Blockchain technology appears perfectly poised to bring innovation into an outmoded remittance industry. The platform offers a more secure way to store individual data, which in turn can minimize fraud and cut down on service fees and transaction time.
However, these exciting innovations are not necessarily great news for financial service providers. As we know, banks have gotten used to making a pretty penny charging customers to send or receive money. The Global Remittance Market Needs to Innovate
According to the World Bank, the global remittance industry
is worth $600 billion, of which $466 billion is money coming into low and middle-income regions like Central Asia, East Asia, Sub-Saharan Africa, Latin America, and the Caribbean. A lot of the financial service providers have been operating the same way for years, and are slow to take up blockchain because they see no reason to disrupt the status quo.
But they will have to innovative if they want to keep their customers. The total size of the industry is augmented by the service fees attached to wire transfers. Consider that sending $200 costs an additional 7.2%, while in the most expensive region (Sub-Saharan Africa) it costs 9.2%. This is much higher than the Sustainable Development Goal (SDG) target of 3% - and the causes appear to be embedded into the existing global financial system. As the Word Bank reports, the two main reasons for the higher cost in Sub-Saharan Africa are due to:
A single money transfer operator (which stifles competition)An agreement between national post office systems to keep prices from falling
We might also add that the cost of sending money via legacy payment systems is being pushed on the customer. Banks need to cut this cost out if they want to remain competitive in a blockchain-based financial services system - but issues do not end at cost. Other side-effects of the existing infrastructure include:
An average wait time of 3-5 daysExposure to fraud (especially in developing countries where IT security is weak)Issues around transparency
Clearly there is an incentive for a financial services company to leverage blockchain technology and offer a more affordable, efficient, and reliable money transfer service. Blockchain Will Underlie the Remittance Industry of the Future Blockchain
offers direct solutions to the most inefficient features of the remittance industry. Whether in the form of a cryptocurrency, or an established remittance company leveraging the blockchain for supply-side operations, the emergent technology provides the following benefits:
Standardization. A blockchain system has authority across borders, dependant only on the consensus of all participating members. This will remove regulatory barriers to money transfers.
Cost and Time Saving. No third party gatekeepers mean the cost of sending/receiving money is greatly reduced. Expense is limited to the transaction cost of the blockchain currency in question, whether it is Bitcoin, Ripple, Ethereum, other others. Also, although Bitcoin is experiencing some growing pains as it scales, cryptocurrencies will easily beat the 3 day wait time for wire transfers. An important distinction must be drawn here between cryptocurrency (which operates via blockchain) and blockchain (which can operate as a processing system without crypto). In both applications, blockchain promises to reduce transaction cost and time.
Data Security. The distributed ledger records every single transaction and encloses it in a secure hash that, in the case of Bitcoin at least, is incredibly laborious to break because of the 'Proof of Work' protocol. Browse our glossary of 50 Blockchain Terms to Know
for a re-fresh on industry terminology. Rounding It Up
It is an exciting time for the remittance industry. The old guard is falling out of fashion as technological innovation, in the form of a blockchain ledger, is poised to set a new standard for money transfers. A safer, faster, and more affordable infrastructure is set to emerge - the only question is whether it will come first from major players, emergent fintech startups, or cryptocurrencies. ABOUT THE AUTHOR Jim Barnish
is Co-Founder and General Partner of Morgan Hill Partners
, an innovative management consulting partner that helps startup to scale-up technology and tech-enabled clients innovate and grow through Strategy & Planning, Executive Leadership, Product Excellence and Revenue Creation
– delivering the right executive expertise
and strategic playbook, at the right time, for the right outcomes. Jim's 15+ years of experience as a strategic change leader
in global and integrated operations, sales, and marketing uniquely qualifies him to lead Morgan Hill Partners associate operations and affiliate partnerships. Over the course of Jim's career, he has successfully worked with companies undergoing accelerated business development, process improvement, change management and operational transformation initiatives. @jimbarnish