There has been a massive increase of globalization of trade and migration in the recent decades. Most of these individuals living in foreign countries transfer billions of dollars to their home countries. This rate of transfer of money is likely to keep on growing at the rate of over 10 percentage per year. Majority of these transfers takes place from individuals from developing or under-developed countries that live and work in developed countries and send back the money that they earn to their families. This money is known remittances and is an important source of income for families that live in these poorer countries. The outflow and inflow of remittances reached a record high in the year of 2018 with over 529 billion dollars (about $1,600 per person in the US) of remittances flowing into developing or underdeveloped countries. This number was remarkably close to the Foreign Direct Investment (“FDI”) into these developing countries. Remittances are key to the economy and the general social welfare of people in the poorer countries. The remittance money is spent on health, education, investment and for other social causes. This money also helps to contribute towards the upliftment of the society as a whole by increasing income and opportunities across community, regional, and even national levels.
Excessive cost associated with the payment of remittances
Thus, on the outset it is clear that remittances are helping to change the world and improve the lives of the poor and those living in the developing countries. However, there is a major with the transfer of the money from developing countries. There is a cost attached to the sending of the coin to the desired destination. This cost is high, and it was estimated by the Word Bank that cost of sending an average of 200 USD was almost 5.6% of the remittance. This cost can be extremely high if the money received by the families in the poorer countries is taken into consideration. In the Caribbean, most of the countries depend significantly on remittances received from the United States, United Kingdom, and Canada. However, the high transfer cost of sending remittances have led the Caribbean emigrants living in the United States to look at informal channels to send the money. However, these informal channels reduce the amount of remittances received by families in the Caribbean and limits the ability of Caribbean households to save and spend the money.
Amongst the ones that cost the most as a method of payment for remittances include banks. Banks cost almost 11% of the remittance money as a fee for sending it as per data by the World Bank. The post offices were also quite expensive with fees of up to 7% for remittance transfers. These statistics clearly show that a significant amount of the money is taken away by the various channels that offer the transfer of money. Apart from the inflated costs, the transfer of remittances is also quite slow when they are sent through banks or post offices. Further, an additional drawback of sending the money via banks is that it requires the receiver to have a bank account. However, many individuals especially the ones that are extremely poor in the Caribbean countries do not have a bank account, which makes the transfer even harder. In the light of this, there has been a global need for a faster, cheaper, and more accessible mode of transfer of remittance with the use of modern technology.
Blockchain and how it is changing remittance payment
Given the drawbacks associated with the traditional methods of remittance payments, blockchain as a technology as really come in leaps and bounds in the recent years. Blockchain powered mobile wallets are way more accessible than traditional banking systems. These mobile wallets can be installed easily onto smart phones and they offer many functionalities including the power to make fast international money transfers.
Blockchain as a technology is quite advanced, offers faster rate of transfers with maximum security and it is based on the distributed ledger technology. The main advantage of making transfers through blockchain powered technology is that once the payment is made it is recorded and cannot be reversed or be tampered. This makes it very secure especially when it comes to Peer-to-Peer transfers (P2P).
In a blockchain technology when a sender initiates the payment, an information is sent the chain. On the basis of this payment information a digital block is formed and is distributed to the blockchain network. This block is then decoded by various computers and is then sent back to the network to be verified. After the verification process is completed, the transaction is put on the ledger and is complete after both the parties are informed about the completion. This technology was originally adopted for use only cryptocurrencies. However, its reliability and faster rate of transfer have made authorities in the United States to start looking at it as a legitimate method for transfer of money.
In a traditional method of remittance payment, there are intermediaries present who take up a lot of costs. This has been discussed above in the article and these intermediaries include banks or post offices. A blockchain removes these intermediaries and the transfer of money is automated, and the cost of transfer is reduced significantly. This helps the families and households in developing countries like those in the Caribbean to receive largest amount of money from emigrants in the United States.
The advancement of this technology and the increasing adoption and favorability towards the technology has helped to promote rapid innovation and has led to increasing number of start-ups and companies that are trying to offer blockchain based payment services. One such company is Everex. Everex allows global P2P transfer of money through tokens based on the Ethereum network called as stable coins. Everex has claimed that using its services would allow transfer of remittances 25 times faster than the traditional modes of payment. Stellar is another such platform which claims itself to be the open-source network for payments. Stellar is based on the blockchain technology but claims that it has no owner but is rather owned by the public. It is decentralized and runs very much like other blockchain platforms like Ethereum, but it also allows a user experience that is like cash payments and is more energy-efficient than other modes of blockchain payment systems.
Marino A. Marrero Baez - Lawyer
CEO - Mercantil Financial Group