Relámpago: A blockchain remittance solution for Latin American migrants
By David Folsom, MALD ’22
Over the last several months, Eric Flood and I have been developing a new way for migrant workers to send money back home to their families; a process commonly referred to as “sending remittances.” While companies like Western Union have dominated the remittance market for decades, new technology built on the Bitcoin blockchain is disrupting the industry. However, the new blockchain remittance apps don’t work for the poor and unbanked who need these solutions the most. Our solution, Relámpago, is designed to fill in the gaps. We plan to focus initially on El Salvador, which recently made Bitcoin legal tender alongside the U.S. Dollar in September 2021. The regulation and blockchain infrastructure currently being implemented in El Salvador is unique in Central America and presents an ideal environment to test our concept. Given that El Salvadoran migrants send home $6 billion in remittances annually (equivalent to 22% of the country’s GDP), we also see an opportunity to provide significant value. Average transfer fees in 2020 were ~3%, which means nearly $200 million in earnings sent home from the U.S. never reached the recipients. The majority of these recipients in El Salvador are women, 80% of whom are living at or below the poverty level and reliant on remittance payments for half of their annual income on average. Furthermore, 87% of remittances are picked up in cash, which is not only inconvenient and potentially unsafe for these women, but also forces them to hold their savings in cash.
Up until recently, value sent over the Bitcoin blockchain took hours to confirm and required fees that tended to fluctuate unpredictably. In Bitcoin circles this was known as the “scalability problem,” but in 2019 a new payment solution called the Lightning Network changed the game. Lightning is a payment application built on top of the Bitcoin blockchain that uses QR codes to facilitate transactions locally, but also allows users to send value to anyone in the world instantly for (almost) no fees.
The use case for Lightning to improve the remittance process is obvious. Why would anyone use Western Union if they could send money for free? The only problem is that Lighting is a digital payment network. All the current remittance solutions powered by the Lightning network require a smartphone, internet access, and bank accounts1. In the context of El Salvador, these are insurmountable barriers for the poor and rural populations that rely on remittances the most. Less than 40% of El Salvadorans have internet-connected phones, and even for those who do, 3G coverage is spotty outside urban areas. On the U.S. side, only 50% of El Salvadoran migrants in the U.S. are banked, and the vast majority of migrant workers are paid in cash or check, so loading that money onto a digital platform to send home is inconvenient if not impossible.
Relámpago, by contrast, will allow low-income El Salvadorans to receive remittances for free, store value in a digital wallet, and make payments—all without internet access or smartphones. Here’s a summary of how it could work:
In El Salvador, a remittance recipient signs up for a Relámpago card at a local shop (tienda), typically run by a trusted woman in the community. Once registered, this new user is ready to receive remittance payments on their card that are immediately available to spend. They can transact and make purchases using Lighting payments via a QR code printed on the card (required by law to be an option at every store in El Salvador), or they can cash out at the local tienda. Users are notified of new remittance payments via a SMS message and can check their balances via SMS messaging at any time.
On the sending side, a remittance sender in the United States can approach any of our U.S. partner shops with cash or a check to send money via Relámpago. Unlike a typical remittance service that takes a 2-5% fee, there is no fee to send cash with us. By moving value over the blockchain directly to our user’s cards, we remove the need for a bank on the receiving end, which is typically responsible for most of the remittance fees. We aim to partner with shop owners in the U.S. that already work with various remittance services and are well-trusted within their communities.
Just a few weeks ago, Eric and I won the Tufts entrepreneurial IDEAS competition with our pitch for Relámpago. While we are grateful for the recognition, we still have a lot of work to do. We intend to use the prize money to travel to El Salvador in January and test our ideas with El Salvadorans. We plan to meet with remittance recipients, government officials, and representatives of the national banks to fully understand the remittance process and how it can be improved. The ideal solution is likely a service we have yet to fully imagine, but we know the technology is there, and we are committed to developing a venture that will return value to the remittance recipients who need it most.