“I think we will know when bitcoin has reached prime time when it is transferring more value each day than Western Union or Money Gram…”

– Roger Ver, November 2013

Bitcoin money transfer is usually discussed in either sensational or downright misleading way. There is a significant category of Bitcoin stakeholders and observers who seem to be completely vested in this innovative product’s awesome potential and are unable to entertain a deviating opinion. This very smart and capable, but, unfortunately, close-minded group believes that Bitcoin cancels a need for regulation and would soon destroy Visa, Western Union and “banks.” Articles written for and by such audience are easy to find, and we will not link to them to avoid enabling such either outrageously ignorant or deceptive opinions.

Rational view of Bitcoin for Sending Money

In this context, we are always grateful to find a write-up about Bitcoin for remittances which attempts to be more objective. Here are some examples: Bootstrappers guide to bitcoin remittances, Tackling bitcoin price swings OR

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However, even more reasonable experts seem to be de-emphasizing a fundamental diversion in understanding of Bitcoin value that shall be considered for its potential in international money transfers. Here are the key points made by Bitcoin proponents, usually taken at face value.

Large segment of consumers is suffering under existing, non-Bitcoin-based setup for money transfer

“The unexpected tragedy of the financial system” is quite representative in this regard. What is common about these articles is seemingly absolute lack of a field research or basic customer surveys. Speaking with enough low-income consumers who transfer money internationally, one could quickly discover that there is no “tragedy,” and, what is most puzzling, this segment is not even that eager to save on sending money. Why? It is not because low-income senders are lacking infrastructure. A large portion of SaveOnSend’ “cash” users have a smartphone and a bank account which could be easily linked for an online money transfer. BUT they are sticking with a cash agent, and, as the result, are paying 3-5-10 times more for sending money home. Counterintuitive? Yes. Tragedy? No.

And that is why, offline-to-online shift in remittances is happening at a crawling, 1-2% annually, pace and will be taking decades, not years. This is not unique to remittances. Such slow adoption is actually quite typical for other types of financial transactions: from cash to plastic cards, from checks to online billing, or from a “swipe-insert” plastic card to a “touch” payment with a phone or a watch.

Bitcoin money transfer can help the needy

Articles about FinTech-Bitcoin are often trying to invoke “unbanked” “poor” or “women” as the reason and special focus for money transfer startups. Instead of simply acknowledging that these startups are primarily founded to make money and accumulate market power, we are asked to believe in their higher calling. Not surprisingly, such articles are always missing two critical components which would make those claims believable: 1) specifics on targeting such segments, 2) explanation on how to make money with such targeting:

This argument is misinformed on both the sending and receiving ends of a money transfer transaction. By definition, most of the senders who transfer $200 per month to their families in India, China, Philippines, Mexico have money. Which means that majority of them have both a bank account and a smart phone. There are of course immigrants who transfer money illegally, but they don’t represent majority, in part due to stricter residence standards and increased deportations. According to Xoom’s analysis of 2011-2012 WorldBank and FDIC data, 78% of US resident non-citizens have a bank account.

On the receiving end of remittances, being unbanked is not a significant inconvenience or cost issue. With around 500,000 Western Union locations, money could be easily picked up by the great majority of such unbanked recipients. There will always be pockets of consumers who live in extremely remote areas, but reaching them with an advanced technology in a cost effective way is simply unrealistic at this point (more on that later).

There is virtually no advantage between receiving money into a bank account vs. picking them up from a cash agent – in most cases, a provider’s margins are the same for either method (check for yourself with SaveOnSend app).

Bitcoin money transfer is instant and, thus, doesn’t carry the FX volatility

There might be a misunderstanding about FX “volatility” in this context. Cross-border money transfer, without Bitcoin, is already evolving to a real-time-fixed-exchange-rate payment. For example, in the world’s largest corridor, USA-to-Mexico, many providers already deliver funds in minutes and more will join (see table below or see results with SaveOnSend app). The reason for why some money transmitters like Xoom or TransFast could already do it for 70-90% of bank-funded transfers while others still can’t is related to a risk management and bank connectivity, and, thus, could be eventually addressed.

