Blockchain technology holds the potential to change how different sectors operate, some of which include banking, cyber security, healthcare, governance, and telecommunications. However, does it have what it takes to transform the international money transfer industry?
Consider this – in 2016, more U.S. $570 billion was sent as remittances by migrants living in different parts of the world. Even though some FinTech players have made inroads into this realm in recent times, the top three older players still control more than 25% of the entire market share.
The Arrival of Blockchain
In January 2018, Ripple announced its tie-up with MoneyGram, a prominent overseas money transfer company. Through this partnership, MoneyGram put XRP, Ripple’s digital currency, through a testing phase. Western Union became the next international money transfer bigwig to partner with Ripple.
In mid-2018, Singapore-based InstaReM partnered with São Paulo-based BeeTech, relying on Ripple’s enterprise blockchain network to facilitate cross-border payments between South America and Asia-Pacific. AlipayHK, a Hong Kong-based company, began offering its blockchain remittance service around the same time.
It appears that banks are also looking at what blockchain technology has to offer. Santander was the first UK-based bank to transfer funds overseas by making use of blockchain technology. Some of the banks that have partnered with Ripple include UBS, the Royal Bank of Canada, IndusInd Bank, Itau Unibanco Holding SA, Crédit Agricol, and the National Bank of Abu Dhabi.
The Effect on Transfer Costs
The World Bank suggests that the global average cost of sending money overseas stands at more than 7%. A different report shows that while the average cost of sending money overseas through a bank is around 11%, it changes to around 5.3% if you use online money transfer companies instead.
In addition, costs increase noticeably in cases of some currency corridors. For instance, sending money from the U.S. to Africa tends to cost more than transferring money from the U.S. to the UK, the eurozone, Canada, or Australia.
Overseas money transfers carried out through non-banking entities still rely on banks to operate as intermediaries. Blockchain-based transfers, on the other hand, can eliminate banks from the picture completely. This, in turn, may well bring transfer costs down even more.
Banks and most prominent overseas money transfer companies still work in a centralized manner, which makes them vulnerable to a variety of online attacks. Blockchain technology, on the other hand, is completely decentralized in nature, which makes it considerably more difficult to penetrate. What also helps is that each transaction is marked with a unique entry in a digital ledger that is impossible to forge.
A Wider Reach
There are several regions in Africa, South America, and Asia where people remain under banked. When these people wish to send or receive money to or from another country, they typically have to pay steep fees to use the services of a handful of companies with agent networks. Given that mobile phone usage has increased significantly even in these areas, there is a possibility of using cryptocurrency-based mobile wallets to carry out cross-border funds transfer.
Regulations surrounding cryptocurrency cross-border transfers are in the nascent stages, and the absence of a regulatory body continues to act as a hindrance. The possibility of losing an account’s private key exists, and anyone with access to your key gets access to your information and money. In addition, cryptocurrency transfers might expose you to currency conversion twice, once when buying a cryptocurrency, and then again, when you need to sell it.
Some of the older players in the world of overseas money transfers have already adopted blockchain technology in some form or the other, and more may follow suit. What’s encouraging to see is that some startups are relying solely on this technology to carry out cross-border fund transfers. Just how quickly the technology gains ground, though, remains to be seen.
Jon’s work with iCompareFX involves researching the world’s top overseas money transfer companies, and he is often found mystery shopping to get the information he needs. When he’s not working, he likes exploring new music from different genres.