This August at The Fintech Times, we’re looking to highlight some of the amazing things fintechs are doing around the world. We are always hearing about the “latest groundbreaking innovation doing good for the community”, but are these innovations doing good for those in an already advantageous position, or are they helping make the financial world more accessible? To us at The Fintech Times, fintech for good means companies looking to help people who desperately need it, prioritising financial inclusion and sustainability.
As the world gradually becomes cashless and starts to adopt digital currencies, there will be some who benefit more than others. While a cashless society is good in developed countries, their real impact will be seen in developing countries, as those previously unbanked or unable to register with a financial system, will now have the ability to do so.
This particularly helps the remittance market, as those sending funds abroad will be able to rest easy knowing their hard-earned money has successfully reached the recipient in a matter of seconds, rather than days. But there is still more that can be done. We asked the industry why remittances were so important and what was missing from the market.
Relying on mobile wallets
Karen Jordaan, head of UK at digital payments company, WorldRemit, believes the pandemic inadvertently helped the remittances market as customers recognised the benefits of digital transactions: customers no longer needed to travel long distances to find pick up locations, stand in long queues and risk carrying cash around with them: “Remittances, or any non-commercial money transfers sent from abroad to a ‘home’ country have an important impact on nations across the globe, as well as being a lifeline for many families. Additionally to helping recipients manage the costs of medical expenses, education, living costs and more, over time remittances can aid in reducing extreme poverty as money finds its way into the wider economy.
“The industry has seen significant change over the past two years. As much of the world went into lockdown to combat the spread of covid-19, many physical financial outlets were closed which accelerated the move towards digital receive methods such as online transfers to bank accounts and mobile wallets. These enabled customers in markets impacted by the closures to still receive their much-needed money – and it is showing no sign of slowing down. It has translated to a longer-term shift towards digital as customers recognise the ease of receiving money in this way, no longer needing to travel long distances to find pick up locations, stand in long queues and risk carrying cash around with them.
“For many of us, owning a bank account is an everyday essential. However, vast swathes of the population (the World Bank estimates around 1.7 billion adults) do not have access to one. There are other means to receive remittances digitally without a bank account, including a mobile money wallet which is linked to a user’s phone number. Some countries rely more heavily than others on mobile money payments, with the most popular service providers including MTN, MPesa, EcoCash, GCash and Tigo Pesa.
“At WorldRemit, nearly all (85 per cent) of these transfers are completed within 10 minutes of sending the money, making them a fast, secure, and reliable alternative. Both the sender and recipient are notified by SMS of the transaction progress, so customers are kept fully up to date of when the money has been sent and received. The recipient can use the funds on the mobile wallet immediately to pay for goods and services, or transfer to other recipients domestically.”
The start of the remittance process has been improved, the middle part of the journey is next
The greatest change in the remittances sector is occurring at the start of the process, as the sender can send money much faster, says Daniel Belda, head of product strategy at global payments and
banking-as-a-service platform, Openpayd: “Remittances are a lifeline for millions of people around the world. But for many years, traditional remittance services have been expensive and cumbersome, creating unnecessary delays for senders and recipients alike.
“The industry is changing though. And fast. The biggest technology improvements have been at the start of the remittance process. For the sender of remittances, real-time payment rails are a faster, cheaper method of initiating the first leg of the remittance process via a bank transfer. Increasing access to digital services has also made a huge improvement to the last mile, of actually getting the remittance payment into the hands of the recipient.
“The next wave of innovation will come from the middle portion of the remittance journey: the cross-border payment. This is where the biggest opportunity exists to cut transaction times and costs.”
Institutions need to be proactive about financial inclusion
Erin Holloway, president of Prime Trust, a company which offers token and FIAT custody, funds processing, anti-money laundering and know your customer compliance, and transaction technology services, points out why some immigrants or lower-income families may not have the items required to open an account with a financial institution, while also looking at how things can be improved: “Remittances can serve as an important stream of income to families and communities globally. Officially recorded remittances in 2021 reached over $600 billion, according to the World Bank.
