Cross-border payments are big business, and crypto companies want in on the action, which means challenging established remittance services such as Western Union and MoneyGram.
A new report from the Stellar Development Foundation, a nonprofit blockchain company, and Wirex, a cryptocurrency payment platform, showed they might just be making progress.
The survey found that 45 percent of respondents from the UK, U.S., Singapore, and Mexico had sent cryptocurrency across national borders. It also found that 61 percent of those surveyed sent international payments via traditional methods, and more than half felt they paid too much.
Crypto payment companies are banking on more frustrated customers like this, as they roll out new offerings that take direct aim at high fees on cross-border transactions.
The consequences for the global payments system are potentially massive, but crypto companies first need to prove they can actually deliver a cheaper service in the long term.
The global average fee for remittance payments was 6.3 percent of the amount sent as of the third quarter of 2021, according to the World Bank. Those fees can vary across countries and regions, however, especially in poorer nations where the payment infrastructure is less developed.
Cross-border payments make up 2.4 percent of total GDP in Latin America, for example, with countries such as El Salvador and Honduras getting more than 20 percent of their national GDP from remittances. This has made the region a target for crypto companies looking to increase the number of international payments made on the blockchain.
Blockchain analytics firm Chainalysis said in a recent report that remittances are fueling crypto adoption in Latin America. The firm estimates that crypto remittance payments below $1,000 soared from more than $100 million in April 2019 to nearly $400 million in April 2021.
The Middle East and Africa saw similar increases — though it's worth noting that this data was collected before the recent crypto bear market, which could alter the trend.
One of the biggest moves from a crypto company to capitalize on this trend came from Coinbase. The crypto exchange last month launched a pilot program with payments company Remitly that allows customers in Mexico to cash out digital currencies for free until March 31.
"After that date, customers will be charged a nominal fee that's still 25–50% cheaper than traditional cross-border payment solutions," the company wrote in a blog post.
Given the range of fees globally, it's hard to know how much, exactly, Coinbase will charge, but soon the proof will be in the pudding, as customers start paying up for cashing out. Coinbase did not immediately respond to a question about what it plans to charge in fees.
The Stellar Development Foundation, meanwhile, is actually partnering with existing remittance service MoneyGram to help bring down fees.
"With respect to Stellar, lower fees is a key differentiator of the network and a feature that is built in at the protocol level, making it sustainable and scalable," said Denelle Dixon, CEO and executive director of the Stellar Development Foundation. "The network was designed to be fast and affordable. That means transactions can be processed on average in five seconds and the cost for companies and developers is negligible, costing fractions of a cent."
In this area, at least, the crypto community has the blessing of the Biden administration.
"Our Treasury Department is enthusiastic about financial innovation when pursued responsibly, and with an eye toward broad opportunity rather than just financial engineering," said Deputy Treasury Secretary Wally Adeyemo at a conference last year. "We hope that technology will help reduce the cost people pay to transact across borders, for example."
President Joe Biden echoed this sentiment in a recent executive order calling for government agencies to explore the possibilities of blockchain technology to lower payment costs.
The United Nations, likewise, has endorsed the use of crypto and blockchain technology to potentially bring down remittance fees. The organization's Sustainable Development Goal framework aims to "reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent by 2030."
But moving money across borders is notoriously difficult. As former Bank of Mexico Governor Guillermo Ortiz said in an interview back in 2015, "With the implementation of 'know your client' rules, anti-money laundering efforts, and so on, it has become increasingly difficult to have an efficient payment system. Many banks have retired from the business, for example, of handling remittances, which are a very important source of income for many emerging markets."
Crypto also isn't the only sector trying to muscle into the market for cross-border payments. Fintech companies are similarly making moves to undercut existing offerings with a variety of deals and discounts. Revolut, a London-based financial services company, currently offers U.S. customers 10 fee-free transfers per month to any global bank account.
Revolut is also offering unlimited 30-minute transactions in Mexico. Jane Nho, communications manager for Revolut, said remittances will be a major focus for the company in the coming year, and expansion in Latin America is a top priority.
As for how Revolut is able to offer such a sweet deal, she said the company wouldn't disclose the specifics of its business model, but noted that it makes money in a number of ways.
"We're able to make money in other ways," she said. "We make money on interchange [fees]."
Dixon noted that blockchain technology offers more than just cost-savings.
"Fees are one component of what makes crypto a compelling alternative for payments, but there are others, like speed and usability," she said. "When done right, crypto wallets are easy and affordable to use with fast payment flows. That's how crypto is competitive in the long run."
