The remittance market is growing again. A World Bank report says that remittances topped $596 billion in 2017, of which $450 billion was sent to developing nations. After two years of decline the market is recovering, fuelled by rising migration, particularly in Europe. The majority of this money is being sent across borders to families in places such as India, China, Mexico and Nigeria. As migration continues to shift globally, the trajectory of cross boarder remittances will continue to increase.
International money remittances historically were sent from an offline agent location domestically to an agent location internationally. However, this market has been consistently shifting online given the convenience and more competitive pricing. Instead of waiting in line on a Saturday morning at an agent location, consumers now send money from their phone or computer at a lower price.
Online international money remittances have traditionally been settled through the onboarding of funds in the home country, through automated clearing houses (ACHs) or debit/credit facilities, with offboarding of funds at local banks and/or retailers. In many countries, such as in the US, the company facilitating the transfer bears the risk of fraud, which can be very costly (retailers average ~100 basis points (BPS) of the total transaction value, for example).
Hence, the cost of onboarding and offboarding funds to banks can be very expensive for remittance companies. If you think about how a transaction works, someone enters their debit card information online and initiates a transaction from a bank. This instruction goes to a remittances company, which in turn sends the money to a local bank or retail institution for the recipient in another country. There is a cost from the bank to onboard funds, a fraud cost and a cost to offboard the funds to the local bank, which the money remittance company owns. There is cost and risk at all points along the chain.
Crypto currencies have the potential to significantly reduce the costs for the companies moving money internationally and also pass savings and convenience onto consumers. The costs (onboarding, fraud and offboarding) become significantly less while the consumers have the convenience of sending money instantly from their device.
Challenges
Companies that utilize crypto currencies will need to continue to get better at the off and onboarding of funds into other more regularly used fiat currencies. The onboarding and off boarding of crypto currencies is not any different, in terms of fraud costs than fiat currencies, in that the risk of loss is with the company.
We saw when there was a large increase in volume back in December, some crypto currency companies that broker these transactions had some latency issues with settling funds in other currencies. They couldn’t keep up with demand. Ultimately, this latency issues needs to addressed or people will lose confidence in using crypto currencies. The cost savings really come from the transactions occurring within crypto currencies.
One of the larger hurdles is to get consumers comfortable using crypto currencies. It has been a long process to shift consumers from using offline to online facilities over the past 20 years, so this is another leap. We should anticipate that crypto currencies will likely follow a similar trajectory of adoption given the uncertainty of how they work.
Companies will likely need to provide some sort of assurance or guarantee that if the crypto currency being used is fraudulent, stolen or lost, the consumer won’t be out of money. In the U.S., for example, the risk of fraud is with the remittance company. However, crypto currencies don’t have the same regulatory requirements as US dollars. To get consumers comfortable with using crypto currencies, a money back guarantee is needed requiring companies to have strong tools to ensure they can send and receive currency without the risk of fraud.
Outlook
In the short term, the more volatile the currency, the less likely consumers and businesses will feel comfortable using crypto currencies for money remittances. The dramatic price fluctuations may have drawn in short-term investors; but, it also increased scepticism. Can these currencies be a stable currency to use as a medium of exchange? If fears continue that crypto currencies will have large swings in value, businesses and individuals will continue to use more stable, traditional currencies. Cryptocurrencies will need more liquidity and less volatility over the long term to be used more regularly as a medium of exchange.
There has been an emphasis on the short-term bubble in crypto currencies; but, people often forget about the long-term viability. In 1999, we had an internet/technology bubble. Almost twenty years later many of the technologies or companies that survived (e.g. Amazon, PayPal) are now valued significantly more, making great returns for the employees and shareholders. 1999 was too early for some of these companies to grow as fast as expected given the consumer adoption curve of the internet was still new.
The pattern is similar for crypto currencies and for the moment at least there are still significant risks. In the long term, however, it is realistic to believe they will be used to transact in the money remittances markets, in addition to other areas of the economy. Companies still need to solve similar problems for their consumers when onboarding and offboarding crypto currencies to fiat currencies, however, overall the costs for consumers and business will be less allowing for more seamless and cost-effective transactions.
