The first recorded mention of money traveling over large distances comes in the form of “flying cash.” The term referred to paper vouchers that Chinese traders used as proofs of payments, partly because copper coins were too bulky to carry, and party to serve as a safeguard against thieves. Since then, the overseas money transfer industry has experienced several significant changes.
Wire Transfers and International Money Orders
Sending money from one country to another saw a notable development toward the end of the 19th century, with the use of wire transfers becoming commonplace. A number of non-banking businesses entered the field, and Western Union, among the pioneers, remains a formidable player even to this date.
While wire transfers were the most common way of carrying our cross-border transfers until early 20th century, they took a considerable time to process because financial institutions depended on mail as the mode of communication.
Next in line were international money orders, and they soon became the preferred mode of making overseas fund transfers. The main reason for their rise in popularity was lower costs, although the time they took to process depended on multiple factors. Until the early 1990s, financial institutions continued relying on mail for communication.
Special Drawing Right
The Special Drawing Right (SDR), an international reserve asset, was created by the International Monetary Fund (IMF) in 1968. Its aim was to supplement its member countries’ official reserves.
More than 204 billion SDRs, equivalent to around U.S. $291 billion, were created and allocated to its members by September 2017. A basket of five major currencies affects its value, and the currencies include the U.S. dollar, the euro, the British pound, the Japanese yen, and the Chinese renminbi.
Given the support that SDRs find from the IMF, Russia and China’s shift toward gold, and Saudi Arabia’s lookout for a new benchmark for oil, some experts believe that SDRs may become a suitable successor to the USD currency reserve.
The Age of the Internet
Use of the internet became common by the turn of the last century, and this had an effect on how people could carry out cross-border money transfers. Several internet-based non-banking entities started giving people quick, easy, and cost-effective ways to send money overseas.
While banks also started giving their customers the means to send money overseas using online platforms, they have continued to lose out on their share of the pie. This is because most banks still offer less than favorable exchange rates and charge steep fees.
Now, FinTech companies such as HiFX, TransferWise, WorldFirst, and OFX have access to the highly speculative forex market, and by leveraging the technology they have managed to make cross-border payments more cost-effective. According to data released in the Remittances Worldwide Prices (RPW) report, while the average cost of sending money overseas using banks is almost 11%, it is around 5.3% with FinTech companies.
Changes in How You May Send and Receive Money
Transferring money to an overseas bank account is fairly simple. Depending on the company you select you may initiate the process online, over the phone, or in person. Acceptable modes of payments also vary from one company to another, and your options include bank account transfers, debit cards, and credit cards, as well as region-specific methods such as SOFORT, iDEAL, and POLi.
Western Union, WorldRemit, Azimo, Ria, and MoneyGram are some of the prominent companies that now give recipients the ability to collect transferred money from cash pickup locations. WorldRemit and Azimo also let you top up mobile wallets and airtime from different regions.
The use of multicurrency accounts is fairly recent. These accounts fall under a single umbrella, allowing account holders to hold and manage funds in multiple currencies. Some of the companies that offer these accounts include TransferWise, WorldFirst, and OFX.
Scheduling transfers is easy, although not all companies offer this functionality. Some even offer hedging tools such as forward contracts and market orders, giving individual and business clients the ability to make the most of exchange rate fluctuations.
Using Second Generation Mobile Phones
The use of second-generation mobile phones remains prevalent in several parts of Africa, Asia, and South America. Incidentally, these are also regions that are home to large populations of unbanked populations.
Some mobile phone network providers have recognized the potential this market has to offer, and have started providing international remittance services. For instance, Digicel, a company that operates out of more than 30 markets across Central America, Oceania, and the Caribbean, is already making inroads in this realm.
Will Cryptocurrencies Disrupt the Field Further?
FinTech has changed the way people send money overseas, and blockchain technology may disrupt this realm again. Western Union and MoneyGram have started testing Ripple’s blockchain technology to make overseas money transfers more cost-effective. Banks have started using the technology to create a real-time global network.
While blockchain technology holds the potential to make cross-border fund transfers more cost-effective, its decentralized nature can also make them more secure than before. Some start-ups are relying solely on blockchain to facilitate cross-border transfers, a few of which include Ripple, Abra, Circle, BitPesa, Coins.ph, and MOIN.
Existing problems with using cryptocurrencies for overseas money transfers is the exposure to currency conversion twice as well as existing market depth that makes trading in exotic currencies a challenge.
The overseas money transfer industry has changed significantly since wire transfers first entered the picture. Access to competitive exchange rates is no longer the privilege of big banks and large businesses, with FinTech companies now making them available to the masses.
If the industry is able to leverage blockchain in the right manner, even better days for consumers are in the coming.