Essays by: Matías Lopez (Senior High-School student from Colombia)
Essay 1: What is the potential of Bitcoin and Blockchain in remittance payments?
A remittance is a sum of money that is sent to a recipient across borders. Remittance transactions are extremely significant for the economy. In recent years, they have accounted for rising sums of money that represent increasing percentages of developing countries’ GDPs; in 2014, money received from abroad as remittances were around 25% of Nepal’s GDP, while in 2016 this sum increased to 31.3%. In 2016, the World Bank published that global remittances approximated a total of US$601 billion, and estimated that this figure would rise to US$616 billion in 2018. One of the reasons for this is the unprecedented increase in global migration. Remittance transfers are mainly carried out by immigrants. Once they are abroad, immigrants need to send money back home in order to provide for their relatives. Traditionally, international money transfers have occurred through several third party members (Western Union, MoneyGram, and others). However, these traditional methods have various disadvantages that involve many steps in the verification process and added fees for each step. This translates to expensive services, long transaction times, and an increased probability of fraud and the occurrence of illegal actions or events.
Modernization and the third world disruption, alongside a decrease in cost of hardware has resulted in an increase of demand for smartphones and thus, a global increment in smartphone ownership. This has then been accompanied by digitization of the banking industry and financial operations, including remittances. Bitcoin and Blockchain remittance is a relatively new and constantly growing alternative to traditional international money transfer methods that involve third party members. Bitcoin is a cryptocurrency, a “digital coin” or form of electronic cash that can be sent from user to user without the need of a financial intermediary. Blockchain is the technology that enables moving digital coins or assets from one individual to another.
Blockchain combines two systems known as “open ledger” and “distributed ledger”. These publicise and show the specific chain of transactions that occur within the chain, allowing everyone to see when money is being transacted to determine whether the transaction is valid or not. This is one of the main reasons behind blockchain’s huge potential. Another key feature is the safety and security components to mitigate fraud and increase transparency within transfers. Its distributive nature and the fact that it uses a P2P network means that there is no central entity required to supervise the transactions. When someone creates a new block, the network verifies the new block in comparison to the copy of the chains that other users had, and the system makes sure it hasn't been tampered. Further safety measures that blockchain uses are Hash systems and “Proof of Work”. Hashes allow the system to easily identify tampering, as a tampered hash invalidates the blockchain. “Proof of Work” slows down the creation of new blocks. With Bitcoin, for example, there is a 10 minute time period to calculate the required “Proof of Work” and generate a new block.
Because middlemen or financial intermediaries are not necessary, Bitcoin and Blockchain remittances offer reduced transaction costs to the public. In addition, because of the way they are constructed and their electronic dependance, Bitcoin and Blockchain remittances eliminate the need of having multiple transactions and/or steps for verification. This reduces the time of transaction from the traditional three days to an almost automatic and instant transaction. Moreover, the fact that transactions occur almost instantaneously, minimizes the probability that transactors lose money due to currency fluctuations. It is important to highlight that the advantages provided Bitcoin and Blockchain remittances mainly have an effect in the transactor’s experience. The fact that this method provides the transactor with such an improved alternative increases its potential and reduces the demand of traditional methods.
Bitcoin and Blockchain could step in and replace some banking initiatives for international money transfer in developing countries that struggle to compete with new digital transaction alternatives.
The other two main Blockchain platforms for this case are Ripple’s cryptocurrencies (XRP) and BTL Group’s Interbit Platform. To represent the growing and widely recognized potential that Bitcoin and Blockchain have in remittances, it is important to highlight the following. Since January 2017 “seven major European banks, along with IBM, have partnered on a new blockchain-based permissioned trade finance platform, Digital Trade Chain (DTC)”. Furthermore, “Santander has become the first bank in the UK to use blockchain technology to transfer live international payments through a mobile app”. Their solution uses technology provided by Ripple. And finally, “A host of other major banks, including UBS, Royal Bank of Canada (RBC) and National Bank of Abu Dhabi (NBAD), have adopted Ripple to improve their cross-border payments”. 2018 is also the first year where the Global Monetary Transfer Summit (GMTS) will feature ‘remittance in fintech’.
