Concurrently, thanks to innovation and advanced technology, the average total cost of sending money has been declining. According to the World Bank, the global average dropped to below 8.4% in the first quarter of 2014 from the 9% recorded a year earlier (Mohr World Consulting, LLC, 2014).
But with all this growth, why isn’t the process of transferring money as smooth as it should be? Why is some remittance corridors paying negligible amount while others such as Saharan Africa pay is as high as 12% of the amount remitted? These are the questions that this article begs to
Why is transferring money still difficult?
Imagine you are to send your nephew $25 from the UAE. How much would he get?
It is hard to tell if you have never done it before using the conventional system, all because of a myriad of hidden charges. Unless you are internet savvy, you cannot avoid a multitude of fees in addition to diluted exchange rates that accompany such a transaction.
The draining of the lump sum involved is what many customers in this industry decry. The fees charged by Money Transfer Operators (MTOs) and their foreign currency exchange rates reduce the total amount sent. Even in the cases when you fall into the trap of the ‘fee-free rates’, the exchange rate is often too diluted to make up for the lost commissions.
While we may be quick to judge these MTOs as profits connoisseur, there is more to it than what meets the eye. Factors such as technology and infrastructure, and regulation and interoperability all play a role in cost structure and pricing.
For example, leading commercial banks with a global network that operate in this industry are slowly leaving citing the regulatory risks and a high cost of operation that eats on their profits.
Unlike Money Transfer Operators that can handle spoonful transactions, interbank systems are suitable for moving large sums of money. But governments are keen on large transfers owing to increased money laundering activities over the past two decades.
What’s more, it is a requirement for the players in this industry to know their customers, which raises serious privacy concern, apart from eating on your time as you fill out the forms to reveal your identity. Banks succeed here by making their money transfer customer their accountholders.
Just to remind you, Money Transfer Operators don’t have their independent networks in some regions and just partner with the local banks to reach their customers. Such partnership only means additional expenses, which the end-consumer has to shoulder.
After putting all these factors into account, the problem rounds down to the government control. The numerous checkpoints initiated by the state agencies to mitigate fraud and money laundering, not only increase the cost of doing business but also delay transfers.
How do address the problem
While any problem caused by the government is not often easy to overcome, this one is! The answer does not involve engaging in activism or media campaigns but lies on technology. Do cryptocurrencies ring a bell?
Cryptocurrencies are decentralized virtual currencies that use encryption to transfer digital information and funds, and management of assets. Examples of such currencies include bitcoin, litecoin, ethereum, dogecoin and namecoin. However, what has caused a stir is Bitcoin that uses the blockchain technology, an immutable public record of all bitcoins transactions ever performed arranged in linear chronological order (Mizrahi).
To use bitcoin to transfer money, you need to create a bitcoin wallet address and your recipient too needs one. The rest is as simple as sending an email. You fill the amount you want to send and enter the address of the recipient and click send.
Why should you choose bitcoin over the traditional system
There are lots of benefits that come with embracing bitcoin as means of money transfer. However, there are three outstanding reasons namely:
- Fast: Unlike the Western Union or MoneyGram transfers that take days to be processed, the system is almost instant. The money reflects on the system a few seconds after it is sent but may take up to an hour to be available for withdrawal.
- Cheap: Bitcoin is a peer-to-peer network and, therefore, eliminates the roles played by third parties. You only pay negligible fees, and there are no hidden charges.
- Privacy: While using this network you don’t need to worry about somebody snooping around your finances. What’s more, the transactions are protected and devoid of your personal details.
Money transfer is a lucrative business, with World Bank expecting over US$440 billion in 2015. However, hidden charges are eating on the amount we send. This year alone, almost US$3.696 billion (8.4%) is expected to be lost on charges (Migration Remittance Team, Development Prospect Group, 2015). However, with the help of frictionless transfer service offered by bitcoin and other virtual currencies – and their protocols. While this new front opened by technology has proven to be a battle on its own, its adoption by conglomerates such as Google and Apple could change the payment landscape altogether.
Andy Greenberg. (2011, April 20). “Crypto Currency”. (Forbes) Retrieved October 18, 2015, from Forbes.com: http://www.forbes.com/forbes/2011/0509/technology-psilocybin-bitcoins-gavin-andresen-crypto-currency.html
BusinessThink. (2015, July 22). Value transfer: Why crypto-currencies are no longer just funny internet money – See more at: https://www.businessthink.unsw.edu.au/Pages/Value-transfer-Why-crypto-currencies-are-no-longer-just-funny-internet-money.aspx#sthash.yfeoWibX.dpuf. Retrieved October 10, 2015, from BusinessThink: https://www.businessthink.unsw.edu.au/Pages/Value-transfer-Why-crypto-currencies-are-no-longer-just-funny-internet-money.aspx
Migration Remittance Team, Development Prospect Group. (2015, April 13). Migration and Development. Retrieved October 28, 2015, from World Bank Website: http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1288990760745/MigrationandDevelopmentBrief24.pdf
Mizrahi, A. (n.d.). A blockchainbased property. Retrieved October 20, 2015, from chromaway.com: http://chromaway.com/papers/A-blockchain-based-property-registry.pdf
Mohr World Consulting, LLC. (2014). Are Telcos, Money Transfer Companies (MTOs) and Banks. Miami: Mohr World Consulting, LLC.