It opens up business strategies that may have been too expensive in previous years thanks to fees like money transfer charges
The remittance industry is big business, and it continues to grow at a rapid pace every year. The much cited data by the World Bank points to an industry of approximately US$600 billion and growing in many emerging markets by 5 per cent annually.
Payments sent from overseas to maintain families back home are an important facet of many economies (The Diplomat gave a nice overview of Tajikistan, one of the world’s most active remittance economies). The vast majority of these payments being fulfilled in cash at Money Transfer Operators (MTOs).
The humble MTO (think Western Union) is therefore an essential part of global trade providing access for billions of unbanked people globally to easily send money home at their convenience in a form of payment they use and trust. Often these MTOs are small shops with one to three employees who due to their limited size and scale, opt to become part of a larger agent network.
The biggest network of MTOs globally is Western Union company, with others like UAE Exchange, Ria and Xoom making up the rest of the market. And while their business model and services are tried and tested for many decades, the advent of digital commerce is bringing new opportunities for MTOs and new threats for the incumbents.
One of the biggest changes over the last 5 years has been the supremacy of the smartphone enabling digital payments and commerce, most notably in China where payment apps often have hundreds of millions of users thanks to companies like Alipay and Wechat.
These payment applications still run on-top of the existing slow, expensive and cumbersome financial systems, requiring payment app companies to have various banking relationships, regulatory requirements and FX partners to be able to operate smoothly — no easy feat.
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But this is changing thanks to an important technological innovation from the last five years: the emergence of Bitcoin and Blockchain technology.
What MTOs need from Bitcoin and Blockchain
Unlike the infrastructure Alipay and Wechat use, which requires integration with new banks, payment providers and intermediaries in order to enter a new market or country, Bitcoin is open to anyone anywhere in the world.
Does it therefore make sense that we can apply this underlying infrastructure to improve margins and business operations for MTOs? The answer is, most definitely, yes.
MTOs join agent networks for the following reasons.
- It is the easiest way to gain access to the largest amount of destinations for customers to receive money
- They do not have their own in-house payment processing systems
- It is the only option for cash-in cash-out services.
Therefore, for Bitcoin and Blockchain based services to make an impact, not only must they provide those basic services, there needs to be a sweetener to incentivise existing MTOs to make the switch.
MTO customers have cash and the recipients want cash, their customers generally do not know of nor care about Bitcoin so it is best if bitcoin is used as the underlying means of currency transmission without the customer needing to know anything about it.
Actual benefits MTOs can see using this new underlying infrastructure
Notably, hedging and FX costs would no longer be necessary for the platform providers. Western Union and other MTO networks need to hedge and trade currencies every day to settle payments between their stores. The reason is because they cannot send each transaction individually in a bank wire transfer on behalf of their MTOs, that would be way too expensive (wire transfer fees are US$20 minimum anywhere in the world).
However, with Bitcoin based systems, because every transaction can be sent individually and there is no need for a bank wire to do it, it eliminates the need for hedging currencies.
Each MTO transaction can be converted to Bitcoin instantly and then sold for cash at the other end just as quickly. This means platform providers can offer better rates and commissions to their MTOs, who can enjoy higher margins or pass the savings to their customers.
These new systems can also offer benefits in easy integration options for mobile payments apps, compliance automation, auditability and transparency. Plus, the companies can switch to a cloud based platform and ditch the dinosaur software installed currently.
This can drive new customers to MTOs and enable them to save and make more money.
It should be noted that Bitcoin is the first such technology to do this but there are others and there will continue to be new innovations in this field.
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Emerging markets are booming around the world and so is the remittance industry, people are using smartphones more and more each year and the necessity to offer cash based services continues to grow.
For the MTOs of the world it can be a defining moment to jump onboard a new set of tools and services or be left behind in an increasingly global and digital world.
George Harrap is the CEO at Bitspark Limited, which has won several international awards and is the pioneer in the Bitcoin / Blockchain Remittance space- rapidly expanding to cater new customers and geographies.
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