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After two decades of growth that saw remittance flows to low and middle-income countries (LMICs) reach a record high of $548 billion in 2019, the World Bank now forecasts significant declines.
As a result of the COVID-19 pandemic, remittances to LMICs are projected to fall to $470 billion by 2021, a 14% drop over two years. For comparison, remittances fell 5% due to the global financial crisis in 2009.
One of the reasons why remittances proved more resilient than first feared stands out: many migrant workers in Europe and the United States retained their jobs because they were employed in sectors such as healthcare, agriculture, and food processing during the pandemic.
Migrant workers make an essential contribution to their countries of origin. In 2019, remittance flows to LMICs equated to three times all official development assistance combined and exceeded foreign direct investment (FDI).
Unfortunately, remittances incur high transaction fees, with some of the poorest regions hardest hit. A migrant worker sending money to sub-Saharan Africa, for example, pays an average transaction fee of 8.5% to send $200. In terms of poverty alleviation, such fees are concerning but when transaction costs are higher, migrant workers tend to send remittances less frequently.
The United Nations takes the problem very seriously: by 2030, the international community aims to reduce average global remittance costs to 3%. However, data shows reaching this global target on time might be a difficult task. Despite modest improvements mainly due to technological advancements, global remittance fees remain high.
Overcoming the fees barrier
Why has it proven so difficult to reduce remittance fees? In Africa, for example, despite increases in financial inclusion in recent years, consumers still make 95% of payments using cash.
In the absence of solid financial infrastructure, people rely on informal networks to transfer value in cash. Typically, at least one end of a transaction involves conversion to or from paper money, and the cost of manual exchange is ultimately paid for by the customer.
Demand for mobile payment and online remittance services has surged in developing countries in recent years. For example, Mukuru — a platform that helps people send money and groceries — experienced a roughly 75% acceleration in growth last year.
The lockdowns experienced globally as a result of Covid-19 strengthens the case for e-payments is strengthened even more.
From the perspective of international remittances, this is promising, given mobile money platforms typically incur transaction costs that are significantly lower.
However, in regions like Sub-Saharan Africa, the interoperability of mobile money providers remains a barrier to adoption. In this light, it is understandable why mobile money was only used for approximately 2% of international remittance transfers between 2017 and 2019.
Blockchain in Remittances
By enabling decentralized transactions without requiring a trusted intermediary, proponents of blockchain argue it would help to reduce the number of middlemen involved in international remittance payments and reduce transaction costs.
While the price volatility of some cryptocurrencies has made them ill-suited to remittance payments in most circumstances, stablecoins or asset-backed cryptocurrencies offer a promising alternative.
A blockchain provides a trusted, inalterable record of events that multiple parties have access to. The traceability and transparency that this creates could be highly useful in promoting more efficient KYC and AML processes, helping to eliminate duplication of records and administrative work between financial institutions. By combining this distributed ledger with programmable smart contracts, compliance could be streamlined or even partially automated in some circumstances.
Given the diverse nature of the economic structures in developing nations, however, the potential utility of blockchain will vary depending on local circumstances. The regulatory landscape will be an important consideration here. Highly regulated markets are likely to have dominant incumbents which will be difficult to unseat. In such circumstances, blockchain companies may be better advised to form partnerships with local financial institutions to help them simplify KYC procedures rather than trying to provide an all-encompassing solution.
In other cases, direct peer-to-peer payments via stable coin or cryptocurrency may be possible. Here, last-mile delivery will present a challenge: as cash is predominant in many developing countries, recipients will need a simple and reliable way to “cash out” their remittance into either cash or mobile money. As a result, most peer-to-peer transactions will need to be complemented by money delivery infrastructure in the recipient country.
There are also technical considerations to consider. To challenge incumbent, monopolistic payment providers, blockchain applications need to scale fast and at a low cost. However, blockchain networks – particularly those based on proof-of-work consensus which rely on mining – typically face a tradeoff between scalability and security. This is clearly not a compromise that can be made when handling millions of remittance transactions.
Thus, any candidate blockchain network would need to achieve distributed consensus in a way that supports both high transaction throughput and a high degree of security. In addition, it would need to be flexible enough to integrate with multiple front-end systems, helping to diminish the interoperability problems discussed earlier.
Geeq: unblocking remittances
To address the difficulties discussed above, Geeq set out to create a technology that combines security, scalability and flexibility. Geeq is virtually infinitely scalable: transaction fees on the network are expected to be as low as a fraction of a cent on US broadband, a low cost structure that is both adaptable and replicable as infrastructure develops, while supporting a massive volume of transactions.
Furthermore, by using Geeq blockchain, financial institutions will be able to make use of cost-saving technology to prove compliance or allow regulatory bodies to audit records from a distance. Geeq provides unparalleled security, ensuring 99% Byzantine fault tolerance.
Geeq holds the potential to be a key enabling technology to help lower remittance fees, enabling users to make regular, stable payments, even in smaller increments. Such innovation is essential in order to meet the UN’s ambitious 3% target.
Stephanie is an economist, policy analyst and co-founder of Geeq.
Throughout her career, she has applied technology within her specialist disciplines. In 2001, she was the first to use machine learning on social science data at the National Center for Supercomputing Applications.
More recently, she researched the use of distributed networking processes in healthcare and patient safety in her role as a Senior Lecturer at Vanderbilt University. Stephanie is a graduate of Princeton University (A.B.) and the University of Rochester (M.A., M.S., Ph.D.).