06 April 2017
The article originally appeared in The National | Business.
Traditional business models are being challenged by new disruptive technologies whose speed of development makes the “catch-up” act very difficult. However, if something can provide solutions to problems encountered by businesses and individuals, it is most certainly welcome. One of the biggest problems is faced by the large expat population in the region, which relies on remittances to transfer cash across borders. For an industry worth nearly US$100 billion in the GCC, and $19bn in the UAE alone, the process is quite time-consuming and expensive, with the banks, exchange companies and central banks functioning as intermediaries.
The remittance process is carried out through certain models – pre-fund models, post-fund models and subsidy models. The pre-fund model works on a corridor basis, for example, India-UAE, UAE-Pakistan, UAE-China etc, the pre-fund model allows the sending agent to quickly be able to settle the net amount with the beneficiary agent or bank, so that their customers can get the money quickly. In the post-fund model, the beneficiary bank advances the amount to the beneficiary and as a result they have to absorb the loss if the sending bank defaults.
All of these models add to the cost which is borne by either parties. For instance, in the pre-fund model, the transfer agent has to keep a certain sum of money as deposit with the receiving bank, in most cases, without interest to speedily complete the transaction. It also needs to have physical cash of the equivalent amount being sent to be present at their centres to settle the transaction, which again does not pay any interest.
Typically, the remittance process takes one to two days, involves a lengthy digital trail and has to go through the clearing process of central banks.
The costs for using such intermediaries has always been an issue for cross-border remittances. For instance, money transfer agents such as Western Union, MoneyGram etc, charge a flat fee of Dh10 to Dh20 irrespective of the amount being sent. Such transfer agents give the option of collecting the cash at their business centres in the receiving country or credit the amount to the receiver’s bank account. The former transaction takes about an hour, while the latter might take a day or two depending on the tie-ups that these transfer agents might have.
Enter Blockchain technology. And just what is that? Blockchain is an open, distributed ledger that can record transactions between two parties efficiently, and allows users to verify transactions in real time without the need for a central authority.
Every new transaction is checked by the network and, when approved as valid, is added to the Blockchain.
So how could Blockchain disrupt the remittances industry? Reduced time – a typical Bitcoin transfer takes close to 10 minutes to be confirmed by the Blockchain network; imagine sending money to your relatives from abroad in that time as against one or two days in the present scenario.
Reduced cost – remittances from abroad typically cost about 5 per cent of the transaction; sending bank, receiving bank, clearing central banks all receive a cut in it; while Blockchain avoids these intermediaries, thereby reducing costs significantly.
According to Ripple, moving to Blockchain technology could reduce costs by up to 60 per cent in case of cross-border transactions. In the past, disruptive technologies have shown the capability to transform both business models across the spectrum.
Uber and Airbnb have disrupted traditional business models and have made incumbent players to change strategy at a rapid pace or risk irrelevance.
The remittances industry could very well find itself in that position should Blockchain start-ups succeed in convincing country regulators. Gearing up to the knowledge and adapting quickly is the only way out. Shape up or get shipped out.
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