Rodrigo Mejia Ricart, Research and Public Policy Analyst at the United Nations blogged on 26 March about the need for efficient remittance systems. He also conveyed the industry’s current approach.
Rodrigo commenced by noting that remittances are vital in emerging economies. He shared some numbers of personal remittances as a percentage of the gross domestic product (GDP). This number is as high as 29.3% in Haiti. Rodrigo also shared the staggering global remittance reaching 642 billion U.S. dollars in the last year.
Rodrigo captured the global notion on this important transaction as –
“Recognizing the vital importance of remittances in and for emerging economies, the international community, including the G20, G7 and the World Bank have led initiatives to bring greater safety and efficiency to the remittances market and better serve the needs of the world’s most vulnerable groups.”
Rodrigo emphasized that remittances are the most expensive in the region where it is needed most. He shared information that Sub-Saharan Africa sustains as the priciest region to send money amounting to almost 8.97% average cost. Rodrigo brought to focus that cross-border payment innovations can help reduce costs for remittance service providers.
Rodrigo conveyed that traditional business to business (B2B) cross-border payments are prone to be slow and lack transparency. With such drawbacks, cross-border payment industry genuinely needs innovation. Distributed ledger technologies (DLT) would act as a good fit and has the potential for an industry-wide disruption.
Rodrigo further added on the merits of DLT based solutions. DLT solutions could bring down compliance costs and improve the traceability of transfers. DLT solutions could potentially by-pass a correspondent banking requirement. Such use cases streamline the functioning of remittance service providers.
Rodrigo touched upon some solutions that are being actively tested in the market. Ripple, a financial technology company, tried xRapid, a DLT-based cross-border payments solution. Financial institutions part of this project recorded substantial savings in foreign exchange costs.
Rodrigo also expressed the role of companies like Circle and SWIFT. Such companies have embarked on projects that have dramatically changed B2B cross-border payments. A notable mention was about JP Morgan whose DLT application provides messaging, validation and foreign exchange pricing services.
Earlier this month, IBM announced about IBM Blockchain World Wire, a real-time global payments network in a host of markets. The network also allows users to dynamically choose from a number of digital assets for settlement.
Rodrigo concluded by attempting to answer if the future of cross-border payments would be distributed. He emphasized the need for more innovation failing which international targets such as the Sustainable Development Goals (SDGs) cannot be achieved. Such endeavors are required to minimize the cost of remittances.