On the other hand, money transfer via Bitcoin does carry an FX conversion disadvantage, a double-whammy:

– since Bitcoin is more volatile than pretty much any other currency, its internal spread is higher (see the chart below for 2015), and so is its spread for each conversion

– Bitcoin needs to be converted extra time or sometime even twice. For example, for sending money from USA to Mexico, it needs to be converted an additional time (USD-MXN vs. USD-BTC-MXN). For an USD-to-USD conversion when sending money from USA to countries with an option of multiple receiving currencies, like China or Philippines, Bitcoin needs to be converted twice vs. zero times with regular remittance providers.

Here is how HelloBit’s co-founder and CEO Ali Goss summarizes this conundrum in this insightful article by Bitcoin Magazine:

“With bitcoin, you’re adding a third currency,” Goss said. “You go from U.S. dollar to bitcoin, and then from bitcoin to whatever the local currency is. You’re adding an extra FX move right there alone. That increases friction. On top of that, small startups don’t have a big FX department, and they don’t have the big abilities that come with such a department … they’re generating more costs for themselves, not less.”

Bitcoin can dramatically reduce remittance prices

Most of the potential savings for international money transfers could be realized today, immediately, IF ONLY senders stop going to cash agents and spend 3 minutes linking their bank accounts on their smart phones using their existing providers like Western Union or Ria Money Transfer. Not understanding why so many senders continue spending 3-5-10 times more while having a bank account and a smartphone will likely lead to many disappointments for Bitcoin money transfer startups and their investors down the road (read our analysis of fundamental difference in behavior of senders from USA to India vs. Mexico).

Examples of such disappointments are frequent – see the “Graveyard” section toward the end of this article or read these insights from Bitcoin entrepreneurs. But still too many Bitcoin remittance stakeholders keep repeating an outdated adage of a 10% average margin by “traditional” providers and that Bitcoin solution is 250x cheaper:

Instead, spend 30 seconds on SaveOnSend app or read the latest brief from WorldBank. You would quickly discover that the weighted average global margins have been falling to 6% (Western Union‘s global margin is ~5.5%, Ria Money Transfer’s – ~4%). So why are we seeing so many articles about high costs of sending money internationally? Because it was the case in the past, and it is hard to change our mindset to a fundamentally different input. As usually happens, high margins attracted more competition and prices have dropped 30% in the last 7 years alone (from the World Bank data):

More relevant for Bitcoin-based remittance providers looking for tech-savvy early adopters, margins for online remittance in top corridors are in the 1-3% range. For money transfers from USA to India, the world’s most advanced corridor for the reasons we are describing in another SaveOnSend article, margins are approaching ZERO (see table below). And it is just a matter of time before other top corridors would follow same pattern.

There are still corridors with very high cost of money transfer, but they are obviously much smaller in size. For top-10 global corridors, each $10B+ in annual volume, including four covered by SaveOnSend app, margins for online transfers are generally below 3%. On the other end of the spectrum, there are numerous $1-5M corridors, especially in intra-Africa, with very little competition and, hence, much higher margins (see the world’s most expensive corridors here). The smaller the corridor the less likely is the return on building custom digital capabilities. That is why, Western Union only enables digital transfers from less than 20% of countries/destinations (33 by Q3, 2015):

Another argument in favor of Bitcoin’s ability to reduce remittance costs is to focus on small amounts with an underlying assumption that such transfers would dramatically increase in quantity (e.g., if it costs little to send $10 to homeland, lots of migrants will begin initiating lots of small transfers). While some increase in smaller amount transfers is expected (read this interview with Western Union’s executive), there is no evidence of a major trend. Even for smaller amounts, some mainstream providers are not charging any fee, in essence, creating variable-only pricing based only on the FX markup (see top three providers below). With those providers it already costs less than $1 to send money, so even if Bitcoin transfer is free it wouldn’t make enough difference for consumers to care:

Bitcoin-Blockchain can dramatically reduce correspondent banking cost

A typical pitch of Bitcoin-Blockchain startup includes a picture like below which shows a multi-step process for customers (retail or business) who want to transfer money internationally. It then naturally proposes a blockchain-based solution which eliminates the need for all intermediaries letting consumers and business interact with each other directly as they do via email:

While seemingly intuitive and simple, two conditions would need to be met in order for such Blockchain solution to present a significant cost advantage: a) costs of those specific back-end processes need to be a substantial component of a provider’s P&L, AND b) existing providers are deploying those processes in a substantially inefficient manner.

