Why We are Shorting Western Union
Remittances, the transfer of money by foreign workers to family or friends back home, is one of the largest sources of capital inflows to developing nations, accounting for over $436 billion in 2014 according to wikipedia. For some countries, remittances account for over one-third of Gross Domestic Product, thus acting as massive stimulus for development and growth.
The remittance market consists of banks and money transfer companies like market-leader Western Union. It is difficult to understand how these companies have been able to maintain an average fee of 9% for their services, with the fees sometimes creeping over 30% for particular payment corridors. This represent a huge tax both on the families of workers in particular and on the economies of developing countries in general. Whether these exorbitant fees are the result of powerlessness of foreign workers in host countries or the inadequacy of traditional infrastructure to support international transfers is up for debate. More important is that the bitcoin model seems tailor-made to fundamentally disrupt the current remittance market. We review three start ups, Abra, Bitreserve and BitPesa, who are working to provide practical bitcoin-based solutions to the remittance problem, which could serve to inject 10s of billions into developing economies annually.
Abra, or A Better Remittance App, is the brainchild of Bill Barhydt, serial entrepreneur and former senior director of business development for Netscape. Abra is a mobile application allowing the transfer of USD-denominated funds from one abra app user to another. Funds are loaded into the app using either a debit card or by meeting up with a teller in person. Abra then exchanges the USD into bitcoin, allowing the instantaneous transfer of the funds anywhere in the world. The recipient can then hook up with a local teller to exchange the coin – again, denominated in USD – for local currency.
Abra mitigates foreign exchange risk by guaranteeing the USD value for three days after the money has been loaded into the app. For the service, Abra charges ½ a percentage on either side of the transaction on top of a small fee charged by tellers. In the event that the teller does not charge a fee, Abra does not charge a fee.
Abra is focused on ensuring an extremely simple and intuitive experience for users of the application. A recipient’s telephone number is all that is needed to execute a transaction, and while bitcoin is used to power the exchanges the user need not know about it. From the user perspective, cash is given to a teller, that money is transferred to his Abra app, and it can be withdrawn in local currency elsewhere at a relatively low fee.
The success or failure of Abra depends on the teller network. While it should be relatively simple to set up tellers on the sender side, finding teller off-ramps in far-flung destinations will be a much greater challenge. On either side of the transaction, tellers face the risk of working in a cash-heavy business amongst sometimes extremely poor migrant worker communities, as well as currency fluctuation risks, as much capital is stored as digital currency. On the flip side, users will have to trust the honesty of any particular teller. While Abra’s reputational feedback system is meant to mitigate the trust issue, in locations without choice it becomes much less effective.
BitReserve marks the resurgence of internet legend Halsey Minor, who sold his company CNET in 2008 for $1.8 billion only to declare bankruptcy six years later, a result of lavish spending, depression, some foolish investments and bad luck. Mr. Minor sees in bitcoin some of the same potential that he saw in the internet itself, and Bitreserve is meant to be a solution to one of bitcoin’s largest issues – volatility. He is joined by a number of highly regarded executives, including President Anthony Watson, the former Chief Information Officer at Nike, and Tim Parsa, President of Global Strategy and Markets, a former-Peace Corp volunteer and key employee of Mexican business giant Ricardo Salinas-Pliego.
Similar to Tether, Bitreserve allows users to peg bitcoin to the value of fiat, but offers a greater assortment of different “bitcurrencies” including the dollar, euro, pound, yen, yuan, rupee and peso, which can be transferred for free between users. Bitreserve maintains and demonstrates a real-time full balance sheet and will be audited quarterly by PriceWaterhouseCoopers. (Unlike the companies that burned Mr. Halsey during the financial crisis, Bitreserve will be unable to hide any issues with solvency – which hopefully would not be an issue after raising over $18 million in capital.) Thus, users can leverage the transactional ease, quickness and cheapness of the bitcoin network without worrying either about extreme volatility or the solvency of the company holding their funds.
The importance of remittances to the BitReserve business model was reinforced when Ricardo Salinas-Pliego emerged as the main investor after a Series B $9.6 million crowdfunding campaign in January of 2015. Mr. Silinas’s involvement in the group led to much speculation that his Grupo Salinas, consisting of thousands of retail outlets and bank branches in Mexico and Latin America, would be leveraged to disrupt the US-Mexican remittance market utilizing BitReserve. The introduction of pesos to the supported bitcurrencies shortly thereafter did nothing to quiet the noise.
The Grupos Salinas partnership will most likely be utilized to circumvent the greatest obstacle to wider adoption of BitReserve amongst foreign workers – the lack of appropriate on and off ramps. BitReserve is at present a bitcoin-only deposit and withdrawal product. For foreign workers to utilize the service, they must be able to exchange fiat for bitcoin to fund the BitReserve account, and recipients must be able to exchange bitcoin to fiat on the other end. Without a convenient method, prove too large a hurdle for many foreign workers with varying degrees of technical literacy or identity documentation.
BitReserve depends on small fees charged for bitcoin to bitcurrency exchanges, and vice versa. Additionally, BitReserve will earn interest on their own reserve holdings.
BitPesa is a Nairobi, Kenya-based service provider meant to enable the exchange of bitcoin and Kenyan Shillings. Sub-Saharan Africa suffers from a particularly high average remittance rate of 11.7%, making the market ripe for bitcoin-based international transfer methods. BitPesa – Pesa is Swahili for money – charges a flat 3% fee to exchange foreign currencies into bitcoin, and then bitcoin into Shillings in Kenya, where the money is sent directly to the recipients mobile phone or bank account.
Interestingly, over 75% of adults in Kenya use a mobile currency service called M-Pesa, which accounts for over 40% of the entire economy. This mobile money has essentially erased the need for brick and mortar banking services, severely lacking in Sub Saharan Africa. It also makes Kenya a very attractive and accommodating market for digital currency solutions like BitPesa.
A February 2015 round of fundraising saw more than $1.1 million invested in the start up from notable bitcoin VC firms such as Panterra, Crypto Currency Partners, and the Bitcoin Opportunity Corp. CEO Elizabeth Rossiello said that the money raised would be used to expand the service to Tanzania and Uganda, as well as boost the domestic exchange infrastructure, to allow for bitcoin buying.
While operations were first meant to focus on the UK-Kenyan remittance corridor, Ms. Rossiello made the decision to expand to markets with less laborious bitcoin on ramps, specifically Canada, which has emerged as the largest external market of BitPesa.
Remittance services might emerge as the so-called killer application of bitcoin technology, as it provides immediate and considerable value to foreign workers, their families and their countries. Bitcoin can provide fee relief that, if widely adopted, could increase real capital inflows to developing nations by up to $40 billion annually. What an exciting convergence of business interest and the public good.
And the ubiquitousness of smart phones throughout much of the developing world can provide an alternative infrastructure to traditional banks should bitcoin be embraced, which could serve to connect large swathes of the estimated 2 billion “unbanked” people to the global economy.
It will be interesting to see if the above technologies gain traction within developing countries and give Western Union a well deserved kick in the arse.