Blockchain is an increasingly popular topic of financial disruption. This is all for a good reason, as blockchain technology is able to significantly improve financial processes. One of the areas where blockchain already has a disrupting role is in the remittance industry, which focuses on peer to peer cross-border payments. But first, what actually is this phenomenon called blockchain?
A blockchain is a distributed ledger of transactions. The ledger is distributed decentrally across a network of thousands of independent computers, which means that anyone with internet access can view transaction history, creating safety, and ensuring that no one hacker can edit the ledger. As transactions can be processed digitally instead of having to go through banks and other institutions, transaction costs can be significantly decreased.
So, how is this technology applicable to the area of remittance payments?
The remittance industry is the industry where companies facilitate cross-border payments and it has gone largely unchanged for the past two decades. Whenever a person wants make an international money transfer to another person, the money passes through a bank. This bank, acting as a middle-man, needs to verify, record and send the payment to the next institution, which drives up the cost of the transaction. Public blockchain, in the form of Bitcoin or Ethereum, removes this middle-man and allows safe, transparent, rapid and significantly cheaper direct peer-to-peer transactions.
And how exactly is this disrupting the remittance industry, you ask? Let us explain.
Blockchain is disrupting the remittance industry, because the remittance industry is a newly vulnerable market in finance as it is (1) easy to enter, (2) attractive to attack and (3) difficult to defend:
(1) The market is easy to enter because blockchain networks only require an internet connection and thus are easily accessible. In addition, the trends of global digitalization, improved internet penetration have made it easier for individuals to connect with others all over the world. And last but not least the changes in regulations are favourably, since countries as Japan, Australia and the Philippines already legalized Bitcoin for remittance payments and more countries will likely follow soon (Business Insider, 2015).
(2) The remittance market is driven by volume of remittances and fee per transaction, naturally making some countries more profitable than others. The market is attractive to attack because incoming players can choose in which countries they want to operate, while traditional players are active in all high-profit and low-profit countries.
(3) The market is difficult to defend because it is price sensitive, so the companies with the lowest prices are well positioned. Blockchain start-ups can offer lower prices compared to traditional players as they have asset-heavy operating models with high costs due to having to cover costs of physical stores and employees.
This is just a small part of the possibilities that blockchain offers. So, how do you think blockchain will contribute to the future of financial world even more?
References:
Buenaventura, L. 2016. There’s a $500 billion remittance market, and Bitcoin startups want in on it. [online]. Available at: https://qz.com/775159/theres-a-500-billion-remittance-market-and-bitcoin-startups-want-in-on-it/
Business Insider (2015). The global remittance industry is huge, and digital-first startups are taking advantage. [online]. Available at: http://www.businessinsider.com/the-top-global-markets-for-sending-and-receiving-remittances-2015-7?international=true&r=US&IR=T
