$850 matters: How opaque transactions affect SMEs
When I started working in Rwanda in 2005, it was hard for me to internalize how challenging it was to access cash when I needed it. I was used to walking up to an ATM and taking out what I needed or putting down my credit card. It took about three trips for me to remember my trip planning needed to include building a budget and bringing a stash of cash for my 2-3 week trips. By 2011, all that changed with expanded access to financial services and early mobile money.
So, when I took over the Lab for Inclusive FinTech (LIFT) last year, I carried some personal lessons with me: access to financial services varies dramatically by context and can change pretty quickly.
One area I needed to learn about in the LIFT portfolio was blockchain technology. We’ll talk more about how LIFT explores this topic in our portfolio, but today I want to focus on one problem blockchain aims to solve that is illustrated by an experience I recently had with a Berkeley research project.
The currency juggle
For some IBSI research projects, faculty and staff need to balance budgets across many currencies. For this project:
- Berkeley established a contract with a vendor to collect data for a research project.
- The Berkeley research team received additional funding from a fund source in British Pounds.
- The Berkeley contract system works in United States Dollars (USD).
- The Berkeley vendor works in their local currency.
It is hard to convey how complicated it is for the various teams to work out budget, costs, and exchange rates but we try our best and you get the picture.
A contract between Berkeley and a vendor
For this project, the vendor completed work in accordance with their contract and their work was approved by the Berkeley research team. The process then looked like this:
- The vendor submitted an invoice for work done.
- The work was done in local currency working with local staff, but the vendor had to submit an invoice in USD in accordance with the payment schedule written months ago and regardless of any fluctuations between USD and the local currency.
- The vendor expected the USD payment in accordance with the USD payment schedule.
- Berkeley approved the invoice and the USD payment was sent to the vendor’s bank per the vendor’s bank account information.
- The vendor received the payment…..in British Pounds.
Not only that – there was no explanation of the conversion rate or related fees. Worse, this issue was not discovered until two invoices were paid out, further reducing the income received by the vendor. The difference between what the vendor should have received and did receive was about $850 USD. Anyone can agree – this is a huge loss.
Banks as intermediaries
All fingers pointed to Berkeley – why were we paying the vendor less money with different currency!? But, it turns out:
- Berkeley sent the USD payment to the vendor per the account details provided.
- Rather than going straight to the vendor’s bank account, the transfer’s first stop was a UK-based bank before the payment was sent on to the local bank.
The conversion – and loss of income for a small, woman-owned business in a low-income country – was out of the hands of Berkeley and the vendor’s local bank. The difference could not be recovered.
There was a fix – the vendor needed to confirm a USD-specific bank account to receive USD payments and update their information in the Berkeley system. But that didn’t feel like the real problem.
Reducing (some) opaque practices and costs
Here we were – working on a program focused on studying financial inclusion and improvements in financial technology – witnessing a small, woman-owned business who delivered high-quality services to Berkeley paying a price no one understood.
It’s enough to make you want to create a revolutionary technology that allows you to send money straight to the person you want to send it to instead of through opaque intermediaries with hidden costs.
But, as researchers we also look to the data – is this personal experience representative of a larger problem? And those working in this space know the answer is yes. Reducing the time and cost of cross-border payments is embedded in the Sustainable Development Goals (10c) and measuring, documenting, and reporting on the higher costs faced by small and medium enterprises (SMEs) through efforts like the World Bank’s Remittance Prices project are critical.
So this lesson is a new one I take with me as we work to understand innovations and research to harness technology like blockchain to solve problems like this one: institution to institution transactions where those most vulnerable should be protected from risks like currency devaluation and banks’ practices to prioritize their profits over clients’ profits.
More soon from IBSI on our efforts to study blockchain innovation. In the meantime, these lessons help build an understanding of WHY we care about more inclusive, and less predatory, financial services.
