Streamlining Global Transactions: The Power of Remittance Systems

1. Introduction

The use of the term “remittance” actually has a specific meaning in economics. Remittance refers to sending money to where it is needed. As the number of people engaging in international transactions rises, there has been an increasing need to find prompt, cost-effective and dependable ways of sending remittances. Essentially, a remittance system refers to a set of business rules and computerized processes that allows effective integration of the components for conducting remittance transactions, globally. Streamlining these transactions to work as one global system is increasingly becoming a strategic priority of many countries and financial institutions across the globe. Modern remittance systems now serve as a mainstay for global economic resilience and that has led to heightened importance in their steadfast operations. In recent times, the focus on the overall effectiveness and efficiency of remittance systems across the world has continued to gather significant pace. This owes largely to the increased awareness of the economic benefits of remittances and the realization that it is crucial to have effective and reliable systems that can safeguard those economic benefits. A well-coordinated global remittance network is essential if we are to harness the full potential of regional and global economic and social integration. Streamlining global transactions thus becomes key in realizing full benefits of the remittance systems.

1.1. Definition of Remittance Systems

The term “remittance system” is not defined in the Money Services Law of the Cayman Islands. However, the law provides that a person wishing to carry on money services in or from within the islands must apply to the Governor in Cabinet for a licence. Money services are defined in the law to include “the business of providing money transmission services or issuing or managing means of payment”. Money transmission services are defined as services by which money can be transmitted or received by any means, whether or not the transmission or receipt of the money or the identity of the person making the remittance or the recipient is disclosed to any other party to the transaction or arrangement. When money services were first regulated in the Cayman Islands, the definition of “licensed money services”, which includes money transmission services, was not made with reference to the term “remittance”. However, in the Anti-Money Laundering Regulations, 2018 (the “Regulations”), the term “money or value transfer services” is used and defined to mean “services of transmitting money or the value of assets by any means, or by any payment message or instruction, including the use of telecommunication, the Internet, digital cash, digital currency, or similar methods”.

1.2. Importance of Streamlining Global Transactions

Inefficient remittance systems usually require multiple currency conversions, which are costly and time-consuming. For instance, a remittance transaction from the US to a Kenyan commercial bank account in Kenya Shillings will require currency conversion from US dollars to Kenya Shillings. This is because the transaction will pass through the US, its correspondents, and the beneficiary’s bank, each with their different currencies. The direct cost incurred due to these currency conversions is what is referred to as rent-seeking. In addition to the direct cost, rent-seeking can also result in an indirect cost known as the inflationary effect. This happens when the poor foreign country gets a huge influx of foreign currency due to rent-seeking. The exchange rate for that currency will increase in the foreign exchange markets, leading to local inflation. If remittance transactions are done with no unnecessary currency conversions, a remitter is able to send money directly, conveniently, and without many intermediaries who are expensive. This is achievable through a streamlined system where the sending and receiving countries use the same intermediary currency. Such a system removes all the rent-seeking costs and therefore it will be cheaper. This also means that the real value of the remitted money increases. In short, streamlining remittance transactions will save both the remitter and recipient a significant amount of money.

2. Benefits of Remittance Systems

The banking and financial services in today’s world are completely transformed and equipped with modern technology. A remittance system allows for transactions between businesses and individuals, which proves to be a very easy and efficient way of sending funds across the globe. It is crucial that both the host and the sending country benefit from it. The implementation of a remittance system in a certain country aids in boosting the economy of the country and reduces reliance on foreign aid. It helps in stabilizing the exchange rate and also curbs the black market economy of the country. This is because if people are using remittance systems for their own transactions, it means that they go to the bank and the rate they are using is the bank rate. This, in turn, helps to strengthen the local currency of the certain country and also helps in stabilizing the foreign exchange reserves. Also, the economy of the country is stimulated as more and more investors are attracted to invest in the country. When they invest, more employment opportunities are created and hence the dependency ratio of the country decreases. It also alleviates poverty as studies have revealed that there is a direct link between the use of the remittance system and economic growth in developing countries. Remittance enables the recipient to have wider access to the basic needs, hence improving their standards of living. On the other hand, it is more beneficial to the receiving country because there is substantial growth in private and small businesses in the long run. This is because the remittance is paid directly to the recipient and not through any governmental agencies. So when a person is getting this money, the next day they may decide to open a small business. Over the period of time, the remittance payment continues to promote economic activity in communities that are affected by high unemployment.

