July 2, 2016
International payments are not optimized for micro transactions. A foreign withdrawal from an ATM may be charged up to 5%. Wire transfers from banks deduct an arbitrary fee sometimes both from the sender and the receiver. Banks are often not upfront about the currency exchange rates and swallow money in between a transaction without giving any indication to the customer.
When we deal with international payments, there are a lot of moving parts. SWIFT/IBAN wire transfers are not always direct, i.e., from the sender to the receiver, and there may be quite a few intermediary banks involved before the funds reach their destination. There is no way to tell what banks take what amount from the wire. For large payments, these costs may not be too significant but if you are looking to transfer say less than EUR 1000, internationally, then small cuts matter.
Single currency across all the banks seems like an attractive solution. With a digital currency like bitcoin, these extra costs can be avoided completely. Similarly, if you happen to live in a EU region, any transfer within EUR has negligible costs associated with it.
But since bitcoin has not gained widespread acceptance and low cost EUR transfers are limited to, well, the EU region (in essence creating a localized "banking zone"), the fact remains that there has been no solution that facilitates micro payments on a global level.
"Why does one even need globalized micro payments?"
A lot has been written about using blockchain to settle payments in real time. It's admirable that banks have started to recognize the importance of cutting edge technology as a form of future investment but the problem of high cost of fx can be solved much more easily using the tools that are available right now.
We live in an increasingly interconnected world and trade internationally in a largely digital space. What if instead of trying to get everyone to agree on a single currency (like bitcoin) or trying create a single localized banking zone everywhere (like EU) or trying to invest in a new infrastructure altogether like (blockchain), we try something simpler? For example, giving the customers an ability to:
Not quite. A rented postal address is cheap. Once the identity is established a light account can be created that allows the user to accept payments and either transfer money to their local account or withdraw it using their debit card. Transfers within the same network of accounts would be free and fast. There won't be any fx costs associated.
The solution is not entirely novel. Travelers have been doing this for ages by walking up to a bank branch and opening up an account with them. And then transferring their local currency to the foreign account so that they can spend the money locally without having to endure the exorbitant fees from the banks or the atms. The question is how do we scale this?
It's not that hard. We can take inspiration from the people who help in offshore registration of companies. The entire process gets completed within one business day. All you have to do is submit an online request and send in your scanned identity proof along with it. The documents are verified manually and if all goes well, you have a company registered along with a rented postal address.
It will be quite easy and cost-effective to partner with a business that offers mailbox for rent. And given that on boarding a customer is a low maintenance process (one time only), it wouldn't be hard to increase the operational capacity by outsourcing the work to people who are already efficient in doing these things. To cover the cost of operations, the user can be charged a small "rental" to manage their accounts.
It's important to note that we're not proposing to open up a savings account but rather, we're implementing a physical manifestation of digital wallets. A "holding account" of sorts where your funds stay as long as you don't transfer or withdraw them; taking the best parts of what make digital wallets so popular in the first place and putting them inside a bank account.
Such an account solves many problems at once. Firstly, it gives the customers an ability to have funds in multiple currencies. It allows them to withdraw the funds from their local ATM machines at the ordinary transaction costs and no losses in currency transfer. Finally, it allows unrestricted movement of funds within the internal network of accounts.
On the last point, consider a scenario where an offshore company has opened up multicurrency holding account for itself and its employees in a bank. At the end of each month, they move funds from their account (and in their operating currency) to the accounts of their employees (in their local currency). The employees can then choose to either transfer the amount to their savings bank or withdraw the money from their debit cards.
A tremendous opportunity awaits a bank which can recognize this need for multicurrency ‘light debit accounts.’ Multi-currency accounts have been here for a while. But they haven't gained much popularity because of high costs of operation and difficulty of opening one in your name. Most of these challenges can be overcome by simply changing the internal policy of banks. Give the user an easy way to open an offshore account, allow them to hold multiple currencies at once, lower the costs of annual maintenance of such accounts and there you go! Now you have a low-tech, regulated and immediately implementable solution for the movement of micro international funds.