#Digital Currency Ecosystem

Cross-border retail CBDCs can unlock financial inclusion

Global Trends
4 Mins.

Remittances flow from migrant workers to their homes – often in emerging markets. The process is beset with costs and inefficiencies, however. Cross-border retail CBDCs have great potential to positively impact this situation, making the process for sending money home quicker, cheaper, and more secure. This helps migrant workers integrate better into global financial systems.

Let us first define our terms. We are using cross-border payments here to refer to transfers where the payer and payee reside in different jurisdictions. While these payments can be made for tourism, investment, etc., we focus on a particular situation: workers migrating away from their homelands, and remitting money back home. These cross-border retail remittances are a huge and growing market.

For most migrant workers, however, the experience of transferring money is beset with significant challenges, since many of them are under- or unbanked. These issues can force migrant workers to use informal, unregulated channels. Together, these problems present a real barrier to financial inclusion, i.e., access to sustainable and useful financial products and services,1 for a significant proportion of the working population globally.

Once the issues are laid out, it will be apparent that central bank digital currencies (CBDCs) have a lot of potential to help migrant workers resolve these pain points in the remittance process and achieve real financial inclusion.

Pain points for migrant workers

Portrait of Dr. Roman Hartinger, Senior Business Analyst CBDC
Dr. Roman Hartinger, Senior Business Analyst CBDC, G+D

A recent G+D white paper studies these issues in detail, with a special focus on the African continent. Dr. Roman Hartinger, Senior Business Analyst CBDC, and one of the paper’s authors, said, “Africa faces very particular challenges to the financial inclusion of its migrant workers: among other things, difficulties with digital and electrical access, and lack of interoperability between banking systems.” These issues aren’t limited to Africa. They can be found across the developing world, which is where most migrant workers tend to be from.

Even in countries with comparatively well-established correspondent banking systems, remittances through formal channels can be costly, time-consuming, and often opaque, especially regarding pricing and duration of transfer. For those with questionable legal status in their place of work, a lack of documentation is an almost insurmountable problem. Nor are all the issues on the payer’s side: payees might have to walk hours to a bank, post office, or other payment hub, and queue there for hours more, just to pick up their money. All these problems push migrant workers to use informal channels.2 A World Bank study in Africa points out that remitting $200 from Tanzania to Uganda could cost the migrant worker almost 30%!3

Given the size of the global market and the numbers of people involved, these issues must be addressed.

“Africa faces very particular challenges to the financial inclusion of its migrant workers: among other things, difficulties with digital and electrical access, and lack of interoperability between banking systems“
Dr. Roman Hartinger
Senior Business Analyst CBDC at G+D

Cross-border retail remittances in a global context

Woman using her mobile phone

According to an OMFIF report, global remittances to low- and middle-income countries amounted to $540 billion in 2020.4 Over 200 million migrants, working across 40 countries, remitted money to a further 800 million people in 125 countries. This money came largely from high- and middle-income countries, with the USA, UAE, and Saudi Arabia topping the charts of where workers are remitting from.

On the receiving side, in countries like Lebanon, the Kyrgyz Republic, and Tonga, inbound remittances are between 25% and 50% of GDP. India, China, and Mexico received almost $200 billion between them as inbound remittances (given the size of these economies, the percentage of GDP is significantly less). On the African continent, inbound remittances are above 20% of GDP in Somalia, The Gambia, and Lesotho.

Given an average cross-border transaction fee of 6% (as we saw above, it can go as high as almost 30%; 6% is conservative), the potential for cost savings is immense. Not only would the migrant workers save money, but this can also be passed on to the people they are remitting to, with significant positive effects in the receiving economy. Take Egypt and Nigeria: inbound remittances to each nation could cost over $1 billion a year. Clearly, a significant portion of that money would be put to much better use if it were actually in the Egyptian or Nigerian economies, instead of being deducted at the point of transfer.

In this scenario, the benefits of cross-border retail CBDCs are immediately apparent: they can provide secure, reliable, cost-effective access to financial services for migrant workers globally. In other words, CBDCs offer them financial inclusion.

CBDCs make things easier

A balance is required between cost and access from the point of view of a customer in the remittance value chain. The transfer needs to be cost-effective, but it also needs to be convenient to make, quick, trackable, and easily available to the payee. CBDCs can help with this, as they mitigate settlement and counterparty risks, especially in comparison with e-money or privately issued digital currencies. Unbanked populations with limited electric and digital access need to have no fear about getting their remittances delivered on time, as well-designed CBDCs like G+D’s Filia® solution have these issues in mind.

“There is a real push in Africa to find innovative solutions. Central banks in the region are taking the lead with exploring CBDCs“
Daniel Nagy
Business Analyst CBDC at G+D
Portrait of Daniel Nagy, Business Analyst CBDC
Daniel Nagy, Business Analyst CBDC, G+D

Africa illustrates both the issues that migrant workers face, and the potential that exists if CBDCs are considered as part of the solution by all stakeholders, including governments, central banks, and consumers. Many African central banks, with the active backing of their governments, are looking at issuing CBDCs. Nigeria and Ghana are leaders in this respect. The roll-out of CBDCs has the additional benefit of making remittances more accessible and affordable for migrant populations.

As Daniel Nagy, Business Analyst CBDC and the G+D paper’s other author, pointed out, “There is a real push in Africa to find innovative solutions. Central banks in the region are taking the lead with exploring CBDCs. Countries have entered into, or are discussing, common currency unions. With G+D’s decades of experience on the continent, we can say that the potential for retail cross-border CBDCs in enhancing financial inclusion is huge.”

  1. World Bank, last updated March 2022

  2. Exploring barriers to remittances in Sub-Saharan Africa, volume 2,” Cenfri, June 2018

  3. Migration and Development Brief 36, “A War in a Pandemic: Implications of the Ukraine crisis and COVID-19 on global governance of migration and remittance flows,” World Bank and KNOMAD, May 2022

  4. Future of Payments Report 2021, Official Monetary and Financial Institutions Forum (OMFIF), 2021

Published: 15/12/2022

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