Overcoming barriers to remittances using Blockchain
Remittance is a booming industry that contributes to many countries economies. According to World Bank, one in every seven people in the world are involved with remittances either as senders or recipients. Despite the financial output, migrants bring to their home countries, the challenges of sending funds face a lot of hindrances.
What is a remittance?
This is money or goods sent by migrants to family and friends in their origin countries. An example is if we said you moved to Canada to work as a nurse. The purpose of leaving is to look for a better life, leaving behind your family and friends with a promise to send them money. According to theWorld Bank, migrant workers send an average of $200 to $300 to their home countries every month or two, representing only 15% of what they earn. The money they send can make up to 60% of a household’s total income, supporting millions of families.
The growing industry
As of 2021, International Monetary Fund (IMF) puts global remittance at $597 billion, and it is projected to reach $630 billion in 2022. This comes from the over 200 million immigrants across the world sending remittances to over 70 countries around the world. The receiving countries rely on remittance for more than 4% of their GDP. It is also noted that about 75% of remittances are used for medical expenses, food, school fees, and housing expenses.
The role of migrants through remittances cannot be overlooked. Through remittances, they promote sustainable development goals such as ending poverty, good health, good education, reduced inequality, clean water, and sanitation among others.
Despite their contribution to the socio-economic development of a country, migrant workers face a myriad of challenges in sending remittances. To understand this, let’s look at the traditional way of sending remittances.
A traditional approach to remittance
There are a couple of ways one can send money across borders such as electronic payment systems, cheques, mail, and wire transfers. You could opt to send money using a bank through a wire transfer which will convert it into foreign currency or open an account with companies that specialize in sending money such as MoneyGram, PayPal, or Western Union.
International wire transfers are done using the SWIFT network which allows money to travel between banks internationally. Every bank has a unique identifier code to ensure the accuracy of the recipient. With swift, funds don’t directly move to the main destination but rather to two or three intermediary banks that charge a fee. A transfer can take 1 to 5 business days. In order to receive these funds, one requires a bank account.
An alternative is the use of a Money Transfer Operator (MTO) offered by money transfer service providers. These financial institutions engage in cross-border transactions using internal systems or access to another cross-border network. The sender goes to the local agent and provides the money to be sent together with the fees and provides the transaction information such as name, address and the recipient’s name, and the transaction amount. The agents perform checks to ensure that the money is legal and forwards the information to the MTO. They then send the agent a unique transaction identifier to the money sender who will give it to the recipient. Funds will be transferred from the local agent to the MTO. The recipient of the money will go to the disbursing agent, provide the unique transaction identifier and the agent will transmit the identifier to MTO, and once approved, they receive their money.
Here is the problem
- It is an expensive affair.
According to World Bank, the average cost of sending $200 is 6% with Sub-Saharan Africa at 7.8%. Wiring money incurs charges such as withdrawal, deposit, and transfer MTOs incur the service charges. These fees depend on the amount you are transferring. Converting the money into the local currency also costs money that will be shouldered by the sender. According to the World Bank, if the cost of sending remittance is reduced by 5% of the value sent, remittance recipients would receive $16 billion more each year.
2. This takes too much time
.Wire transfer takes 1–5 business days as for MTOs, the duration depends on the agreement between the agent and MTO. Same-day transfers are possible but with additional fees. Migrants are faced with the dilemma of sending money faster but at an extra expense or using the normal process that takes a lengthier time.
3. Requires a bank account
Wire transfers require recipients to have a bank account. This can be a challenge in Africa as 57% of Africans do not have access to a bank account or internet access. It is approximated that $49 billion of remittance is sent to Africa. Wiring of funds locks out a majority of remittance recipients from accessing funds
4. It is very inconvenient
In the traditional approach, the sender and recipient have to physically go to a bank or an agent to send or receive the money. This also means they operate during business hours and on official working days. If one needs to send or receive money, they have to avail themselves at the convenience of the bank or agent. This is a challenge in Africa because the majority of the recipient of remittance live in rural areas and access to services such as banks or agents are a distance away from where they live. This means they have to deal with the inconvenience of distance and expense of transport to get to the banks and agents. They also need to avail themselves within the operating hours of the banks and agents.
A Blockchain solution
Then comes blockchain technology whose use goes beyond Bitcoin and cryptocurrency. It has the ability to create more transparency and fairness all while saving the business time and money.
- It is very cheap
Sending remittance using the blockchain in the form of stablecoins or cryptocurrency is very cheap. This is because blockchain technology eliminates the middlemen who profit from the transaction fees. Migrants can send money to their families from their blockchain wallet directly to their families’ blockchain wallet. This is because transactions are peer-to-peer rather than business-to-business.
According to a pilot done by Mercy Corps Venture, Appen and Kotani Pay on cross-border payment of gig workers in Kenya, cryptocurrency payments cut down transaction fees by 93% regardless of the size of the payments
- It is very fast
Unlike traditional remittances, sending money using blockchain is very fast. By removing the middlemen and transacting from one person to another, transactions are direct and fast. All that is required is the recipients’ wallet address. The transaction is fast because its all happening on the blockchain network.
A use case of this is when Dr. Florian, based in Germany, wanted to send some money to Madam Prossy in Kisii, Kenya. Traditionally, it would take 3 to 5 days for Madam Prossy to receive the funds at the MTO. Using Kotani Pay, Dr. Felurian sent $1000 from Germany using his wallet address to Madam Frossy’s Kotani Pay address in seconds and was able to off-ramp to her mobile money in minutes. A three-day transaction that was reduced to minutes.
- It is very convenient/flexible
The beauty of blockchain technology is that it’s constantly growing and evolving and more people are building into it. A peer-to-peer transaction removes the inconvenience of movement, accessibility, and additional expenses. Recipients are able to receive the money directly to their mobile phones and withdraw from their local mobile money agents. One does not require a bank account or in Kotani Pay’s case, an internet connection to access these funds. Also, the sender can send money any day or time without fear of being locked out. The recipient can choose to withdraw their funds at any day or time without the fear of expired time.
With Kotani Pay, a sender can send money to their families living in the rural areas, regardless of the phone they use. Using the USSD code, recipients can access their blockchain wallet and off-ramp directly to their mobile money and withdraw to fiat at the local mobile money agent. For Madam Prossy who lives a distance away from the nearest town, she was able to receive her funds directly to her phone and withdraw at the nearest mobile money agent.
Blockchain technology improves transparency and accountability. When using traditional remittance, a sender has no control of their funds once they give the bank or the MTO their funds. Any additional expenses or services are hidden from them. Blockchain technology operates as an open ledger where the sender can track every transaction they have done. This gives the sender a sense of power and control of how their money is stored and its movement.
This is seen when NGOs such as Impact Market send Universal Basic Income (UBI) to refugees in Ghana. The funds are transferred from Impact Market directly to the recipients. The donors can track all the records of transactions thus building more trust in the organization.
However many benefits and solutions blockchain brings to the remittance industry, the greatest barrier is cryptocurrency restriction in many African countries. The cryptocurrency ban means that migrants may have the means to send the remittance in a faster, easier, and cheaper way but the recipient faces the challenge of receiving the money. As the blockchain industry continues to evolve, a common hope is for more crypto adoption across the world.