The significance and size of the US-Mexico remittance corridor has been amply discussed. In 2019, remittances to Mexico reached a record high of US $36 billion, most coming from immigrants living in the US. Since 2016, remittances to Mexico have broken the yearly record and there are signs that the trend may continue in 2020 despite Covid-19. As the pandemic took hold in the US, remittances to Mexico reached a record monthly high in March with a total of US $4 billion. The figure is 35% higher when compared to the same month the previous year. Even in such a difficult economic scenario, remittances flows are booming. Without any doubt, remittances are the most important source of foreign income.
It’s easy to grasp the importance of remittances from an economic perspective. But, what is the social impact of remittances in Mexico? And furthermore, what would a potential cost reduction mean for the recipients in Mexico? Is technology a potential solution to crack the long withstanding problem of high costs in sending money?
Remittances of migrants in the US usually flow towards the most marginalized socio economic sectors of the Mexican society. Remittances benefit 1.5 million households in Mexico and touch the life of 6 million people. If we consider remittances as a development program, it would probably rank as the largest and most impactful social spending in Mexico.
What would it mean to reduce the costs in remittance transfers to Mexico by 50%? A reduction of that size would mean US $1 billion in savings, an amount that would go directly to recipients. Moreover, remittances would be almost equivalent in size to the current government’s flagship social development programs. If we were able to figure how to reduce the costs of sending money in 50%, the total value of remittances would be similar to the appropriations for some of President Andrés Manuel López Obrador’s signature social development programs like the apprenticeship program (“Jóvenes Construyendo el Futuro”) and the pension for the elderly (“Pensión a Adultos Mayores”). This, without government and legislators having to raise taxes or issue more debt. It’s also win-win for both the US government and society.
I firmly believe that the most successful social program in human history has been innovation and technology. Goods and services in the past that were too costly for the average citizen are now available to the masses. Cars, TV, aeroplanes, radio, telephones, and many other technologies were considered upper-class luxury are now accessible to most of the world’s population. Can technology be used now this time to bring the cost of remittances down? I personally think that the answer is an absolute yes.
In the modern world, money generally doesn’t move through physical contact but rather through the digital spectrum. In the 21st century, the concept of “moving money” means, in reality, moving information. The marginal cost tends to zero. If it is such a trivial task then why does the average sender has to pay between 5-8% of the amount transferred? Is there any possible solution to reduce the cost and positively impact the most marginalized families in Mexico?
What in 2015 was only a dream is a reality in 2020. By leveraging crypto and blockchain technology, Mexico City’s financial firm, Bitso, has been able to enter the remittances market. Mexico’s first Bitcoin exchange, Bitso has seen an exponential growth in the volume of remittances sent from the US to Mexico through cryptocurrencies. This was made possible by a new product called On Demand Liquidity (ODL). This automated, digital and transparent product works like this: a money transmitter company receives the money as it would traditionally but converts it into crypto. Money is received via XRP (a crypto exchange in the US) and then send it to Bitso converted in Mexican pesos.
Currently, Bitso is managing 5% to 10% of all US remittances sent weekly to Mexico this year and is expected to keep growing. By the end of 2020, Bitso has set the ambitious objective of sending and receiving 20% of weekly remittances via cryptocurrencies. The Bitso team is working hard to reach the consumers directly and expand the product’s potential to provide cost-effective and fast services for the whole domestic market.
The use of ODL offers some advantages that reduce transaction costs potentially between 50% to 70%. First of all, with ODL, the funds are sent immediately (usually seconds) which eliminates the need for pre-funded accounts. In addition, ODL reduces the risk of exchange rate volatility. Finally, ODL allows to eliminate intermediaries in the value chain which lowers the amount of fees charged.
Sometimes technology is seen as a luxury or just as an upper class gadget. That is a wrong vision that completely ignores the facts. Technology and innovation have played a pivotal role throughout history in fighting poverty, and this time is not the exception. Moving bits of information won’t be expensive anymore if technologies such as crypto and blockchain are given a chance.
* Felipe Vallejo Dabdoub is head of risk and corporate affairs at Bitso and current Board Member of The US-Mexico Foundation. The U.S.-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant. Twitter: @usmexicofound