How does your money move out of Thailand?
Moving money around the world has never seemed simpler. Half the time, you can just punch some numbers into an app and the cash instantly appears in the recipient’s account. It’s certainly a far cry from when you would have to physically carry your money to the person you want to pay, making you a prime target for every pickpocket, highwayman and pirate in the area.
The reality is actually a lot more complicated. What seems like a one-tap process for you is actually something akin to a Mexican stand-off for the banks, sometimes involving half a dozen institutions relying on a variety of payment systems and a lot of trust.
This is going to be easier to explain if we follow a simple example, so meet John and Nok. John needs to send 100 baht to Nok and, for whatever reason, he can’t just physically hand her an orange bank note. He’s going to have to find another way.
How does correspondent banking work?
The ideal solution would be if both Nok and John had accounts with the same bank because debiting John and crediting Nok is then just a case of moving numbers around in the internal system. Sadly, Nok is banking with Kasikornbank while John is with Bangkok Bank. That makes things more complicated.
The solution is called correspondent banking and is surprisingly simple. It revolves around the fact that the two banks can have accounts with each other. Bangkok Bank has an account at Kasikornbank, which is known as a Nostro account. Similarly, Kasikornbank has a Nostro account at Bangkok Bank, which Bangkok Bank would call a Vostro account.
Here’s the process:
- Bangkok Bank contacts Kasikornbank and informs them that John wishes to send 100 baht to Nok. The 100 baht is removed from John’s account.
- Bangkok Bank indicates that they owe Kasikornbank 100 baht. At the same time, Kasikornbank indicates that they are owed 100 baht from Bangkok Bank.
- Kasikornbank credits Nok’s account with 100 baht from their own funds. As far as Nok and John are concerned, the transaction is complete - John is down by 100 and Nok is up by 100. This is step 1 of the process, which is called “clearing”.
- The problem is that the banks have yet to balance their books. Bangkok Bank has 100 baht that isn’t really theirs while Kasikornbank has a 100-baht-shaped hole in their vault. They now have to rely on trusting the other bank to do the right thing.
- Bangkok Bank needs to put the 100 baht in the Kasikornbank Vostro account and then transfer 100 baht out of their Nostro account at Kasikornbank. Both of these are simple internal transfers within the same systems, as described above. This is step 2, aptly named “settlement”.
Why not use a hundi?
The hundi was developed in Medieval India and is, in essence, a very early form of correspondent banking. It’s almost like an IOU - what the Reserve Bank of India describes as “an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order.”
In the example of John and Nok, John would buy a hundi valued at 100 baht and send it to Nok. She could then take it to any merchant and get 100 baht in cash in return for the hundi. The two merchants then trust each other to settle the difference, just like the banks do now. It’s kind of like an early cheque, only it operates entirely without banks. It could even work with sending money overseas as you could theoretically cash a hundi in with any merchant who accepts hundi.
Sounds like the ideal solution to your remittance problems, right? Sadly, despite the fact that they have been around for centuries, they are now illegal. For the most part, they are illegal because they are unregulated and leave no paper trail. There is no evidence of the money having moved because the system works entirely on trust, backed up by family honour and connections. The US government suspected that hundi (or the Arabic equivalent, called hawala) were used to fund terrorist organisations and the Indian government banned them to prevent money laundering.
What alternatives are there to correspondent banking?
The big problem with correspondent banking is its dependence on trust. Remove that and money can flow virtually instantly from one institution to another, speeding up the whole process. This is why you need a trusted go-between like a central bank.
Let's go back to the original example: John wants to send 100 baht from his Bangkok Bank account to Nok’s Kasikornbank account. As well as having accounts with each other, these two institutions also have accounts with the central bank, Bank of Thailand. All commercial banks in Thailand have an account with Bank of Thailand.
Now the process goes like this:
- John tells Bangkok Bank to send 100 baht to Nok. Bangkok Bank forwards this message to Bank of Thailand.
- Bank of Thailand makes sure that Bangkok Bank has at least 100 baht in their account and, when they find that they do, transfers 100 baht from that account into Kasikornbank’s account at Bank of Thailand. Again, this is an internal transfer, so it’s just a case of pushing numbers around a spreadsheet.
- Bank of Thailand informs Kasikornbank that 100 baht has been transferred into their account and that it is intended for Nok.
- Kasikornbank credit’s Nok’s account with 100 baht.
This is called Clearing House Automated Payment System (CHAPS). Because clearing and settlement happen simultaneously and the intermediary is entirely trustworthy, the transaction can be almost instantaneous.
