Remittance Disruption Is on the Way. Incumbents BewareBy Cristian Huertas | Tue, 06/22/2021 - 09:06
Remittances from the US to Mexico represent a vast amount of money – US$43 billion in the last 12 months – that goes directly to low-income families in Mexico. They are the epitome of a painful and dangerous migration that aims to improve the life quality of the relatives who stay in Mexico. However, this exodus is not exclusive to the Mexican population. In 2020, Latin America received more than US$100 billion in remittances. For some countries, like El Salvador or Honduras, remittances represent up to 20% of their GDP.
The common way to send a remittance is to do it through the closest local store, which is usually connected to the systems of WU, RIA, and the like, mainly because the immigrants didn't have a bank account and also because some of these companies are the only ones that can pay in cash in places near their relatives. To send and to receive money, ID is often required (at least by law). ID verification is manual and some liquidation networks even make a physical copy of the documentation of the recipient (next-gen tech to prevent money laundering).
Although the average remittance is about US$300, when you dig into the data you will find that the vast majority of transactions are just over US$100. When you do the math on the average cost charged by traditional remittance companies, in many cases this could go north of US$10. Yes, sometimes more than 10 percent is charged to the hard-working immigrants and their families.
A wave of fintech players have been launching more competitive offers. Some of these companies have reach unicorn status but they are highly concentrated on already banked clients. The other customers (the poorest) are too expensive and too complicated for them to manage. This is changing at a very fast pace, mainly because of the phenomenal success of fintech in Latin America that is banking more and more people in the region (doing the homework that the banks never wanted to do), and also because banking is also happening in immigrant communities in developed countries.
However, the rails that connect innovative products in sender and receiving countries remain outdated, expensive and highly dependent on correspondent banks (banks that honor the transfers of other banks). This makes it difficult for fintech companies to connect to each other transnationally and increment the transfer costs and transfer times of their international transfers.
The new era of remittances comes with the adoption of blockchains that facilitate the flow of funds internationally, at very low cost, and in a more compliant way. The embracing of blockchain technology is a consequence of its technical virtues and the massive global surge of cryptocurrencies. The low cost comes from the de-intermediation, the decentralization and the liquidity of several cryptocurrencies in several markets. The regulatory advantages come thanks to the publicly traceable nature of blockchains, which if properly adopted, could allow any regulator to monitor remittance transactions (without asking anyone – not fintechs, not senders, not recipients).
Avant-garde companies are making the first tests with blockchains like Algorand, within a regulated framework, with powerful results: by allowing senders and recipients to hold zero-cost accounts, allowing them to move money transnationally at almost zero fees, while adding value to the transaction and the ecosystem, they are hoping to persuade customers not to withdraw money from their wallets. This was also extremely difficult some years ago mainly because of two factors: the lack of internet coverage in small towns and the painful process to obtain a POS (a device to accept payments from debit and credit cards). Digital inclusion is allowing several fintech companies like Clip, Mercadopago, Sr. Pago and iZettle to penetrate into small towns, opening the opportunity for challenger banks like Bnext to make a more compelling offer to unbanked customers.
The remittance disruption will come with severe consequences: incumbents will be doomed, more resources will come to Mexican families and a new wave of financial products will be created, opening the way for more unicorns. Traditional remittance companies won't be able to react rapidly enough, not only because of culture or corporate bureaucracy but because of their technological stack and their old business models based on the number of transactions that allows them to receive and liquidate paper money. They will be selling cassettes while others are selling streaming services. By bypassing intermediaries, more money can come to Mexican families, thanks to a more efficient technology that creates lots of possibilities, like paying for a Mexican energy bill from Spain or lending money to a person in El Salvador backed by one of their relatives in the US.
The disruption will happen so fast and be so abrupt that this will be the classical case study in several business schools: The digital revolution destroyed Blockbuster and lifted Netflix. The blockchain revolution destroyed incumbent remittance companies and lifted (Insert the name of a bold fintech/blockchain company).