Bitcoin Might Be The Next Big Thing In The Remittance Market

Editor’s note: Florian Graillot is a VC investor at AXA Strategic Ventures.

Bitcoin’s most disrupting feature is its decentralized architecture. Indeed, bitcoin relies on a P2P network of computers to proceed money transfers. Each part of the network works to create new bitcoins (‘mining’), keep the network alive and validate transactions.

All the transactions are registered in the blockchain that is used to validate a transaction using cryptography technology: it ensures that you can’t use a bitcoin you don’t own or you don’t use the same bitcoin more than once. This last action previously required a third party, but with bitcoin this is not the case anymore: the network replaces financial institutions and banks.

Then, money transfers are almost in real time as the network is responsible for validating transactions. Currently you need only 10 minutes to get your money transfer approved.

As there is no third party the transfer is almost free. Miners are the only ones to be rewarded to issue new bitcoins. They also collect fees to integrate a new transaction into the blockchain, then validate a transfer. Currently a typical fee costs 0.0001 bitcoin (BTC) per transaction.

The remittance market is huge and moving swiftly to digital

Remittance was a $582 billion market in 2014 according to the World Bank. Most of all it is dominated by transfers from developed countries to developing ones. In 2014, China received $64 billion through remittance and India $71 billion. Philippines received $25 billion, Mexico $22 billion, Nigeria $21 billion, Egypt $17 billion and Vietnam $11 billion in 2013.

So far most transactions are made through brick and mortar networks; in 2014 only 5% were digital transactions. These networks like Western Union or MoneyGram charge high fees to finance their deep local presence worldwide. A typical money transfer costs up to 10% fees.

But as mobile phones are spreading across the world, even in emerging countries, money transfers are shifting to digital. And mobile/digital remittance services are booming as they offer reduced fees mainly thanks to lower-fixed costs (maintaining a mobile app is much cheaper than operating a retail network).

Most of the digital remittance operators claim they are at least 45% cheaper than physical networks. Some of these new companies are operating under a P2P model: CONNECTING BUYERS and sellers to arrange currency exchanges.

Bitcoin allows several operating models

Even through digital, remittance remains deeply dependent on third parties: banks are still validating money transfers from senders to the remittance operator and again to recipients.

Then Bitcoin could even lower fees thanks to its decentralized network and through three different operating models that could be shaped:

·         Full bitcoin: The sender owns bitcoins he sends to the recipient who can directly use them. This requires the owner to get bitcoin, which is easy in developed countries thanks to e-wallets and exchange platforms like Coinbase in the U.S. But it also requires the recipient either to be able to exchange them in fiat currency or to use bitcoins to pay for goods or services which is not that easy so far.

·         From bitcoin to fiat currency: The sender have an easy access to bitcoins he sends to the remittance operator that sends fiat to the recipient. This model considers developing countries have an easy access to bitcoins wallets but paying with bitcoins is very limited especially in developing countries.

·         From fiat currency to fiat currency: The sender pays its local money to the remittance operator that sends fiat to the recipient, using bitcoins to transfer money from one currency to another.

A few startups are already operating on the bitcoin/remittance market

Even at the early beginning this market has already attracted entrepreneurs and investors.

Though far from Transferwise, a mobile remittance company that has a valuation over $1 billion and uses a P2P model to facilitate easy money transfers and currency exchanges, BitPesa has recently raised $1.1 million to ease bitcoins transfer from the UK to Africa.

Abra raised a seed round and launched its service a few weeks ago in San-Francisco to ease money transfers based both on P2P and bitcoin technologies.

In emerging countries, Rebit is developing its remittance service to send money to the Philippines through bitcoin, ArtaBit develops a service to Indonesia and Coincove to Latin America.

Risks and threats

Whereas bitcoin is an open-source technology, it has long been regulated and constrained by banks and states. Because it relies on a P2P network to operate, bitcoin is seen as a threat to financial markets and states. Based on a combination of public and private key the technology is seen as an anonymous way to transfer money then easing traffic and money whitening. Then, for instance China forbids Chinese’s financial institutions from handling bitcoin transactions.

Companies that are operating bitcoin transfers also need to get a regulation approval to operate in developed markets as financial institutions request every actor to confirm it operates under transparent processes.

The bitcoin currency has also been very volatile, as its value moved from a few dollars for 1BTC at inception to over $1,000 for 1BTC at the end of 2013 and is now around $230 for 1BTC. This is a threat for bitcoin/remittance operators as they need to be very quick at exchanging currencies to make sure they will not keep bitcoins for a too long time. Protecting against currency exchange rates is the main issue for these companies.

Security is another issue for the Bitcoin industry as a few platforms have been hacked and bitcoin wallets have been closed making millions of BTC disappear without any counterpart for their owners. Then bitcoin/remittance companies need to ensure customers they will not lose the money they upload on their platforms.

Finally, bitcoin technology has a lot of property to attract digital remittance operators, starting with its decentralized technology, and some money has been invested in this market as the remittance industry is quickly shifting to digital. Bitcoin also seems to have been introduced to manage remittance to developing countries thanks to it low-cost operating structure, especially as a lot of money is currently lost in fees along the remittance process.

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2015 WILL BE THE LANDMARK OF REMITTANCES?

In 2015, the World Bank expects $608 billion to be sent back home by migrant workers around the world through money transfers known as “remittances”.

