The Problem With Remittances
Welcome to the third part of our series of conversations with the International Blockchain Monetary Reserve’s Managing Director, Sinjin David Jung. Today, we’re talking about a topic that’s near and dear to Sinjin’s heart, and that’s the topic of remittances. A remittance is simply the transfer of money, usually by a foreign worker to an individual or family member back in their home country, in order to provide financial support. Money sent home by foreign workers competes with international aid as one of the largest financial inflows to developing countries. According to the World Bank in 2018, overall global remittance grew at a rate of 10 percent to 689 billion dollars which included 528 billion going directly to developing countries.
Now the big questions that I wanted to cover with Sinjin are: Are remittances a good thing? Isn’t it a positive thing that individuals are supporting their loved ones and families by working a higher-paying job, even if it’s overseas, that they couldn’t get in their home country? Doesn’t it make sense then that we should be trying to find a way to make the whole process a little easier?
Read on to find out his answers…_______________________________________
ERIC: We’ll start with the latest on Libra which is that the Libra Association has revamped its white paper and pulled back from its original vision, announcing that rather than having a single stablecoin backed by a basket of assets, it will now look to issue a series of stablecoins backed by a single asset each. The new proposed design for Libra would make it seem more like a standard digital payments service such as PayPal but it’s still unclear if the changes announced Thursday will be enough to sway regulators and policymakers in favor of the project. Sinjin, so do you think Libra will gain approval from regulatory authorities?
SINJIN: I think no and it’s not because had they started with this first it would have been kind of okay, but I think what Libra fails to really acknowledge or they’re trying really hard to make people look the other way is that, you know Facebook is behind this and they have definitely shown that they have a culture of…
ERIC: Spying?
SINJIN: Spying, lying, covering up, not apologizing, justifying their actions, blaming it on third parties, threatening, cajoling… haha. No. Yes, and no, but they are so big and they have been so successful that they are still somewhat unaware how belligerent they are. And everything that they do and they write it smacks of someone who thinks they can get away with anything and it smacks of someone who is writing or speaking as if they really believe they are the smartest person in the room and no one else understands that and they’re going to get away with everything that they want to do. The only thing that Libra is doing at the moment, is simply trying to progress the project and they pivoted in a way that still keeps them on track for their original objective and the original objective wasn’t financial inclusion, wasn’t banking the unbanked. The original objective was to create their own financial e-commerce system that supported their network, their social media network Facebook.
ERIC: So when Libra first launched, their marketing was geared towards the developing world, they made it seem that Libra was an altruistic attempt at Financial Inclusion to make remittances easier and more fair for the urban working poor…
SINJIN: No no, for the poor in general. For the whole world, actually! For every single poor person in every single country, that’s what Libra is for.
ERIC: I know you have strong feelings about this.
SINJIN: So it’s funny though because there’s a fintech playbook, which shines a really nice polish on what fintech is doing to justify why they are disrupting banks and the entire playbook has been up to this point Financial Inclusion and Banking the Unbanked. Those are the two major things. And basically they’re saying that the current fee structures in the current financial structure for transactions, whether it’s banks or like other third-party remittance providers, it’s simply too high. And for the users who don’t know what remittance is remittance is basically overseas transfers but back to your home country. So if you’re working abroad as an overseas worker or you know on a visa or whatever work visa and you want to send a portion of your monthly amount of your salary back home through whichever way you send it through, it’s called remittance. So you’re remitting back to your home country. And the reason why people do that is because if you’re from an emerging market, you may be only making as a professional and this is not an exaggerated figure, anywhere between a hundred to two hundred dollars a month right. In some of the more or less established emerging markets and even if you’re an executive at a major national company, maybe you’re only making a thousand five hundred a month at most maybe 2,000, right? But if you were to go to the United States and you were to get a visa or another more developed country, for the same amount of work, because you’re not less qualified, it’s just where you’re at, you can be making instead of two hundred dollars a month, you can be making $2,000 a month and then instead of making $2,000 a month, you could be making $10,000 a month. And then also the currencies are a lot stronger in these developed countries. And so you end up remitting back to your home country and then you know that money actually basically that monthly amount of money could provide for not just your family but an extended family and you’ll see that in emerging markets, they don’t have a social security net. And so the social security net has generally been relatives and extended family. And so money is always being borrowed back and forth between everybody. And so when you have one person who’s being able to remit back properly then it’s great. Now the way that it’s being done though is that it’s either being done by private agencies or by banks themselves and I’ll give you a reason why it’s two of those things.
