After two decades of growth that saw remittance flows to low and middle-income countries (LMICs) reach a record high of $548 billion in 2019, the World Bank now forecasts significant declines.
As a result of the COVID-19 pandemic, remittances to LMICs are projected to fall to $470 billion by 2021, a 14% drop over two years. For comparison, remittances fell 5% due to the global financial crisis in 2009.
Migrant workers make an essential contribution to their countries of origin. In 2019, remittance flows to LMICs equated to three times all official development assistance combined and exceeded foreign direct investment (FDI).
Unfortunately, remittances incur high transaction fees, with some of the poorest regions hardest hit. A migrant worker sending money to sub-Saharan Africa, for example, pays an average transaction fee of 8.5% to send $200. In terms of poverty alleviation, such fees are concerning. Also, when transaction costs are higher, frequency of remittances decline.
The United Nations takes the problem very seriously: by 2030, the international community aims to reduce average global remittance costs to 3%. However, data shows reaching this global target on time might be a difficult task. Despite modest improvements mainly due to technological advancements, global remittance fees remain high.
Disruption through Digitization
There is a common perception that mobile phones, combined with the demographics of a far younger and larger percentage of young people in Sub-Saharan African countries compared to the rest of the world, may give those countries a boost to adopt digital currencies.
Let’s dig deeper into the details. A Pew Research Study in 2018 confirms tremendously high ownership of mobile phones in these countries, between 75-91%. However, of those who own phones, the majority have basic phones, such as a flip phone compared to smart phones. The result? The largest innovator in the fintech space has been M-Pesa, a mobile banking service. M-Pesa, working with telecommunications company Safaricom, has made it easy to transfer cash via text message. As of 2019, M-Pesa had more than 30 million users in Kenya and more than 31.4 million users outside Kenya.
What are some of the ingredients for M-Pesa’s success?
- Easy to understand instructions.
- A reduced need to carry cash, while still being able to transact in cash.
- The ability to make payments at retail outlets.
- The ability to transfer cash to others, whether they are in the same telecom network or not.
Are consumers in other Sub-Saharan African countries ready to follow suit? It depends. According to The African Leapfrog Index, South Africa is the second highest user of mobile money payments, with 60% of the population having made digital payments in 2017 compared to Kenya’s 70%.
There are many prerequisites for technology adoption, however, and other countries are not at the same stage. For example, the same studies showed only 5.8% of those in Egypt made a digital payment in 2017 and 80% of those in Nigeria (known for its embrace of innovation otherwise) had never heard of mobile money.
What about the predicted use for digital currencies? Even if digital payment applications were the norm, the price volatility of most cryptocurrencies suggest they would not be suitable for remittances.
Digitization without Disintermediation
The M-Pesa model teaches us some of the conditions to replicate to encourage adoption of new payment technologies. It also serves to remind us that digitization is not the same as disintermediation. M-Pesa is successful because it disrupted banking with digitization. It still enjoys all the powers of being an intermediary.
Fees: M-Pesa charges a fee to withdraw cash and another fee to transfer cash. Fees depend on whether the recipient is in network or not, and vary depending on the amount sent. Fees are high and regressive: the lower the cash transfer, the higher the percentage charged as a fee. (On May 12, 2021, only the first $0.46 may be withdrawn from a M-Pesa agent for free, and charges for sending payments begin at $0.93.)
Limits: M-Pesa has the power to cap daily transactions. For example, small or medium sized businesses were limited to $700 per day before Covid19. (During 2020, M-Pesa waived some fees and raised the daily limit.)
Identification: In order to register for a M-Pesa account in Kenya, customers must show a valid government ID such as the Kenyan national identification card or a passport.
Lessons for Remittances: Decentralized Blockchain Payments
As we’ve argued elsewhere, intermediaries in financial markets incur fees which they pass onto their customers. While these costs may be easily absorbed by the rich, they are prohibitively high for the economically vulnerable. While mobile banking applications have led to dramatic increases in economic activity for many, what happens if your most valuable transactions are small? What happens when wages fall due to economic shocks like Covid, and the money you have available for remittances shrinks?
We have observed part of the recipe for success. Provide what consumers want: ease of use, reduced needs to carry and track cash, and the ability to interact with anyone. Be realistic about existing infrastructure and regulatory constraints. Eliminate limits on transactions by removing the power of an intermediary to impose requirements. Finally, provide a payments platform that lowers costs so much it is able to compete with, or be adopted by, existing financial services providers. It has never been possible to bring all these ingredients together – until now.
Why Hasn’t Blockchain Solved These Problems Already?
Blockchain platforms were never designed to cope with the volume of small payments that ordinary people make while going about our daily lives. Private blockchains fail to provide a sensible alternative to cash: they are expensive to implement, limited in scope, clunky by design, and as potentially corruptible as whoever puts them in place. Public blockchains have failed as well, by focusing on disruption in finance rather than payments.
In fact, many blockchain platforms have structured their technologies in ways that make small transactions more difficult than the status quo. When security models depend on participants who are willing to burn resources, they give up the opportunity to lower costs through decentralization. When people must lock up capital or try to understand complex rules in order to participate, incentives are created for agglomeration, delegation, and concentration – leading right back to the organizational forms that have solved these problems for all time, albeit with different financiers. Blockchains such as these do not serve people who simply want timely, uncomplicated, and inexpensive payment solutions.
Geeq Payments : A Thoroughly Practical Approach
Geeq is a public blockchain platform, with architecture that scales to handle any volume of transactions. Described at the most basic level, distributed ledger technologies provide a way to keep track of digital transactions. By focusing on the cost-savings from putting decentralized technology to work, Geeq’s payment platform lowers the cost of a basic transaction to less than one 1/100th of a cent using a typical US household’s broadband. Geeq is reinventing blockchain to make it technologically and economically feasible to send any number of transactions, of any size, including remittances.
As mentioned earlier, countries differ in the state of their infrastructure. The African Leapfrog Index indicates plenty of room to grow in mobile payments, as well as crucial awareness and support from governments that aim to cross the digital divide. Nonetheless, the reality on the ground includes frequent power outages as well as less take-up in older age brackets and more rural communities. To provide utility in these cases, true adoption of Geeq payments requires more targeted approaches.
Geeq’s patent-pending token categories may be used when access to connectivity is difficult and intermittent. Geeq’s certified bearer tokens do not even require the recipient to be the one to redeem them. Geeq has the potential to be the key enabling technology for regular, stable remittances, as well as support all the small payments that make up daily life.
In Kenya, at current prices, M-Pesa charges 5% or $0.23 in Kenya to send $4.67. Geeq’s patent-pending token technologies do not require an intermediary to coordinate liquidity or set fee schedules, because Geeq transactions, applications, and blockchain validation are all decentralized. Such innovation is essential to meet the UN’s ambitious 3% target. Most importantly, these payment technologies will be able to provide more financial security and a better quality of life for all who rely on them.
Geeq is a multi-blockchain platform secured by our Proof of HonestyTM protocol (PoH), safe enough for your most valuable data, cheap enough for IoT, and flexible enough for any use.