The remittance market is mid-stream a complete transformation. It’s also heading towards being one of the most solid use case scenarios for blockchain technology. This market, which serves an estimated 244 million migrant people who leave their country to work and send money home to their families, is on a growth trajectory, making the case for cryptocurrencies even more compelling.
What are remittances?
Remittances generally entail payments that are sent home by workers who have moved abroad to find jobs. These workers support their families this way and sometimes prepare to bring more of their family members over with them. At the moment, the remittance market is booming and set to increase by ~23% over the next 5 to 6 years.
Costs for those sending and receiving remittances have lowered somewhat. At the same time, improvements in convenience via online payment platforms have made it easier for those sending and receiving a remittance.
On the other end, this market has long been a lucrative side business for banks, charging flat fees of up to $50 and taking 4-7 days to clear the electronic entry. Western Union took up the side business and grew it exponentially by opening kiosks across almost every post office and grocery store in the US alone, often charging even more than the banks.
In the past few decades, industry changes by way of payment technologies have benefited the banks to a greater extent than that of its remittance customers. Still, competition for financial institutions is much heavier with the proliferation of online remittance platforms, driving costs and forcing platforms to create aggressive and innovative marketing strategies.
Remittances, a little history
When we speak of remittances, we are referring to the digital market, as online payments have been crossing virtual borders since the emergence or internet payment technologies. Up until the last few years, these global payments were made in person mainly at banks and Western Union kiosks. Now, while the remittance market enjoys a vast infrastructure firmly entrenched within banks worldwide, online payment processors are ever taking a chunk of the business.
Challenger banks start taking market share
More and more we are seeing challenger banks offer online applications such as Paypal and Transferwise, taking on some of the remittance market share. We also have many websites that focus only on remittances to a specific country such as Monito, which processes payments for Mexicans from abroad, and Remit2India.
Across all these different providers of remittances, each has their own fee structure with different exchange rates and offerings as to which countries you can send to and from using their platform. They all use marketing tactics like coupons and specials to get you in the door and using their service.
Some offer free transfers if you want to connect their website to your online banking, but still the transaction can take up to 3-5 days. In fact, many of the paid remittance payment providers quote 2-5 days with plenty of reviews stating it took up to 7. Many of the online remittance platforms we researched advertised “zero transaction fees” but charged about 18-19% in exchange rates.
With a global remittance market set to reach $8.61 billion by 2025, regions that may see the most growth are North America, the Asia-Pacific, Europe and Latin America. The fees that users pay to send and receive remittances may vary by currency, amount sent/received, exchange rate, and country.
Why is the remittance market growing so fast?
High growth rates are expected over the next decade, at least according to a World Bank remittances report. In 2018, the market reached a record high $529 billion, almost 10% higher than the previous year. The biggest reason for the anticipated growth is the increased immigration rate of people in search of work and educational opportunities from developing countries to developed countries. Two major, accompanying forces are:
- A marked rise in mobile banking applications
- Increasingly higher mobile device penetration and internet usage
The countries that generally receive the most in annual remittance payments include India, China, Mexico, the Philippines and Egypt.
Update to India Remittance Market
Remittances in India alone increased over 10% to $16.3 billion in Q4 2019 (over Q3). Along with this significant, recent growth, the Supreme Court of India just removed a ban on cryptocurrency banking services. Since 2018, India’s central bank had prohibited virtual currency businesses from the ability to connect their business to a bank.
Bitcoin and other cryptocurrencies have increasingly come under the spotlight as an alternative within a faltering fiat economy. With oil markets and the Dow crashing, and the Coronavirus hugely impacting supply chains and world markets, the case for bitcoin as a safe haven continually comes to light. Could cryptocurrencies fuel a surge in India’s remittance industry, which now has legal access to the instant scalability and global reach of public blockchains?
Problems in the remittance market and bitcoin’s answers
Let’s take a good look at some of the major problems with remittances on the user end. After each problem, we’ll see how the most dominant cryptocurrency today, bitcoin, can offer a solution.
Cost to users is still too high
Even with many developments in internet payments and mobile apps, the costs of remittances continue to be more than it has to be for users. The average fee for remittances today across global banks is 11%, or $110 per $1000. Other fees and hidden costs may also be applicable.
Payment processing platforms often have complicated and semi-transparent terms of service, especially when it comes to fees. It’s not uncommon to see statements like:
- Your credit card company may charge a cash advance fee and interest charges.
- Fee and cost estimates apply to this online transaction at this time.
- Special corridor pricing, promotions, currency and other factors may cause receive amount to vary at different locations.
For instance, at MoneyGram, those that go in person with cash to send a remittance are charged $10 above and beyond the exchange fee. Other platforms average between 7 and 11% fees on the amount sent and received.
₿itcoin’s answer: It only costs pennies to send bitcoin peer to peer, or wallet to wallet.
Bank account still required
While 1.7 billion people worldwide do not have a bank account, at the same time, some of the newest online platforms still require you to have one to use their service. As for unbanked people, they often face higher fees and more inconvenience when using services that accept those without an account.
₿itcoin’s answer: You can set up a bitcoin wallet in minutes for no charge and with zero verification process. (However, you will most likely need a bank account if you want to exchange the bitcoin into your country’s fiat.)
Usually, you have at least three 3rd parties involved with each remittance transaction: a sending bank, the payment processor, and the receiving bank. Often, intermediary banks are also in the picture. All of them receive a fee for each transaction.
