Global-scale P2P Remittance Platform using Cryptocurrencies
Current Market Challenge
The international remittance fees worldwide are currently too high at 6.75% on average, and about 1.7 billion people around the world still do not have bank accounts, excluding them from remittance services.
Solution by Changer
Most of the fees incur from going through interbank money transfer networks like SWIFT or SEPA. Changer aims to dramatically reduce the cost and time by roughly 90% using blockchain and cryptocurrency, instead of such networks, and by allowing individuals to serve as remittance intermediaries.
According to the World Bank, international remittances amounted to 575 billion USD globally in 2016, of which 74.6% (429 billion USD) was money transfers to developing countries. The World Bank estimated that about 232 million foreign workers sent money to their families in their home country. If international remittance fees could be lowered to 5%, an additional 16 billion USD worth of their annual salary would be freed up to send, save, or spend.
The international remittance fee, which was close to a world average of 10% in 2008, has dropped to 6.75% as of 3Q 2020. In order to meet the G20 target of 5%, however, it is expected to take another 6-7 years considering the current trend. To meet the UN target of 3%, it is expected to take about 15-20 years.
By type of international money transfer companies, the global average fee banks charge is 10.89% as of 3Q 2020. This means that banks take more than 1/10 of the workers’ hard earned money as brokerage fees.
Changer’s solution to address this financial challenge using cryptocurrency received a patent in Korea (Chang er’s parent company based in Korea) in July 2020 and completed a PCT application.
In the past, companies like Ripple Labs, which operates XRP, have tried to replace traditional banking net works like SWIFT using blockchain and cryptocurrency, but most have tried to solve the fiat currency deposit and withdrawal problem by partnering up with remittance companies or banks in their country.
From the money sender or receiver’s point of view, using a bank or remittance company still remains the same. However, this new way was designed to enable money to be directly sent to banks or remittance companies' accounts (wallets) in other countries that supported blockchain remittances, without having the bank or remittance company go through a traditional remittance network.
This is an improvement as transactions have become much faster and more affordable than going through the traditional banking networks. However, solely from the customer’s perspective, the fees have not been reduced enough to a meaningful extent as a bank or remittance company still serves as an intermediary.
To more radically address this problem, Changer devised a new method in which the entire remittance process is fully peer-to-peer (Refer to the diagram below for a better understanding.)
The example above is the traditional international money transfer method through banks. As too many banks exist in the world, commercial banks in different countries are usually not directly connected. Rather, they are connected to large global banks referred to as intermediary banks.
As shown above, if person A living in Korea sends money to person B in South Africa, the money will go through a commercial bank in Korea and at least one intermediary bank before being transferred to a commercial bank in South Africa. When the money transfer is completed, the receiving bank in South Africa contacts and informs the customer, and the money is deposited into the customer’s account. This process takes about two to five business days excluding weekends, and is only possible for those with a bank account. Since banks are involved, they charge fees, and person B in South Africa will only receive around 90% of the original amount due to fees.
This structure is not only inefficient but also unfair for financial consumers as banks in the middle are taking too high of a percentage of the total money being transferred.
To solve this problem, money transfer companies began to have multiple branches operating in various cities and countries. Companies like Western Union and Moneygram have branches and partners worldwide.
As an example, when person A living in Korea requests a money transfer to person B, the US branch or affiliated partner of these remittance companies sends person B the money first with their money. Within this structure, money is not being internationally transferred; companies repeat these credit transactions for a specified period and settle the difference at a set time.
If a customer at a Korean branch wired 1 billion KRW to another customer at a US branch, and a customer at the US branch sent 900 million KRW to a customer at the Korean branch, each of the branches will first use their own capital to transfer the respective amount to their customers, and on the day of the settlement, the Korean branch will only have to send 100 million KRW to the US branch.
This way, banks do not have to be involved every time a money transfer is requested, saving both remittance time and fees. However, there is still a branch or affiliated remittance company involved for each sending and receiving side, inevitably leading to a certain amount of service fees. Even though intermediary banks have been removed, and fees lowered, the marginal cost for office space, employee payroll, and so forth still remains high and hence makes it difficult to reach the proposed UN target.
A report by the Overseas Development Institute (ODI) demonstrates this problem, centering around Western Union, the top non-bank money transfer company. According to the report, Western Union was accused of charging excessive fees in Africa, taking advantage of the lack of competition in the region. The company artificially inflated its money transfers fees, charging what has been called an “Africa charge” of 8% consistently “applied across countries regardless of the size of the market, regulatory costs or market risk.”
The fees were as high as 10% or more, depending on the region. It is known that Africa’s remittance market remains the most expensive in the world (International Fund for Agricultural Development), and the region is estimated to incur excess costs of 1.4 billion USD to 2.3 billion USD per year as a result of these high remittance fees (ODI).
The company has also been criticized for its exclusivity agreements with banks in countries that receive remittances, restricting competition and requiring the consumer to use nominated banks, imposing above-average transaction fees (ODI).
The case for Western Union shows that even if players have been replaced from banks to remittance companies, the new players can always impose excessive fees in markets with limited competition, putting aside the priority to operate in the best interest of their consumers.
Changer Transfer seeks to exclude bank or money transfer companies from the remittance process as their engagement automatically keeps the fees high due to their operating costs. Changer developed a model where individuals voluntarily act as remittance partners and profit from the service they provide in the form of a peer-to-peer network. Although individual remittance partners also charge fees, they will be much lower than what the banks or money transfer companies charge.
