What is a remittance?
The word remittance literally means money transferred between two parties. The transfer of money by migrants to their home country is called migrant or workers’ remittances.
It can be cash or goods
- Financial support to the family
- Medical treatment
- Educational fees
Why is it important?
Remittance is critical for low & middle-income countries. The remittances to these countries is expected to reach $630 billion by the end of 2022. It represents the largest foreign income for many countries. Basic needs such as food, sanitation, health services, and education depend on the money received as remittances.
It helps alleviate poverty in developing nations because of its direct nature compared to foreign aid.
“A 10% increase in remittance is associated with a 0.66% permanent increase in GDP” (Source)
Challenges with remittances
The biggest challenge with remittance is the cost associated with it. The current average cost to send $200 is 6%.
The United Nations Sustainable Development Goals want to bring down the cost to 3% by 2030. And SDGs aim to make the fees less than 5% across all corridors.
(image source: worldbank)
Banks remain the most expensive type of service provider, with an average cost of 10.92%. Although the rates are better for MTOs like Moneygram or Western Union, compared to banks, there is fees associated with each intermediary. Sender pays a fee to the MTO. MTO pays for the payment network (for using SWIFT or managing its internal network).
In global payments, the widely used currencies are USD & Euro. So transfers between developed countries are cheaper & faster than transfers between a developed country and a developing one.
This is a disadvantage for emerging countries that need cheaper transfers.
Avg costs by regions (image source: worldbank)
In Q2 2022, The region with the least cost to receive is South Asia at an average cost of 4.05% and the highest cost is SubSaharan Africa at 7.84%.
Remittances with fiat have around Four intermediaries.
For example, if someone wants to send money back home via operators, they need to reach out to an MTO Agent, who then delivers the funds & required information to the Operator. The operator then transfers the funds to their partner in the recipient country. The partner then processes it and gives it to the Agent, who in turn finally gives it to the recipient.
The involvement of so many intermediaries makes the process slow.
(Source: coinbase research)
Now if operators have so many intermediaries & they are slow why do people still use them?
That is because a lot of people still remain unbanked and they use cash for their needs. Covid did shift some cash to digital transactions, but cash still rules. (source)
Even in developing economies where digital transformation is in place like India & Mexico, there is a lot of demand for cash transactions. In Mexico, cash payments continue to rise and are expected to be ~81.5% of transactions by 2025.
Cash is not the only problem in Mexico. Even if cash is provided, another challenge pops up. The location of these players is far off from the rural places. So it is difficult for a local to access it. There are instances where people get robbed near the operator’s branches once they collect their remittances.
Lack of transparency
There are lots of hidden costs in the fees charged by the service providers. Senders often do not realize about the higher costs they are paying to send the money. Only a very few players quote the mid-market price.
Another issue apart from the hidden cost is misleading claims about the speed of transfer.
Moneygram deliberately slowed down online transfers during the covid lockdown. A time when people needed money the most and speed was critical.
It was not just during covid, but they have been deliberately doing slow remittance transfers since 2014 and it got worse in covid-19 crisis. For immediate transfers these companies preferred cash. For transfers using a debit card, the sender’s account was debited instantly while the transfer to the other country’s bank was made after ~4 days. They misled the customer saying the problem was with the recipient bank’s end but on tracking it shows that the recipient bank received the amount after 4 days of being debited from the sender. (Source)
How does Crypto help?
The key factors which make crypto an attractive option are
- Less cost
- Accessible for everyone without discrimination
- 24×7 Availability
- Can work on mobile
The main challenge with using crypto is its volatility. But Stablecoins are a good solution for this volatility. One of the most popular stablecoins being used for remittances is USDC. It is backed by USD and it has Partnerships with the Visa network.
A SWIFT bank transfer between two developed nations may take a day or two, but for it to a rural place in India, it could take almost a week. This is where transactions with cryptocurrency which are much faster and cheaper can be of help.
Making remittances affordable
“Lowering remittance fees by 2 percentage points would potentially translate to $12 billion of annual savings for international migrants from LMICs” – Dr Dilip Ratha, Head Knomad
In reducing the costs, Crypto helps senders-receivers as well as the operators. Those who are unbanked can also receive money. While the operators do not need parties to have bank accounts, the sender & recipient have to queue up for availing of the services of the operator making it a high indirect cost with the time lost and added inconvenience.
