The global economy spent approximately $44 billion last year on fees for remittances. Remittances—money sent from one country to another—most often go to low-income households and are proven to reduce the overall poverty of a given nation. They also come with high transaction fees and long transfer delays—significant obstacles to people trying to pull themselves out of poverty.
A core cause of high fees for remittances is friction—money moves slowly and inefficiently from one country to another. Transferring money is expensive because there are limited connections between financial institutions and systems. Currently, we don’t have a neutral network to tie our disparate, siloed institutions together and move money cheaply and seamlessly.
Remittances cross national boundaries, cross currencies, and cross financial institutions. All these barriers add up to inefficient and expensive transactions for everyone. In particular, microtransactions—or transactions, as they’re called everywhere outside of higher-income nations—become prohibitively costly for low-income people who rely on remittances. A typical transfer can cost 10% of the total remittance; when you’re living on $2 a day that lost $0.20 is a direct cut to basic needs like food, healthcare, and education.
For example, let’s say that Maria, who lives in the United States, wants to send $20 home to her mother, Paulina, in Mexico City. Maria can’t transfer money directly from her Bank of America account to her mother’s Santander account, so she sends $20 via MoneyGram. MoneyGram charges $4, a 20% fee. The $16 left over is converted to 246.36 pesos, which arrive in Paulina’s Santander account three days later. This friction places a huge and expensive burden on migrant families and makes it difficult for families to send smaller amounts of money on a regular basis.
Bank of America has to talk to MoneyGram, which then talks to Santander. Each of these financial services has its own rules and technical processes, so moving money between them means wasted time and money. But what if there were a system that could connect them all? What if Paulina could have the 61.60 pesos lost in the transfer? What if the transfer could take less than 10 seconds?
Our current financial infrastructure dates from the pre-Internet days. Siloed financial systems and channels prevent currency from traveling efficiently. Email used to have the same limitations: Previously, only people within the same network could email one another, but that changed when email networks connected around an open standard, also known as a protocol. As with email, the best way to streamline remittances is to connect the backend infrastructure for financial institutions with an open protocol.
Digital currency protocols are especially significant for global remittances. The most well-known digital currency protocol, Bitcoin, is already being used by some technology startups to help alleviate the cost of remittances. Because bitcoin is a peer-to-peer currency that works freely on the internet, transferring money with it is cheaper than using traditional banking methods.
Beam, for example, is a startup using Bitcoin technology to tackle the issue of global remittances in Ghana. Approximately 3 million Ghanaians live outside of their home country. In 2013, this population sent $120 million home. Beam accepts bitcoin from the sender and delivers Ghanaian cedis to the recipient for a lower-than-average 3 percent fee. Beam can bypass traditional financial institutions to lower costs and drastically improve efficiency.
Bitcoin has brought a surge of new talent to the financial technology space. The projects it has inspired address challenges—handling of local currencies, low-to-no fee microtransactions, real-time transactions—that are still untouched by Bitcoin but are critical for bottom-of-the-pyramid use cases. One such project is Stellar, a universal financial network that makes it easier to transact with people around the world in any currency. Anyone can use Stellar to build local financial services for their community. The network’s open-source infrastructure is supported Stellar.org, a nonprofit that aims to expand financial services to the world’s two billion unbanked people.
At its core, Stellar is a unifying layer between all payment systems and all currencies. An open-source SWIFT-like network that allows connected organizations to transact with one another, Stellar has the potential to link siloed financial institutions and services and reduce the friction that contributes to higher fees.
In 2014, the remittance market was worth approximately $582 billion. The World Bank expects the amount of remittances globally to rise to $608 billion in 2015. With emerging technologies such as Bitcoin and Stellar, reducing the cost of remittances is possible. Already, Beam is lowering the cost of remittances sent to Ghana from abroad. With the Stellar network, traditional banking institutions, microfinance institutions, companies like Beam that run on Bitcoin, and other entities will become interoperable. This interoperability would substantially lower global remittance costs by making transactions that cross national boundaries, currencies, and financial institutions more efficient.
For an overview of a more efficient and inclusive future, watch my talk at the UN on using technology to make global remittances work for everyone.
This post was written by Joyce Kim, Executive Director of Stellar.org, a nonprofit that couples technology and digital financial literacy and contributes to open-source software for a universal financial network.
A core cause of high fees for remittances is friction—money moves slowly and inefficiently from one country […]