2.1. Cost Efficiency

Remittance systems offer cost-saving benefits for businesses and individuals alike. Entry barriers into the remittance market are low, leading to competitive options between companies, such as SWIFT, Western Union, and others. This means that businesses and individuals will often find a range of providers offering different price points, services, and transfer fee options for them to choose from. A normal checking account, designed for someone who is living off of their funds and not sending the majority of their earnings globally or making enormous transactions, will sometimes have fees for international wire transfers and do not offer a competitive market exchange rate and settlement options like the above remittance services do. Conversely, a new account designed for those using remittance services will have no international wire transfer fees, an increased level of efficiency by employing straight-through processing, and an elimination of corresponding bank fees, which are incurred when a bank uses another as an intermediate bank to complete a wire transfer. On an industry-wide scale, remittance strategies are so advantageous that payment service directives in the EU, which are laws that govern payment services and payment service providers, require national governments to distinguish between normal banking providers and remittance services when providing easier access to setting up a new bank or account. Such laws will mandatorily require governments and the Financial Conduct Authority, a key market regulator, to identify if there are any unnecessary regulatory requirements when creating a new payment service provider with a specialism in remittance.

2.2. Speed and Convenience

There are over 3,000 registered remittance companies that provide services that vary from humongous multinationals to small and domestic services. Due to this fierce competition and a steady need to make best use of their services, the speed at which international money transfers can be facilitated is continuously improving as companies compete on the basis of speed and convenience that they can offer to their clients. The rise of online and digital remittances means that regardless of hours of opening and geographical locations of company offices and service outlets, customers can transmit money quickly and conveniently. The freedom to remit money online via the internet 24/7 means that the endless queues in high street shops and the conformity to strict opening and closing times of companies are becoming a thing of the past. Being able to access and find out about multiple options based on speed and trend is a distinct benefit of using digital and online money transfers. For example, by knowing not only individual companies’ posted times for sending money, but the inherent average speed for all international transfer paths, senders of remittances can make informed decisions as to what facility to use based on what is the best available option. Much digital and fully online remittance mechanisms exhibit a great differential in speed when compared with traditional methods such as bank drafts, postal orders or high street money transfer shops. Faster methods of transferring money can lead to greater convenience for recipients because they are more quickly able to gain access to funds sent by relatives and friends abroad – an important consideration when thinking about the sometimes urgent and unexpected life events that require cross-border security in the form of money. Finally, it’s wise to take advantage of any speed that these new online digital remittance systems have to offer because certain studies have shown that the realization of remittance income by recipients is linked to the efficiency and the speed of the transmission.

2.3. Enhanced Security

This extra level of security provides a big confidence boost to senders when providing sensitive financial information such as their bank account, PIN or password details. Businesses are often attracted by the financial security benefits this kind of service will bring. Firstly, if either the sender and recipient’s money doesn’t arrive, or the money is late, firms like MoneyGram will refund the transaction and transaction fees in most circumstances – a guarantee on using services efficiently. This kind of refund policy can be attractive in comparison to just a straight bank transfer, providing a strong reason to invest time and money into setting up a remittance service. And of course, firms can advertise that they are using a remittance network to uphold best practice in secure money transfer, demonstrating that customer satisfaction and security is a top priority – a win-win for both the company and the consumer!

“Remittance systems use specific software to contact the sender and ensure that the money transfer is legitimate. The technology employed by remittance companies requires a secure log-in, and personal information is usually safe using encrypted software. For example, Western Union uses the latest electronic technology, processing more than 22 pieces of information through a secure server before the transaction is finalized and the funds are paid out to the recipient.”

