Remittance Transfers: Policy, Practicalities, and Innovation

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New partnerships, new ledger systems, and cutting-edge initiatives in the payments industry continue to meet evolving customer and market needs, offering faster processing, reduced costs, and enhanced transparency.  The remittance market, in particular, is one in which there is a strong policy interest in making payments as efficient and reliable as possible.

Although there is no single, authoritative definition for remittance transfers, the World Bank describes them as the sending and receiving of small amounts of money from one country to another and notes that such transfers are often initiated by migrant workers. According to its estimates, 232 million migrant workers sent remittance transfers totaling $582 billion in 2015, $430 billion of which went to developing countries. Although individual remittance transfers are generally low in value – as the IMF has observed – they provide a significant source of capital for developing countries in aggregate.

In a new article I co-authored with Alaina Gimbert, Senior Vice President and Associate General Counsel at The Clearing House, titled “Remittance Transfers: Policy, Practicalities, and Innovation,” we take a deep dive into remittances and conclude that achieving worthy policy goals remains a challenge when faced with the practical limitations of legacy payment rails. The article is featured in the August 2017 issue of the Banking & Financial Services Policy Report.

We begin with a discussion of the realities of remittances, including the business models and operational practices used by remittance transfer providers (RTPs) that rely on legacy rails to connect to financial institutions around the world. From there, we explore how worthy policy goals – improving access to competitive, low-cost remittance transfers services that are also transparent and reliable – may not always be aligned when confronted with the limitations of today’s transaction models and global communication practices.

To illustrate the dynamics of these competing policy considerations, the article discusses the provisions and implementation of the new remittance transfer requirements of Section 1073 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Finally, we consider how promising developments in financial technologies can bring global stakeholders together toward enhancing remittance services. With respect to blockchain technology, and Ripple in particular, we explain:

“Blockchains and other distributed financial technologies (DFT), when combined with robust governance and process standardization, potentially offer RTPs a novel solution… Essentially, DFT can enable financial institutions lacking any direct relationship with each other to establish trust and coordinate their actions to settle with each other… This direct connection, paired with communication functionality, can allow an RTP and a receiving financial institution to agree upon exact fees and exchange rates prior to settlement. The technology developed by Ripple is one example of DFT with these functionalities that could be used in just this way.”

Why do innovative financial technology solutions like Ripple’s matter?  The roll-out of the Dodd-Frank Act’s new regulatory structure may leave RTPs that lack a feasible way to meet its regulatory requirements little choice but to exit the remittance market. The result is less competition, which drives up prices and undercuts consumer access to remittance services.

However, this policy outcome is not inevitable. Innovative financial technology solutions like Ripple’s can help the industry restructure relationships and enhance communication systems to facilitate precise remittance disclosures. This allows RTPs to continue offering remittance services to their customers. It also opens the door and empowers new market entrants to start doing so.

At Ripple, we recognize that financial technology can help regulators, policy makers, and financial institutions solve complex, global problems that yields real benefits to the public. I am proud of our role in challenging the status quo and engaging with regulators and policy makers to drive sustainable change that improves payments for the broader global community.