Sending money home is most expensive for those who have the least
Stagnating economies and regional conflicts have a tendency to urge workers to find opportunities abroad, at an increasing rate. With the rise of migration, the amount of remittances to developing countries have rapidly grown. The definition for remittance is: “transmittal of money (as to a distant place)”. In the case of this article, it is specifically referring to money transferred by a foreign worker to an individual in their home country.
In 2017, it was reported that there are approximately 258 million migrants globally, and this number has been growing between 2–3% per year. The United Nations reports that 64% of international migrants live in high-income countries; countries that have experienced far greater growth in migration than other countries. More than 60% of migrant populations live in Asia or Europe.
According to the World Bank remittances sent to developing countries amounted to approximately $444 billion in 2017, which grew by 3.3% from the previous year. By the end of 2018, it is expected to reach $485 billion. Staggeringly, the global remittance market is estimated to be $642 billion in 2018.
Another surprising fact is that remittances account for a large share of certain nations’ GDP — Nepal (28%), Tajikistan (42%), Armenia (21%), Moldova (25%), and the list goes on.
The global remittance market is expected to grow in the future due to increasing international migration population, decreasing remittance costs, increasing disposable income, improving economic growth, growing refugees population and growing urbanization. Source: Global Remittance Market: Industry Analysis & Outlook (2018–2022)
So how much does it cost for these remittances?
For many years businesses like WesternUnion and MoneyGram have held a duopoly on the remittance market. Being the most established, they also have been able to charge high fees for transferring money — this is largely due to the vast network of physical locations that enable customers to send/pick up cash. For many countries that lack proper digital infrastructure the natural way of thinking is the ”cash is king” way.
The global average for the cost of a cross-border transaction has been brought down to approximately 7.13%, which is an overall decline of 2.54% since 2009. In 2014 the G20 National Remittance plan was to reduce the global average of remittance costs to 3% by 2030. Yet, that may be easier for some nations to achieve than others. For example, South Africa (one of the G20 participants) has remittance costs as high as 17.13%.
However, how come Western Union boasts low fees? For one, the hidden fees are tied into the exchange rates at their kiosks. In all actuality, looking at the difference in value that is transferred through their networks, there is a clear disparity between what goes in and what comes out. They can buy currency at the market price, although for foreign exchange, oftentimes they can add up to 4% on the exchange margins, resulting in more expensive transactions. There is also the issue of added costs if using a credit/debit card, which can multiply the fee many times over.
Furthermore the lack of proper competition in the space has not threatened their business models enough to provoke a decrease in fee structuring. Finally, having to deal with complex issues like local monetary policy has kept competitors away, as regional regulation and anti-money laundering laws can quickly become a headache for the unprepared.
The call for digital disruption
It seems that the music may be slowing for these behemoths of remittances. With massive leaps in technological developments, scores of fintech companies seek to challenge the titans of international payments. Everything from cryptocurrencies to e-money issuers are appearing in droves to capture shares in a highly lucrative market. Most are proposing low transaction fees that are made possible by improved technology, as well as added security and quick transfers of value, although without sacrifice.
For example, businesses seeking to utilize Blockchain technology for cross-border payments are often well aware that the cost of on-chain transactions typically are quite high. The technology is still not mature in the sense that scalable and cheap blockchains have not been perfected… yet. While players like Ripple claim that their bank-centric technology is ideal for cross-border settlements, the cost of conducting a transfer is nowhere near where it needs to be to prove optimal cost levels. At the same time, blockchain technology is still in the early years and the argument for mainstream adoption of cryptocurrencies and blockchain as a means of international payment may be a ways off.
Emerging companies, like TransferWise or WorldRemit, offer low-cost transactions and are particularly attractive for non-SEPA transfers. SEPA (Single Euro Payments Area) transactions are oftentimes just as cheap to conduct through standard bank transfers — however when looking at the volume of remittance payments, the vast majority of transfers are going to developing countries, where bank transfers will inevitably be quite expensive.
Overall, the incumbent remittance payments giants need competitors in this space, which could be made more efficient by emerging technology due to lowered costs for cross-border transactions and near-instantaneous transactions. Yet the challenge of altering user behavior remains, as was pointed out in a special report by The Economist:
“…finance is a notoriously sticky business. Just as few people move their bank accounts, so customers are reluctant to forsake a money-transfer system that has worked for them, even if it charges steep fees.”
It appears that the “big guys” like Western Union are not even slightly nervous, as they have the edge of being a recognizable brand and are firmly accepted in terms of local user behavior and regulations. However, being so ingrained and comfortable in the world of remittances may prove to be dangerous when dealing with rapidly evolving technology, which could dramatically challenge the business models of those on top.
In recent years, stablecoin technology has seen a rapid rise in intellectual debates. While the benefits of cryptocurrencies may be numerous, the issues of volatility, scalability, user experience and lack of regulatory oversight may be the biggest inhibitor of mainstream adoption. Check out this article for a glance into the differences between various stable coin concepts.
Stablecoins are crypto-assets that maintain a stable value against a target price (e.g. USD).
There are many use-cases for where stablecoins could provide efficiencies like remittances, salaries, wealth management, trading, lending, store of value, etc. By combining the advantages of blockchain with the trust and stability of traditional fiat currencies, we see the creation of stablecoins.
The issue of high fees for remittances may well be solved by stablecoins, provided that the user experience involved can rival that of existing players in the market. Furthermore, once a trusted, digital ecosystem for moving value (or ownership of value) is established, countless industries and individuals can build platforms upon it.
As blockchain technology matures, it’s likely that we will see free consumer cross-border money transfers becoming a global standard — the challenge is naturally to alter user behaviour. By providing incentives and seamless user experience, stablecoins could potentially become the new model for the transfer of value. Essentially, cryptocurrencies combined with trusted fiat values in a regulated manner — stablecoins — are in it for the long run.