₿itcoin’s answer: 3rd parties are not required. So more of the money (bitcoin) sent is actually received.
Lack of financial privacy
Each of the middlemen requires identity verification and while banks and money transmitters are tasked with keeping your money secure, laws do not compel them to keep uphold your data privacy as you may wish. In fact, the entire banking industry uses their customer’s data in a similar way to how Facebook uses our feeds for profit. They share the data of their customers with their partners and others for purposes of offering you better services. Customer data legally belongs to the banks.
₿itcoin’s answer: While law enforcement agencies can track some blockchains for payment a wallet movements, the only info available is transactional. So the amount of your transactions and the date are public on the blockchain explorer.
Additional security measures that ensure the freedom and privacy to transact are popular developments in the blockchain realm, such as with Coinjoin second generation privacy coins including DAPS Project and NIX Platform
Takes too long
Once you’ve experienced a wallet to wallet (or peer to peer) transfer with cryptocurrency, you can really see how unnecessary it is for a transaction to take 5 business days.
₿itcoin’s answer: When you transfer bitcoin from one wallet to another, it takes minutes.
Because banks, online services and payment processors like Venmo and Paypal are centralized companies, they have a single point of failure. This means if their server is down, all users are out of luck. It also creates an attractive target for hackers.
₿itcoin’s answer: Because bitcoin is decentralized, its servers are in the thousands and distributed across the globe. On top of that, it’s immutable, meaning the data can not be changed or altered without changing every transaction on the blockchain since its inception. It would not be financially feasible to hack it. The entire protocol uses game theory and incentivization so that users benefit from using the system correctly and without harming the network.
Downsides to using cryptocurrencies for remittances
With the crypto market being in its nascent stages, naturally there are some associated downsides:
- Some countries have bans on using crypto.
- Regulations are in a gray area at the moment. Some people many not feel comfortable without full knowledge of how these currencies will play out in future laws.
- Scam artists, because of the lack of regulations, are abundant. As such, new people coming into the crypto market can learn the ropes on sites that provide educational resources, like HedgeTrade. Additionally, digital literacy is becoming more and more important in protecting those that use crypto service providers.
- A bit of technical know how is necessary. Or at least a willingness to learn. That’s because crypto is in its early stages and with time, it will become a more user-friendly place.
- When you want to cash in your cryptocurrencies for fiat or transfer an amount to your bank account, you’ll need to adhere to all banking verification processes, fees, wait times and regulations.
- Merchants do not accept bitcoin as payment in a broad sense. So it is harder to spend your money than with fiat at this time.
The main deterrence to using bitcoin for remittances
While you can use bitcoin to buy many things, it simply doesn’t yet have the wide acceptance that fiat enjoys. However, bitcoin can be used for many things, such as hodling it as a savings. With its popularity growing worldwide, especially in economically volatile regions, more people are finding ways to use it every day.
As far as buying bitcoin, people at this time can use exchanges or ATM machines, both of which will charge exchange rates. Sometimes, bitcoin enthusiast gift a little BTC to a friend or newcomer to the space to get them started.
There are also a few ways to earn bitcoin and other cryptos, too. The idea is that once bitcoin and other cryptos take hold (because of all the benefits they provide), ways to purchase and use the coins will get easier and more mainstream. And as this happens, fee-charging 3rd parties are simply no longer necessary.
Blockchain projects disrupting the remittances market
We’ve covered how bitcoin can solve the problems inherent in today’s remittance market. But what about some other crypto innovations? Let’s take a look at a few:
The OmiseGo Network is a blockchain-based project centered on creating a new kind of banking and payments infrastructure. Built on the Ethereum platform and having its own cryptocurrency, OMG, this tech company’s main mission is to improve lives and ‘bank the unbanked’. They aim to do so with a decentralized blockchain infrastructure that offers higher security along with reduced costs and quicker transfers. Read more about their Plasma blockchain, which they’re building to disrupt the payments and remittances markets, in their white paper.
Odyssey Financial Group – MoneyFi
Singapore-based Odyssey Financial Group is partnering with Moonwhale Ventures to create a new remittance platform that uses a hybrid blockchain-ATM model, called MoneyFi. The goal of the MoneyFi app will be to provide multi crypto capabilities in a wallet that converts currencies for remittances.
Their goal is to reduce fees and waiting times for their customers, which are primarily in the US, Argentina, Spain, and Italy. They have 1000 vending machines and 600+ ATMs that are hooked up to their Octagon Blockchain Network. Additionally, they plan to install 4000 more ATMs in the near future. All of them will enable bitcoin, Ethereum and Litecoin transactions to start.
EthaRemit.org claims to be the first decentralized remittance platform that allows crypto to fiat transfers. They want to enable people worldwide to use crypto to send fiat to other countries. Their interoperable blockchain platform will accept and convert multiple cryptocurrencies.
Even Western Union is experimenting with blockchain to reduce overall costs for the bank and its users. However, customers must go through the same bank verification process and have a bank account. Also, they still pay transfer and exchange fees, although the transfers are faster and said to be more convenient than with their previous system.
Increasing financial inclusion
This is one example where people new to the crypto space can clearly see the benefits to blockchain technology. It’s a use case that helps people and it makes sense.
Many people may have to shake themselves a bit from the gridlock of banking regulations that we are all used to. But the benefits of bitcoin and other cryptocurrencies are obvious, very notably in the remittance market. It will not take long for migrant workers to move to blockchain systems when the advantages are so clear and the technology is so unbreakable and available.