Blockchain could revolutionize India’s $80 bln remittance industry

With the advent of global trade and commerce, the number of people working abroad has also steadily increased. Most of them send back a huge amount of their earnings to their home countries as remittance. With around 250 million migrants in the world, the size of global remittances has grown to a staggering 689 billion dollar industry in 2018 according to the World Bank. As much as 528 billion of the 689 billion goes to developing countries. Some countries rely on remittances heavily. In Nepal, for example, 33 percent of their 27 billion dollar GDP is made up of remittances. This has a significant impact on some countries as this brings in much needed foreign exchange reserves. This form of modern economic migration is usually a good thing, for both the country who receives the worker and the country who receives the remittance money. The country where the worker ends up working gets labor and skill much needed for their economy. In fact, it can be said that the entire Gulf region was built and is still run by immigrants. In return, the countries who send the workers get money which is vital for their economy, as there is usually a limited scope for foreign investment. Many families around the world depend solely on the remittance money to go about their lives. With all this said, remittance is a huge business and many are profiting from it. Each dollar that is taken as profit is a dollar less for the families of workers who most need it. Any cheaper, alternative form of remittance can bring a huge relief for the financial situation of many families around the world.

How does remittance work?

When someone wants to send money to their loved ones abroad, let’s assume from Vancouver to New Delhi, first the money is deposited in a local bank. Then the local bank sends this amount to a banking partner in London. It will take a few days to get confirmation on this transaction. Once the confirmation is received, the money is sent to a bank in Dubai where the Delhi bank has a partner. The same process of waiting for confirmation takes place. Finally, the money is sent to New Delhi. There are many intermediaries that are involved in the current system which take a cut as their commision adding up to a huge portion of the remittance, making it too expensive for most users.

According to the World Bank, around 25% of the remittance corridors charge commissions upwards of 10% or higher. For instance, usually a $100 sent back home will cost someone $10 as commission. Apart from being expensive, traditional remittance channels are slow. Cryptocurrencies can do away with the need of intermediaries and the need to wait for confirmations bringing the cost down significantly.

The advent of Cryptocurrencies

If someone was to send money from Vancouver to New Delhi using Bitcoin or Ethereum, the person can send the cryptocurrency from his wallet to the wallet of the person in New Delhi. The transfer would be almost immediate considering the normal remittance channels. Also, this would take only a negligible cut from the payment as a fee. Sometimes, payments in Bitcoin can be delayed by over a day, but with new improvements like the lighting network, this time delay can be brought down significantly. Some solutions, specially designed for interbank fund transfer, like Ripple, have already been developed but have not yet been successfully implemented on a large scale.

Is crypto the future?

For a new technology to replace an already existing one, it should be better than the existing one, not just as good as the traditional one. Given the advantage cryptocurrencies have over traditional remittance channels, why has it not taken over? One of the things we have to understand is that remittance is a highly regulated market, and regulators have not been kind with crypto. For instance, in India, the country with the largest remittance by volume, cryptocurrencies have been totally banned. Banks and individuals are not allowed to hold or trade in cryptocurrencies. Although banks have shown interest in using cryptocurrencies for remittance settlement, RBI, the central bank of India, has put a dent to this effort. Indians send back around 80 billion dollars as remittance to India, paying around 4 billion dollars in commissions. Let’s assume that cryptocurrencies can bring the commision rates down to 1 percentage. This would mean a saving of around 3.2 billion dollars, considering that the average annual income of an Indian is 1670 dollars. This is equal to the annual income of around 2 million Indians. One thing that needs to be seen is if banks using blockchain to settle payments will actually reduce costs or if they will charge the same commissions, just reducing the time needed. Meanwhile, people have taken to decentralized exchange to do remittances and circumvent the ban, although this is not very prevalent.
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