Let’s review financial statements of publicly-traded consumer remittances companies.

It becomes apparent that most of their costs are related to payments for receiving and discharging funds from-to customers, customer acquisition, channel infrastructure, customer service, and risk-management-compliance, not in recording transactions or moving money internationally (read this SaveOnSend article for more details). Hence, providers are eagerly looking for more cost-effective ways to collect and distribute funds vis-a-vis customers, acquire customers, deploy offline and online channels, service customers, manage risks of releasing funds before getting paid… not functions where Bitcoin seems to be offering a distinctive cost advantage. For example, Western Union spent HALF of all expenses in 2014 on “agent commissions” – whether underlying currency is fiat or bitcoin wouldn’t seem to make any difference. Or, let’s consider fraud-related expenses – the major issue in the remittance industry, like the case of “employee impersonation” at Xoom or when people lie about 1) having sufficient funds in their bank account or 2) not sending money or when hackers take over online accounts. Again, it is not clear why a Bitcoin-based provider would be much better at preventing such “front-end” fraud unless it is a so-called “full Bitcoin” transfer (no on- and off-ramp conversion with fiat). This will be indeed a potentially safer infrastructure, but a very slim chance of mass adoption unless we start seeing billions of dollars spent on PR-marketing globally.

But what do large remittance providers spend on correspondent banking? As we describe in this SaveOnSend article, it costs them 0.01-0.1% of revenues and is managed by a global team of 2-5 people. Compare that with compliance activities which involve 5-10% of the total company staff among established providers.

Bitcoin money transfer will destroy Western Union

Obsession with crushing Western Union seems to be a huge distraction for many remittance startups, Bitcoin or not. One thing is to have a crazy audacious goal, another is to keep talking about it as if such goal could be a reality in the next several years. To put things into perspective, 8 years since it got its act together, Xoom and Transfast are still 1/10+ of Western Union’s transfer volume, and after 4 years, Remitly is 1/30+ of Xoom’s. Remittances’ latest darling, TransferWise, is growing very fast and only after 4 years surpassed Xoom’s monthly volumes, but its business model is constrained to bank-to-bank transfers, therefore, its revenue would likely to stay marginal in comparison with Western Union’s (learn more in this SaveOnSend article):

Picking ANY corridor in the world and achieving 1% share would seem like a much more plausible milestone that a Bitcoin community could rally around. Achieve that in few years and many skeptics would start taking Bitcoin potential for remittances seriously. Instead, we keep seeing another clever way to compare Bitcoin’s non-existing business with the world’s leader:

In the meantime, Western Union has proven to be an agile adaptor to digital evolution. It was the first online in 2001, the first to experiment with mobile money in 2007, and has maintained a resounding lead in digital cross-border transfers. And that maybe the biggest “blind spot” of Bitcoin-based or remittance startups in general. They have an image, wishful thinking, of Western Union as a cash-only business which missed telephony and sticked with telegraph. The reality is quite different, and Western Union’ stable stock performance leaves more doubt about its imminent demise:

The only reason preventing mass Bitcoin money transfer adoption is [enter your favorite]

Articles like this highlight something unique about stakeholders in a Bitcoin money transfer community, both startup founders and their investors. Rather than learning and embracing a challenging reality of consumer remittances today, they prefer to believe that Bitcoin by itself is a “game-changer” for remittances. The are betting on a miracle of new technology taking off once enough remittance consumers hear about Bitcoin features. In their views, if only a large retailer would agree to accept Bitcoin for money transfers or if a Bitcoin remittance startup would cut its fees and conversion rates to zero, mass adoption is guaranteed. Even more grounded Bitcoin remittance participants feel it is reasonable to compare Bitcoin with Skype and WhatsApp.

They seem to forget two most basic principle behind success of any innovation

1. Manifestation of product-service virality takes weeks-months not years. WhatsApp and other “viral” giants spread like fire to millions of users and didn’t require second guessing. Nothing even remotely close has been transpiring with ANY bitcoin-based apps, and the active user base of the ones focused on remittances is typically measured in hundreds. Yes, it is possible, that one day in the future somebody will invent a fundamentally better bitcoin remittance app than anything available on the market today, but that has nothing to do with existing startups and their investors.

