The Blockchain Effect on the International Remittance Market

Is the overseas money transfer market already experiencing a blockchain effect? Brad Garlinghouse, Ripple’s CEO, recently announced that three leading international remittance companies are in the process of putting the company’s blockchain technology through a testing phase. The first to start was MoneyGram, and next in line was Western Union.  Incidentally, Ripple (XRP), the cryptocurrency, was the highest gainer among all global currencies in 2017.

Banks don’t want to be left far behind, with a report suggesting that they are using blockchain technology to come up with a real-time global network. Itau Unibanco Holding SA, Latin America’s biggest bank by market value, plans to start using Ripple’s blockchain technology soon, as does India’s IndusInd Bank. Crédit Agricole, a French bank, has already put the technology through a test phase.

 

Changes in Recent Times

The overseas money transfer market was predominantly the domain of banks and a few high street brokers until a couple of decades ago. This changed with the arrival of several FinTech companies that leveraged technology to make overseas fund transfers quicker and more cost-effective. Some of the leading players who helped changed the landscape include WorldFirst, TransferWise, CurrencyFair, and OFX.

 

The number of people travelling to foreign shores for work has increased considerably since the turn of the last century. Consequently, so have cross-border remittances. Data released by the Pew Research Centre suggests that remittances by migrants to their home countries have increased by around 300% since 2000. In 2016, migrants from different parts of the world sent over U.S. $570 billion to their home countries.

 

Blockchain Benefits

Blockchain technology holds the promise to make some positive changes in the world of overseas money transfers.

  • The cost factor. According to World Bank, overseas money transfers attract an average of 7% as fees.  The average cost of using a bank’s service is almost 11% whereas it is 5.3% if you turn to a FinTech money transfer company. What’s interesting to note is that transfers carried out by the FinTech companies still rely on banks on both ends of their transactions. Blockchain holds the potential to eliminate banks from the process, which can lead to further reduction in costs.
  • The time factor. When you carry out an overseas money transfer to a bank account, even through the top FinTech companies, it may still take days to process. However, transfers carried out using blockchain can go through in real time.
  • Enhanced security. Blockchain can make overseas funds transfers more secure. Banks and money transfer companies operate in a centralized manner, which makes their systems vulnerable to cyber attacks. Blockchain, on the other hand, is completely decentralized. Each transaction carried out using this technology comes with its own unique entry in a digital ledger that is impossible to fudge.
  • Increased Accessibility. There are several parts of Africa, Asia, and South America where people have easier access to mobile phones than conventional banking systems. By going the mobile payments route, blockchain holds the potential to make overseas money transfers easily accessible in areas that remain under-banked.

 

Probable Shortcomings

While there are shortcomings in how blockchain technology is put to use in the current day scenario, these should be effectively addressed with the passing of time.

  • Learning curve. For anyone new to the world of cryptocurrencies, cash- and card-based transactions are way easier to understand. In addition, while you can find companies that carry out transfers in fiat currencies by using a cryptocurrency as a go-between, the process becomes more cost effective if you do it on your own.
  • Currency conversion happens twice. A cryptocurrency transfer in today’s world might expose you to currency conversion twice.  For instance, say you want to transfer a cryptocurrency from Germany to the U.S. You will first need to purchase the cryptocurrency using euros, and the recipient will then have to exchange the transferred cryptocurrency for U.S. dollars. This is not so much a problem if the sender and the recipient use the same cryptocurrency, and it should not remain a concern when the use of cryptocurrencies becomes more prevalent.
  • Speed. An overseas cryptocurrency transfer can go through almost straight away, although this depends on whether you are carrying out the transfer on your own or using a service provider. An existing downside is when a fiat currency is involved at either end of the transfer. In such a scenario, a banking institution becomes involved in the process, thereby adding to its processing time.

 

Conclusion

The collaboration between Ripple and some of the top overseas money transfer companies goes to show that blockchain holds promise. However, we have to wait and watch to determine if the technology will take the industry by storm, or if its effect will limit to a ripple.