Another major benefit of remittance systems in relation to global money transfers is the enhanced security they can bring, a factor which is summed up nicely by a recent Knowledge @ Wharton report:

3. Challenges in Implementing Remittance Systems

Finally, the section “3. Challenges in Implementing Remittance Systems” will be discussed. And it is explained outlining various factors that have contributed to the delay of widespread adoption of remittance systems. First and foremost, it is mentioned that “true cross-border remittance services can only be fully realized when the regulatory framework facilitates connectivity between national remittance systems and the remittance services provided by cross-border remittance operators”. Also, “fragmented national remittance markets around the world impose a barrier to the successful implementation and operation of cross-border remittance systems”. It is explained that the regulatory oversight in any given jurisdiction on national remittance services seems to restrict the extent to which a national remittance system can participate in providing cross-border remittance services. This also means there are “jurisdictional limitations on the ability of cross-border operators to provide remittance services in different countries”. These explanations are very important and underline the crucial role the regulatory framework plays in ensuring the seamless delivery of remittance services. In addition, the compliance with a more robust and technology-oriented form of anti-money laundering and counter-financing of terrorism measures, including “Know Your Customer requirements for cross-border wire transfers” cited in the Financial Action Task Force statement, add to the difficulty of providing true cross-border remittance services. The section also discusses the challenge for cross-border operators in maintaining a direct settlement link with banking partners in multiple countries. This is because the banking partners may take a long time to agree to participation in the remittance system, and the development of direct settlement links may also be protracted due to the need to establish a complex network of bilateral agreements between the operators and the banking partners in different countries. As a result, it is mentioned that “the ability to establish and maintain a direct settlement link with banking partners worldwide is at the very core of successful cross-border remittance operation”. It is such a challenging process that “having to coordinate the implementation of direct settlement links in parallel with the development of the overall remittance system can be very time-consuming”.

3.1. Regulatory Compliance

Similar progress has been made in the realm of international law as well. In April of 2016, the G20 nations endorsed a set of policy measures to “tackle tax evasion, money laundering, and terrorist financing.” This was viewed as a significant step forward for international cooperation in setting standards for appropriate regulation of remittance providers and establishing better, more secure information sharing between countries. And more recently, the Committee on Payments and Market Infrastructures, in collaboration with the World Bank Group, revealed that 94% of the 74 jurisdictions have already taken steps to engage in, enable or permit electronic money/remittance services. This report sheds light on both the widespread adoption of regulatory reforms and the increasing consistency of these reforms across the globe, which greatly supports the thesis that global remittance networks are becoming easier to navigate in terms of regulatory requirements.

In the United States, the issue was largely addressed when the Financial Crimes Enforcement Network, or FinCEN, issued new rulings regarding stored value gift cards in 2011. These new rules explicitly stated that users of these cards are not engaged in money transmission activities when sending or spending “value that was paid for or transferred from a stored value with a primary function of conducting financial transactions.” Stored value gift cards, as defined by these rulings, are those that are “pre-funded and whose value is intended to be decreased on the use of such funds…for the purchase of goods or services” and cannot be “redeemed or withdrawn” for cash. This means that when a remittance provider uses a stored value card to facilitate a transfer of money, there is a concrete regulatory framework for how these transactions are handled under United States law.

One of the key promises of remittance technology is the ability to quickly, easily, and securely send money across borders, all at a relatively low cost. This idea of the “frictionless” transfer of money is the key selling point for most remittance providers, which is why strict anti-money laundering and counter-terrorism regulations are frequently cited as a major barrier for successfully implementing remittance systems. However, regulators have mostly responded to this challenge for remittance providers, both in the United States and across the globe.

3.2. Integration with Existing Financial Infrastructure

Incompatibility with existing systems and the resultant difficulty in integrating remittance solutions effectively is a major challenge in remittance system implementation. These systems are run on disparate and often outdated systems that are extremely inflexible – something that makes it difficult to integrate remittance platforms with the existing systems. Traditional financial messages use a model of store-and-forward messaging such that messages are queued and forwarded to subsequent servers until they are eventually delivered to the intended recipient. This model is inflexible and does not support peer-to-peer messaging that is used in modern remittance systems. The high level of fragmented systems in the financial services industry over the years has led to multiple proprietary systems that operate as information or data silos, and thereby organizations have difficulty interacting with each other. Such a situation is further worsened by the lack of a universal integrated data interchange format, and that is why inter-organizational data transfer is a necessity for any functional remittance system. The disparate nature of conventional banking and likewise payment systems means that industries are cavernous and have no standardized way of interconnecting different financial systems and networks. The infrastructural requirements for establishing the links between the different countries and the subsequent high cost have been a major barrier for many providers who seek to provide global remittance solutions.

