The bitcoin graveyard is littered with ideas that were going to revolutionize the field of remittances, spread income more evenly and lift developing economies. Structural barriers, higher-than-expected costs and limited markets are the usual culprits. But even when those obstacles have been overcome, success is no sure thing. On Monday, the best-funded business in the sector was dealt a blow by a fellow fintech, in a move that shows that even innovators can become establishment, and that unclear regulation is perhaps the biggest hurdle of all.
Remittances – money sent home by relatives working abroad – are the economic lifeblood of not only hundreds of thousands of families but also of entire countries. By not requiring a bank account, remittances are crucial for wealth distribution and financial inclusion – the sent money can be received at participating agents, which could be stores, supermarkets, pawn shops or mobile money handlers. One of the largest and fastest-growing markets is sub-Saharan Africa, which received $33 billion in 2014. In some countries, remittances account for 20% of GDP. Yet these inflows comes with a high price: the fees and commissions. The global average cost of sending money is about 8%. In sub-Saharan Africa it rises to 12%, reaching as much as 20% in some countries. In 2011, Bill Gates urged G20 leaders to commit to bringing the costs down to a more reasonable 5%, which would generate global savings of $15bn. Yes, billion. More money in the hands of low-income, unbanked families in developing countries would be a significant step towards reducing poverty.
BitPesa was founded in November 2013 to improve the UK-Kenya remittance corridor using bitcoin transfers. It soon moved into other originating markets, and now handles remittances from just about anywhere to Kenya, Tanzania, Nigeria and Uganda. Users deposit bitcoins which are converted into the destination local currency and sent via the blockchain, for a 3% fee. BitPesa doesn’t handle the cash-out side of the equation, but instead deposits the funds in a mobile money wallet, which the receiver can then cash out in his or her usual way.
Yet businesses almost never develop as originally planned. The startup soon found that their service was being used by an increasing number of businesses to pay suppliers and employees, rather than for personal transfers. Their website shows a partial pivot away from remittances, towards a business payment platform. It has also diversified into trading, and offers one of the largest bitcoin exchanges on the continent.
In February of this year, BitPesa secured a $1.1m funding round led by Pantera Capital, one of the prime VC investors in the bitcoin space. Yet, as is usually the case, securing the round does not mean that their troubles are over. In November, M-Pesa stopped payment gateway company Lipisha from processing M-Pesa transactions, freezing Lipisha funds held in M-Pesa accounts. They offered to reinstate the service if Lipisha stopped working with BitPesa, claiming that BitPesa does not have the necessary license and does not comply with anti-money laundering (AML) regulations. According to BitPesa, they do comply with all AML and know-your-client (KYC) regulations, and that the Central Bank of Kenya has told them that a license is inapplicable to its business. Both Lipisha and BitPesa have taken M-Pesa to court. A preliminary ruling on Monday declared that more time is needed to make a definitive ruling. Meanwhile, BitPesa’s access to M-Pesa’s clients remains cut off.
The Kenyan remittance market is surprisingly tough. It is competitive: the World Bank lists 12 official participants in the sector, with fees ranging from 3.4% to 11.3%. Innovation is beginning to play a bigger role. WorldRemit and Equity Direct keep rates low with their online channels. The Cooperative Bank of Kenya announced last month a partnership with mobile payments startup SimbaPay to facilitate low-cost and instantaneous remittances between account holders in the UK and Kenya. UK-Kenya payment services company Continental Money has teamed up with TransferTo, a mobile remittance hub, to allow users to send remittances in the form of mobile airtime.
Losing the Kenyan remittance market would be a blow, but not necessarily game over. M-Pesa is not the only platform that BitPesa can use: its gateway Lipisha also works with Airtel Money, Visa and Mastercard. BitPesa has managed to diversify its markets over the past few months, recently moving into Tanzanía, Uganda and Nigeria, the continent’s largest remittance market ($21bn in 2014, vs Kenya’s $1.5bn), and 5th largest in the world. It has also managed to develop a liquid bitcoin exchange in Kenya, Nigeria and Uganda, and will no doubt keep on innovating in payment mechanisms and services.
M-Pesa’s blocking manoeuvre can be seen as the recognition of the potential threat that innovative platforms pose, at a time when M-Pesa’s high fees and restrictive business practices are being increasingly called into question. Which is ironic, since M-Pesa is itself a classic example of successful financial innovation. What’s more, a large part of its success is due to relatively relaxed regulation, the same concept that it is now arguing against. It is surprising to see it attempt to block a new player such as BitPesa instead of working with them – unless their plan is to move into bitcoin remittances as well. Perhaps their intention is to provoke explicit bitcoin regulation, which in the long run will help the sector. Yet there are less destructive ways to do it. In the end, BitPesa will hopefully come out stronger, more diversified, and having benefitted from the public support of the underdog. As the saying goes: “When they start shooting at you, you know you’re doing something right.”