Over the next 5 years, the global remittance industry is set to be worth just under $1 trillion. For developing countries that rely so heavily on these funds, how that money is sent is crucial. Blockchain technology could unlock cheaper and faster remittance methods to make the process more efficient than ever before, writes Zak Killermann.
The global remittances market could reach over $930 billion in 2026 with a compound annual growth rate of 3.9%, according to Allied Market research. In the Philippines, money sent home by overseas workers jumped by 12.7% in April, the fastest jump since November 2016. In Bangladesh, remittance inflows increased by 36% in the 2021 fiscal year.
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While remittances have rebounded from the COVID-19 pandemic extraordinarily well, the remittance industry is still an imperfect one, and in many cases, it is plagued by high fees and lengthy delivery times. For people in developing countries that rely on these funds to pay for essential services, these hurdles have impactful consequences on the amount of money they receive and the speed at which they receive it.
Thus, finding cheaper and faster methods to remit money is essential to land more money in the pockets of those who need it. While remittances are becoming increasingly digitised, blockchain technology could accelerate the process further by creating a truly decentralised remittance model that leads to faster delivery speeds, lower fees and better exchange rates.
How Blockchain Makes Global Remittances Cheaper And Faster
One of the core stumbling blocks for people sending remittances overseas is simply the sheer cost of the transaction. By using more traditional forms of remittances, fees can quickly add up and take away from the total amount of money being sent abroad because there are many people and companies involved in the process. Data from the World Bank suggests fees average between 5- 7% of the total transaction, depending on the method used. For people in low- and middle-income countries who rely on these funds for their living expenses, any lost funds due to fees have a negative impact. The higher the fees, the less money they have to spend on essential items like food, medicine and shelter.
However, recent research from Juniper suggests the adoption of the technology behind Bitcoin could help lower the costs of remittances. The decentralised nature of blockchain technology allows for cross border payments free of third-party intermediaries, which in turn speeds up the process of the transaction and cuts back on the costs involved. Blockchain technology could reshape the way we send money overseas – instead of bank to bank, or provider to provider, sending money overseas could be sent directly from wallet to wallet.
From Theory To Application
There’s a lot of talk on the future of blockchain technology in the remittance space – with theories circulating on where the technology could be headed and how it might be used. But theories only take you so far, so let’s look at some real-world examples of how it is playing out.
In El Salvador, where the economy is known to be perpetually volatile, President Nayib Bukele recently announced plans for the country to adopt Bitcoin as its second local currency, alongside the US dollar. The rationale? By employing a digital currency as state currency, Bukele hopes to make it easier for people to send money in and out of the country. Remittances made up 24% of El Salvador’s total GDP in 2020. By recognising Bitcoin as a state currency, El Salvador should be able to more easily facilitate the inflow of remittances from the country's diaspora, thus boosting El Salvador’s overall economy. However, the decision isn’t without criticism, with both the IMF and World Bank expressing concerns over this plan on the grounds of “macroeconomic, financial, and legal issues that require very careful analysis”.
We’re seeing a similar trend in Lebanon, where inbound remittances account for about a fifth of the country's overall GDP, according to World Bank data. In Lebanon, the country's diaspora is reportedly turning to cryptocurrency as a means to gain financial freedom following the financial crisis that erupted in late 2018. While Lebanon hasn’t gone to the lengths of naming Bitcoin as a state currency, anecdotal evidence reported in Arabian Business suggests families overseas are increasingly opting to send cryptocurrency over fiat when sending money to their loved ones. While there are no concrete figures on the number of people who are choosing to send money this way, those who’ve sent cryptocurrency cite “faster and cheaper transactions as reasons” for choosing to send cryptocurrency over other options.
Where The World Goes Next
As countries grapple with the reality of cryptocurrency and how to regulate it, some are choosing to adopt it wholeheartedly by developing their own digital currency while others are choosing to heavily regulate its circulation. For countries where remittances are the crux of their economy, it is hoped that any technological advancement in this area will boost their economy.
El Salvador is an example of a country escalating digital currency to the state level – though the full effects are yet to be seen. The rise of cryptocurrency transactions in Lebanon is another example of how people are making this choice for themselves by simply opting for the cheapest and most efficient way of sending money available to them. Both of these scenarios showcase digital currencies being transferred, and we could easily see the combination of fiat currencies with blockchain technology leading to more local currency ending up in the hands of those in need.
About the author
Zak Killerman is a writer for Finder specializing in money transfers and cryptocurrencies. He loves dogs as much as he loves helping people make better financial decisions.