I imagine a world where transactions will be immediate and cost almost nothing, no matter who you want to pay, where they are located, or what currency either party prefers to use. Transactions will seamlessly cross borders, foreign exchange fees will be virtually non-existent as currencies can always be instantly exchanged at the market rate, and physical moneychangers with high fees or hidden policies will no longer exist.
This world isn’t as far off as it may seem.
Current Problems with the Payments and Remittance Industries
Transferring money is slow and expensive.
Even though domestic wire transfers within the US can clear within a “speedy” 24 hours, international transfers can take 5 to 6 business days to clear; and often these transfers can only be processed during bank business hours, meaning further delays may be expected on weekends or holidays, or due to time zone differences.
Moreover, transfer fees can be considerable. A recent comparison of top banks in the US found the average fee for a domestic outgoing wire to be $29, and $49 to send an international wire1. This may not seem much if you are sending large sums of money, but often that isn’t the case; in fact, it’s the reason an entire industry has formed around remittances, or sending money to family members in another country.
Remittances are a huge industry. The World Bank expects over $616 billion to be sent back to families around the world in 2018, with $466 billion of that amount being sent back to low- and middle-income countries2. A significant portion of these transfers are of small amounts of only a few hundred dollars; this may not seem like much to those in developed countries, but a few dollars here and there could very well make the difference in being adequately clothed, fed, and sheltered.
Companies like Western Union and Moneygram dominate the remittance industry by undercutting the major banks and by not requiring senders to have bank accounts. Still, the average worldwide cost to send $200 internationally via a remittance service in Q3 of 2017 was 7.21% of the amount being sent2. That’s more than $14 to send $200.
It doesn’t matter whether you are in a first world or developing country; it’s easy to see that money transfer services are ripe for disruption.
Foreign exchange can be costly and opaque.
Banks, credit card issuers, and remittance companies routinely charge foreign exchange fees. Western Union makes money on currency conversion in addition to its stated fees3, and a large number of banks and credit card issuers add up to 3% fees on every transaction that you use your card on abroad.
Another alternative while traveling abroad is bringing cash, but moneychangers often charge a larger percentage than banks and credit card issuers do!
Cryptocurrency Solutions Will Revolutionize Payments and Remittances
Cryptocurrencies already allow for fast and cheap cross-border payments. Cryptos like Bitcoin and Ethereum reach their destination in a matter of minutes and fees range from a few cents to a few dollars, no matter how much money is sent. The foundation has already been built, and the infrastructure and systems needed to make cryptocurrency ready for the mainstream are in the works:
Secure, Multi-Currency Digital Wallets Are on the Way
In the very near future you will be able to hold a variety of both fiat currencies (USD, Euro, etc) and cryptocurrencies in an encrypted wallet application right on your cellphone. From within the passcode protected digital wallet, you’ll easily be able to send money to anyone around the world. QR code wallet addresses make payments simple, transactions will clear in seconds, fees will be pennies, and access will be uninterrupted so long as you’re connected to the internet. Digital wallets will provide simple, fast, safe services to users around the world.
You’ll even be able to send fiat currency from your digital wallet back to your traditional bank account (though that transaction may take a few days to clear).
A number of secure digital wallets already exist, such as the Enjin Digital Smart Wallet, and fiat integration is the next big step.
Automatic Currency Exchange at Market Rates
Cryptocurrencies like Ripple XRP and Stellar Lumens (XLM) are used as bridge currencies to facilitate exchange. Cryptos like XLM facilitate transactions by creating an exchange where currencies and other assets can always be traded against the bridge asset. This creates market liquidity: for example, there may be little demand to directly trade Chilean Pesos for Vietnamese Dong, but if all assets are traded against XLM, there will always be a route to trade your Lira to Dong (Lira -> XLM -> Dong).
Furthermore, since any exchange involving the Chilean Peso, Vietnamese Dong, or any other currency can use XLM as a bridge, market exchange rates are forced to be competitive.
As an example, if you were to hold USD in your digital wallet and a vendor wanted to be paid in Euros, your transaction would automatically trade USD to XLM to Euros on a digital exchange and then send Euros to the vendor. The entire exchange and transaction would happen over a few seconds, automatically exchanging each currency for the best available price.
The Stellar network automatically finds the fastest route and best rates, whether the conversion is direct or involves a chain of conversions. Plus, each conversion in the Stellar network costs less than a penny. Image from www.stellar.org.
Bridge currencies won’t just be used for payments. You’ll be able to trade for and hold a wide variety of currencies and other assets within your digital wallet, allowing you to take more control over your finances.
A Vendor Doesn’t Have a Digital Wallet? No Problem with a Linked Debit Card
Monaco is linking a Visa debit card to its digital wallet so you can pay anyone within the Visa network with either cryptocurrency or fiat currency. From within the wallet application you can choose which currency you want to pay with, and currency exchange rates max out at 0.5% as opposed to the 3% that big name banks like Bank of America charge when you use your debit card for purchases abroad.
Image from Mona.co.
Micropayment Industries Will Finally Become Reality
Micropayments, or payments of very small sums of money, have until now been impractical due to high transaction fees. But cryptocurrencies such as Stellar Lumens, Ripple XRP, Iota, and many others allow for payments to be made for a fraction of a penny or even for free.
In the near future you may be able to pay a minuscule amount for access to a single news article instead of paying for a subscription, or pay to charge your phone for 2 minutes while you’re waiting on the next train to arrive. Expect creativity and innovation to stem from efficient micropayments.
The payments and remittance industries, in many ways, still work much the same as they did decades ago. But now, people around the world are realizing that current systems are inefficient and overdue for disruption. That disruption is right around the corner.