One of the most hyped recent concepts in the transfer industry has been the idea of “peer-to-peer” networks. Such systems could in theory significantly reduce international transfer costs by eliminating the need to move money across borders. By matching up requests to send money from one country to another (for example, from the UK to the US) with requests to send money in the opposite direction (i.e., from the US to the UK), a service could keep the majority of (or perhaps all) money within its original borders. This would benefit both the company and consumers, as the company wouldn’t have to buy currency on the market and deal with the resultant risks, while consumers would enjoy significantly lower transfer fees.
Some of the largest new companies in the transfer space were founded on and marketed themselves around this concept – most notably Transferwise and CurrencyFair. However, many have since abandoned such peer-to-peer branding due to the difficulties of executing this strategy.
While peer-to-peer companies have achieved proof of concept, the main obstacle to scaling such a service is the lopsided nature of global remittance flows. In essence, while there are many people sending money from developed to developing nations, there are far fewer individuals sending money the opposite way (such as from Nigeria into the UK). Additionally, companies’ uneven capital controls, making it possible to move money into certain countries but difficult to legally move currency out.
One of the biggest challenges of P2P providers is that in many cases, they cannot actually operate as pure P2P providers because the flows of money need to match. For example, the latest annual remittance flows into the Philippines are 54 times the level out of the Philippines. For Nigeria it’s 23 times. Other countries such as India or Malaysia impose capital controls on sending money out of the country, adding another barrier to operating a pure P2P service.
This means P2P providers often require another party to provide them with liquidity. The Malaysian Ringit and Nigerian Naira are not easy currencies to get hold of. For startups, obtaining the required liquidity relationships with either a bank or a third party group has become much harder in recent years as many financial institutions do not want to work with smaller payments companies, while others have hesitations about working with parts of the developing world due to money laundering and terrorist finance regulations.
Practically, this indicates that peer-to-peer startups must either restrict their operations to remittance corridors in which there is relative parity (and therefore greatly limit their operations), or hold customers’ money for significant periods of times while they wait for matching orders before executing trades. Neither of these options are viable in the long-term, or on a large-scale. While some companies (e.g. CurrencyFair and Transferwise) have strategically used the concept of peer-to-peer in their marketing and promotional efforts, in practice they rely on traditional currency markets for liquidity and to execute the majority of their orders. As such, peer-to-peer technology remain an intriguing premise but is ultimately unlikely to alter the nature of the money transfer market.