Ant Financial’s bid to purchase Moneygram is on the verge of failing, apparently because it’s Chinese.
So much for free markets.
Euronet (electronic payments software, pre-paid processing, money transfers) has stepped into the ring, with a $2bn offer for the remittance company. According to the FT, Euronet believes that it has a much better chance of succeeding – largely because it’s based in Kansas. (It’s interesting to note that Euronet made a bid for Moneygram 10 years ago, which was withdrawn when Moneygram made it clear it didn’t like the idea.)
Two Republican senators recently published an open letter in the Wall Street Journal warning about the consequences of allowing Chinese firms to take stakes in American enterprises.
“Unfortunately, America’s economic strength is at risk from strategic, well-coordinated and state-sponsored Chinese investments in American financial institutions. Chinese spending in the financial sector has risen dramatically and is often driven by the priorities and objectives of the Chinese government.”
The main concern seems to be the access to information that ownership of Moneygram would confer. What could the Chinese government (via its stake in Ant Financial’s possible stake in Moneygram) do with that information? Target certain individuals.
Quite why the Chinese government, for all its human rights infringements, would choose that channel to glean sensitive information is not explained. Given the increasing level of competition in remittance services and the ease with which the contributors of that sensitive information can use another service (such as bitcoin?), it’s hard to believe that they don’t have better ways to spend their intelligence resources.
An anonymous expert is cited as claiming that Chinese corporate acquisitions are “part of a broader state-led strategic effort” to gain influence in American markets. As if the massive Chinese holdings of American debt weren’t enough.
While it may be the case that the Chinese government really wants to “gain control of western investment syndicates” and use investments in remittance companies to target dissidents and their families, we should all be raising an eyebrow at the level of US interest in state intervention in market operations. After all, Moneygram’s board approved Ant Financial’s offer. But it looks like they may not have the final say.
I’m not saying that state intervention is wrong. There are cases where anti-trust legislation does help keep prices affordable and innovation humming. And certain strategic industries understandably need to stay in local hands. However, it does seem insincere to espouse capitalist free-market principles in non-strategic sectors, but only when it suits.
Going back to the deal in question, Euronet’s offer per share is higher than Ant Financial’s – $15 vs $13.25. That in itself should be enough to win, without the need to resort to nationalist instincts.
Moneygram shareholders should do well out of the fuss, as should traders. You can almost hear them rubbing their hands in glee at the thought of a bidding war. Looking further ahead, deeper coffers could help to fund innovation that helps to lower the cost of remittances – good news for businesses, individuals and globalization.
The merger may have an impact on blockchain innovation in payments. While Euronet has not been involved in any proof-of-concepts that I’m aware of, it did issue a white paper back in December 2015. Ant Financial, on the other hand, is – through various subsidiaries – relatively advanced in blockchain work, and could have embarked on interesting projects with blockchain-reluctant Moneygram.
Back in November of last year, CoinDesk interviewed Peter Ohser, Chief Revenue Officer of Moneygram. He is reported as having dismissed bitcoin as a “poor fit” for cross-border commerce, largely due to the impact it could have on vital banking relationships. He also expressed skepticism as to the potential of the blockchain to revolutionize the remittance sector, on the grounds that it was “already efficient”.
Fast forward a couple of months, and Moneygram is bought by Alibaba’s Ant Financial.
A couple of weeks ago Ant Financial’s CEO gave an interview to CNBC acknowledging that the Chinese firm was exploring uses of blockchain technology.
Ant Financial’s mobile payments unit Alipay has over 450,000,000 users in China, and aims to quadruple that over the next decade (according to the same CNBC interview). That’s going to require some investment in improving efficiencies and reconciling different systems.
What technologies might they be looking at?
According to the article accompanying the interview, artificial intelligence and the blockchain will be “deeply” integrated into Ant Financial’s operations.
This does not necessarily mean that Ant Financial will apply the blockchain to Moneygram’s operations. But the transition certainly looks more possible now than it did back in November.
Continuing with tenuous connections, last July Ant Financial announced that it was going to use blockchain technology to “clean up” China’s charity sector, which has a reputation of fraud and mismanagement.
Fast forward again, and cross an ocean. Last week it emerged that Western Union, Moneygram’s main competitor, has agreed to pay $586 million in fines for “aiding” money laundering and wire fraud.
