Money transfer providers abuse their position of power by charging exorbitant transaction fees. New, more efficient money transfer solutions are necessary to help African economies push forward, and blockchain technology might be the best option.
Remittances coming from migrant workers from all over the world make a major contribution to the African economy. While the impact of these money transfers differs from country to country, it’s a fact that in many places they play a crucial role not only for the families of workers. Remittances are a big source of fuel for economy. Therefore, it’s not surprising that money transfer providers have an acute interest in Africa. However, it turns out that this interest isn’t a very good thing because in many situations those providers abuse their position of power by charging exorbitant transaction fees. New, more efficient money transfer solutions are necessary to help African economies push forward, and blockchain technology might be the best option.
Today, over 30 million Africans work in foreign countries and support their families back at home with regular money transfers. These remittances literally pour money into local economies, thus fueling the development of the country as a whole. According to data and predictions from WorldBank, remittances to Africa will rise to $39.6 billion in 2019. That’s only for the sub-Saharan region, meaning the total volume of remittances is much higher. Moreover, it’s constantly growing, which means that the importance of these transfers for the developing countries increases.
In some African countries remittances percent of GDP nears or even exceeds 20%. For example, in Gambia it’s 21.25%, in Liberia it’s 18.7%, and in Lesotho it’s 15.19%. These numbers are staggering as they indicate that should those transfers stop, economies of these countries will be on the verge of collapsing.
Of course, the situation isn’t as dire everywhere. For example, in South Africa remittances constitute only 0.25% of GDP. Yet even the wealth of this country doesn’t allow its citizens to escape the problems caused by the faults of money transfer service providers.
South Africa is a major business hub on the continent, therefore, transfers in this country go both ways. With inbound remittances being only a minor issue, here it’s more important to find trustworthy companies serving South Africa outbound transfers. Those are subject to the same faults, meaning the transfer fees they charge are very high and using them is often inconvenient in general. The situation is the worst with traditional banks because not only are they more expensive by default. The infrastructure in Africa as a whole is poorly-developed, therefore large parts of population have either very limited or no access to banks at all.
Overall, the economic impact of remittances in Africa is huge. A study published at SpringerPlus in 2016 highlights that their influence is most important for the financial sector. And an ICAEW report clearly shows that the impact of remittances is so significant that in the third quarter of 2018 African countries which went through an economic slowdown showed a positive development in spite of it. It’s the money influx coming from remittances that creates the positive outlook for entire states. And this money can be used for innovation and further development, which can help the country pull through the economic downturn.
The importance of remittances in Africa turns it into a highly lucrative market for money transfer services. In theory, this should create a highly competitive niche with multiple service providers and very beneficial deals for customers.
However, the reality is the opposite. The financial industry in Africa as a whole isn’t very strong. Therefore, there are only a few money transfer service providers, and those are big names like Western Union and MoneyGram.
The problem is that these companies understand the importance of fees, commissions, FX markups, and other factors that influence the overall transaction cost. And that importance lies in the fact that the higher the cost is, the less money the economy gets. Yet, those businesses seem not to care and abuse their position constantly.
The simple truth is that with few available options for remittances, migrant workers have no choice but to lose a big part of their money. The sum total of these losses goes into billions, and there is no way to resolve this problem while that handful of money transfer businesses remain in charge.
The good news is that the need for innovation and changes in the financial sector is pushing for these changes to actually happen. Today, remittance services become more accessible due to online money transfers. However, there is still a long way to go until the ‘chokehold’ set by current top service providers can be removed.
Blockchain technology might be the best solution for Africa’s problems with banking accessibility. Digital currencies have the distinct advantage of not necessitating visits to an actual bank to get your money. And even despite the limitations of local infrastructure, it’s much easier for people in rural areas of Africa to reach a place with an active internet connection than a bank.
Decentralization of cryptocurrencies is another big advantage because it makes it impossible for governments to impose regulations over remittances, like additional fees. Cryptocurrencies basically make international and cross-border remittances simple, cheap, and fast. One also shouldn’t overlook the fact that these transactions are highly secure.
However, despite the obvious advantages and huge potential of implementing blockchain technology for remittances in Africa, realizing this plan is a big challenge. The main problem before it is the lack of regulations. There is also the issue of infrastructure and limited internet access. Another factor to consider is that to make this plan efficient, multiple payment systems will need to be reworked to allow for cryptocurrency payments.
Most importantly, cryptocurrencies themselves need to become stable. While their values fluctuate significantly, this type of currency is too volatile to make a good choice for remittances.
To sum it up, one cannot deny that the money transfer system in Africa requires an upgrade right now. Improving it can significantly boost the economy, thus making this particular issue a priority. Cryptocurrency startups, which appear more frequently today, show great promise. However, the financial system as a whole will need to be changed in order to solve this problem.
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