In terms of banks, it’s a no-brainer. Banks will send the wire back and they’ll use the Swift system to do so and Swift is like an internal bank to bank accounting system, right, that basically says, “Okay, look I have this much that I want to send back to another bank in another country.” And even if it’s the same branch they can be on different ownership and different banking infrastructure. And so they use the Swift system to send it back and sometimes not even sent back. Sometimes it’s a matter of just accounting because that bank over on that side has this float and then that same bank has a float in the country where you’re sending from and so no money is actually exchanged, just accounts are basically transferred differently internally, but you know, this is all recorded through the Swift system.
And they can incur massive fees. Okay, so whether you’re sending $100 or whether you’re sending $30, or whether you’re sending $10,000 you’re paying $50 for the wire fee to transact it, and then you’re going to pay a currency conversion fee, if you’re sending not in the same currency, which the bank will never give you the best spread on, right. So when you see like, whatever the buy and the sell is from the bank, you know, there’s a spread between the two right and then when you buy from them, you’re never getting the best rate where they’re actually getting from the market. So they make money on that as well. And then when the person receives it in the bank themselves then there’s also the fees for receiving the wire itself and then there’s fees for withdrawing the money from the account. And so it’s all well and good if you’re sending a million dollars, right and besides the fact it could take between two to five business days. But if you’re sending a hundred dollars and you’re paying a $50 fee plus the conversion fee and stuff like this, the absolute percentage is humongous like 60%. So you have to send a much larger amount right? And for those who can’t send it because there’s an emergency situation, remittance is brutal. And then you have other providers or agents, who basically the reason for those is because sometimes the banks don’t operate a branch in some jurisdictions where people’s hometowns are right, like there literally is only one type of bank there, but there are like Western Union, there’s other types of remittance agencies and they have agents and they charge quite a bit too, but they might charge on a percentage basis just 5%. It doesn’t seem like much again, and it might be a better deal than sending it via the bank, but if you’re sending $100 and if you’re spending like 5% plus whatever say five bucks. But again, this all adds up and then finally, you know, sometimes there are local groups, almost co-ops which are able to send, you know remittance in kind of pooled amounts, so then it’s cheaper but fundamentally, you know, the agents are still taking a fee that’s less than what the banks or directly maybe Western Union is charging but they’re just charging a little bit less and those are more like kind of informal channels, but you know, they provide a service.
ERIC: Let’s talk a little bit more about remittances and take a little higher, thousand foot view on it and historically remittances are, you know, a product of the 20th century. First off, when did they begin?
SINJIN: I think remittances have always been there, historically I mean like whenever, even if you say there’s differences, international remittance and there’s domestic remittances. Domestic remittance is like when the rural community comes into the urban community and then basically they send money back home. So you can see this in China, the coastal cities were the first ones to really develop first and then people came from the village who are making literally like 20 bucks a month and then they’re making two hundred bucks a month. And basically they either saved their money or sent their money back and you have this hometown girl she goes out and works in the big city as an administrative assistant for like five years and then comes back home and buys a house, right? Because they had made so much money in the coastal cities relative to you know, the rural. Then in terms of internationally, I think you see this with every immigrant population where you know, whether it’s the East Indians or the Pakistanis or this is like someone who has a family of five…
ERIC: This is families being torn apart, right? This is families not seeing one another for 5 years, 10 years.
SINJIN: Yes. Yes, five, 10 years and a lot of these overseas workers have no rights because they’re not seen as humans, because they don’t have a choice. I mean they go to like Hong Kong and they work as a maid and you can Google this like maid abuse and stuff like that or even worse like in the Middle East and in certain countries where they’re not even viewed as human because what human would be able to stay away from their families for like five or 10 years. And so they’ve been totally dehumanized in that respect and it’s such a brutal case of the situation. So when people say to me, “Oh you know, this is really good because this country has a lot of remittance,” and I would say well, yeah, I mean the local governments might say that but in actuality it’s showing how fucked up their country is because if you have like nurses and doctors and professors who make more money being a masseuse or some kind of other profession where they’re an apprentice rather than their main profession, and you think that’s a good thing that families have to be split up for 5–10 years, then you’re totally missing the structural issue here. Right? And it’s like this kind of easy drug because people are away from it. People don’t feel that it’s bad because number one is that people are making money and they’re making such a great deal of money in this conversion between where they’re working and then when they’re sending the money back that that money justifies it. But the country isn’t getting any better. You know if the country got better, then the difference between what they’re making overseas with what they’re making domestically, would be so much less that they would be able to make the decision to come back home and deal with their families. And that’s what happened with Korea, you know, you had people working abroad and then suddenly Korea’s economy started shooting up and then once it got very established and people are like, well, it’s actually better to work in Korea, right? Because the amount is about the same or maybe it’s just a little bit less, but I still have buying power here in Korea and I get to be with my family…
ERIC: And they all returned.
