Informal Value Transfer System (IVTS)

Executive Summary

Informal Value Transfer System (IVTS) facilitates money transfers, especially in regions lacking formal banking systems.
Common forms include hawala, hundi, and flying money, primarily used for cross-border and domestic remittances.
IVTS is evolving within the digital landscape, integrating with mobile and online money transfer technologies.
Significant in enabling fast, low-cost transactions, especially for migrant workers and small businesses.
Though efficient, IVTS faces regulatory scrutiny and potential risks like money laundering.

Definition of Informal Value Transfer System (IVTS)

An Informal Value Transfer System (IVTS) refers to a method of transferring money without formal banking systems or official regulation. This system includes various informal channels such as hawala, hundi, and flying money. Generally popular in regions with limited banking infrastructure, IVTS operates on trust and community networks, allowing individuals and businesses to send and receive money quickly and privately.

Background / Backstory on Informal Value Transfer System (IVTS)

IVTS has been around for centuries, originating in cultures where trust and face-to-face interactions are integral. Historically, these systems arose out of necessity, often driven by socioeconomic factors where formal banking was inaccessible or impractical. For instance, in South Asia and the Middle East, hawala became popular as it enabled labor migrants to send remittances back home without the high fees charged by traditional banks. As globalization increased, the relevance of IVTS grew, particularly in regions with large diaspora communities.

How is Informal Value Transfer System (IVTS) used in the Industry today?

Today, IVTS operates alongside formal money transfer methods, providing a choice for both consumers and businesses. Within the money transfer industry, IVTS is utilized for:

Cross-border remittances: Migrant workers often use IVTS to send money back home to families, avoiding the high costs of traditional remittance services.
Domestic transfers: Individuals can quickly transfer funds to relatives or friends without going through banks.
Small business transactions: IVTS can be a viable option for businesses that deal with suppliers and small vendors.

Significance of Informal Value Transfer System (IVTS)

The significance of IVTS in today’s industry lies in its ability to offer faster, more affordable, and flexible transactions than traditional bank transfers. Given that IVTS is often quicker and allows for immediate access to funds, it serves as a popular alternative for individuals who require speedy transactions without incurring steep fees. Furthermore, the informal nature of these systems allows individuals to maintain their financial independence without relying solely on formal banking channels, thus empowering underserved communities and small businesses.

How does it work?

IVTS operates on a trust-based model wherein agents or brokers facilitate transactions without the exchange of cash between sender and receiver. Here are two examples to illustrate:

Example 1: Hawala

An individual in the U.S. wants to send $1,000 to their family in India.
The sender approaches a local hawala agent with the cash.
The agent records the transaction and contacts another hawala agent in India.
The Indian agent pays the recipient in rupees, deducting a small fee, often ranging from 1-3%.
Funds are transferred without formally moving through traditional banking, ensuring speed and efficiency.

Example 2: Hundi

A merchant in Dubai owes a supplier in Pakistan $2,000.
Instead of conducting a bank transfer, the merchant gives the cash to a hundi broker.
The broker then contacts their counterpart in Pakistan, who pays the supplier in local currency.
Again, no formal banking channels are involved, lost funds are minimal, and both parties save on fees.

ELI5

Imagine you want to give your friend a toy, but you can’t meet them in person. Instead, you ask another friend who is going to see them to deliver the toy for you. You give the toy to this friend, and they promise to hand it over to your friend when they meet. This way, you didn’t have to drive to their house, and your friend still gets the toy. This is similar to how IVTS works; people trust each other to deliver money without using banks.

Stakeholders and Implementation

Key stakeholders using IVTS include:

Migrant workers needing to send remittances home.
Small business owners conducting transactions across borders.
Community members relying on trust for in-person money transfers.

Challenges include regulatory issues, risk of fraud, and lack of consumer protection. Many countries are increasingly scrutinizing IVTS due to its potential association with money laundering and terrorism financing, resulting in some advocates pushing for greater regulation.

Pros & Cons

Pros:

Faster transactions compared to conventional banks.
Lower fees for sending money.
Accessibility for individuals in remote areas without banking services.

Cons:

Lack of consumer protection or remedies in disputes.
Regulatory scrutiny potentially leading to restrictions.
Vulnerability to illicit activities and fraud.

Future Outlook

As the demand for cross-border transactions continues to rise, IVTS is likely to evolve, integrating more with digital platforms. The rise of mobile wallets and blockchain technology may transform these informal systems, providing security while retaining their fundamental principles. New regulations might shape the future landscape, ensuring that IVTS can coexist with formal financial systems.