I am in no way implying that Moneygram has done anything similar, not at all. But if the sector as a whole is vulnerable to the temptation, then perhaps Ant Financial will see an opportunity to prevent such incidents happening in the future? With, ooo I don’t know, the blockchain? As he did with Chinese charities?
At the moment it is no more than conjecture. But if Ant Financial decides to go ahead with explorations of how to put global remittances on the blockchain, that would be huge – not only because of the shockwaves it would send through traditional remittance suppliers, but also for the sheer size of the potential market, and the potential impact.
I was going to write about how bitcoin could help to improve economies in Africa through its efficient and low-cost secure method of transferring money. But after doing a fair amount of research, and realising that many of the companies mentioned in the press over the past year as being the “hope” of the future have since closed down, I’ve changed my mind. Instead, I’m going to write about how hard it is for a bitcoin-based company to do business in Africa. It’s not impossible – there are some success stories. But the advantages of bitcoin at this stage are not as obvious as they might seem. The theory is excellent. But the reality is complicated.
First, let’s talk about the promise. According to the World Bank, 66% of adults in Africa do not have a bank account. They deal in cash and in barter, with considerable lack of efficiency and security, and scant possibility of escaping that hand-to-mouth cycle. With bitcoin, they could effectively have a decentralized bank account and manage their finances more carefully, with control over what comes in and what goes out. Families could start to save and even lend. Payments would become easier and cheaper, leading to significant savings in both time and money. Current mobile money payment systems are efficient, but have a high fee structure. Bitcoin’s decentralization and security could economically empower those that are traditionally at the margin of the economy.
The ease and low cost of sending bitcoin anywhere around the world makes it the potential saviour of remittance services. Approximately $53bn was sent to the region in 2015 by workers abroad, with fees averaging 12.4%. Remittances cost more in Africa than in other areas – the world average is 7.8%. There are five remittance “corridors” (flows between two countries) in the world with fees over 20%, all of them in Africa. Using bitcoin, the fees would come down drastically, with the savings going directly to the beneficiaries.
The potential is huge. But the reality is very different.
Bitcoin has limited end uses in Africa. Very few merchants accept it as payment, and it can’t yet be used to pay for utilities or public services. That will change, but slowly. Bankymoon, a South Africa-based blockchain financial services company, has developed smart electricity meters that can be topped up from anywhere with bitcoin.
To be able to buy bitcoins on an exchange, you need access to a computer or a smartphone. Relatively few Africans have that. It is true that the majority of the adult population has a mobile device, but only 15% have a smartphone. According to the International Telecommunication Union, only 37% of adult Kenyans had access to Internet in 2014. In Ethiopia, the figure is 2%. So, buying bitcoin is possible but not simple, and the number of exchanges that can trade local African currencies for bitcoin is limited. Most require an initial conversion to dollars or euros, which significantly increases the transaction costs.
So, buying bitcoins is not simple, and even if you receive bitcoins as a remittance from a family member or friend working abroad, changing it into local currency on an exchange is difficult. Those without a bank account would need to find an agent willing to exchange bitcoins for cash. They do exist, but their scarcity and the technology access required allow them to charge very high fees for the service.
And bitcoin as a remittance rail has competition. Innovative international payment methods are eroding the incumbents’ market share by offering much lower fees. In Kenya, for example, WorldRemit, Equity Direct, and even new e-cash services offered by incumbents Moneygram and Western Union can transfer money for less than 5%. Of course, the low fee structure depends on electronic transactions. Once cash is involved, the fees shoot up.
And regulation, or the lack of, is an important structural problem. Although Nigeria’s Central Bank has called for bitcoin regulation, no country has it in place or is even, as far as we know, working on it. Kenya’s Central Bank issued a warning in December against Bitcoin use, citing its unregulated status. Unregulated does not mean illegal, but it does create obstacles for bitcoin exchanges, wallets and payment systems.
Regional differences and market size are also a complicating factor. Kenya alone, for instance, is not a big enough market to attract the funding needed to reach profitable scale. According to IMF estimates, its GDP is roughly equivalent to Bulgaria’s, and significantly less than Luxembourg’s. Each country has its own currency and phone system, so compatibility issues are barrier to rapid continent-wide expansion.