SINJIN: Yeah, they all returned. I mean all these countries go through it but the problem is that in Emerging Markets right now, because the way that globalization has happened, remittance has happened, It’s almost like they don’t need to fix it. You know, they can just let the thing keep going on.
ERIC: So historically remittances have always been a part of how a developing country moves to become a developed country, but you’re saying that today that might not be the case because of globalization?
SINJIN: Yeah, it’s almost like a crutch now. What they’ve done is they’ve kind of hijacked this idea of remittances and used that as kind of like a commodity resource for them, like a harder currency and so on and so forth. So it’s super duper unfortunate and because ironically the gap between the pay domestically and the pay abroad is so huge that it justifies even to the person who’s doing the work that it’s okay. Yeah.
ERIC: Well, what are the sociological effects of remittances today in, say a market like the Philippines. you know, you lived there and worked there for over five years. What did you view?
SINJIN: I’ll give you the super best example actually and this is where I always use my litmus test to see whether or not a foreigner who’s come in or an expat who’s come in to Southeast Asia and who’s talking to me about Southeast Asia, really understands what’s kind of going on. There’s a company in the Philippines called SM and it stands for Shoe Mart actually and it’s owned by the Sy family, the patriarch is Henry Sy and he’s the richest man in the Philippines. And these malls are known because they are humongous, like they’re the biggest malls in the world really. And you would think like why are these malls so profitable and how are they so big and why are some of the biggest malls in the world in the Philippines? And then in the urban centers you go to you can see these massive malls and they’re great, but what’s crazy is that you’ll go to like the rural areas, not rural areas, but the urban centers that are kind of out of the way where there’s not really any industry at all. And you’ll see basically, you know, like as far as the eye can see you can see kind of like really low income housing, not necessarily slums but really low income housing and then in the middle of all this low income housing there is this massive beautiful white citadel of a mall. Okay, which is going to be an SM Mall. Okay, there are other competitors, a couple of others, but it’s basically SM. So you have this like mecca rising in the middle of all this low income housing.
And when you go there it’s unbelievable. Under Armour, Nike, Adidas, the things that are just coming out on the international market or in the United States, it’s there already. And there’s not really any kind of a discount here; and there’s Starbucks. There’s any kind of possible restaurant you could ever want to have. It’s like being in suburbia in America, but like the best suburban America ever possible, right? Arcades, awesome movie theaters, whatever like this. And then everyone’s happy if everyone’s buying things and then you would go in and think wow the Filipino people love to spend. Even if they don’t make money domestically, they love to spend money and these are the best consumers in the world. And then this is where the test comes in play because then the expats are like saying this and they’re like, you know, obviously Filipinos are not really doing that badly because they’re able to spend and you know participate in and buy these things at the mall. They’re able to buy iPhones or smartphones and you know, they’re big consumers. We love it. And the biggest beneficiary of remittances is actually SM. And why I say that and you know, I say beneficiary in a very nice way. I mean, there’s another way I could say it. Where is this money coming from? This money is actually coming from remittance. Right? So all of these families in all these low-income housing they have at least one or two relatives who are working abroad and when they send the money back to their relatives, instead of necessarily spending it on better housing, on better education, on better nutrition or whatever and even electricity and so on so forth. They tend to see this white Mecca, which is like less than a mile away. And as soon as they have the ability to know that they have a remittance coming in, they go to the white Mecca, they withdraw and are able to get remittance money and before they’re able to go pay for their cell phone bill or their electricity bill or their water payment or whatever like that. “Oh my God, there’s a Starbucks there,” which the price is exactly the same as the US. So like $4.50. “Oh, there’s a pair of Nike's great, you know, I love this and a great t-shirt that I’ve always wanted to have. Oh and LeBron James was wearing that same one last week.” And by the time they get out of that mall after they’ve done the remittance they’ve spent probably 90% of it and then they’re unable to pay for their water and their housing and stuff like that and then they call back to their mother or their aunt or their father or their uncle and they say, “we need some more money, we don’t have enough.” They say “why?” “You know, we had costs and stuff like that” and you know, these parents are there because of love and you know, they’re trying really hard to be responsible. But also they want to provide and the fact of the matter is everyone in the entire district is doing the exact same thing. And so then they scrimp and save, then they send an emergency remittance so that the water doesn’t get cut off. And so who’s like vacuum cleaning all this remittance up actually, it’s all domestic as well.
