Banking institutions were primarily built to provide a trusted intermediary between two parties, such as a borrower and a lender. Legitimate commerce required the use of an institutional bank. While banks have come far from their origins in ancient empires, their basic business operations have remained unchanged.
Traditional banks and financial institutions have played an important role in facilitating payments and remittances. A remittance payment is a transfer of funds by a foreign worker to an individual in his or her country of origin, and is often of huge economic significance to its beneficiary. Remittance payments vie with international aid as one of the biggest sources of income in developing countries.
Those who have yet to familiarize themselves with the remittance industry may be surprised to discover its relevance and function as a multi-billion dollar market. Remittances to low- and middle-income countries rebounded to a record level of $466 billion in 2017, an increase of 8.5% following two consecutive years of decline, according to the World Bank. Global remittances, which include transfers to high-income countries, totalled $613 billion in 2017, marking a 7% increase from $573 billion in 2016. Factors such as stricter immigration policies have possibly resulted in an increase in the number of remittance payments this year, and the 2018 figures are expected to rise accordingly.
Besides traditional financial institutions, cross-border transfers have long been dominated by remittance companies such as Western Union. Remittances are targeted at the needs of less developed countries, rather than the Western world. This is reflected in statistics that show that the top countries in 2017 to receive remittances were Kyrgyzstan (35%), Tonga (33%), Tajikistan (31%), Haiti (29%) and Nepal (29%), when taken as a share of GDP.
In many of these developing countries, high percentages of the population do not have access to bank accounts. They are forced to use Money Transfer Operators (MTOs). Due to the challenges that these present, many have called for a solution to revolutionize the process for the ‘unbanked’, bringing them into a corruption-free and inclusive financial arena.
Corruption as the headline act in banking
Corruption has played a starring role in the history of financial institutions. Tackling corruption remains a primary issue of concern for regulatory bodies, financial regulators and the general public. Due to the intertwined nature of the financial sector with government, corruption has systemic complications that threaten economies on a national and international scale.
Compliance frameworks exist to combat corruption, but governance in banking varies hugely on a global level. Banks are intended to function as safeguards to determine and monitor potential illegal activities, such as money laundering. There is a huge responsibility placed on the shoulders of employees to identify and report suspicious transactions, data hacks, insider trading and criminal activities. The transformative nature of the sector has resulted in an increase in incidents, such as cyber hacks, that have directly impacted fraud and corruption, resulting in internal structures no longer being completely reliable.
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Cryptocurrency and blockchain enthusiasts have highlighted the opportunity to leverage the technology to transform the landscape of the banking and remittance sector. A corruption scandal such as the 1MDB case, involving one of the most prominent financial institutions, could have been averted by the use of blockchain technology. Indeed, blockchain’s near impenetrability offers a solution to corruption, as no government can add or remove cash from circulation. So how can blockchain transform the process of remittances and stamp out corruption?
How blockchain stands to disrupt the remittance industry
Until recently, the only two ways of transferring money overseas involved either moving money from one bank account to another or utilizing private wire services. Neither of these options provide security or are the most efficient. However, the global remittance market is undergoing fundamental change. Blockchain holds the greatest potential for revolutionizing and addressing problems within the payments system, including high commission rates, slow transaction speeds and the number of intermediaries.
Although increased competition has resulted in a slight decline in transaction costs over the years, transaction fees and commission from exchange rates which favour the bank or wire service are still charged, and differ greatly from origin to destination. Blockchain facilitates the reduction of commission fees and provides more cost-effective transfers, as it removes the overhead costs associated with intermediaries.
Traditional financial services charge 7.4%. Blockchain can potentially reduce commission fees to below 3%, as is the case on a recent pilot in Serbia. Using traditional banking and wire transfers, the remittance process can take several days, and fees are charged every step of the way. If banks can be removed from the process, costs will decrease even further.
While it is still in its nascent stages, the global banking system can only benefit from introducing blockchain into its services. Its anti-corruption features will save both the public and financial institutions billions, while also introducing greater accountability into the system and policing corruption effectively. Blockchain will enable more people to access money and bring them closer towards financial inclusion.
Aid:Tech is a member of the World Economic Forum’s Tech for Integrity Community.