The future of global remittance payments : on identifying cost drivers and the role of blockchain technology

Abstract

The estimated number of international migrants has steadily increased over the past decades and so have cross-border payments. Remittances often constitute a lifeline on the receiving end, even more so in low and middle-income countries (LMICs). Despite their importance, transaction costs of sending small-value payments of around $200 remain high. The United Nations has put the reduction of remittance costs on its agenda for 2030 and researchers seem to have placed their focus on remittance flows and their implications again. While most studies analyse the total flow of funds sent between countries, this study investigates the most important cost drivers of current payment services by implementing a Kruskal-Wallis test and a multiple linear regression model. The results suggest that higher remittance flows and higher percentages of mobile subscriptions are negatively related to transaction costs. On the other hand, higher percentages of people receiving remittances to their bank accounts are positively related to transaction costs. Regional differences are also significant and digital solutions generally outperform traditional channels, such as retail banks. The emergence of blockchain-based payment services has widened the gap as they enable low-cost cross-border payments, often within seconds. Therefore, this dissertation also presents case studies of two specific blockchain networks, the Lightning Network and Stellar, that offer payment infrastructures that other FSPs can connect to or build upon. As these new challengers outperform incumbents in terms of transaction speed and cost while partnering with them to benefit from their extensive distribution networks, they are positioned to capture a significant share of the remittance market and shape the direction the market is heading towards. As even established players are leveraging blockchain technologies to offer more competitive rates, they are set to play an integral part in the future of remittance payments.