Future of remittance: Blockchain?

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Source: VectorStock.com

In 2018, 200 million migrants sent approximately 689 billion US dollars to 800 million family members in their home countries. If you’ve ever transferred money overseas, studied or worked abroad — or dealt with anything money-related internationally — then you know what that entails: commission fees.

For many, local banks are still trusted as the most secure and familiar method of transferring money overseas. Their security doesn’t come cheap, though — it’s by far the most expensive method to remit money with an average cost of 8.6%, higher than the world average of 7.4%. Even with their weak exchange rate and delays from procedural necessities, banks are still trusted by people to carry out remits, namely due to their security and familiarity. However, this trend is changing.

In countries where the internet has been thoroughly integrated into day-to-day basis to the point it has become familiar, cashless payment systems are vastly more important than the traditional banking system. Alternatives like providers with cash pickups (Western Union (WU), MoneyGram) and online transfer services (PayPal, Venmo) gained traction with their convenience and speed. WU and MoneyGram gain customers’ trust by handling transactions face-to-face, whilst PayPal and Venmo are often used to carry out small-scale transactions on Amazon and eBay.

Yet, Western Union and MoneyGram are riddled with security issues and asset losses. Venmo and PayPal have their own arrays of horror stories — Venmo with its lack of buyer/seller protection agreement and PayPal with its long history of fraudulent businesses taking advantage. As “the future” of the cashless society, their security doesn’t seem to be up for the job just yet.

Meanwhile, the amount of money being remitted every year grows. The World Bank estimated that global remittances will grow to 715 billion USD in 2019, and it can be expected that remittances to low- and middle-income countries will continue to grow. For underdeveloped countries, remittances can account for up to 35% of their annual GDP, making it a crucial pillar of its economy.

When blockchain and cryptocurrency began development as the future of cashless payments, security and confidentiality were promised to be its pillars. The security of transactions is not only assured by cryptography, but also by its consensus mechanism — where everyone must agree on the validity of a transaction before it is carried out — and peer-to-peer network. Transaction costs are set in advance, and the chain is essentially an immutable ledger once the transaction record becomes part of the chain.

Its issue, however, lies in its scalability, where the number of transactions carried out per second (TPS) are limited due to its peer-to-peer system, which assures its security. It’s like a three-way see-saw, with TPS on one end, decentralization on the second, and security on the third.

To give a little bit of a perspective: PayPal carries out 150–450 TPS and VISA can handle 24,000 TPS (although that number has been debated since), whilst Bitcoin carries out 3–7 TPS and Ethereum handles 10–15 TPS. To take over as the world’s main payment method, cryptocurrencies — and blockchain — need to increase their throughput, without sacrificing security nor decentralization.

Each blockchain is now racing to either get their ideas through testing or is already in the market. One of them is Conflux, which has reached 6,000 TPS in their testnet without compromising security. Control is fully held by the people within its network, and the system is expected to be scalable.

Nevertheless, every blockchains’ mission is one and the same: to be the next platform of the future global currency, which will consequently bring about a new era of remittances.

Instead of being dubbed as “remittance”, it’s just going to be considered as another transaction in the network, with the convenience, security and confidentiality we should and will come to expect. We shouldn’t have to worry about intermediaries losing our assets in the process. After all, we’re already in the 21st century. It’s about time, don’t you think?

Sources: World Bank Organization, KNOMAD survey data

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