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It’s almost 2020. That means a lot of things. Just think of the way we pay for stuff. We have finally said ‘good-bye’ to the bulky wallets in our jeans and welcomed mobile-based solutions like Apple Pay and Google Pay. The way we communicate is no exception either. We’ve run out of excuses to call our relatives as messaging apps allow us to communicate free-of-charge. Yet, for some strange reason, we still cannot send money across the world without relying on those filthy remittance services charging us huge fees.
We are living in a world with global opportunities. Going ‘solo’ with your project? You can easily set up an Instagram account and start shipping hand-made products to nearly any country on earth. Is your country facing a disastrous economic crisis? You can flee the country and move somewhere else in search for a better future. So… technology and society seem to keep up with globalization, but money does not.
It is estimated that the fees migrants pay to send money to their families in other countries often surpass 5%. That said, we have tried to identify the factors behind those high costs, the positive effects of potentially reducing them and, of course, the possible avenues to do so.
Migrant workers are without a doubt the main drivers of the remittance industry. Every time migrant workers send money to their families living in poor countries, they pay a remittance fees for transferring money. An easy way to understand the impact of these international money movements is to compare the annual cross-border remittances with the total development assistance worldwide. The numbers speak for themselves.
The total development assistance displays, which tracks the loans and grants issued by official agencies of the Development Assistance Committee (DAC) and other multilateral institutions to promote the development in underdeveloped nations, is about $150 billion.
Personal remittance, which reflects the money people in poor countries receive from relatives working in other locations around the world, is running about $600 billion. That’s four times the amount of government assistance. Therefore, it is an unmistakable fact that remittance money plays a vital and major role in the economic development of poor nations.
When you look at the situation in some particular countries, these figures gain even more significance. In Tonga, remittances exceed 40% of GDP. A similar situation is seen in countries like South Sudan (35.3%), Kyrgyz Republic (33.2%) and Haiti (32.5%).
The cost of sending money falls entirely on a single question: local or international transfer? Sending money to your co-workers to pay for a birthday cake together will most likely cost you absolutely nothing. Even if you use different banks. The situation changes radically when you add geographical borders to the equation.
According to the World Bank’s Remittance Prices Report (September 2019), the global average charge for sending $200 — a common benchmark used by governments to estimate costs — is about $14. That number is a combination of fees and the markup added to the mid-market exchange rate, which ultimately end up eating a rough 7% of the amount.
As of Q3 2019, the global average cost for sending remittance stood at 6.84%, showing little to no improvement from previous quarters, but remaining steady below the 7% benchmark. In the last decade, the average cost has fallen from nearly 10.5% to 6.84%. It doesn’t take a genius to realize that isn’t a big improvement when looking at the technological innovations that society has adopted as the “new normal” over the past decade.
Back in 2009, leaders of the world’s most prominent economies (G8) commited to reduce the cost of remittances to 5%. The United Nations included the same goal as part of its Sustainable Development Goals years later in 2015. However, we remain far from reaching those goals.
In the meantime, as the G20 and United Nations continue to work on reducing the global average cost of remittance, the volume continues to increase at a dangerously high rate. Today, remittance flows have triple the 2000 values and are five times what they were in 1990.
The remittance market is widely dominated by big players, with Western Union on top. The company’s annual report for 2018 outlines the WU platform moved $300 billion in principal in one year across 200+ countries, processing 34 transactions every second. In other words, this player handles approximately half of the entire remittance market. Yearly revenue? $5.6 billion.
As you can imagine, there are plenty of other companies competing in this market. TransferWise is sort of the lower end in terms of fees when focusing on traditional remittance methods. The tech-forward startup uses a private network of bank accounts on multiple locations, as well as the mid-market exchange rate. By doing so, they bit WesternUnion, MoneyGram and other services most of the time.
The corridor level is also an important factor to determine the cost of transaction, but here is a hypothetical example just to understand the substantial difference between these services. If you wish to send $200 from Italy to Morocco, you will end up paying anything from $2 (TransferWise) to $11 (WesterUnion) to $15 (Banca Monte dei Paschi di Siena).
So the big question ahead seems to be only one: how to reduce remittance costs? Because doing so will undoubtedly boost economic development in the poorest nations, freeing those with less resources from a huge economic burden.
Raising the level of consumer education is certainly a place to begin. And by that we mean that people need to know that there are cheaper options to perform the same actions.
Competition is clearly a second but vital piece of the puzzle. Researchers have identified a pattern in which remittance corridors with more migrants tend to benefit from lower costs. The answer to this phenomenon is quite obvious: companies are serving first those channels with more potential clients, competing harder and ultimately pushing their fees lower.
Maybe it’s the wild volatility, the lack of knowledge, or simply the fear of what’s new. Whatever the reason, customers and companies keep neglecting digital currencies as a solution to high remittance costs. The technology behind these currencies — blockchain — makes them transparent and flexible. They can move from A to B in minutes, if not seconds for cents.
Using digital currencies to transfer money is definitely an alternative worth exploring. With solutions like Crypterium, anyone can send money zero-free, instantly.
Bitcoin is the most popular asset out there. Yet, the volatility of its price doesn’t make it a wise choice to transfer value. Hopefully, companies like Coinbase and Circle have developed so-called stablecoins, like UDSC, which are pegged to fiat currencies. So they offer both the benefits of a native digital asset, and the stability of a government-issued currency.