However, CHAPS comes at a cost. There’s a significant fee for each transaction - easily double the 100 baht being sent and sometimes more than five times that amount. That being the case, banks tend to only use this approach for very large transactions, where a fee of around 500 baht represents only a fraction of a percent of the value being exchanged. Additionally, this system only works when the central bank is open - during normal office hours. Even if you wanted to send 100,000 baht, if you’re trying to do it with CHAPS on a Saturday evening, that money is going nowhere until Monday.
So, that clearly doesn’t solve our problem. John still needs to send Nok 100 baht and CHAPS is too expensive and limited. Fortunately, still more systems exist, including Faster Payments.
What is Faster Payments?
To simplify what is a really complicated process, Faster Payments creates a record of the transaction to give to Bank of Thailand when they open for business. To use John and Nok’s example, Bangkok Bank sends John’s instruction to give Nok her 100 baht through Faster Payments. Kasikornbank receives it and clears it. Faster Payments then sends the instruction to remove 100 baht from Bangkok Bank’s account with Bank of Thailand and move it to Kasikornbank’s account.
What generally happens is that hundreds of transactions will be added up together, so Faster Payments may end up asking Bank of Thailand to move around millions of baht. As the two commercial banks aren’t communicating with Bank of Thailand for every individual transaction, there are fewer fees and transactions can happen at any time.
Why are international transfers still expensive?
Faster Payments seems to be the solution to the problem of moving money around, right? It’s cheap, instant and available at any time of the day or night. However, that doesn’t solve the problem of moving overseas. Faster Payments still works through a nation’s central bank and, unsurprisingly, Bank of Thailand doesn’t have an account with Bank of England.
This is where remittance companies like DeeMoney, TransferWise and Western Union come in. Non-bank organisations like these have accounts in many countries around the world so can circumvent the problem with what you could call a modern (and properly recorded, fully legal) version of a hundi.
Imagine this scenario:
Nok, based in Thailand, wants to send money to John in the UK.
Nok gives DeeMoney approximately 100 baht (depending on the fees and that day’s exchange rate) to send £2.50 to John’s NatWest account.
- DeeMoney passes the instruction on to the local office.
- The Thailand office sends the instructions to their bank here to send the 100 baht. The bank uses Faster Payments to send the money to John’s NatWest account.
- At some later time, DeeMoney sends 100 baht from their Thai account to their UK account, along with hundreds of other small payments grouped into a single payment to make the transfer cost-effective. Unlike the hundi system or even correspondent banking, no trust is required in the settlement phase since the money is just moving from a company account in one country to the same company’s account in another country.
The reality is a little more complicated than that. In particular, step 3 from the above process is slightly different because the money is not moved through accounts with the various banks but by partnering directly with the banks, reducing fees for banks, the non-banks and the customers. This is now an official solution offered by Faster Payments called the Directly Connected Non-Settling Participant model.
Other solutions are coming
Even the model described above has its weaknesses. There are a lot of players in the chain, each with their own fees. However, as non-banks grow in popularity, they are also growing in capability. Some central banks are now willing to work directly with non-bank organisations, cutting out the need for partner banks. There are even non-banks working with regional central banks like the European Central Bank, opening the door for easier short-range overseas remittance.
There is still some way to go since different countries operate subtly different systems. For example, the US doesn’t have a nationwide equivalent of Faster Payments, though one is expected some time soon. In other countries, central banks are much more reluctant to work with non-banks.
However, the fact remains that it is now possible for John to send Nok 100 baht from a range of countries around the world and for Nok to send £2.50 back to John. Unlike transfers conducted with Western Union, neither Nok nor has to physically go into a Western Union office to collect the money - it can be deposited directly in to their bank account. Thanks to non-banks and the Directly Connected Non-Settling Participant model, either one of them can have the money ready to spend within minutes of the instruction having been sent from half a world away and, more importantly, without it costing orders of magnitude more than 100 baht in fees to send it.
How is DeeMoney solving the problem?
DeeMoney is a Thai fintech solution to the problems faced by many in moving money from Thailand to other countries, offering more reliable, faster and cheaper transfers than other providers.
With multiple direct partnerships worldwide, DeeMoney is taking the traditional bank-owned international remittance system in Thailand by storm. Bypassing middlemen and harnessing the power of blockchain are just two reasons why DeeMoney is able to provide a superior cross-border payment solution to traditional services provided by banks or other third parties.
Having partnered with Ripple, DeeMoney is an early adopter in Thailand of the multi-billion dollar blockchain-powered global remittance network. RippleNet has also been used by Standard Chartered, Santander, Mitsubishi Financial Group and many other finance industry giants. In addition to Ripple, DeeMoney has direct partnerships with 24 banks and non-banks globally to process payments swiftly and affordably.
Being an early pioneer of Ripple technology allows DeeMoney to circumvent problems common to elements within the traditional payment infrastructure like SWIFT, high exchange fees and slow transaction speeds.
Head over to our sign up page to register and get started with DeeMoney as soon as possible.