As depicted in the diagram above, person A living in Korea can turn on the Changer Transfer application and enter how much he/she wants to send to a friend B in the U.S. Then, Changer automatically matches the remittance partners C and D based on the number of their successful remittances, processing times, and reviews.
When the matching is completed, person A will receive a message to send a set amount of money to person C’s bank account. Person A then deposits KRW to person C’s domestic account (Korea). Person C will then buy a cryptocurrency such as BTC with the KRW received from person A. When person C turns on the Changer Transfer app after, the BTC wallet address of person D will be displayed, and he/she will transfer the purchased BTC to person D’s wallet. Once the transfer is automatically confirmed on the blockchain, Person D will be notified. Upon confirming the receipt of BTC, person D will sell and convert it into US dollars. The dollars will then be sent to person B through a US domestic bank account. This successfully settles the remittance transaction. In this entire process, no foreign fiat currency has been transferred through banks.
Persons C and D acting as remittance partners on Changer Transfer may be concerned that cryptocurrency prices may fluctuate in the process of receiving fiat or cryptocurrency from the preceding person and converting it to the currency required by the next person. This is where the connection with the DFX Gateway, the core function of Changer, comes into play. Person C and D can be protected from price volatility by conducting hedging transactions in the BTC/eKRW market of the DFX Gateway and the BTC/eUSD market, respectively. Let’s assume both of them turn on the “auto hedging through DFX Gateway” function, which will be automatically connected to Changer Transfer. As soon as a remittance order is placed and the remittance partner is connected based on the algorithm, hedging transactions will occur so that all the partners incur no loss and ensure fee income.
Anyone can participate as a remittance partner on Changer Transfer, including individuals and even money transfer companies with licenses in each country. As for the latter, they will mainly be connected when their fees are lower or their reviews are better than that of retail partners, or when there are not enough retail remittance partners in the area.
If a customer continues to choose a money transfer company over an individual, Changer can match money transfer companies in each country only. To cover international corporate money transfers and payments, Changer intends to give customers the option to have them matched to only licensed money transfer partners in the future.
To prevent money laundering, Changer will require all participants to submit a copy of their ID and personal information and have remittance partners place a minimum margin to ensure responsibility. In addition, all remittance partners will be checked against a list of more than 1,600 international sanctions published by the government and international organizations including the UN, the EU, and Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury. Changer’s KYC/AML verification system will keep the platform clear of any prohibited individuals and companies on this list.
Chain Partners — developer of Changer — has been using Dow Jones Risk & Compliance, a leading provider of regulatory compliance and risk management solutions in AML/CFT, since January 2019. Once Changer launches, all participants will be monitored through this solution from subscription to the entire service process.
The money transfer company most used in a given country depends on the local conditions. For countries with few banks, remittance offices are located in each of the regions within the country. The process requires visits to remittance providers. People visit and line up to send money to their family and friends through these local offices. The person receiving the money also has to line up at the nearest remittance office.
In Singapore, for example, it is said that foreign workers (working as maids) from neighboring countries like Malaysia and the Philippines, work 6 days a week and take only one day off. On that day off, they go to a money transfer office and line up for at least one to two hours or half a day at most. They spend their only day off sending money to their family back home. Those receiving the money also have to wait in line at a money transfer office. Considering the amount of time they have to spend, international remittance remains a common problem throughout the world.
Foreign workers waiting in line to make money transfers in Singapore
Changer can bring a significant change to these countries’ remittance practices. Roughly 1.7 billion people, or one out of four people in the world, still do not own a bank account. Through Changer, the remittance partner in the final stage of the transfer can actually deliver the money directly to the person who is supposed to receive the money. The money can also be dropped off at the nearest store or money transfer office.
As the entire money transfer process is handled on behalf of users on Changer Transfer, both senders and receivers can post any requests they would like to make via this platform. Although delivering money to the recipient’s home can be more labor-intensive and with higher fees charged, people will increasingly be willing to join the platform and offer competitive rates if they find out they can earn money through this as well.
People will have an incentive to serve customers’ requests as their chances of earning money rewards through the platform (matching basis) increase by receiving positive feedback. If money transfer partners increase this way worldwide, remittances that were difficult or expensive in the past will become easier and more affordable, and more importantly accessible by anyone.
There are still many countries without a crypto exchange. In such places, it is difficult for local remittance partners to convert BTC into their own currency. For this case, Changer’s DFX currency indexed to the local currency 1:1 can be traded, significantly solving the cryptocurrency hedging problem that would otherwise be impossible to solve in the country.
Therefore, Changer’s goal is to solve the social problems common across the global remittance market by utilizing the DFX currency and the DFX Gateway through which these currencies are traded, along with the mentioned incentive structure.
Considering the current trend, the 3% global average remittance fee, which the UN aims to achieve by 2030 as part of their SDGs, is expected to be achieved by the 2040s. Changer will be in demand by vulnerable and foreign workers around the world who spend 5-6% on remittances and spend their only day off a week to send money to their home countries.
Changer will bring together individuals and corporate remittance partners who can transfer money from country to country in the fastest and safest way at the lowest rates, and also best communicate this information. In short, Changer will become the international money transfer version of Airbnb, which rents the most rooms in the world every day without owning a single room, or Uber, which runs the most cars without owning a single car.
Without a penny or a single cryptocurrency directly going through Changer, the platform will move money to and from the largest number of countries through the most diverse channels in the world at the lowest price. The DFX system and P2P international remittance system that Changer envisions can utilize international payments to contribute to humanity.