On top of the “typical” problems that startups have to face, new businesses in Africa also have to contend with relatively poor connectivity, recruiting difficulties and electricity outages. Africa has always been a very entrepreneurial continent, but at the micro level. The cultural and logistical difficulties of setting up cross-border businesses; recruiting, training and retaining a qualified team; the general lack of political and economic stability; high interest rates; limited access to funding… These and many other factors make the launch of scalable, profitable enterprises even more challenging.
And yet, bitcoin’s time in Africa will come, and its effect on the continent’s economy will be significant. Some remarkable businesses are struggling hard to make this happen. The use cases are much clearer there than in Europe or the US, where credit cards are ubiquitous and mobile payments are easy. The impact it can have on people’s lives is much greater. With persistence and brave first-movers, with rationally enthusiastic public comment and constant dialogue, regulators will see the economic advantages of further encouraging financial innovation. Tech hubs are springing up all over the continent, creative entrepreneurs are attracting international interest, and a lot more than transaction fees is at stake.
Over breakfast on December 15th, readers of the main broadsheet newspapers in Nairobi were greeted with a full-page ad taken out by the Central Bank of Kenya, warning them about dealing in bitcoin. The public notice was also posted online.
This is in equal measures surprising, disappointing and encouraging.
The main surprise is in the timing. The day before, the Kenyan justice system decided to postpone a ruling on the lawsuit brought by bitcoin remittance company BitPesa against the mobile payments giant M-Pesa for intimidation and unfair business practices. M-Pesa had blocked access to its platform, citing as the reason BitPesa’s unregulated status. Bitpesa claims that the Central Bank told them that bitcoin fell outside their remit, and therefore they could not offer a license. The decision, which allows M-Pesa to continue to block access to the main mobile money platform in East Africa, not only denies the convenience and economy of bitcoin remittances to a significant portion of the rural population. It also highlights the absurdity of trying to get a license, being told that licenses are not available, and then being punished for not having one.
While in theory the Central Bank does not influence the justice system, and the government does not control the Central Bank, the timing of the announcement in the newspapers can be interpreted as an indication of which way the government would like the courts to rule. For a fairly modern government battling increasing concerns over deepening corruption, this level of public “intervention” is perplexing.
Another perplexing aspect of this public approach is the list of warnings about bitcoin, and the subliminal messages they contain. The first one reads:
“Transactions in virtual currencies such as bitcoin are largely untraceable and anonymous making them susceptible to abuse by criminals in money laundering and financing of terrorism.”
Putting bitcoin’s untraceability and anonymity first and foremost as a help to criminals will surely attract the attention of even more criminals (or at least those that read the newspaper), and could possibly increase rather than decrease bitcoin use. BitPesa does follow KYC/AML guidelines to prevent money laundering and terrorist financing, but other less high-profile exchanges may not be so rigorous.
The second warning claims that bitcoin exchanges “tend to be unregulated”.
“Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world. Consumers may therefore lose their money without having any legal redress in the event these exchanges collapse or close business.”
While not untrue, it is misleading. Some regulated exchanges do exist (Coinbase, Gemini, itBit), many more are in the pipeline, and many others, while not officially regulated, behave as if they are. Often it’s not that they don’t want to be regulated. It’s that they can’t, as there is no regulation in place. Such as in Kenya, for instance. BitPesa complies with KYC/AML regulations, yet is being treated as if it didn’t.
And the third warning, pointing out bitcoin’s vulnerability and volatility because there is “no underlying or backing of assets”, will surely draw attention to the fact that there is no underlying or backing of assets on the Kenyan shilling, either, other than faith in the economy (doing quite well) and the government (not so much).
Political mistrust is a strong motivator in bitcoin use, and the Central Bank’s request that the public “desist from transacting in Bitcoin” could have the opposite effect. With a fragile democratic stability (the current president took power with only 50.07% of the popular vote in the 2013 elections, and is currently under investigation by the International Court of Justice for crimes against humanity), and with increasing political violence and concerns about corruption, many readers of the major newspapers could well take an official call to refrain from using bitcoin as an open invitation to try it out.
