The Inefficent World of Remittances - Spark's ZEPH Token Solution
In developing nations, basic expenses such as food, housing, education and healthcare among other things are largely paid for by workers who earn a living abroad. For that reason, remittances are often credited with reducing poverty and acting as insurance for the poor in developing countries. When natural disasters strike, remittances are often the first wave of financial aid to reach nations in need.
You can easily see how important this industry is. But did you know that the remittance industry is incredibly inefficient and operates at such high costs to the point that it negatively affects the people that rely on it the most? In fact, the remittance industry is at an inflection point where it’s largely up to new companies like Bitspark to solve structural challenges.
Before we get into how our service is transforming the remittance industry with cryptocurrencies, let’s dive into the inner workings of the industry and take a closer look at the 3 biggest challenges:
- High transaction costs
- Inefficient processes
High transaction costs
Of all the money being transferred in remittances, a large proportion is drained away by the high transaction costs. In 2017, $32bn of the $440bn in remittances was lost in transaction fees. Too much money is being spent on the transaction itself and too little money is reaching the recipient families.
The recent Remittance Prices Worldwide report by The World Bank concluded that the global average cost of sending $200 reached 7.09 percent in Q4 2017. The cheapest receiving region was South Asia with average cost of 5.34 percent, and Sub-Saharan Africa was the highest-cost region with an average transaction fee of 9.27 percent. Banks remain the most expensive type of service provider with an average cost of 10.44 percent.Besides high transaction fees, several high-income countries are thinking of new ways to increase the costs of remittances. One example is the potential taxation of outward remittances, designed in part to raise revenue and in part to discourage undocumented migrants. However, this won’t benefit anyone as taxes on remittances are difficult to administer and it will likely drive the flows underground.
The UN’s Sustainable Development Goals (SDG) recognises the key importance of remittances for global development and has set a goal for reducing the average cost of sending money from the current 7.09 percent to below 3 percent. But as you’ll see in the next 3 points, reducing transaction costs working with the existing system certainly won’t be easy.
If you want to move money across borders, you have two main options:
- Retail remittance channels
- Transferring directly from bank account to bank account.
As you now know, both channels are expensive. A big part of the costs comes from the inefficient processes behind international money transfers.If you plan to use retail channels, you’ll soon find out the market is heavily concentrated among four or five incumbent players. Retail payment channels are expensive because companies need to have a physical presence in multiple locations and they need to manage hundreds of bank accounts around the world in order to facilitate transactions. When it comes to the more exotic currencies, liquidity across these locations becomes an even bigger challenge.
But taking your hard-earned cash and transferring it from your bank account to another is not necessarily a better option for you. Let’s take the top recipient of remittances in Africa, Nigeria as an example. When you send your money from the US to Nigeria through a bank transfer, it will move from local bank to national bank and several intermediary banks. Then it travels through messaging network SWIFT to a corresponding bank serving the African market and eventually it’s delivered to the local bank account at the destination point.
This process takes several days, and fees are added every step of the way. But simplifying and streamlining the process to lower the fees is only getting harder as banks disengage from the remittance industry in an attempt to de-risk their exposure.
De-risking is threatening the industry
A major barrier to reducing remittance costs and streamlining the process is de-risking by international banks. De-risking means that banks disengage from the industry by exiting relationships and closing the bank accounts of money transfer operators. Many financial institutions are choosing not to work in sectors assessed as high-risk, unprofitable, or complicated, including working with money service businesses. As a result, competition is stifled and business is concentrated on four or five incumbent players.
The trend is in part caused by restrictive anti-money laundering and anti-terrorism financing regulations which have resulted in increased scrutiny from regulators on the formal and informal financial sectors. Although, it must be said, that even though the money transfer system could be misused, the small size of the average remittance transaction, which is between $200 and $300, makes it inherently inefficient to use for money laundering.
Bitspark lowers costs, increases efficiency and removes bank reliance.If we wait for institutions and governments to design and implement a better remittance system, it’s likely not much will happen any time soon. So instead of waiting for the future to arrive, Bitspark is making it happen with a crypto-enabled remittance network that completely transforms the industry and takes the 3 challenges head-on by lowering costs, increasing efficiency and completely removing the reliance on banks.
Our service achieves those benefits by using cryptocurrencies pegged to fiat currencies – a feature made possible by the BitShares Blockchain and Decentralised Exchange. Instead of using intermediary banks sending fiat currencies to each other, money sent abroad will be exchanged into fiat-pegged cryptocurrencies. It’s an entirely new transfer option which is open to all of the world’s 180 fiat currencies. Instead of slow and expensive processes, money can now travel across markets using pegged cryptos as cheap, fast and reliable vehicles. This becomes especially important for exotic currency pairings like in our Nigeria example from before. In the end, transaction costs will be reduced drastically with the savings being passed on to the senders and receivers.
All you need is a phone with an internet connection and you can send and receive money. Instead of using bank accounts, Money Transfer Operators (MTOs) buy and sell fiat currencies which increases or decreases their digital fiat-pegged-crypto balance. With our web-based platform and mobile app ‘Sendy’, users can easily locate MTOs near them, top up their balances and transfer money to their relatives abroad. It’s a cash in cash out network with cryptocurrencies as the connecting thread across markets.
For the world’s 2 billion unbanked citizens, removing reliance on banking services is critical in widening the remittance market to reach more people in developing countries. For local entrepreneurs, bypassing banks secures their position as they are less exposed to the trend of banks disengaging from the industry.
The role of the Zephyr utility token
Zephyr is the native token that fuels the growth and usage of our network globally. As in incentive token, Zephyr is rewarded to new members for joining the network and to users for performing certain activities. Any action you take that is economically beneficial to the global remittance network is rewarded with Zephyr. This means that with every transaction and top up for a Sendy user, MTOs will receive Zephyr. The same goes for Sendy top up agents that will be rewarded with Zephyr for successfully topping up the digital balances for Sendy Users.
To support the long-term utility and value of Zephyr, Bitspark commits 25% of transaction fees it earns on remittance transactions to buying back ZEPH from the market on the BitShares DEX. This puts Zephyr at the centre of a positive feedback loop between network growth, usage and value where one positively affects the other. It’s a mechanism that benefits everyday users, token holders and traders.
If you’re interested in getting Zephyr tokens for yourself, you can get them straight from the BitShares DEX. It’s currently the only exchange where you can buy ZEPH, but we are planning to list the token on other exchanges well. To provide additional convertibility, we offer options for selling ZEPH through the mobile app and on our website should you want to do so quickly without accessing the BitShares DEX.