How blockchain is redefining cross-border payments
When you take into account the billions of people that send money around the world every year, cross-border payments is a huge industry. As we grow more global and decentralized, this will only increase. The past few years of FinTech has already revolutionized this sphere, but what does the future hold?
The biggest disruption to this is blockchain – the lurking behemoth of the financial sector. If you’re not up to date, blockchain is the foundation of Bitcoin and other cryptocurrencies, like Ethereum or Golem. All of these currencies are purely digital, with no physical notes, and so are separate from banks and governments – its decentralized nature means there’s no central authority regulating its worth or how many exist. You can see already how this may shake things up. In essence, cryptocurrencies cut out the middleman.
Blockchain works as a digital ledger where all transaction history is stored in ‘blocks’ that are built upon, so the chain is ever-changing. Bitcoin uses blockchain for currency, but it can be used for much more than that. The blockchain network enables an irrefutable and nigh-unhackable record of data. And here enter blockchain’s other uses. Ethereum can use it to create smart contracts, Tierion to verify any data or file. A new one to watch is Golem, which uses blockchain to give anyone access to the power of a supercomputer.
With the rise of these digital currencies and blockchain’s non-currency related uses, you can see why there’s rapid change in sectors facing any kind of crossover. Welcome to the world of adapt or die.
I could talk about the way blockchain is shaking up different industries for ages, but let’s narrow the focus back down to the money transfer industry.
Greater access for the financially underserved
Just over 33 percent of the world’s adults make little to no use of formal financial services, according to the World Bank. The number of adults with a bank account is slowly increasing, but a third of the adult population is still a huge number. Here’s another stat: 41 percent of adults in developing economies have a bank account, compared to 89 percent in high-income economies. This is where the terms unbanked or underbanked come in, referring to those with little to no access to mainstream financial services.
Blockchain has been bandied about as a solution for the underbanked and they’re not wrong. It’s particularly important in terms of remittances. The flow of remittances to developing countries is huge – an estimated $429 billion in 2016 alone. While money is being sent to higher-developed countries, this is a fraction compared to that being received by the Global South.
Many people sending or receiving the money are low income and potentially underbanked, and are then being hit by money transfer fees. These transactions often happen out of necessity, with people sending money to families in developing areas, and frequently lack transparency. On average, the price of sending remittances is 7.68 percent of the transaction.
An example of this is the country that receives the most remittances from the U.S. In 2015, U.S. remittances to Mexico totalled $25.68 billion, which averages at $4,178 per immigrant per year. You can see the huge scale of money that is being sent.
This is where the entry of blockchain is a game-changer. Without the middleman taking a cut of the remittance pie, the cost to send money overseas will be a lot lower. Cryptocurrency can be sent instantly, regardless of borders. It’s whole definition is decentralized, making it unaccountable to the regulations many money transfer providers face. And suddenly, it becomes a lot more affordable to send money around the world. This will have a huge impact on those in rural areas, particularly those sending money back to friends and family in those areas.
I think experts across all the industries can agree that the increased technology with smartphones has been a game-changer and will continue to be. Around the world, more and more continue to become connected to the Internet through their phones. The UN found that while only 4.5 billion people have access to a functioning toilet, six billion have access to a cell phone.
This is where the integration of phones with banking comes in. Many financial institutions are working towards, or already have, user-friendly smartphone apps, like MoneyGram or World First. However, many countries are missing a local payments infrastructure, as well as a grasp of how digital wallets and payments work. Trust is also a major issue here, as it tends to be with any new technological advancement.
The biggest benefit of mobile money is that it’s not only cheaper, but it’s so much easier to send and receive remittances. Evolving technology is all about improving convenience for the user, so we should continue to see money transfer providers branching out into innovative smartphone tech.
Unprecedented digital security
Online security is a worry for many, and with good cause. Out of all developed countries, the U.S. was found to be the most susceptible to cyberattacks, with over 70 percent of Americans believing that it’s getting harder to stay secure online.
Blockchain is near-impenetrable for fraud and more secure than what the banks use now. In short, it is a lot harder to fool. The weakness of banks comes from their centralization, which makes hacking easier. In contrast, blockchain keeps track of all transactions in its digital ledger, so no one can invent one. Every time this digital ledger is added to by a new block, the security of the entire chain before it is increased. It’s also decentralized, with an enormous peer-to-peer network verifying transactions across the globe. So far, the security issues that have been unearthed with blockchain have primarily been the fault of user error and have been easily fixed.
Another element of digital security it can help with is Know Your Customer protocols (KYC). This refers to how an institution identifies and verifies a customer. Currently, it’s a long process, filled with long paperwork and processes that end up not being too secure (like the security answers you provide that can often be uncovered easily). Blockchain can make KYC a much shorter and smoother process, by entrusting customer identification to the global database.
Be ahead of the curve
Of course, the challenges blockchain faces are many. To see it come to true fruition, it would require mass adoption. The more users, the more secure it becomes. But it’s already happening. Already, financial institutions are putting blockchain strategies into place. Even the United Nations has started using it – in May 2017, they used Ethereum to send aid to 10,000 refugees in Syria.
The market is maturing and slowly gaining the users it needs. And so it becomes more stable and more trustworthy to the sceptics, and invites more users. It’s a cycle and one that is already growing. The effects in the money transfer industry are already shaking the floor. It won’t be long until we begin seeing it everywhere, with those ahead of the curve leading the charge.
Fred Schebesta is CEO and co-founder of personal finance and money transfer comparison website finder.com. Fred is intrigued by digital currencies and always on the lookout for new and breaking trends. Not only is he an award-winning entrepreneur, but also an author, blogger, and keynote speaker.