We live in a world where people are forced to leave their home and move to another country just so that their families can have a shot at decent living. Those migrants then have to pay anywhere between US$5 to US$95 just to send that money home and wait up to five days for it to reach the destination. The existing money transfer pathways leave much to be desired. This is why we will soon be witnesses of today’s remittance industry disrupted by crypto.
Understanding the Remittance Industry
Simply put remittances are money sent to support a family member living abroad. In a typical situation a migrant conducts money transfers to the country of origin. However, the opposite may be the case as well as with parents supporting children studying overseas.
Conventional remittance transfers involve the sender paying local currency to a Money Transfer Operator and the recipient collecting the transferred funds in the country of destination currency. This process involves certain transfer fees and can take up to 5 days to be finalized.
Remittance transfer prices result from transaction fees (percent or a fixed rate) and foreign exchange margins. Average remittance cost on a global level is 6.75% of the transferred amount, however, it varies by region. This amount ranges from under 4% for transfers made to Mexico, to over 8% for those to South Africa and China.
These high fees and slow processing times are a direct result of legacy technology involving a large number of intermediaries. A typical transaction involves engagement of three separate banking systems: a Sender, a Corresponder and a Receiver Bank, therefore it is no surprise that fees can reach almost a tenth of the sent amount.
Global remittance is a US$700 billion industry involving over one billion people either sending or receiving remittances worldwide. It is estimated that this figure could even reach a whopping US$1 trillion by the end of 2022. Western Union holds the largest market share, followed by Wise, MoneyGram, Ria and others.
Wave of Crypto Remittance in Latin America
According to the World Bank, US$100 billion or one seventh of the global remittance market is contributed by Latin America. This part of the world has seen significant growth in cryptocurrency remittances in the past few years. Lately, many money transfer platforms were unavailable to certain markets due to the Covid-19 pandemic, geopolitical conflicts and internal economic restrictions. Therefore, people were forced to find alternative money transfer channels and crypto was an obvious choice for some.
Western Union had suspended all U.S. dollar transfers to Cuba due to newly imposed sanctions by the United States in 2020. Venezuelan economy is encountering an inflation rate which makes volatile cryptos actually more stable than their own currency and they are not the only nation in Latin America facing hyperinflation.
El Salvador has even adopted Bitcoin as a legal tender in 2021. The president Nayib Bukele has specified high money transaction fees as one of the reasons for this move as a quarter of the country’s GDP comes from remittances. The same reason was listed by Alexander Höptner, the CEO of BitMEX, for at least five additional countries moving to accept Bitcoin as a legal tender by the end of 2022. All these circumstances have incentivized more people than ever to turn to crypto for remittances.
Could Crypto Remittance Replace Conventional Money Transfers?
Crypto remittances offer faster transactions and can come with much cheaper fees than traditional money transfers. Unfortunately, cryptocurrencies still present an obscure concept for the majority of people. For those less familiar with the crypto market, there are many articles and tutorials online covering anything from how to perform peer to peer (P2P) transactions to how to buy crypto if you are under 18.
For many, the synonym for crypto is Bitcoin. Sending Bitcoin is definitely one alternative of crypto remittances, however, transaction fees for Bitcoin transfer are unpredictable as they are determined on a per-byte basis instead of a percentage. According to Coindesk, an average Bitcoin transaction costs $23, though, patient users willing to wait for lower congestion can pay $9-$11 instead. For a person sending $200, this is costlier than using traditional money transfers.
These high costs incentivized other blockchain-based projects like Ripple, Stellar and BitPesa to focus on money transfer and consequently offer substantially lower fees for remittances than Bitcoin. Some startups today provide software for crypto remittances that require no understanding of cryptocurrencies from the users. In some countries, like Venezuela, you can even hire an agent to handle crypto fiat transfers for you, for commission, ofcourse. However, despite all these incentives most people still shy away from crypto remittances due to high technological barriers perceived to buy and convert it.
Remittance Crypto Unity
People are creatures of habit and realistically, for most it is difficult to learn and adapt to a completely new payment system. This is why the announced partnership between Stellar and MoneyGram is of such importance to all money transfer users. This is not the first such cooperation as MoneyGram was initially associated with Ripple on a similar project. However, once the SEC filed a regulatory lawsuit against Ripple, the partnership was terminated.
Stellar is a blockchain-based project that is aiming to connect institutions, payment systems and individuals on its platform. The goal is to provide cheaper, faster and more secure international transactions than the ones currently in place. Its mechanism allows the funds to be transferred instantaneously worldwide.
MoneyGram is one of the largest money transfer providers in the world servicing over two hundred countries.
This partnership is currently being piloted within the U.S. and should provide an easy on and off ramp for cryptocurrencies and cash. Since millions of people worldwide trust MoneyGram with their money transfers, it is safe to assume that we will witness a gradual shift from conventional to crypto based remittances in the future.
It is a fact that money transfers from one country to another are slow and expensive today and this is all due to a large number of intermediary parties and legacy technology used. This is why we will witness the remittance industry disrupted by crypto in the years to come. It will take time, however, the world remittance service as we know it will be a thing of the past.