Example of cross border remittance payments on Stellar

bkolobara

Stellar advertises itself as the perfect platform for cross border remittance payments. In the beginning, it was hard for me to understand how this would work. Somehow the money needs to move over the boarder and moving it is going to get expensive. How can a system like Stellar reduce the cost? What happens in the case if the money doesn't arrive at the other end? Who is giving me a refund? Isn't Stellar just a distributed database?

Here I will provide only one specific example how cost can be reduced leveraging a system like Stellar. In this example you will see that money doesn't need to physically travel for it to arrive somewhere.

The problem

Bernard is from Brazil, but currently he is working in Germany and looking for a way to send money back home to his wife Luísa. One of his problems is that he earns Euros, but Luísa can only spend Brazilian Real. So he needs to exchange the Euros for Real. If he was sending money inside the EU and there was no exchange happening the process would be extremely fast and cheap (and it's getting faster and cheaper in 2017), but sending it to Brazil is much more expensive. Especially using regular bank transfers. One of his options are companies specialised in cross border remittance like Transferwise. Sending 1000 Euros to Brazil costs around 14 Euros in fees and takes several days with Transferwise.

There is also a parallel story happening. Carlos living in Brazil wants to buy a new nice table for his kitchen. The problem is that the table is sold by a French company called BestTables and costs 1000 Euros. Carlos has now similar options to move his Brazilian Real (around 3,487) to Euros and send it from Brazil to France.

It's better to work together

If Carlos and Bernard work together they can minimise the cost and time to transfer the money. What they need to do is:

Agree on a fair exchange rate from Brazilian Real to Euros (lets say 1 Euro = 3.487 BRL).
Carlos giving 3,487 Real to Luísa.
Bernard sending the 1000 Euros for Carlos to BestTable using a cheap/fast bank transfer inside the EU.

In this case no money left the country, but from the perspective of the involved parties it looked like it did. The only problem with this solution is that finding the right person to trade with and trusting that the person will not just run away with your money becomes impossible.

Stellar is here to save the day

Stellar can completely eliminate the need for the involved parties to trust each other. Lets now see how the example above can be done on the Stellar network. Lets assume that there are 2 anchors. One in Germany that issues Euros and one in Brazil that issues Brazilian Real. This anchors can be banks or other financial institutions. They only need to provide a way to deposit and withdraw money from inside the same country.

Bernard deposits 1000 Euros with the German anchor and is given 1000 Euro tokens on the Stellar network.
Carlos deposits 3,487 Real with the Brazilian anchor and is given the equivalent amount of Real tokens.
Now both have the possibility to send their tokens to someone else in seconds over the internet. But if Bernard did so, Luísa would still not be able to withdraw the Euro tokens in Brazil. The German anchor only decided to allow deposits and withdrawals in the EU.
Because the Stellar network is at the same time a distributed exchange, Bernard and Carlos can in a secure way exchange their tokens without the possibility of one of them cheating.
Now that Bernard has 3,487 Real he sends them to Luísa and she withdraws them from the Brazilian anchor.
Carlos sends his tokens to BestTable and they can redeem them for the equivalent amount of Euros.

Lumens as a bridge currency

This process seems a bit complicated, but I wanted to explain what happens on a lower level on the Stellar network. Most of the technology is built into Stellar and thanks to path payments Bernard doesn't need to be aware what is happening in the background. Once he deposits his Euros with an anchor he gets access to the whole Stellar network. He just types in what tokens he wants Luísa to receive (in this case Brazilian Real) and is shown an exchange rate. If he agrees Luísa gets the money in seconds.

The process doesn't need to go Euro -> BRL, it can be Euro -> Croatian Kuna -> XLM -> BRL. The system will find the cheapest way. Because Lumens are the native currency of Stellar they can be a middlemen. So you don't need to have sellers and buyers from Euro to BRL, only from Euro to Lumens and from BRL to Lumens. This increases the liquidity of all exchanges and keeps the price down. Now if you want to go from Croatian Kuna to BRL you just need to have a way from Croatian Kuna to Lumens if there is no direct path to BRL.