Three-quarters of this sum will flow towards developing countries to pay for food, education, health care or starting businesses. Some insurance services will provide Inter Care globally.

Remittances can contribute to better health by enabling household members to purchase more food and access better health care services. Remittances have also been shown to provide greater access to health care. Especially, in 56 developing countries, higher remittances per capita.  Remittances are often a crucial source of income, ensuring the survival of many poor households. Remittances allow households to better withstand unexpected losses of income or threats to livelihood such as drought, famine, or other natural disasters. Remittances are often used to make improvements to property, allowing for more sturdy construction.

The size of this market and the fact that it is still dominated by ancient monoliths and payment behaviors make it ripe for disruption and has attracted many new providers. The extraordinary amounts of venture capital (VC) being poured into the money transfer industry, over $140m in the first two months of 2015 alone, are enabling new technologies and business models to take over.

TransferWise, which offers the true mid-market exchange rate thanks to a “peer-to-peer” payment system, announced in late January that it had secured $58m from American VC firm Andreessen Horowitz. After raising a record  $40m last year in a Series A round from VC firm Accel Partners,  WorldRemit  just announced a $100m funding round to fuel its global expansion. Xoom, a digital remittance service provider founded in 2001, is now publicly traded and valued at over $600m. New player, Remitly just raised $12.5M in Series B in March to help immigrants send money to family and friends abroad. Remitly is a mobile payments service that enables consumers to conveniently make person-to-person international money transfers from the U.S.

Other great examples include  Azimo,  TransferGo, PayWay, CurrencyFair and Remit.vn. These companies are part of a new wave of money transfer operators around the world, operating entirely online and with a more transparent and fair pricing of remittance services.

“A characteristic of the global remittances trade is the prominence of informal as well as formal funds-transfer methods and instruments” Nguyen said. Formality and informality are, of course, relative concepts in many developing countries as in Vietnam, typically, banks and post, and so on dominate formal transfers. Now, the trend is changing, there are a number of ways, depending on the circumstances. Pay Way is a hub to Vietnam with plenty methods as Deposit Bank Account, Cash Pick – up, Direct to Cards, Mobile Wallets, Home Delivery, etc. Nguyen shared.

The SEA region has high remittance flow, the SEA region has large inbound remittance, which constituted $56.8 billion or almost % of the total SEA remittance of $ billion in 2014. Two countries with largest remittance flow in SEA, namely the Philippines and Vietnam  collectively contributed to more than half of the region's total remittance. In terms of inter-region remittance outflow from SEA, the 3 largest remittance recipients are from Asia Pacific, while most of the inflow came from North America and the Middle Eastern countries. China and India are the largest recipients of inter-region remittance from the SEA region, as migrants from these two countries fill up domestic jobs in the SEA region. Meanwhile, US is the largest source country for remittance into the SEA region due to a large population of Filipinos and Vietnamese in the country.  Vietnam is forecast to receive between $13 billion and $14 billion in overseas remittances this year, up from $12 billion in 2014, the central bank. Remittances from Vietnamese overseas remains a key part of the country's economy, equivalent to about 8 percent of gross domestic product. More than half of the capital comes from the United States. With appointed remittance, many players allow the sender to pay for specific goods and services such as a mobile phone bill or medication, retaining control over how their money is spent and giving more emotional meaning to the transfer than when sending cold hard cash.

While over 2.5 billion people around the world lack access to a bank account, 1 billion of them own a mobile phone which can serve as a gateway to financial services to invest in and protect their livelihoods. This has convinced prominent figures of the promise of mobile money solutions for the financial inclusion of the world’s poorest, as by partnering with mobile wallet providers such as MoMo, VTC, Viettel, Ngan Luong, … , money transfer operators such as Pay Way is enabling their customers to send money to millions of mobile wallets in Vietnam instantly.

Finally, Visa card, Master card, Bitcoin and other virtual currencies are starting to show their potential as worthy methods to send money. Visa card and Master card that aim to offer extra money move as remittance by settle with local banks as debit cards. While, Bitcoin isn’t without its flaws, and the system isn’t sufficiently mature for recipients in developing countries to enter and remain in the Bitcoin ecosystem. Simply put, too few merchants accept bitcoins as a means of payment. Recognizing this, Filipino startup Satoshi Citadel Industries launched Rebit.ph, a service allowing migrants to send bitcoins to the Philippines. The recipient receives Philippine pesos on their bank account, in cash, as airtime credit or to pay for bills, without ever knowing that the transaction involved a virtual currency. BitPesa, which recently raised $1.1m, offers a similar service for remittances from the UK to Kenya, disbursing Kenyan Shillings on mobile wallets such as M-Pesa or Orange Money.

The entrance of these numerous new actors in the remittance market will undoubtedly drive down fees and provide migrants with cheaper, faster and more convenient services as well as an overall better customer experience. The enormous sums being poured into the industry and the ensuing growth in the adoption of new solutions will certainly make 2015 a landmark year for remittances, with more exciting developments yet to come.

However, the large number of remittance options also entails more complexity for migrants when deciding which service to use, which can confuse and overwhelm them. For this reason, we built www.remit.vn , a hub for money transfer services. Pay Way enables Vietnamese Oversea to easily find the services best suited to their needs, stop wasting their hard-earned money on excessive money transfer fees and they can make their money move smartly. 

Tham khảo thêm tại: remit.vn

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