ADB report looks at impact of digital technologies on remittances
According to the report, around 75% of global remittances projected in 2017 ($443 billion out of $593 billion) came from developing countries, particularly in the East Asia and Pacific and South Asia regions. The World Bank estimates that the number will continue to grow by 3.5% to $459 billion by 2018.
The report notes that the remittances have a significant development impact. They increase household income which can be spent for social services such as education and health. In addition, they can contribute to financial services expansion and drive growth of inclusive finance.
But these benefits are hampered by high costs which impact the efficient flow of remittances. Though the costs are declining, they remain at 14%-20% for all developing regions. The worldwide average cost of bank transfer is 11%, a slight decline from its 2008 level of 14.6%. The average costs for IMTOs (international money transfer operators) are lower at around 6%, with post offices’ being 7%.
Remittance costs in Asia have gone down to 8%, but are still above the global average (7.4%) and the targets set by the United Nations’ Sustainable Development Goals (3% by 2030). A 5% decline in remittance costs could generate $15 billion in savings. Information and communication technologies could play a key role in this area.
The basic mechanism of cross-border remittance transactions, built around correspondent banking relationships, hasn’t changed much during the past few decades. Most recent innovations focus on repackaging efficiencies within the international financial infrastructure according to the report.
Dependence on back-end clearing and settlement entities adds opacity to remittance cost structures. The report also notes that fluctuating foreign exchange rates obscures the costs further, as the disclosure or estimation of such rates varies across remittance service providers (RSPs).
Potential impact of digital technologies
Currently, purely digital cash-in solutions cater to high-income sending to middle- and low-income country corridors. The solutions can lead to substantial savings as demonstrated by the 1% flat fee of TransferWise , but the benefits are limited to people who can deposit by local bank transfer, debit or credit card (in select currencies), or SWIFT international transfer. Savings with other providers are often similarly confined to that sub-segment.
Access to digitised channels, has not yet fully translate to usage. Obstacles include to inadequate value propositions for merchants, weak stakeholder economics for card networks, insufficient aggregate customer demand, inconsistent infrastructure and regulatory frameworks, ineffective distribution models, and reluctance to pay full taxes on previously unreported revenues.
The authors of the report expect physical currencies to remain as the fallback for situations where electronic acceptance is not available, either because one party lacks the proper means, or they find it uneconomical, inconvenient, or both.
Some Fintech players are seeking to consolidate and/or replace parts of the legacy remittance value chain, while others want to reconfigure it in a more fundamental fashion.
The report classifies Fintech propositions based on scale and scope of impact.
Status Quo Plus: Traditional IMTOs using the well-established infrastructure of intermediary banks and bilateral agreements along with SWIFT and focusing on optimising cash-in, cash-out. Digital services may bring efficiencies, but are reliant on existing core financial infrastructure.
Improved Fundamentals: Here, international IMTOs seek to leverage their massive scale to bring fixed cost efficiencies. An alternative model is to use aggregation with hubs managing the corridors; multinational “borderless accounts” with providers doing net transfers across their international accounts.
New Paradigm: The objective here is to move toward significanty lower, even zero-fee services. These companies are also exploring new revenue sources, such as user insights and targeted advertising. Some are trying to leverage cryptocurrencies for disintermediation and open APIs to make for more democratic access.
According to the report, the third cluster of innovative technologies and business models could prove especially disruptive and may require a complete reworking of the existing competitive environment.
Decentralised cryptocurrencies and distributed ledger applications could potentially address the backend opacity. Blockchain-based solutions can provide granular transaction history. They will also provide visibility of cross-institutional data by numerous parties in real time, along with cash-out opportunities through strategic partnerships. The distributed nature of access, would hinder any attempts to falsify records.
Cryptocurrencies could theoretically render intermediary banking infrastructure unnecessary. Digital assets might then be transferred between two parties without external permissions, which is then moved over a cryptocurrency’s secure network to the receiver. However, the perceived illiquidity and volatility of cryptocurrencies remains a challenge.
Central bank digital currencies (CBDCs) could produce a peer-to-peer (P2P) transfer network whose value would be anchored by its 1:1 exchangeability with the other liabilities of a central bank, cash, and reserves. CBDCs could also help to universalise a technological standard for electronic payments.
The report cites the Monetary Authority of Singapore as a pioneer experimenting with a state-controlled cryptocurrency. Its Project Ubin has placed the tokenised form of the Singapore dollar on a distributed ledger, the first of its kind in Asia.
Interbank distributed ledger technology applications, more widely, could bypass correspondent banking and promote direct settlement between financial institutions. Ripple recently announced that over 100 financial institutions are now active on its enterprise blockchain network RippleNet, wherein in-network banks can initiate and settle wholesale payments through cryptotokens. IBM, Mastercard, JPMorgan, SWIFT, the Gates Foundation, R3CEV, and more are all competing to establish a distributed ledger platform for cross-border international payments.
At the moment though these initiatives represent only a tiny sliver of cross-border flows. A consensus has to be reached by all stakeholders over the utility of either cryptocurrencies or distributed ledgers for realizing the large-scale structural impact of the technology.
The report notes four ways in which governments can play an enabling role for digital transformation of remittances and driving greater financial inclusion.
Firstly, governments can develop national IDs, potentially including biometrics and other technologies. Examples include the Aadhaar digital identity program in India or the Mexican Matrícula Consular in the US.
Initiatives such as universal coverage programs for rural mobile broadband can facilitate wider access to digital remittance channels.
Appropriate regulation of distribution channels would also be important. The report states that agents should be regulated on a risk-proportionate basis, as heavy licensing and compliance requirements can limit their footprint and exclude the local merchants that have been typical of mobile money. Interoperability can help establish critical.
National awareness campaigns, financial and remittance literacy, and technology usage assistance (e.g., classroom-style sessions, via SMS, or even door-to-door) can be organized through public-private partnerships and with possible donor agency support.
 Transfer-wise avoids currency exchanges by rerouting money domestically. A euro outbound remittance is used to fund a euro in-bound remittance.
Read the report, Labor Migration in Asia, Increasing the Development Impact of Migration through Finance and Technology’ here. The section on 'Leveraging Remittance Technologies for Financial Inclusion in Asia' is available here.