In conclusion, the advantage that Bitcoin and Blockchain represent to remittances is due to a variety of factors regarding improvements in transaction cost and speed, fraud mitigation, reduction of financial transactions, and elimination of financial intermediaries or third party members’ requirements. It is evident that banks and financial institutions worldwide have already recognized this potential and have started to consider Bitcoin and Blockchain remittance as a mean to evolve their services.
Essay 2: Social media platforms and new apps on the sending side.
Facebook is is the most used social media platform with in the world 2.235 million monthly active users.Facebook Inc. has a huge list of mergers and acquisitions comprising 74 other companies. According to Statista, 4 of the top 6 most famous social media platforms (including WhatsApp and Instagram) are owned and controlled by Facebook. This huge media reach that Facebook Inc. has through every social platform they control and own can be extremely useful if implemented correctly when it comes to the remittance industry.
Cryptocurrency is currently leading the race when it comes to the digitization of remittance payments. Despite the fact that Facebook introduced a cryptocurrency advertisement blanket ban in early 2018, this decision was rapidly overturned when CEO Mark Zuckerberg realized the potential that cryptocurrency has for money transfers. Therefore, in May of the same year, Facebook launched its blockchain team and it was recently reported that Facebook is planning to develop their own Stablecoin for money transfers using WhatsApp. Nonetheless, Facebook is not the only company that is approaching the remittance payments industry; many companies are trying to leverage the power of blockchain. Facebook, however, has a huge advantage because of their unparalleled reach through their network.
According to experts in the field, India is the most advanced country in the implementation of remittance through social media platforms. It is currently the only country that has managed to successfully implement money transfers through social media platforms. In 2016, the ICICI Bank, India’s leading private sector bank, launched a service that allows non-resident Indians to transfer money to beneficiaries in India through WhatsApp and Email. This service was named ‘Social Pay’, and it is available for public use through ‘Money2India’ (M2I), the bank’s mobile application for remittances.
This specific service works in the following way: Senders need to generate a link from the M2I app and share it with beneficiaries on their social media profiles, where beneficiaries add their bank details. This link is valid for 24 hours and protected by a four-digit code that is created by the sender and shared with the beneficiaries. The beneficiary enters the four-digit code before adding the bank details. The M2I sender then verifies and confirms the payment details on the app in order to finalize the transaction in a safe manner.
This is the first case where social media has been successfully involved in securely transferring money between people. However, this isn't the only way money transfers have been digitized by the modern world. Apps are the biggest digital tool that people use when it comes to remittance payments. There are several cases where the apps are developed by independent companies that are dedicated to money transfers and only work through the mobile application. Two good examples of money transfer apps are Venmo and Azimo. Similarly, there are various companies that were established a long time ago and have the traditional in-person method for the transferring of money, where senders go to a local store or shop and send cash to their beneficiaries. An example of this is world-renowned Western Union. In a similar manner, many banks have developed apps to help their clients transfer money internationally. These, however, are not very developed as they simply represent a virtual “office”, where users carry out the same process they would if they physically attended one of their offices.
In conclusion, the development and introduction of social media platforms as a mean to transfer money internationally would be extremely significant in making remittance payments a lot easier and more accessible for senders. Facebook Inc. and other social media giants are actively working in order to facilitate cross-border money transfers through their platforms. Facebook has also considered the development of their own Stablecoin; they realized the true potential of cryptocurrency and are working on joining this to social media in order to facilitate remittances. Overall, social media platforms have huge remittance potential because of their astonishing global reach. When it comes to applications, there are many companies that have an app dedicated to money transfers, and many banks that have their own app, but these are still too underdeveloped as they don’t present the client with an innovative and easier method to carry out remittances, when compared to traditional, person-to-person transactions.
Essay 3: Remittance through mobile money wallets and card networks. Different initiatives in mobile money remittances and their global reach.
Mobile money refers to the term used to describe technology that allows people to send, receive, store, and spend money through the use of a mobile phone. These services are often provided by mobile money service providers. Because of this, each mobile money user’s account number is generally the same as their phone number. The transfer of funds often occurs through the use of a special mobile money menu on the user’s phone or through mobile apps. Mobile money wallets are a popular alternative to traditional money transfers as they are easy, safe, and can be used to transfer money anywhere there is a mobile phone signal.