And this is where that underlying economy is and so basically the entire fintech playbook or like what Libra is saying… I’ll say a really great thing about it is that they put the conversation on the map because I would say if you’re from a developing country, you have no idea what remittance is or how important it is. On the other side, I feel like they totally exploited and debased the words of financial inclusion, banking the unbanked, empowerment. I really hate the entire Libra team for that and to their credit though, they have put that really much more on the back burner because they got pretty much, in some ways, not necessarily called out for it, but I think they used that as a cover for what they really wanted to do on the commercial front and they realize that the cover really doesn’t work completely. And the regulatory side now is much more in the forefront and they put that on the back burner. So maybe not to their credit. They just realize that their PR spin that they were going to use to kind of make a cover for their business has not been as effective. But I’m glad for the discussion and the dialogue to be brought out at least because they did a great job in educating everyone and then suddenly people who never understood anything or learned anything about financial inclusion or remittances said, “wow, this is such a great thing that Facebook is doing.” Because they’ve never thought about it. You never had your parent leave for two years to send you money because you are unable to pay for electricity or water or food for your family, your extended family of 12 who are totally dependent on you because there’s no other Social Security net. So I get that, it’s great. And you know for at least creating this awareness, I’m really happy for what Libra has done, regardless of whatever their intention was.
ERIC: Two last questions. Say Libra gains regulatory approval, what do you expect will happen?
SINJIN: Nothing actually because what they’ve done is that, you know, the business models here in payments and with governments and monetary policy are extremely extremely complex. I think there are extremely few people on the planet who really understand where and how they can structure it and so what has ended up happening was that Libra basically had a vision to be the world’s global currency. Let’s just say it really clearly. That’s what their intention was. Whether or not they realized that’s what it would be perceived to be or that’s what they were actually doing because they’re just basically kind of running into it. The reality is what they had first proposed was a global currency owned by a corporation right? No matter how much they said it was decentralized. And so what they’ve done is they’ve fallen back into basically saying that they’re probably going to issue all these stablecoins. And so basically what it ends up being is for them right now is just a way for them to kind of move forward and then they put a line in that basically says that when Central Digital Bank Currencies are made available then this system will be able to replace their fiat stablecoin with the actual Central Bank one. So now they’re, I think they’re being a lot more honest and transparent about what they’re trying to do and that is basically, be a global system for digital currencies regardless of what kind, right. And so they were kind of forced into being this honest. But then on the flip side of it too is that they’ve totally lost the ethos of what decentralization is and what accessibility truly is and so on so forth. And then the next kind of few points that they have for the Libra Foundation and how they revised it, is basically trying to be more compliant or completely compliant and designing things that basically will be more in line with what the current financial structure is. And so they have in actuality almost become like a global PayPal or a Wechat and you know honestly they could have forgone all of this stuff and just launched their own centralized digital currency based on the US dollar and had so much more progress. And so the entire premise of Libra has basically gone out the window in all honesty right other than the fact that I mean, but one thing I’ll say is that everyone agrees that their tech is going to be really good and has been good, you know, but, you know, it’s a far cry from what we’re trying to or what the experience of decentralization or the entire cryptocurrency was supposed to be.
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The International Blockchain Monetary Reserve is an economic development reserve established to promote inclusive financial development for the urban working poor in emerging markets. IBMR.io has just launched ARCC, the Asia Reserve Currency Coin. It’s the world’s first digital microasset. ARCC are debt free sources of capital for entrepreneurial investment, specifically allotted for the urban working poor, and are a new form of microfinance that exists outside of the established financial and credit systems.
