108.10台灣銀行家雜誌第118期 / By David Stinson
RegTech, not Blockchain, is the Path Forward for PaymentsBankers Digest
International remittances are not a point of pride for the banking industry. With the internet and liquid foreign exchange markets, it should be possible to send money from two points anywhere in the world at minimal cost. In many cases, however, the process is unnecessarily complex. Remittances are a key source of currency inflow for some developing countries, and also an important means of support for low-income populations. In several countries with significant out-migration including Kyrgyzstan, Tonga, Tajikistan, Haiti, Nepal, and Liberia, remittances make up over 25% of GDP. Accordingly, the topic has received increasing attention from multinational development organizations. Sustainable Development Goal (SDG) 10.C of the United Nations aims to reduce the transaction cost of a US$ 200 transaction to US$ 6 by 2030, from US$14.20 in 2018. Major political battles have been fought over taxes with smaller rates. Furthermore, actual transactions are often smaller than this benchmark, generally causing rates to be even higher. World Bank statistics show a global total of US$ 689 billion in remittances in 2018, but informal, illegal channels make up an unknown market share and the above figure would probably increase if more customers could be brought into the formal sector.There are a variety of reasons for these high costs, imposed on people who can least afford it. While some of these issues are specific to developing countries and exist on the receiving end of the remittance, others apply to the banking sector as a whole. The question of remittances has received attention recently with the high-profile entrance of a plan to disrupt the market: Facebook Libra. Libra features a stablecoin architecture – a blockchain cryptocurrency backed by actual deposits to guarantee its value. Digging deeper, though, Libra's real value comes not from its blockchain design, but rather its user data.The last mileThe challenge with remittances is not getting the money into the country, but rather getting it into the hands of consumers in a usable form. In the cases of Western Union and MoneyGram, the problem is simply the physical costs of the branches: the two service providers have a combined total of over 800,000 branches globally. Western Union has a 150-year history and has so far proven somewhat immune to various waves of financial innovation, but its market position is ripe for disruption.Another major factor, relating directly to the regulatory concerns mentioned above, is “de-risking” on the part of commercial banks. Remittances must usually pass through intermediaries called Remittance Service Providers (RSPs). These entities are often smaller, based in the receiving country, and may not have the infrastructure to store all customer information. Banks, facing various global, regional, and local regulatory requirements, have often decided that such customers are often not worth the risk.A third factor ties in with the previous one. Efforts to bring local operators into compliance have had the effect of reducing competition. Exacerbating this effect, some post office systems and national banks have also entered into exclusive partnerships with specific operators, preventing new entrants from gaining market share. Meanwhile, since these are developing markets, consumers may not be entirely aware of their options and prefer only traditional routes.Mobile money transfer has ameliorated this problem, helping reduce branch costs and increase consumer knowledge, even without the need to more fundamentally rethink payments. Yet, a deeper solution will involve reducing the role of RSPs. It is worth noting that in the case of cryptocurrency, e-wallets or exchanges take over the role of RSP as an additional layer in the stack between the bank and the consumer, but there are still some reasons to think they may have an advantage over the traditional method.A look under the hoodFacebook has had ambitions in payment services for a long time. In 2010, it promoted Facebook Credits, which were successful enough to generate 16% of its revenue in 2012. However the project eventually fizzled as the system still relied on other providers, and did not control enough of the payment process to become profitable. Facebook’s recent announcement of the Libra project marks an attempt to “enable a simple global currency and financial infrastructure that empowers billions of people,” according to the Libra White Paper.The project has attracted widespread regulatory scrutiny, largely due to its association with the Facebook name. Much of this pushback has involved concerns over market competition as regulators on both sides of the Atlantic become more skeptical about large tech giants. Facebook also owns WhatsApp, Messenger, and Instagram, and would likely also link Libra to those ecosystems. Reportedly, Facebook's direct influence over the Libra cryptocurrency will be checked by the Libra Association, which aims to have at least 100 other shareholders by launch time.Silicon Valley has acquired a reputation for innovations that “disrupt” existing regulatory structures rather than technologies. Uber’s activist business model involved systematically challenging outdated municipal taxi laws. Is it feasible for to Libra become the Uber of payments, and be unconstrained by anti-money laundering (AML) laws created to ensure compliance in traditional financial services?By highlighting remittances, Libra’s announcement may in fact challenge some aspects of the global AML regime. Governments have been purposely vague about what exactly needs to be checked, under the apparent premise that “if banks get clear guidelines on what constitutes adequate KYC they will never look any further than the minimum requirements,” according to John Callahan, CTO of Veridium digital identity. Some observers say that whatever you do, it's never enough. Meanwhile, the fines involved can be enormous. Cases including HSBC and Standard Chartered have scared the industry straight, but the result has been that small transactions – which pose little risk – have become more difficult. Governments could do more to clarify the KYC process.On the other hand, the Libra model does not aim to challenge existing regulations head-on. The currency can be traded in the dark as cash, but this is no different from other cryptocurrencies. The more interesting part of the proposal – and where Facebook will have more direct control – is an associated wallet, a Facebook subsidiary called Calibra. This is where regulatory overview of individual transactions would take place, and is also where Facebook may be able to bring its data advantages into play. Facebook has pledged not to use Calibri data without user permission, but large brands typically have no problem obtaining user permission when it comes to essential tasks like receiving money. Thus, we should compare Libra to WeChat Pay, not Bitcoin. In fact, Calibra may even allow regulators to have greater insight into monetary flows than the status quo. In a July Facebook blog post, David Marcus, head of Calibra, highlights “the ability for law enforcement and regulators to conduct their own analysis of on-chain activity.” In the past, they would rely on banks to provide suspicious activity reports (SARs), which proved to be a major regulatory burden. Offloading this task to government can likely boost efficacy. A new nicheLibra’s announcement may herald a new split between the technology-driven and investment-driven worlds of finance. Libra coins are probably not intended to be held for long periods. They don’t earn interest, and their value is pegged to a basket of currencies that could fluctuate in any local currency. These fluctuations may be acceptable within the context of overnight holdings, and much more expensive alternatives, but may be less so over longer periods. Some observers have noted the lack of banks on the Libra Association’s list of partners, despite the presence of a variety of other sectors related to payments. It may be attempting an end-run around bank-led payment systems. The question is whether the practice will pass regulatory scrutiny.If it successful, there are a variety of other markets it could attempt to disrupt next – many with strong incumbents. PayPal, for example, also charges fees of nearly 4%. This is equivalent to staying 20 extra minutes a day at an 8-hour job. Uber charged US$ 43 billion to credit cards in 2018, meaning that it probably lost on the order of US$ 1 billion in transaction fees. Payment itself is conceptually simple, but the need to monitor flows of funds imposes direct costs while also reducing competition. The technology industry may be best equipped to handle this requirement, not through decentralization, but rather by streamlining cooperation with financial supervisors. And if solutions inspired by the tech industry can succeed in the world’s least-developed markets, they stand a good chance of being adopted everywhere else.