Peer to peer money transfers across borders, or remittances in the short form, are arguably the world’s most important international cashflow. Compared to other cross-border capital flows, such as foreign direct investment (FDI), or official development assistance (ODA), which is typically channeled through multilateral institutions or as bilateral aid, remittances are not only a bigger overall figure, they are more persistent. Remittances have also demonstrated recession resistance. During the 2008 global financial crisis, all cross-border cashflows declined precipitously, while remittances held their course, charging to a projected $715 billion globally in 2019, which is merely the tip of the iceberg as the officially reported figure.
In a world roiled by populist sentiments and anti-immigrant tendencies, the world’s well-trodden migration corridors, which follow remittance corridors one to one, are under strain. It would seem fitting (if tragic), that a world hellbent on retrenchment and deglobalization, is not only raising barriers to entry to the more than 260 million economic migrants around the world, it is also squeezing remittance flows with costly transfer fees. This diaspora population whose hard labor, productivity and intellectual capital power the goods and services of the advanced economies, while their remittances to loved ones in their home countries are in many ways the flywheel of global development. Unlike FDI or ODA, which are largely institutional cashflows often falling into corrupt, kleptocratic or nepotistic hands, remittances by their very peer-to-peer nature are most often below the corruption threshold. Simply put, remittances are too small a sum individually and too disaggregated for corrupt people to care as they have other attractive nuisances drawing their attention in the form of large institutional capital flows, or informal and unregulated value transfer networks such as Hawalas. Furthermore, remittances are not propping up corrupt regimes nor are they a meaningful source of capital for terrorism finance or narco-traffic, particularly in the formal remittance industry. Rather, they are principally propping up households and serving as a backstop against poverty and financial hardship. A disproportionate money control system, however, makes remittances up to 10 times costlier to send than domestic transfers greatly depressing the net amount of remittance flows reaching their intended recipients and beneficiaries.
Of the $150 billion in outbound remittances from the U.S. sent by a more than a 45 million strong diaspora population, the annual average outbound sum is a mere $3,300. Adjusting for purchasing power parity or the local currency conversion from a hard currency to the often hyper-inflated currencies in many developing countries and even a paltry remittance can go a long way. Indeed, for all the innovation taking place in contesting traditional money transfer organizations (MTOs) such as Western Union or MoneyGram using technology, the race for more efficiency has not done nearly enough to combat the often-usurious transfer costs, notwithstanding the impressive gains on instantaneity. In 2017, the estimated aggregate transfer costs of sending remittances was $30 billion. By this measure, the global banking system has reached a point of diminishing returns, wherein the risk-averse brick and mortar operating model that dominates the trade has left 3 billion people around the world on the margins as either unbanked or underbanked. It is hard, if not impossible, to pull people into economic productivity and thus opportunity, if we cannot give them access to the veins through which capital flows. Perhaps it is time to redefine what it means to be “banked” in the first place?
In some countries the number of people without a bank account is so high with Egypt at 85% for example, it begs the question why have we not redefined what a “bank account” is or ought to be? Insidiously, women represent 56% of all unbanked adults globally, demonstrating another way in which the modern financial system has failed on the diversity and inclusion scorecard. You cannot end extreme poverty, let alone achieve whole segments of the UN’s Sustainable Development Goals (SDGs), unless the issue of financial inclusion is redefined and prioritized. Remittances are one obvious and meaningful area of opportunity. It would stand to reason that if government largesse from donor countries went to creating zero-cost remittance transfer corridors, it would be more meaningful to the development of these countries or targeted beneficiaries on the receiving end than the often controversial “tied aid” they receive in a trickle – often with onerous technical provisions that make the donor nations feel good about themselves, but in the end do very little to help their intended beneficiaries. The inverse is also true about reducing trade barriers for imports from developing countries, enabling countries that produce the lion’s share of the world’s commodities to also move up the value chain.
A world with more mobile phones or connected devices than people, is also a world that could flatten the cost of financial transactions such as remittances, the world’s most important international cashflow, to near zero. The cost of physical intermediation, particularly in rural communities who face the double-jeopardy of having to absorb exorbitant transfer fees while having to spend money and time traveling to remittance collection sites – often at the peril of physical harm – is a high price to pay indeed. The compounding effect of these fees and the attendant risks along the way are like a negative drag coefficient on the global economy writ large, and the development agenda in particular. As if the senders of remittances did not face enough challenges with the anti-immigrant sentiments that have gripped many advanced economies, their hard-earned money of which they steadily share a portion with their loved ones in their home countries are largely uninsured by today’s standards. As a result, should ill fortune, death or disability fall upon the remittance sender, it is likely their family and loved ones in their home countries will fall into hardship or poverty as remittances become intermittent or end.
To fill this void, three gaps must be crossed. The first relates to connectivity for which the internet and a vast global network of nearly 5 billion mobile phones have paved the way. The second is to find alternative proxies for payment networks and payment methods that do not sacrifice accepted banking norms, such as anti-money laundering (AML), fraud or know your customer (KYC) rules. This is now a 12-year-old solution, with well-worn mobile payment networks like M-Pesa in Kenya responsible for safely transferring nearly 50% of the country’s GDP with 93% of the population with access to mobile payments. Although the work of scaling this model across countries has encountered obstacles, with perhaps the highest being the inertia of operating an “unbroken” business model, particularly from the vantage point of status quo. The third gap to not merely mark a step change in remittance innovation, but mark a radical improvement in efficiency, trust and scalability is to embrace blockchain, cryptocurrencies and digital wallets, with this last item now becoming standard issue in new generation smart phones. What is missing then in stretching this capability across borders is some degree of consensus among financial, technology and civil society leaders that such a network would not erode known banking and money transfer norms, but rather augment them. Herein the experience of BitPesa is illustrative as they leverage blockchain and cryptocurrencies to improve efficiency, security and speeds across its African commercial payments network, all while remaining highly compliant. Removing friction from official remittance flows can have a measurable impact on financial inclusion and keep the economic flywheel turning.
