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International Remittances and Blockchain Technology



Ed Wu

In recent years, blockchain-based attempts to improve cross border money transfers have garnered a great deal of attention. Within the cross-border money transfer space, the enthusiasm to apply blockchain has been particularly high for remittances - the niche segment of cross border flows that migrants make back to their families in their home countries. This enthusiasm is in part due to the significant size of the remittance market - by some estimates over $400 billion.[1]  The enthusiasm is also due to the potential to improve the economic livelihood of migrants by reducing remittance costs, which, according to the World Bank, globally average 7.7%.[2]

Blockchain proponents tend to suggest blockchain technology in cross border payments can lead to a reduction in costs for remittance markets. Specifically, proponents believe blockchain is uniquely suited to overhauling and streamlining the decades old correspondent banking system, the “pipes” through which most cross border money flows through. However, on closer investigation, the picture that arises is much more complicated.

Firstly, while being careful to generalize given the heterogeneity of remittance corridors, the literature challenges the commonly cited view amongst blockchain proponents that remittance markets are dysfunctional and costs are exorbitantly high. One remittance client survey suggests that many remittance clients are satisfied with the service of existing providers, and may be willing to accept normatively higher prices in exchange for other benefits including convenience and the ability to transact in cash.[3] Other studies note that in some large volume country-to-country corridors, remittances exhibit characteristics of market efficiency and low and declining costs over time, spurred on by competition (although inconclusive, smaller country to country corridors tend to be where more volatility in pricing occurs).[4]

Secondly, it appears that blockchain initiatives in the cross-border payment space only address two of the four key cost drivers in the remittance business: the inefficient correspondent banking system and lack of market competition in certain corridors. But blockchain does not address other key cost drivers such as regulation and agent network infrastructure. Thus, its overall impact on remittance costs may be overstated relative to mainstream press reports.  

Thirdly, the two dominant models of blockchain startups impacting the remittance space are still in the early stages of development, with mixed evidence on their cost benefits. The first model consists of consumer-focused start-ups leveraging the bitcoin blockchain for the transfer of payments across borders. So far, the cost savings of this model (potentially faster settlement of funds by leveraging bitcoin), are counter-balanced by challenges that arise in implementation. Some implementation challenges are unique to the blockchain-aspects of their business model: high bitcoin network transaction fees, foreign exchange costs and volatility, corridors with limited liquidity for fiat-bitcoin pairs, and difficulty finding and maintaining their banking relationships. Other challenges are simply related to being a new player in the remittance market: the difficulty of acquiring digitally unsophisticated customers without a bricks and mortar agent network, and the high cost of compliance without operating a remittance business at scale. Recently, many of these bitcoin remittance startups have migrated away from their early focus on small dollar remittances to the more digitally savvy (and relatively larger per ticket size) small business clients.[5] Others have abandoned the international money transfer service completely. 

The second model in the blockchain sphere with implications for the remittance space is at the infrastructure and protocol layers. Specifically, a handful of start-ups are attempting to create an alternative to SWIFT, the predominant back-end enterprise software and messaging system that powers the correspondent banking system. Startups such as Ripple and Stellar do not aim to replace or make irrelevant the many intermediary banks involved in correspondent banking. On the contrary, they are attempting to convert as many of the 8,000 member banks of SWIFT to their new blockchain-based software solutions, which claim to provide more seamless and integrated communication when transferring funds from one country to another. Where bitcoin-based remittance start-ups can quickly deploy a consumer-facing business in a specific country-to-country corridor, these blockchain infrastructure alternatives to SWIFT are much more ambitious in scope and global in scale. It requires bringing together disparate actors across the remittance eco system, not to mention overcoming concerns over replacing a tried and tested technological solution with a new solution in the risk averse banking sector. Furthermore, while these startups may lead to increased efficiency in the market, it may go against the incentives of many incumbent correspondent banks, who are beneficiaries of some of the inefficiencies of the current market structure. At the same time, SWIFT has also made strong efforts not only at upgrading its existing protocols, but also has cautiously explore potential applications of blockchain as well. So far, only a small portion of banks are adopting these new solutions, and without giving up their links to SWIFT.[6]

[1] World Bank. 2016. Migration and Remittances Factbook: 2016.

[2] Ibid.

[3] Orozco, Manuel and J. Yansura. “On the Cusp of Change: Migrants’ Use of the Internet for Remittance Transfers.” Inter America Dialogue. 2016.

[4] World Bank. Report on Remittances Prices Worldwide. 2017.

[5] Interview, Minsi Wang, BitPesa

[6] Ripple. “The World’s Biggest Banks Lead the Blockchain Charge.” Last Updated 2017. Access in February, 2018.



Remittances, Blockchain, Bitcoin, Migrants, Correspondent Banking, Cross Border Transfers, Moneygram, Ripple, Western Union