Using crypto helps the operator save settlement time. When someone sends money from one country, the recipient in the other country can immediately collect it from the branch. But the money is not moved from the Moneygram account to the receiving country instantly.
With crypto the movement of money is instant. Instant settlement is a major benefit for organisations. There is increased transparency & accounting convenience
The process becomes fairly simple with crypto.
(Source: coinbase research)
Right now there isn’t much scope to use directly from a wallet, so people are mostly off-ramping. But once the acceptance of crypto increases for everyday transactions, people can choose to keep it in the wallet and spend directly from the wallet.
The Ukraine war has put crypto for remittance in the spotlight. With traditional routes being shut, citizens of Ukraine adopted crypto for their needs.
A not so good headline to wake up to in a war-torn country.
Not just individuals, the Ukrainian government also adopted crypto, The Ukrainian government along with an NGO (providing support to the military) raised $63.8 million through crypto.
Crypto Remittance Landscape
Over 100 remittance companies and banks are using crypto to make remittances faster, cheaper & secure. Crypto exchanges like Coinbase & Binance also have products for remittances.
Traditional Players embracing crypto
Moneygram is a traditional Money Transfer Operator. It is using crypto along with its traditional offerings to provide enhanced service to its customer. It has partnered with Stellar to facilitate transactions. Stellar will support real-time transfers in USDC and an option to payout in local currency.
It is another traditional player which has a partnership with a crypto firm or network.
It has partnered with Coins.ph to serve Philippines, customers. Customers get mobile wallets where they can hold and spend both local and cryptocurrencies. The partnership aims to make receiving cash remittances easy.
Partnerships of operators with Ripple
Ripple has partnered with traditional players like Azimo (Europe), iRemit (Philippines), Nium (APAC), Modulr (Europe), Santander (Europe), TransferGo (UK), Sentbe (Southeast Asia), Xendpay (UK), MercuryFX (Europe) for enabling them for crypto remittances.
There are many corridors of two countries where the remittances are large in number. Ripple has been powering a lot of these corridors.
|Japan & Thailand
|SBI Remit – largest money transfer provider in Japan & SCB – Siam Commercial Bank of Thailand. Thai nationals in Japan can send money back home. They send JPY using SBI Remit’s ATMs and the recipient receives THB. Now this is done in seconds which earlier used to need the help of an agent for cashing out.
|Malaysia & Bangladesh
|Partnership between the National Bank of Egypt (NBE) & LuLu International Exchange of UAE
|South Korea & Thailand
|GME (Global Money Express) remittance, one of the largest South Korean remittance firms & Siam Commercial Bank, Thailand’s largest bank have tied up.
|UAE to Egypt
|Partnership between National Bank of Egypt (NBE) & LuLu International Exchange of UAE
|Cambodia & Vietnam
|Joint Venture between Ripple & SBI Holdings
Crypto Native Players
Coinbase has started a pilot in Mexico for its remittance product. Customers in the USA are sending crypto to Mexico. The most frequently sent crypto asset is Bitcoin followed by USDC.
The recipient can hold the assets in Coinbase if they want, instead of cashing out. But ~70% of the recipients cash out to pesos. The cash-out process is convenient for the recipient. Coinbase enables customers in Mexico to cash out their crypto in pesos. People in Mexico can cash out at over 30k locations like Walmart. For the cash-out services, Coinbase has tied up with Remitly. (source)
The sending process is also easy. One can get started with just the email or phone number of the recipient.
Binance is offering gift cards on its platform which can be used for remittances.
It is an accessible way for the majority of people. They can use it to send it to their loved ones. The recipient doesn’t have to be a binance user.
Binance also offers physical gift cards in Ghana & Lebanon.
Bitso is the largest crypto exchange of Mexico. Mexico received 51.6b USD (2021) and almost 95% of it was from the USA. Bitso aims to capture 10% of the market.
Bitso has partnered with Circle to allow converting dollars to stablecoins and then sending them to Mexico and changing them to Mexican pesos. The charges are $12 for $1000, which comes to 1.2%
It is a Nigeria-based crypto exchange.
Nigerians can send remittances to their families. The funds are converted to a token “NGNT” backed by the native currency of Nigeria, Naira. The funds are transferred to the Nigerian bank accounts of the recipients.
