[Part 1] Application Example of REMIIT RSC : Difficulty of Funding using SWIFT for Money Transfer Operators
By Logan Hong (CTO)
The REMIIT Team uses the blockchain ledger technology and blockchain cryptocurrency mechanisms to overcome the inefficiencies of existing remittance systems and to realize cost savings. Though we have already attempted the possibility through comparison with the existing system several times, due to un-controllable limitations such as regulations, we are conducting various attempts with deeper and focused research. In particular, we will look at the very specific limitations faced by Money Transfer Operators (MTOs) and explain how the REMIIT product using the blockchain ledger technology can overcome them.
Money Transfer Operator’s Remittance System
Although Money Transfer Operators (MTOs) are primarily aimed at users who do not have access to banks, they also want to offer money transfer services to ordinary users at a lower cost and faster than banks. Due to regulations under the Foreign Exchange Transactions Act, MTOs must also use the banks to legally remit money. Therefore, MTOs have sought a variety of algorithms/methods to reduce costs and improve remittance rates based on remittances through the bank (AKA SWIFT protocol). There are a variety of algorithms used by MTOs, but there are largely two categories.
- Method that reduces cost and enhances speed by reducing the number of actual transfers between countries
- In the case of bidirectional remittances, the method of reducing costs by offsetting the transfer of funds between countries
Since the second case is possible in the case of a bidirectional or even a multi-way remittance network, we will only cover the first case. The first case uses pooling and pre-funding methods as a way to send transfers from one country to another which reduces the number of transfers by collecting money from individuals and send in lump sum. Pre-funding is a method of deducting a certain amount of money sent to a recipient partner each time a user remittance transaction occurs, and pooling is a method of collecting a large amount of remittance users and remitting them at once. Both of these methods results in separation between funding and actual remittance processes.
Limitations of the MTOs’ Remittance System
The pre-funding or pooling method described above is a useful way of reducing the actual number of transfers between countries by separating funding and remittance. Pre-funding is generally an essential method for MTOs as the pooling takes time to collect a large amount of money. The pre-funding method requires sending large amount of funds to a recipient partner in advance. However, the formation of a trust relationship between remittance partners must be preceded, but the formation of such a trust relationship is costly and time consuming and counter-party risk also exists. Therefore, overcoming these limitations is one of the core values provided by the REMIIT team, and has already been emphasized several times.
Although pre-funding is an important method for MTOs, there are currently significant limitations to this approach. Since the remittance process is divided into two phases, funding and remittance, it is impossible for all the banks and supervisory authorities involved in the process to confirm the individual remittance and the users of the MTOs in the current system. In other words, the bank can check the details of each MTO that send and receive, including KYC and AML. However, it is not possible to verify information about the person who actually sent or received money through the MTOs.
As a legal obligation, the MTOs in Korea are required to report the remittance details to the Bank of Korea, but the relationship between the remittance and funding histories are not reported. In addition, it is impossible to work on request for audits by the US supervisory authorities although the remittance is mainly made with USD. Because of this situation, most commercial banks are refusing funding, such as pre-funding, which is carried out by MTOs, and only a few banks are accepting them at risk.
In the next post, we will look specifically at how the REMIIT team is trying to solve this situation using the blockchain ledger technology.
