Blockchain technology and its cyber currency Bitcoin have long been used under the radar, but it’s now being used to modernise the process that international remittance is sent. While young and agile fintech firms are keen to embrace these technological advances, the financial regulations and large incumbents are creating barriers to it becoming mainstream.
The United Nations Sustainable Development Goals have acknowledged how critical remittance is when it comes to global development; the average cost of sending money cross border, is 7.5%. Goal 10 of the development goals is to reduce this figure to under 3%.
The total annual figure of remittance sent back to developing countries sits at around $440 billion, and the World Bank reports this to be three times higher than official aid flow. However, the actual figure is thought to be much higher than this as it doesn’t capture the amount sent via unofficial channels.
While of course, the total figure is an astronomical amount and for the top 25 countries that receive remittance, it is 105 of their GDP – it’s reported that a further $32 billion doesn’t reach recipients due to charges and transaction fees.
Banks are inherently the most expensive channel, with Post offices and legacy money-transfer operators coming close behind. Remittances have been praised for being integral to reducing poverty and financial inclusion, and for countries that are hit by disaster, remittance is often the first avenue of aid to reach them. On these occasions, money transfer firms have been known to waive fees and charges, in order to maximise the amount that is received.
Back to our point about financial inclusion, remittance plays a large role. As cryptocurrency becomes more widely used for cross-border transfer, it encourages individuals to seek bank accounts. Despite the wealth of benefits this new wave of currency brings, issues with regulation threaten the rate at which it is adopted and the remittance industry still faces several challenges before it can hinder its evolution.
The outdated regulations and red tape that surrounds the financial sector means that firms find it difficult to meet the demands of the new wave of customers. Regulators are not moving fast enough when it comes to embracing more efficient processes for sending money.
An example of this can be seen in the profiling of migrants; previously low paid and accepting of the expensive methods charged by banks for sending money home. Now, many industries thrive on migrant workers, who are well-paid and tech-savvy, wanting to have the opportunities to send money on a global scale, in a fast, secure and cost effective way.
Of course, compliance and due diligence remain a top priority for money transfer firms, but one of the issues that is regularly faced in the industry is the outdated requirements when it comes to identification.
In order to continue to drive the industry forward and embrace developments, remittance needs to leverage digital identification innovation such as automated identification and real-time transaction scanning.
Derisking (also known as debanking) is also acknowledged as one of the biggest threats to the industry, and the World Bank has underpinned this by reporting that money transfer and remittance firms are the most affected. Derisking is the practice of ending or exiting relationships with clients who are observed to be high risk. This partly caused by the strict anti-money laundering and anti-terrorism regulations; this legislation has seen scrutiny from regulators vastly increase.
Those within the remittance industry have worked relentlessly to ensure that cross-border transfers were moved into the formal sector, but this trend of de-risking is making the informal sector more appealing. The average remittance is small, meaning that in reality, it’s considered to be inefficient for money laundering purposes.
Of course, the current political turbulence is having an enormous impact on the remittance sector, especially for those businesses currently based in London. The Brexit decision has shrouded the financial sector in uncertainty and investment has plummeted. Banking passporting is reported to be a bargaining chip throughout the exit talks; while changes to legislation and regulation hang in the balance, many businesses are unable to drive forward, adopting new data and embracing advanced technology that requires capital that simply isn’t available.
The future of remittance relies on technological advancements, namely cryptocurrency and tech that can also mean that bricks and mortar transfer firms can increase efficiency and security when it comes to identification. The fear is that digital currencies are going to worsen financial inclusion, they need to integrate with the service being offered by firms with physical locations to send cash, because, it is undoubtedly these individuals that need to benefit from the reduced fees that cryptocurrency can deliver.
The regulations that surround remittance walk a fine line; while of course, preventing money laundering and the funding of terrorism will continue to be critical, the industry must ensure that this is not at the cost of those who rely on the transfer of these funds to survive.
Note: This article is originally written by Omar Mohammed, Financial Analyst at Imperial FX.