For about a decade, India has been the largest remittance recipient in the world, according to annual remittance data by The World Bank. In 2015, India received $69 billion in inward remittance, followed by China at $64 billion. For the year 2016, India is estimated to get about $65 billion from remittances.
With new fintech companies looking at cross-border remittance, technology is likely to change the way money is sent across the globe. And since India is the largest recipient of remittance, any development in cross-border remittance is likely to have an impact here too.
The traditional remittance
Say you live in South Africa and hold a savings account in a local South African bank. And say you want to send $100 worth of money from the local bank in South Africa to your mother, who holds an account with a Nagpur-based bank in India.
To remit money to her, you will have to first instruct the local bank in South Africa to debit 100 rands worth $100 from your account and send it to your mother’s account in Nagpur.
Your bank in South Africa cannot send the money directly, because it does not operate in India. Thus, your local bank will give the mandate to a corresponding bank— say Bank A. Now, Bank A takes the money from your local bank in dollars and talks to its Indian entity and asks if it can pay the money in Indian currency to the local bank using NEFT or IMPS.
Here, first the South African bank’s ledger has to be updated to reflect the debit of money and credit to Bank A. Then, Bank A’s South African ledger has to be updated to say that it has got the money from the bank in South Africa, and that this money has to be given to Bank A’s Indian entity.
Then, Bank A’s Indian entity will update the ledger to say it has got the money from Bank A’s South African branch, which is to be given to the local bank in Nagpur.
Each of these things happen one after the other. Because of time zone differences, it can take up to 2-3 days for the entire process to get completed.
Ultimately, when the money shows up in your mother’s account, the local bank in Nagpur updates its ledger to say that it has got the money that is to be given to your mother.
These actions can take place because of the concept of central authority, which in every case is a bank or a central bank of the sending country and the receiving country.
Technology companies say that they have a solution for this complex problem which, if done successfully, can change the way cross-border remittances happen.
Companies such as Ripple are looking to change the way cross-border remittance is done. “Bankers are not used to going out and doing cool things. You have to work out solutions for them and tell them how it fits into their environment. We decided to focus on solutions for banks and only on cross-border payments. We think that in cross-border payments, there is a fundamental problem in terms of how banks work with each other,” said Dilip Rao, managing director, Ripple Asia Pacific Pty Ltd. Ripple is planning to bring in distributed ledgers to India for cross-border remittance. “The magic of a distributed ledger is that it allows all parties to share information on a ledger. It is like looking at a Google document and we all see the same thing happening. You don’t have to update five ledgers one after another. We can update the shared ledger instantly in 5 seconds,” said Rao.
Some would say that is a bit like how bitcons get transacted. And banks are wary of crypto-currencies like bitcoin because they run on public ledgers, which are not controlled by any central authority. Banks want a greater level of control over the ledgers. The new companies are looking to build their technologies around ledgers that are shared, but are not open to the public.
Ripple sees potential in India. “For a country like India, which is the biggest receiver of remittance in the world, removing the friction in these transactions will make a huge difference.
Typically, remittances are expensive for small companies. Banks charge on an average over 10%. Some of the third-party companies might charge more, which is often hidden in a bad exchange rate. We think by enabling banks to use this new infrastructure, it will allow them to reduce errors and also make it cheaper,” said Rao.
Ripple has tied up with 25 banks globally, which now use its network. “Our target is to get one or two banks in the country. And from India, I expect an actual transaction by May,” said Rao.
Another company that is looking to tap into cross-border remittances is Earthport, which got the approvals from Reserve Bank of India (RBI) last year to do international money transfers on behalf of banks. “It is the first time that RBI has actually given a non-bank the permission to work with all banks. This is something that we have been doing in different parts of the world. And now we bring it to India,” said Hank Uberoi, chief executive officer, Earthport PLC.
What does it offer? “The traditional way of moving money across borders is through correspondent banking, where all banks have a relationship with each other and have accounts with each other—a model that was developed 30-40 years ago. We eliminate correspondent banking. The money now comes straight into our account through an API (application program interface), and we deliver it to the final destination. We choose the best routing possible to send the money,” said Uberoi.
Do you benefit?
Sending and receiving money internationally through a banking channel is expensive and time consuming. Many companies are making an attempt to reduce the turnaround time and costs by using technology.
Remittance involves transfer of fees to each of the banks that participate in the transaction, which are eventually passed on to the consumer.
This is an interesting space to watch out for as, in the coming days, many new developments are going to unfold in the cross-border transactions space.