3.3. Ensuring Data Privacy and Protection

The increasing use of technologies such as blockchain provides the potential to create new and innovative remittance systems that improve upon existing methods and practices around data and security privacy. Blockchain is largely considered to be a “secure, shared, distributed ledger” that allows for the tracking of transactions through the recording of data and the constant verification of data integrity across multiple users. Its use has been promoted in industries that handle sensitive data such as healthcare and finance, and it is believed that moving to a blockchain network could greatly improve the security and safety of remittance systems.

It is expected that remittance systems today should use advanced cryptography and encryption techniques to ensure that data is protected both when it’s at rest and when it’s on the move between different systems and storage locations. However, a lot of remittance systems in use at the moment do not yet make use of modern cryptography methods to secure personal data. Instead, the standard in the industry, which has been so for quite a long time, is to rely on encryption methods such as triple data encryption standard (3DES). This method uses the same key to encrypt and decrypt the data and while it is significantly more secure than older standards that it replaced, it is still known to be vulnerable to certain types of cyber-attacks. This is largely because 3DES has a fixed key length that limits the effectiveness of the encryption algorithm in defending against the processing power available to modern computers.

The success of global remittance systems is dependent on the ability of stakeholders in the remittance process to comply with relevant data privacy regulations and to ensure the security and integrity of the data associated with remittance transactions. Mandates like the European Union’s General Data Protection Regulation (GDPR) impose strict requirements on the processing and storage of personal data. Non-compliance with these regulations can result in severe penalties and fines being levied on operators and organizations involved in the remittance process.

4. Future Trends in Remittance Systems

Technological destabilisation paves the way for profound changes in the field of transaction processing. Existing developmental inadequacies leave a lot to be desired when it comes to ensuring that the maximum number of people benefit from the remittance mechanism. In the age of digital and borderless money transfer, it is so easy and convenient to send money across the world and at a significantly lower transfer cost thanks to the many numbers of digital tools made available for that process. This is partly adapted as a result of a growing customer base in the form of millennials who demand on-the-go and functional applications from remittance system providers. Governments have increasingly opened up to the implementation of blockchain technology in provision of public services. Blockchain technology gives governments the avenues to provide faster, more efficient and secure ways of serving their populations. One of the most significant successes associated with the integration of blockchain technology in remittance systems is the ability to break down the traditional borders and allowing of movement of fund within and without those borders. The emergence of blockchain technology in the remittance system is of significant advantage to the developing counties that relies on remittance flows. By adopting this technology, it is possible to bypass the middlemen, reduce transfer cost and ensure that the means to funds transmission is transparent and democratic.

