In Payments

In 2021, the volume of remittances received in Latin America rose to 126 billion dollars, more than twice the amount in 2011—a year in which the volume reached 60 billion dollars—according to data from Americas Market Intelligence (AMI). Unfortunately, sending money across borders has one of the highest fees in the market: the average fee is 7% per transaction in Brazil, 6% in Peru and Dominican Republic, and 5% in Colombia, according to our research. According to Tim Jacklich, AMI senior analyst specializing in cryptocurrencies, digitalization among remittances industry players would open the door to blockchain technology, a mechanism that would allow money to be sent with zero fees, as is in fact already happening among players such as Novi. This mechanism would benefit a poorly banked and more digital population. Facebook Novi is just getting its pilot plan off the ground in Guatemala.

The Traditional Remittances Industry Has Fallen behind

“The traditional remittances industry has not had the expected level of innovation in Latin America,” Jacklich explains. “It is worth noting that traditional banking has improved the traceability of its transactions, thanks to technologies like SWIFT. Yet the mechanism is still expensive due to the need for interbank arrangements. Brokerage is often excessive, especially for those currencies that are not often exchanged.” However, Jacklich says, a small number of players already have made significant advances in the field of remittances, even without resorting to blockchain technology. Revolut, a neobank from the UK, recently began operating in Mexico, and allows transfers between Mexico and the US. Users can register from the mobile application, and access free transfers that are apparently able to reach their destination in under 30 minutes. CEO of Revolut in Mexico, Juan Miguel Guerra, is aiming to impact a market that amounted to more than 45 billion dollars in 2021.

However, for many traditional players, achieving optimized costs and rapidity at the same time is complicated. Typically, Jacklich explains, thanks to money transfer operators (MTOs), transfers can be done easily and—to a certain extent—quickly. However, there are costs integrated into the exchange rate, and fees that, altogether, represent a high cost to the user when compared with other alternatives. In fact, a few MTOs are already resorting to the adoption of crypto technology. An example of this would be the integration of Stellar—a blockchain network that functions with a stablecoin linked to the US dollar—with MoneyGram, in order to facilitate instant transfers.

Blockchain Technology to Send Remittances in Latin America

“Cryptocurrencies allow for a single point of exchange, through the blockchain, as a distributed network among its users without the need for intermediaries,” explains Jacklich. Cryptocurrencies could emerge as a popular resource for the unbanked adult population. According to AMI’s upcoming cryptocurrency report, “persistent distrust in the banks has limited the growth of financial digitalization and made for the continued use of cash, even though consumers have felt more comfortable with other digital tools. This creates the possibility that some consumers may skip conventional banking entirely and adopt a cryptocurrency wallet.” It is worth pointing out that, at the end of 2021, around 76% of consumers in Latin America had a smartphone, compared with 69% that had a bank account or digital account, according to internal analyses by AMI.

With regard to the risks usually associated with cryptocurrencies, such as their high volatility, Tim Jacklich highlights some solid blockchain alternatives that could evade the skepticism of investors or users of remittances. Unlike the buying and selling of BTC (Bitcoin) or ETH (Ethereum), there are certain stablecoins or stable cryptocurrencies that are bolstered by fiduciary currency, such as the US dollar. The Stellar network, whose integration with MoneyGram we have already mentioned, “sacrifices decentralization, but allows for transfers in under five seconds, and at under one cent.” This is achieved through the USDC cryptocurrency. In fact, Stellar is already integrating players like Bitso in Mexico.

The key, Jacklich says, lies in differentiating the blockchain from the direct purchasing of cryptocurrencies in the form of BTC, ETH, or others, which some users often do as a form of medium- or long-term investment, or for purchases. “Cryptoassets like BTC are not that efficient for sending money. The average transaction fee is three dollars, but it can go up at times of high volume on the network. In April 2021 it reached a fee of 62 dollars per transaction.” And yet, according to AMI’s upcoming cryptocurrency report, some cryptoasset-based solutions for sending remittances have emerged in Latin America, using layer 2 protocols like Lightning Network. This is the case with the Chivo wallet in El Salvador. However, this mechanism is also not without its challenges.

Facebook Novi Could Revolutionize the Latin American Market

Novi is a financial solution developed between Facebook (now Meta) and Paxos — whose pilot is operating in Guatemala — which allows remittances to be sent to and from the United States. “Novi works with a dollar-backed stablecoin, the USDP. This is a highly regulated stablecoin that is licensed in the United States, and is used to facilitate transfers between parties through custodial wallets,” says Jacklich. The Paxos company’s USDP is the seventh biggest stablecoin on the market, with capitalization of 950 million dollars, according to the portal PYMNTS. By comparison, the capitalization of Tether and USD Coin is 76 billion dollars and 42 billion dollars, respectively.

According to Jacklich, Novi would allow Meta to offer a scalable financial service, with greater liquidity, and more importantly, with the endorsement of the regulatory entities, given its unsuccessful attempts to launch its own cryptoasset. The potential scalability of Novi includes the possibility of having a digital wallet integrated with WhatsApp to send money free of charge.

One of the most interesting aspects of Novi is that its present communications plan deliberately leaves out the use of the words “blockchain”or “cryptocurrency.” This appears to minimize the fears of its audience with respect to the high volatility often associated with this technology. In fact, this omission is intended to differentiate it from those players that do offer high-risk cryptoassets.

Change In the Status Quo of Remittances in Latin America

“At present, Novi is not competing with the traditional remittances companies; its short-term impact is rather the pressure it is exerting on those players to improve their services. In other words, Novi is breaking with the status quo,” Jacklich says, reflecting on those players known for facilitating cash-to-cash transfers or bank transfers through enormous payment networks with brick-and-mortar branches, such as Western Union and MoneyGram. By contrast, the new players, including Novi and others like Revolut and Remitly, have focused on digital payments and transfers.

But the differentiation will be increasingly less evident.

MoneyGram has already synchronized with Stellar, and, like Novi, is apparently leveraging blockchain technology. On the other hand, there is also the case of PayPal, with its Xoom service that facilitates receiving remittances at local banks.

The Future of Facebook Novi and Similar Blockchain-Based Solutions

Novi’s pilot plan is underway in Guatemala, which is no less than the second largest remittances market in Latin America, after Mexico, but with much less competition. For the time being, Novi is accepting a few thousand people in this pilot, and in the United States it requires users to have a credit card.

“Novi’s success will depend primarily on regulatory issues, so it is too soon to jump to conclusions,” says the analyst. “What is certain is the power shown by this technology [blockchain], and its disruptive potential for the current market in Latin America.”

As to the question of whether Novi will consolidate as a sustainable model, AMI’s analyst presents us with two possible scenarios.

Favorable Scenario

  • Easy to use, accessible in terms of user experience
  • Potential integration with WhatsApp and Facebook
  • Benefits of digital currencies, for example, access to a very low-risk stablecoin.

Adverse Scenario

  • Concerns about costs, particularly for withdrawals
  • Regulatory concerns
  • Privacy, power over monetary flows
  • Monetary or financial stability: control of capital, AML/KYC, deposit security, risks of fraud
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Next Steps

Blockchain technology will have significant implications for the remittances industry, particularly in Latin American emerging markets. At Americas Market Intelligence we offer various workshops on cryptocurrencies that can be adapted to the needs of payment professionals, entities, and investors. This includes corporate training (on aspects such as how the blockchain works, mining, and validation), strategic, competitive, and intelligent differentiation, opinion leadership, etc.

Get in touch with us to find out more about how we can help you with a training workshop or a comprehensive study tailored to your needs, which could be key to forging your future strategy with respect to cryptocurrencies.

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