Conclusions

This is only one of many examples how we can use Stellar to move money extremely fast and cheap around. As the network grows and more financial institutions are joining Stellar it will just become easier to find matching trades. With path payments and simple mobile wallets it will become extremely easy for users. The whole complexity will be hidden in the background. Just one click on Bernard's mobile phone and Luísa got her Brazilian Real that she can immediately withdraw from her anchor in Brazil.

BorisReznikov

Hi bkolobara, what you described is in fact the TransferWise model (matching so money doesn't actually have to move across borders). This model becomes problematic especially in cases where the flow is unidirectional, as it often is in remittance corridors. For this reason, among others, money actually does move across borders on Stellar. Here's a quick video that describes how money moves on Stellar: https://www.youtube.com/watch?v=EA53r43vGCA

bkolobara

Hi Boris,

Yes, this is the TransferWise model. And the same can be done on Stellar, avoiding fees charged by TransferWise and much faster. One of the reasons why TransferWise is slower is exactly this. They need to wait on a matching payment from the other side.

I watched the video multiple times and can't see how this flow in the video is unidirectional. My idea was actually to explain exactly what is happening in the video. I just didn't use the term market makers when the exchange happened. The exchange is happening between end users in my post.

If Amy was just depositing cash in her account at Universal Remittance Company and Tunde was just taking out cash from the Domestic Bank. The Domestic Bank would end up only with Universal Remittance Company's tokens and no cash. While all the cash would be at Universal. At some point Universal would need to ship all the cash in exchange for tokens to the Domestic Bank to balance things out. In this case it would be truly unidirectional. But you would need to pay the cost of moving the cash and we are at the beginning again.

What this video is showing instead is that the market makers are depositing cash at the Domestic Bank and buying Universal's tokens in exchange for Domestic Bank's tokens. Market makers (instead of Carlos) will get cash out on Universal's side. So that the cash never moved boarders. But if there are no market makers willing to move to the opposite side we have again the same problem. Introducing a magic entity of market makers that will always buy from the other side doesn't solve the unidirectional problem. Carlos had a goal, getting his table. What is the motivation of market makers to move in the other direction is the right question?

EDIT: When I say that money doesn't move across the boarder I mean that cash is not moving, but for everyone involved it actually looks like it did. That's the beauty of the it.

centaurus

Thx @bkolobara for the nice wrap up!
From my understanding the thing with unidirectional (or not equally balanced) corridors , let's say from Germany (EUR) to Philippines (PHP) is this:
It pushs the price of EUR down and the price of PHP up (participants in the network need to sell EUR and buy PHP)
In a first step this price shift only exists within the stellar network, but it opens an opportunity for a big player with access to traditional currency exchanges to do the oposite direction outside of stellar and gain from the price difference.
The thing is, it is much cheaper for him to move large amounts once a day than it would be for individuals on single payments.

JensBernhardt

Thx also @bkolobara your post was very helpful for undertsanding the basics. As i understand, the whole concept makes some sence like that:
There is some money going to the philippines and there is some money going out of the philippines. Money going in is (for simplicity) all the stuff philippines import (80 billion dollar) and money going out is all the stuff they export (80 billion dollar) see http://atlas.media.mit.edu/en/profile/country/phl/. So i guess market makers are the one who find the guys who want to import stuff and need to change philippin peso to dollar or euro. Stellar can offer them a cheap way to do so. If you search for "market makers stellar" you get this http://www.stellartradingsystems.com/stellar-market-maker/ i wonder if they are connected.

Anyway according to http://atlas.media.mit.edu/en/profile/country/phl/ biggest imports are Integrated Circuits so if some philippino oversea worker send some money from european union back home some one in the philippines will most likly buy Integreated Circuits in the EU in return.