranking only a few percentage points ahead of gifting recipients prepaid debit and credit cards.
Yet there’s reason to believe that this is still a new trend and one that could figure to grow over time.
When asked, the reason most often cited in survey as to why respondents weren’t already using cryptocurrency to send money to other users was a lack of awareness and knowledge around the subject.
One would think that gap should narrow over time as cryptocurrencies continue to gain more widespread acceptance.
Implications of the potential for remittance payments on investors in crypto currencies
As Ravi Agrawal writes about in his 2018 book, “India Connected”, the smartphone is transforming our lives in ways that we have yet to completely comprehend.
This phenomenon meanwhile is particularly true of developing nations like India, Mexico, the Philippines and others, precisely the same markets where remittance payments play such a vital role in influencing social and economic decision-making.
In a world that is experiencing almost unprecedented technological innovation, interconnectedness and an urgency to undue generations of income and wealth inequality, it seems as though markets have created the ideal conditions to foster the growth and acceptance of blockchain technology and digital assets.
With fintech, mobile tech and the internet of things bringing us ever closer to our data, our desires and our wallets, its difficult to envision a scenario in ten years whereby blockchain technology and cryptocurrencies would be playing a smaller role than it does today domestically, internationally and everywhere in between.
If you are based in Canada, and looking to try using digital currency for remittance purposes, try Bitbuy Canada’s best cryptocurrency exchange.
For more interesting digital currency blog posts, visit The Bitbuy Blog.