Introduction
According to Migration Data, global remittance flows are estimated to have reached $550 billion in 2021, with the majority directed towards low and middle-income countries. The World Bank projects that remittances will reach $630 billion in 2022, with record flows into countries such as Ukraine.
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Despite the significance of these flows, the remittance industry is fraught with challenges. High transaction fees, slow transfer times, and lack of access to banking services are common issues. These problems are particularly acute in emerging markets, where many people lack access to traditional banking services.
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Concepts to understand the remittance business
Before we go in depth explaining each concept it’s important to understand that we are extracting them by analyzing one of the world most successful remittance businesses which is western union.
Corridors:
- In the context of remittances, a corridor refers to the path that money travels from one country to another. For example, a common remittance corridor is from the United States to Mexico.
- There is no single integrated global remittance market. Instead, there are multiple markets acting as networks connecting various country corridors.
- Different remittance service providers operate along these corridors under different legal and regulatory frameworks.
The Network effect:
- Western Union's network is vast, with a presence in over 200 countries and territories.
- The company's network includes a combination of retail locations, ATMs, kiosks, and digital platforms.
- Western Union has also invested in tech partnerships that have enabled integrations into platforms like Whatsapp, WeChat, and Safaricom’s mPESA.
Fees:
- Fees for sending money through Western Union can vary greatly depending on the amount of money being sent, the countries involved, and the method of transfer.
- Traditional remittance providers like Western Union and MoneyGram are typically more expensive than their fintech counterparts, with an estimated 15% premium on average.
- These fees can be built in as a transfer fee, a marked-up foreign exchange rate, or both. Depending on the corridor, these fees could account from almost zero to up to 20% of the total transfer.
- The cost of remitting to Africa has historically been among the highest in the world, averaging around 10% of the total amount sent.
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With all of that being said, how can account abstraction and emerging market stable coins change how remittance works? And in which markets can they have a meaningful impact?
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Analyzing Corridors
For the sake of this analysis, we outline a couple of remittance corridors that could provide interesting value in terms of how they can be improved for the betterment of the users, and which represent interesting opportunities.
💡 It's important to bear in mind that the biggest corridors in terms of volume are those coming from the US into Latin America. But given matters of both regulation and compliance, I have decided to omit them since they require further investigation.
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The 🇧ðŸ‡- to -(🇵🇰/ 🇪🇬) corridor
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The 🇸🇦-to-(🇲🇲/ 🇵ðŸ‡) corridor
Now that we have the raw information in the table. We can have a expand a little bit on the flow of capital in the case of remittances.
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The Case of Egyptian Anon and His Family
Anon is from Cairo, Egypt but he currently works in Bahrain in the service industry. Each month, he earns his hard-earned salary and manages to send 60% of it back home to his family.
When he wants to send that money back home, his process may look something like this:
- Visit an agent for a service like Western Union or MoneyGram with his money
- Be charged up to $13 to send his money back home
- Anon’s family member must go to an agent in Egypt to collect the money, but only 48 hours after the transaction
- Perhaps Anon’s family member wants to save some of this money and, due to Egypt's recent currency devaluation, they might want to convert whatever money is left at the end of the month into dollars
- After that, they might want to stash those dollars under the mattress as a way of safeguarding their savings
Though greatly simplified, Anon's case may not be uncommon and serves to illustrate the hassle that many people have to endure just to send money back home. Coupled with this, is the economic situation in many of the countries these foreign workers hail from. They have been hit with rising costs, inflation, and devaluation of their currency.
Amid all this turbulence, an interesting phenomenon has been happening in countries like Egypt. Given currency restrictions, devaluation, and the need to safeguard their savings, more and more people have found a way to dolarize their savings without having to go through a bank or even having to stuff their bills under the mattress.
Egypt has seen an interesting uptick in the use of stable coins among its people since the 2022 devaluation of the EGP. So much so, that the topic is often discussed in internet forums.
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Adding crypto to the equation brings many advantages, but can also introduce some downsides if people are not properly onboarded. Fortunately, there are new methods for onboarding people and creating new flows for remittances. Like smart wallets
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How can AA wallets and stables can improve the process.
The use of smart wallets and local stablecoins can provide a new solution to the remittance flow, with the added benefit of helping people instantly send, receive, exchange, and invest in one place.
Below, I have outlined how an AI-powered solution could potentially simplify the remittance flow and help the receiver easily spend, save, or exchange the money being received.
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Case 2: Anon now uses an account abstraction wallet.
Since the first case, some things have changed for Anon, who is now working from Bahrain. He has the following options:
- Receive part of his salary in nBHD or easily convert his BDH to nBHD through an authorized on-ramping partner.
- Automatically deposit his balance into a money market protocol to earn additional yield on his account.
- Send some of his money back home to his family. To do so, he:
- Selects his brother's account.
- Chooses the amount of money he wants to send. He can optionally perform a swap before sending, so his brother receives the money in his desired currency.
- Presses send, and the money is transferred to his brother in less than 10 seconds for less than 0.25 USD.
- Anon's brother receives the money and can:
- Spend it at any merchant that accepts Mastercard or VISA, since he has connected a card to his account.
- Convert it to cash via an off-ramp partner.
- Swap it for a USD-linked stablecoin like DAI to dollarize his income and perhaps invest in a protocol that offers some APY on those stables.
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Although this has been a short piece of writing outlining the some facts about the remittances business and how account abstraction combined with emerging market stable coins could be used to improve the peoples life and user experience. We are still dealing in experimental territory but we are working towards making something like this into a reality very soon.
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