The disappointment comes from the closed-minded approach to financial innovation, from a government that has a reputation for encouraging it. In its early days M-Pesa was not required to comply with complicated and expensive regulations, which allowed it to grow rapidly and inexpensively, creating efficiency and opportunity, as well as a near-monopoly on mobile money transfers. Although it has increasing competition, its extensive network and brand mindshare still give it considerable power in the sector, which enables it to maintain the relatively high transfer fees. Lower fees from a more nimble competitor would benefit the recipients and the economy, while technology and scale bring costs down. Lower profits for M-Pesa, perhaps, but greater wealth for Kenya. Bitcoin-based services can complement the established mobile money networks by expanding their reach and broadening their client base to include remittance senders from all over the world. Trying to limit participation to competitors with less potential is short-termist and damages the incumbent’s reputation.
However, it is encouraging that the Central Bank deemed bitcoin important enough to issue a public statement. In so doing, it has called attention to the digital currency: no doubt most of those that saw the ad hadn’t heard of bitcoin. Now they have. And while it is important that those interested in buying bitcoin be aware that it is not government-backed, all who investigate further will start to realise the opportunity that it presents.
This announcement could be a first step towards regulating bitcoin, which would be positive for the sector (although why the Central Bank didn’t just issue a statement about contemplating regulation instead of advising against bitcoin use is a mystery). It would also be in line with an incipient regional trend. In August of this year the Nigerian Central Bank called for bitcoin regulation, and an increasing interest in Bitcoin conferences on the continent indicate that other nations are contemplating doing the same.
Trying to wipe out bitcoin use makes no sense, especially when the economic advantages are so strong. Harnessing the opportunity, establishing regulation to protect users and limit illicit use, and incorporating a global virtual currency into an economy already heavily dependent on mobile-based local virtual currencies would increase economic activity, encourage saving and bring even more of the population into the virtually banked sector. And it would entrench Kenya’s reputation as a regional technology hub with an innovation-friendly government. Kenya has a lot to lose if it tries to stamp out bitcoin, and a lot to gain if it cautiously supports its integration into the already strong virtual economy.
“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.
Banks’ growing interest in Bitcoin is not news. Yesterday I came across a new twist: banks filing bitcoin-related patents. This development makes sense, given the increased activity in Bitcoin research. It looks like the banks, far from being terrified of the potential disruption, are jumping on board and seriously thinking about how this new method of value transmission can improve their operations and their service. By starting to file patents, they seem to be moving – however slowly – from research to actual implementation.
Just last week the US patent office published a filing by Bank of Americafor a patent called “System and Method for Wire Transfers Using Cryptocurrency”. The idea is a simple exchange: client 1 exchanges dollars (for example) into bitcoins (for example), which are then transferred to client 2, who changes them back into its local currency. This way client 1 avoids hefty currency transfer fees, and client 2 receives the funds sooner (10 minutes or less, depending on the cryptocurrency, versus several days). In addition, client 1’s information is kept more secure, and stays with the originator (Bank of America), who obviously has complied with the Know-Your-Client/Anti-Money-Laundering laws.
The twist here is that Bank of America’s algorithm will decide whether a cryptocurrency is appropriate (there are cases in which it will be simpler to use traditional channels), and if so, which one.
Other financial services companies have tried the patents game: Western Unionwas granted a patent in 2014 for an alternative currency exchange. While it didn’t explicitly mention cryptocurrencies, it did refer to tokens and virtual “coins” in use at the time of filing in 2009. In 2014 Mastercardfiled a patent for a “global shopping cart” that supports a variety of payment methods, including bitcoin. And Amazon, which seems to be on its way to becoming a financial services company, has been awarded a bitcoin-related patent for cloud computing payments.
Bank of America is the first “bank” to file a patent that would allow it to offer more flexible and lower-cost services to its clients. It certainly won’t be the last, and in the typical game of catch-up, we’ll probably see more activity in bitcoin-related patents filed by established institutions over the coming months. Barclays, UBS, Citi, Santander, ING and many other big banks have all acknowledged bitcoin “labs” dedicated to exploring and improving on the blockchain technology. Citi has so far said that the results of its experiments with Citicoin (a bitcoin-like in-house virtual currency) will be open source, which means that they have no intention of patenting, so that other brains can build on its work. But patents are a logical extension of private research, and an understandable way of getting some sort of return on the lab investment, as well as of stopping others from patenting “obvious” and/or proprietary technology.
A flurry of patent filings, which we’re likely to see over the coming months, is a good sign that case uses are being polished. Let’s hope that the patent office is sensible in which ones to grant. And let’s hope that patent filings are rapidly followed by implementation.