It is powered by Stellar network
Another platform focussing on the African region. The sender can send remittances from the USA to 16 African countries
It currently supports Bitcoin, Ethereum, USDT
Gaps & Opportunities
People love cash
The web3 use case of remittance, a couple of years old. But off-ramping is still an issue. For the end user, it is a hassle as long as they are not able to off-ramp it to their local currency.
In countries like India and Mexico even though digitization is in progress, people primarily run on cash. So if the offering doesn’t convert the crypto to the native fiat, then people may find it restrictive and need to take the help of banks or operators for remittance.
Crypto ATMs can be a solution.
It can replace the traditional operator kiosks. Instead of handing over cash to the operator agent, the sender can directly send using the Crypto ATMs available. The crypto ATMs connect to the user’s wallet eliminating the need for a bank account.
Poor User Experience
There has been a significant increase in the adoption of crypto in the last few years, but the UX friction is a deterrent in mass adoption.
There is a lot of apprehension in using crypto products by people who are not tech-savvy. The remittance products should be built in such a way that people should feel familiarity. The interfaces & processes should be simple so that it can be done without needing anyone’s help.
Cryptocurrencies are often associated with negative effects for the government. They are viewed as a threat to government-imposed capital controls. They are assumed to be used for criminal activities because of the absence of central authority & regulation.
There are Countries which may have clear regulations related to crypto or they may be against it or there can be an ambiguous stance.
A comparison of the biggest remittance markets in the world. Source: (FXC Intelligence Analysis)
Top 10 sending countries
The USA has been increasingly interested in cryptocurrency regulation. France has also extended its PACTE law to cover all crypto firms in the country. UAE & Saudi Central Bank have been pioneering the use of crypto for remittances, as we read about their partnership with Ripple.
Top 10 receiving countries
Stance is ambiguous to negative about crypto in most of these countries.
For example, India recently launched e-rupi (https://www.npci.org.in/what-we-do/e-rupi/product-overview) but it is still not clear about the stance for other tokens. Nigeria is also working on its own CBDC, eNaira & digital renminbi.
The lack of clarity is a deterrent to adoption in the countries that would benefit the most. Though it may change in future, the situation right now is not clear. In India, this lack of clarity has led to a brain drain to favourable countries like UAE. (Source)
The irony is now they will be sending remittances back to India instead of innovating in the country.
We need a clear & unambiguous regulatory environment. Japan is planning to finalize amendments to foreign exchange laws. Exchanges have to share customer information like name address, and time of transfer. It may not be liked by crypto purists but it protects the consumers.
But till the time regulations are in place across countries, self-regulation can be an option. After the FTX saga, the need for self-regulation increased. AML is a pressing issue for many countries and if crypto gets a bad reputation for making it easy, then the whole space will move backwards by many years. Enhancements in transactions & AML measures are needed.
Expertise in handling major “behind the scene” steps
In a remittance transaction, there are tons of things which retail users are usually abstracted from. They get to see just a simple transfer of money. Steps & checks in a place like the following are hidden from the user.
- Transaction disputes, Bank reversals, Processing chargebacks
- Detecting fraud & illegal activities
- Reconciliations & Financial reporting
- Integrating with accounting systems
- Handling taxes
For crypto to become mainstream these also need to be handled. There needs to be a mechanism to audit while maintaining the privacy of the parties involved. There is also a need for a uniform data-sharing mechanism across stakeholders.
A collaborative effort is needed from everyone – builders, regulators, policymakers, and payment providers
Crypto promises to disrupt the traditional methods of global money transfer with speed, cost, security, access for all, and programmability. The UN Sustainable Development Goal of a $200 remittance average transaction cost of 3% by 2030 seems to be achievable by using crypto-based solutions.
But there is still so much to be explored on the technology to be made mainstream.
- There are lots of challenges to be addressed. For a successful remittance product in many low & middle-income countries, not just on-ramping & off-ramping is needed, but enabling cash to crypto and crypto to cash is critical
- Builders need to focus on the user experience to make it as smooth as possible for the senders & receivers
- Till the time regulatory frameworks are in place, self-regulation can be the key. This is still a relatively early space and one bad player can lead to the entire space getting a bad reputation
There are players in both crypto native players like Coinbase, Binance etc and web2 companies like Moneygram, Western Union etc who are making progress in using crypto for remittances.
The future does look bright where the transfer costs less and is done instantly.