“These funds can help families buy essentials like food, clean water and housing, pay off debts, enable them to travel, or sustain them during issues like international conflict.
“Through the traditional financial system, it can be challenging to create the necessary accounts, let alone send the funds internationally. Many immigrants or lower-income families may not have the items required to open an account with a financial institution, such as:
- Government-issued photo IDs
- Social Security Numbers or Tax IDs
- A permanent address or phone number
- Funds for an initial deposit
“This has locked swaths of people from accessing the economy and impedes their ability to save money, buy necessities, or send money – internationally or otherwise.
“To improve the process, institutions need to be proactive about financial inclusion. This may include incorporating alternative KYC methods for persons without traditional identifying documentation, facilitating a more easily accessible 2FA process for these cases, and creating financial literacy programs for underserved populations and individuals.”
Could CBDCs eliminate high fees?
Ian Epstein, global head of digital assets at Makor Group, a company providing bespoke advice and execution to leading institutional investors in equity, fixed income, FX and specialised trading strategies, pointed out how remittances are a lifeline but could be improved through digital currencies: “The World Bank estimates remittances reached nearly one per cent of global GDP in 2020, but that obscures the imbalance. Most emerging economies produce over 10 per cent of GDP from remittances. International transfers are critical to separated families living and working abroad. Digital assets and stablecoins like CBDCs could eliminate the usurious change to high fees most people experience when sending money internationally.”
Blockchain technology provides a more secure way to transfer funds in an extremely efficient manner
Sarah Robertson, SVP operations at paytech, NuPay Technologies looks at how the remittance market has evolved: “Remittances, or transfer of money for the payment of goods or services, are important for the functioning of modern society’s functions. All needs have been gained through trading since the beginning of time. The methods of bartering may have changed overtime, but the desire of exchanging goods for a payment of sorts has not. We continuously have evolved the remittances methods over time to increase efficiency. Credit card payments, ACH bank transfer, and peer-to-peer payment applications are all great examples of improvements in the process. Blockchain technology provides a more secure way to transfer funds in an extremely efficient manner. There are a variety of blockchain options, and they all seem to lack one aspect that makes them great. The HELO blockchain, which will be launching in Fall 2022, will be the best option of payment transfer and remittances thanks to advancements in speed, security, and ease of use.”
Three days or four seconds
Daniel Oon, head of DeFi at the Algorand Foundation, the blockchain organisation, analyses how blockchain can be effectively used in the remittances market: “Remittances are one of the most important functions of the modern banking system; billions of dollars are moved daily by both businesses and savers across national boundaries. In recent years, the foreign exchange rate issue has been the lowest hanging fruit to tackle. We’ve observed the rise of blockchain solutions. A great example is when an individual transfers a dollar on the Algorand blockchain, he/she is able to seamlessly send that asset from Latin America to a counterparty in Asia in just 4.5 seconds, these transactions are irrevocable and benefit from efficient and robust blockchain technology. This is in sharp contrast to existing financial infrastructures that charge heavy FX fees and large service charges to remit that amount. Additionally, it can take up to three days before their counterparty receives a notification to receive the sum.”
Blockchain is the solution
Pat White, CEO and co-founder of Bitwave, the digital asset finance platform designed specifically for businesses to manage cryptocurrency tax, accounting, and compliance, compares the current remittance market to what it could be if blockchain technology was used: “Remittances are big business – and incredibly inefficient:
- – In 2021, remittance flows reached $605billion – The average cost of sending remittances from the United States was 5.14 per cent of the total transaction.
- – It takes on average three to five business days to transfer cash internationally.
“Moving to a financial system supported by the blockchain (CBDCs or ETH/BTC) would solve all of these problems by freeing up liquidity in seconds, not days. Western Union averages about 24 transactions per second. Ethereum, for example, currently averages around 30 transactions per second and will eventually be able to handle 100,000 transactions per second after its major upgrade scheduled for September. And every day, Bitcoin is safely sent around the world for cents on the dollar.”