4.1. Blockchain Technology in Remittance Systems

There are two common technological constructs that make blockchain-based remittance systems work – smart contracts and distributed ledger technology. Distributed ledgers allow each transaction to be caught and adequately recorded by several network members spread across multiple jurisdictions, thereby making it harder to misuse remittance systems for money laundering and terrorist financing. This will be a key advantage to businesses looking to implement more efficient digital remittance systems as the fifth Anti-Money Laundering (AML) Directive, due to come into effect in the European Union. This new directive not only lowers the spend level required for customer identification checks but also introduces a preference for electronic payments over cash wherever possible. By using distributed ledger technology in remittance systems, consumers will be able to maintain more control over their finances by avoiding middleman fees and third-party delays. They are keen to use technology to further streamline the remittance process by allowing our customers to make transactions in their own time and on their terms. They will be able to speed up the time it takes for payments to be received. The main attraction of a blockchain-based remittance system is the significantly lower costs involved. Unlike a traditional 1:1 currency exchange, adopting a universal cryptocurrency at the end of the remittance process eliminates the need for the majority of international banking and liquidity providers. This means no excessive cross-border fees, no prolonged waiting times for funds to clear, and no need for extensive accounts on both sending and receiving ends. There is no need for the money to be passed through a network of corresponding banks at any time, so such costs can be bypassed. Plus, transactions completed via a distributed ledger are secure and completed more quickly. By avoiding the use of intermediaries, a blockchain solution also provides greater transparency over remittance transactions. Each transaction recorded onto the ledger forms a chain of history that cannot be altered or tampered with without the agreement of all who share that ledger. As a result, customers can see exactly where their money is at different stages of the remittance process, something not possible through the largely opaque and imprecise systems in place today. Customers will benefit from more certainty on timescales for the money to reach their destination and the reassurance that their transactions cannot be affected by external interference. Plus, because each transaction is digitally stamped with key information, help and guidance services like customer support desks can also benefit from having real-time information on the progress and nature of remittances.

4.2. Artificial Intelligence and Machine Learning Applications

Cybersecurity plays a significant role in the remittance system as the industry is handling sensitive financial information on a regular basis. By providing extra layers of security and ensuring the continued functionality of a business without interruption from security issues, remittance platforms that utilize AI can promote good practice for both the industry and its client user base. This is particularly important in the context of combating cybersecurity threats that pose a risk to directly disrupt and impact upon the clients of remittance platforms worldwide. Combating cybercrime should not only focus on external attacks. AI also empowers the remittance system in taking a pragmatic approach to curbing internal frauds. By incorporating predictive fraud prevention tools powered by machine learning.

In terms of using artificial intelligence in the detection of suspicious activity, the potential for machine learning algorithms to process the big data involved in flagging red versus false positive flags that are created through human monitoring is incredibly valuable. By changing the current methods, which typically rely more on human input than automated processes, to rely more on machine learning, there are potential time efficiency savings and lower costs. AI and machine learning tools can also be applied to minimize the incidence of “cybersecurity headache”. By using predictive analytics embedded in many modern cybersecurity platforms, remittance platforms can protect themselves and their clients from cyberattacks by recognizing patterns of abnormal activities and fixing problems proactively.

The application of artificial intelligence and machine learning has become increasingly relevant in a wide range of industries. In the case of remittance systems, these tools contribute to facilitating and expediting the authentication and verification processes. According to Deloitte’s 2018 Remittance Technology Survey, over half of remittance industry executives say that “improved data analysis and business intelligence” was the most important feature of their remittance platform strategy, and nearly half said that some form of machine learning was their technology of choice. With increased digitization and further acceptance of e-know-your-customer procedures, the potential for greater use of these predictive and analytical tools will surely increase.

4.3. Enhanced User Experience and Mobile Solutions

The ease of access and delivery of information to users through their phone applications or mobile devices has seen an increased usability of remittance systems worldwide. Most leading digital money transfer services and banks have developed mobile applications that enable clients or customers to do various transactions, such as sending and receiving money, tracking the status of their transactions and taking control over their financial information. This has been made possible through the utilization of responsive design and the adoption of new and advanced mobile technologies, such as near field communication (NFC), quick response (QR) code and fingerprint recognition. For instance, in the United States and some European countries, there has been a rise in the use of mobile money payment services, such as Apple Pay, Samsung Pay and Google Wallet, all of which use the NFC technology. This has seen withdrawal services being incorporated within mobile money transfer systems such that customers can now visit any supported automated teller machine (ATM) and make a cardless withdrawal by scanning a QR code displayed at the ATM, as opposed to the traditional way of using a debit card. The implementation of NFC technology has not only future-proofed the current mobile money systems, but has also increased the payment regulation standards and interoperability with other payment systems. As a result, we have witnessed a significant reduction in customer services response time when providing assistance on how to send money fast through a mobile phone, track delayed transactions or how to obtain statements for a given mobile transaction. This is mainly attributed to the fact that clients now have access to sophisticated self-help tools and better user interactions when using remittance systems on their mobile phones, all thanks to the enhanced user experience.