Why Stablecoins? Part 2 - Sending Money Home
Approaching $700 billion in cross-border flows, according to World Bank data, the global remittance market presents an immediate use-case for stablecoin adoption. Remittances are funds that people working in foreign countries send back home to their family members. According to the Organisation for Economic Co-operation and Development (OECD), an intergovernmental group, there are some 266-million migrants living abroad today. Roughly 18.5 million of these migrants are refugees, who have been displaced by violence and economic distress.
Over three-quarters ($528 billion) of global remittances flowed to low-and-middle-income countries (LMICs) last year, a 10-percent increase from 2017. In developing nations, remittances often account for a significant share of local gross domestic product (GDP). The World Bank’s 2018 “Migration and Remittances” report identified 10 countries where remittances accounted for 19 percent or more of their GDP in 2017, with the Central Asian nation of Kyrgyztan leading the way at 35 percent.
According to the World Bank, the top-five remittance markets are India ($80 billion), China ($67 billion), Mexico/Phillipines ($34 billion each) and Egypt ($26 billion).
Despite steady remittance growth, the sector remains exploitative, with legacy money-transfer operators charging senders an average of 7.1 percent in remittance fees. For people sending money back to their relatives in Sub-Saharan Africa, fees creep up to 9 percent. Those percentages translate into fees of roughly $14 and $18, respectively, for every $200 sent back home. While these dollar amounts may not seem significant in the developed world, those micro-funds can mean the difference between starvation and survival in the developing world.
There are four primary factors driving high remittance fees:
- Anti-Money-Laundering (AML) regulations
- Remittance oligopolies
- Paper-intensive processes
- Correspondent banking dysfunctions
In the first case, post-9/11 AML regimes have forced remitters to implement bank-grade transaction monitoring systems (TMS) to keep track of every payment that flows through their platforms. Not only do money transfer operators (MTOs) have to invest heavily in IT systems, they also have to hire and train AML compliance staff to operate their TMS. These rules are in place to ensure that capital is not being repatriated by terrorist organizations and criminal groups. The fact that most LMICs overlap with so-called “high-risk jurisdictions,” where corruption, organized crime and terrorism are more entrenched, only aggravates the problem. Ultimately, the cost-intensiveness of transaction monitoring and suspicious activity reporting in riskier geographies is passed onto consumers in the form of higher fees.
Secondly, transaction-monitoring costs are so high, that only established MTOs like Western Union and MoneyGram have the resources to deploy and maintain compliant controls. And unlike smaller operators, these deep-rooted organizations have the capital base to survive high-dollar, regulatory enforcement actions and civil monetary penalties, in the event that they are found to be in violation of AML laws. Thus, costly AML compliance regimes preserve oligopolistic MTO market structures, while stifling competition from smaller operators and new entrants. Further raising barriers to entry for smaller MTOs, are exclusive partnerships between established operators and national post offices, which allow remitters to “charge higher fees to poorer customers dependent on post offices.”
The third driver of high remittance costs are the industry’s cash-and-paper-intensive legacy processes. Ninety percent of the remittance industry is still cash-based. Even today, the remittance-customer journey still revolves around face-to-face interactions with money-transfer agents at brick-and-mortar locations. Before their wads of cash are processed by remittance agents, consumers must manually fill out multiple paper forms, confirming their identity and the target destination of funds. While the logistics of moving money from point A to point B is not that expensive in and of itself, reconciling the documentation and compliance checks to deposit those funds into recipient bank accounts are a major cost center.
Correspondent banking dysfunctions are the fourth fee-catalyst in remittance markets. Correspondents banks are financial institutions that perform services on behalf of other institutions in foreign countries. In remittance transfers from developed nations to LMICs, money bounces through a web of complex correspondent networks, with multiple bank intermediaries charging a fee, before the funds reach the recipient’s or MTO’s bank account. Further complicating the equation is the de-risking trend, where financial institutions have shed their correspondent banking relationships with high-risk businesses and geographies, due to difficulties in vetting the integrity of underlying transactions.
While operational inefficiencies continue to cannibalize life-essential funding streams to the financially excluded, stablecoin technology may hold the key to a new global remittance ecosystem. Specifically, the tokenization of cross-border, money-transfer systems will help reduce transaction costs to levels that are more in line (or below) with the World Bank’s Sustainable Development Goal (SDG) of 3 percent, while bypassing the correspondent-banking fee frenzy.
Reserve envisions a scenario where financially excluded populations are able to transform their lack of access to traditional banking services into an advantage. Armed with nothing but a mobile phone and a 3G Internet connection, unbanked populations will be able to leapfrog geographic and regulatory barriers to financial inclusion, receiving payments via blockchain remittance apps that deposit funds directly into their mobile wallets.
However, instead of receiving volatile crypto-assets like bitcoin or ether, which can lose 30 percent of their value in less than a day, remittance recipients can mitigate exchange-rate uncertainty through stablecoins. Pegged to reliable fiat currencies, commodities or a combination of assets, stablecoins provide a safeguard against the downside volatility that has engulfed crypto-assets over the last year.
The global remittance market’s transition to stablecoin mechanisms of exchange will not happen overnight. But our team has spent time in Angola, Argentina, and Bogota (where there is a large population of Venezuelan refugees) speaking with the people who need these solutions the most. We’ve learned firsthand how oppressive these remittance fees are, and the extreme lengths that people can (and do) go through to get around these systems. And, most importantly, we learned that the people who need a cost-effective way to send money home to their families are desperate for a better way to do so.
At Reserve, we believe that a critical step in scaling prosperity to these developing economies is making it easier and more cost-effective for people to send money home to their families. And a stablecoin-based digital payment platform is the best way to enable this. Which is why - in addition to helping people protect their money - this is the second essential real-world problem that we’re tackling.
If the intersection between stablecoins and enabling people to send money home to their families sparks your interest, please join the conversation on Telegram.