For the proper functioning of mobile wallets, phone providers or mobile money companies partner with card networks such as Visa, Mastercard, American Express, and Discover. These partnerships are crucial for mobile money wallets because of the huge global reach and acceptance card networks have.
There are several processing models that mobile money wallets use to deliver payments. The first processing model is mobile-based billing. This is the most widely used model as it allows users to send and receive payments through their mobile service provider. A second model for transferring mobile money are SMS-based transactions. These allow users to locally and internationally make money transfers and they are initiated by sending a short SMS code. In this case, the money transfer can be credited or debited from the user’s configured bank account, card network or mobile phone provider. The third processing model is mobile web payments, which allows users to send and receive money through a mobile app. All of these payment processing models, however, are generally delivered in collaboration with mobile service providers, financial institutions (banks, credit unions) and mobile phone providers.
Mobile money wallets have had a huge impact in accelerating the digitization of international remittances. According to the World Bank, in 2018 overall global remittance grew 10% from last year and amounted to US$689 billion. However, the actual size of remittances is in fact considerably larger than official statistics due to the high use of traditional informal channels that provide less transparency, less security, and fewer benefits compared to regulated models. Mobile money, however, can help address key barriers that drive the use of informal remittance channels. The main benefits of mobile money are affordability and accessibility. Mobile money has currently enabled remittance services across 184 corridors and has connected migrant workers in 35 remittance-sending countries to 40 remittance-receiving countries. Mobile money can cater for the most underserved and impoverished. Over the past two or three years, the average cost of sending remittance payments has decreased significantly. Currently, the cost of sending mobile money transfers is below 3% in 96% of country corridors. Mobile money also provides immigrants with a gateway to financial inclusion. It gives them the ability to access a broad range of digital financial services. Because of all of these benefits, GSMA (an association that represents the interests of mobile network operators worldwide) has partnered with the Bill & Melinda Gates Foundation and Mastercard to promote the GSMA Mobile Money Programme. They are currently working with “mobile operators and industry stakeholders to create a robust mobile money ecosystem, which will increase the relevancy and utility of these services, and ensure their sustainability”.
The advantages provided by mobile money for impoverished people makes it a crucial mechanism for the development of international remittance payments. As GSMA reflects: “To truly transform the financial lives of underserved people, mobile money must become a central monetisation mechanism, universally available across a greater range of digital transactions. By making mobile money more central to the financial lives of these users, greater financial inclusion, economic empowerment and economic growth can be achieved”.
Essay 4: Price comparison platforms for remittance. How do they make money?
Remittance service providers charge users a certain percentage of the amount they desire to transfer. Traditionally, banks have charged a significantly large percentage of the transaction. Non-bank market players and FinTechs like TransferWise and World First are disrupting the remittance segment and increasing pressure on banks by offering very competitive prices. For example, Monito.com charges around 0.5% and 1.3% for a transfer of £10,000 to INR (Indian Rupee). This is around four times less than the average for banks. In the United Kingdom, “the top 20 non-bank money transfer providers account for over £40 billion of foreign exchange per year, saving customers over £900 million annually” (GoMedici.com).
Another way remittance service providers make money is by modifying their exchange rate when compared to the mid-market exchange rate. If a remittance service provider decides to modify their private exchange rate and make it better than the mid-market exchange rate, it would decrease the total cost of the transaction for users. However, if they are to make their private exchange rate worse than the mid-market exchange rate, it would increase the cost of the transaction for the users and the institution would make money. For example, if an individual wanted to transfer £10,000 from the UK to India on Jan 19th, 2019, at 12:38pm EST (1GBP = 92.3759INR) and he chose to do it through Western Union, the total cost of his transaction would have been £64.65. This is because Western Union modified their private exchange rate to be 91.7787INR, 0.65% lower than the mid-market exchange rate, adding £64.65 to the total cost of this transfer.
The third way in which remittance service providers make money is with a transfer fee. This fee is decided by the provider itself and increases the total transaction cost.
There are numerous price comparison platforms for remittances, such as Monito, Remitfinder, Best Exchange Rates, Exchange Rate IQ, Finder and TTrate. While researching for this paper, Monito seemed to be very complete and easy to use. Monito is a Swiss company that has a real time comparison engine that allows customers to obtain the best exchange rates and find the cheapest transfer provider. It compares and reviews over 300 money transfer companies and shows users the best way to send money for each corridor.