“Bitcoin will not be a significant player in the remittance industry.”
At the Money 20/20 conference last month, the Executive VP of Business Development at MoneyGram dismissed bitcoin as a possible remittance solution, alleging that “you can send money to a phone, but these people need cash”. It is somewhat perplexing that someone so involved in moving money has not realized that mobile money can be converted to cash relatively easily, using any existing extensive network of mobile money agents. And that it is precisely the spread of convenient mobile money services that is relaxing the dependence on cash, as more merchants and suppliers are happy to accept the digital equivalent. It is even more perplexing that MoneyGram does not seem to have realized that the move towards mobile is one of the main factors behind the fall in MoneyGram’s market value to almost half its value of three years ago, and the net loss of $72 million in the first quarter of this year. Someone should give them a Kodak camera.
Market statistics aside, though, the Executive VP may have a point, at least in the short-term. Bitcoin has been hailed as the revolution of cross-border payments, whose cost savings will lift entire regions out of poverty. Unfortunately, it doesn’t work like that. For now.
Remittances – money sent home by foreign workers – is a complicated issue. Too many middlemen eat away at the sometimes already meagre amounts sent. Currency controls delay delivery. But most difficult is the “last mile”, the physical problems of actually receiving the money. In the most common remittance destinations (India, China and the Phillipines), a significant portion of adults do not have a bank account, so they depend on exchange offices. In rural areas, exchange offices are not plentiful, competition is scarce, the fees are high and the security is low.
Enter bitcoin. Finally, money can be sent to anywhere in the world, to anyone with a computer or a mobile phone, almost instantaneously and with almost no fees. All the sender needs to do is to convert some of his or her wages into bitcoins, and with a couple of swipes and taps send it to another bitcoin address, which could be anywhere. Within a few minutes, the receiver has the bitcoins in his or her wallet. And here we come up against the problem.
Well, actually, two problems. The first is that to set up a wallet, you usually have to confirm your identity to comply with the local anti-money laundering laws, and to do this you need to upload a photograph of yourself next to your ID. Easy if you have access to a computer or a smartphone. Not everyone does.
The other, bigger, problem is that most money exchangers in typical remittance destinations do not accept bitcoin. It isn’t hard to switch your bitcoins into a more “acceptable” currency on an exchange, but relatively few exchanges operate beyond the trinity of dollars, euros and yuan. Even if the local money exchanger does accept a non-local fiat currency, there may be barriers to accepting it from an entity they are not familiar with.
Liquidity could be an issue. For an exchange to work efficiently, both sides of the trade need to be fairly liquid. There needs to be enough holders of Ghanaian cedis who want bitcoins, for example, and enough bitcoin holders who want Ghanaian cedis for the trade to go through at the recent market price. Trading bitcoins in and out of the major currencies is not a problem. Beyond that, bitcoin is just not that liquid.
But let’s say that everything has gone smoothly and the receiver has the bitcoin-converted-into-fiat mobile money in his or her digital wallet. What then? Finding an agent to convert that into cash is usually possible although with varying degrees of convenience. In Kenya, for example, M-Pesa agents are ubiquitous, as even rural areas depend on the mobile money system. Other countries don’t have that kind of opportunity or infrastructure. And the scarcity of agents allows them to charge whatever fees they wish. Often the most convenient option is to use the expensive MoneyGram or Western Union facility. Western Union and Money Gram have a combined 50% or more of the remittance market of almost 80% of sub-Saharan countries, and in some, their market share goes up to 90%.
And bitcoin-based remittances have significant competition from other innovators. Payment startups have brought remittance costs down for those willing to seek them out, to a level that in many cases competes with the bitcoin solution. In Kenya, for example, bitcoin remittance startup BitPesa charges a 3% transaction fee. Equity Direct, a payment platform that does not run on the blockchain, operated by Kenya’s Equity Bank and money changer VFX, charges 3.4%.
In some cases, the structural barriers to converting your bitcoins into a local currency are prohibitive. Bitcoin is banned in several remittance-heavy countries, such as Bangladesh, Russia, Ecuador, Bolivia and Thailand.
In others, regulation is clamping down amidst increasing concern about terrorist financing and money laundering. Money transfer businesses have to tighten their account requirements, report any suspicious movement and install a more rigorous screening process, the costs of which will obviously be borne by the users. The off-ramping gets more complicated as well: to avoid red-tape and possible fines, some banks are refusing to handle remittances of any type.
The biggest barrier of all, though, is habit. Even with all the remittance innovation and the more efficient and economic choices that senders have at their disposal, only 2% of remittances are sent via mobile. In part this is due to poor interoperability of mobile providers, and the cumbersome identity proof regulations. Innovators have their work cut out for them to overcome these barriers, and to convince long-term users that the cost saving is worth the effort of overcoming the innate resistance to change.
The potential for bitcoin to make a big impact in the developing world is still there. In theory bitcoin is ideal for the “unbanked” in that it gives users control over their financial transactions with minimal cost. An estimated 80% of rural people receiving remittances do not have access to traditional banking services. In sub-Saharan Africa, more than 70% of adults do not have access to a bank account. In the developing world, the average is 46%. In five sub-Saharan African countries – Cote d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe – more adults have only a mobile money account than have an account at a financial institution.
In countries with political unrest and volatile currencies, bitcoin makes even more sense. While the value of local currencies depends on relative growth prospects, the financial health of the government and faith in ruling stability, the value of bitcoin is above all those things. The value of bitcoin fluctuates, true, but its worth is determined almost exclusively by market forces. No-one can unilaterally devalue bitcoin, no-one can ban it outright, no-one can dictate what it’s used for. Bitcoin is a self-determined alternative store of value, whose worth is protected by cryptography.
As with all innovation, the idea is “essential but not sufficient”. The secret to success is in the implementation. Bitcoin’s use is growing and spreading, and its benefits are still being explored. The potential it holds to put economic power in the hands of the hitherto disenfranchised is real, and exciting. But making that happen is something else altogether. The shift required in regulation, infrastructure and habit is profound, but it is starting. And as bitcoin use spreads, the change will gather speed and the economic benefits will become apparent. That should be enough motivation for the current startups to keep on trying, and for others to fill the service and technology gaps that impede the progress. Bitcoin may not be ideal for remittances now. But in one form or another, it will be.