2. The happier consumers with their existing choices and the more work required by them to adopt, the more branding and marketing efforts are required to initiate said adoption. They should also embrace a harsh implication that an abundance of satisfactory options impedes adoption not only among customers but also among necessary business partners. Why would a grocery store engage with a brand new provider that has a miniscule remittance flow if they already have a satisfactory working relationship with “Western Union” and other well-known brands? Read how CEOs-founders of Bitcoin remittance startups describe this particular challenge: BitSpark, Abra and Rebit.

So even if a Bitcoin remittance startup raises $100MM of “cheap” money from VCs or via IPO and starts offering fiat-to-fiat money transfer for FREE, to win even a 1% market share in any top corridor would take years not months and require a full-out consumer engagement effort (SEO, PR, advertising, referral incentives). But even if successful, what happens when there is the next 2001/2008-type financial crisis and “cheap” money is no longer available? Operating with no margins, what “dream team”of executives would be required in order for such bitcoin-based provider to survive? To be clear, similar challenges apply to ANY remittance startup in the online world – for example, see our assessment of TransferWise and other FinTech remittance startups.

Specific examples of Bitcoin money transfer providers

See updated list of Bitcoin money transfer providers here

Graveyard (closed or pivoted away from Bitcoin consumer remittances)

• November 2015: BitPesa

  Launched in 2013, BitPesa initially was the best-known “use case” for Bitcoin consumer remittances to few countries the middle part of Africa. However, as BitPesa kept struggling with gaining traction among consumer remittance users, it found a typical early adopter being a small business owner who sends money occasionally. Facing this harsh reality and struggling in the initial outbound market, UK, BitPesa expanded its marketing efforts to potential senders from other countries like Canada and USA and began targeting B2B cross-border payments (see informative presentation by BitPesa’s CEO). BitPesa has raised close to $2M to date and its transfer volume has been growing at 30%/month from $50K in January 2015 reaching $400K by July. As of November 2015, nearly all of its customers were using BitPesa for business needs.

• August 2015: Beam

• July 2015: Cryptosigma->Toast

• June 2015: 37Coins

Top Active Companies to Watch:

Abra (A Better Remittance App)

When on September 10th, 2015, Abra announced that it raised $12 million in funding, it was a seminal moment for Bitcoin’s evolution for remittances. For the first time ever, there was a startup with enough funds to acquire 100,000+ customers. This made Bitcoin for remittances no longer a hypothetical question. We can now compare Abra’s progress with initial trajectory of regular remittance startups:

• TransferWise: raised $7 million in its first 2.5 years, reaching $35M in monthly transfer volumes

• WorldRemit: raised $7 million in its first 4 years, reaching $50M in monthly transfer volumes

• Remitly: raised $11 million in its first 3 years, reaching $2M in monthly transfer volumes

Abra was launched in February 2015 with a fascinating premise, but a comical-borderline-bizarre pitch. At that point, it was hard to imagine a better parody on the disconnect between bitcoin’s ardent fans and reality of money transfers than this presentation and the follow-up reaction – please watch it (only 6 minutes).

Now, this is actually a real serious presentation that won 2015 “LAUNCH Festival” Award. Moreover, the Abra app was hailed as the finally arrived “uber for remittances” (which is true) and “Western Union killer” (which is silly). And if you are not inside of the bitcoin bubble, you could have been forgiven for chuckling few times while watching the video. Abra presentation starts with: “I wanna talk to you about Mexican immigrant named Bill” and proceeds with painting us a story of human suffering of someone in Mexico who has to “drive 2.5 hours” to the nearest cash agent. And Abra has the solution for those apparently greatly inconvenienced folks called the “human teller.”

Considering the ubiquity of cash agents, it is not hard to imagine a place that is so remote. There are numerous small villages, 50-100 residents, in such hard-to-reach places which remain there for historical rather than economic reasons. For anyone who ventures to such villages few gaps become apparent in Abra’s presentation: a) Mobile data connectivity, which could be spotty even around NYC, is usually non-existent once you are this far from larger cities and infrastructure, there is just no business case for deploying such capabilities, b) comfort-trust of technology, especially as it relates to money is far behind in its evolution, c) while it is usually very safe to live in those communities, the overall protection coverage by government is quite limited. So this “uber for remittances” “killer app” will be deployed to THESE areas?!

There might be definitely one segment who could be eager early adopters: criminals. There is finally an app for them which allows to quickly identify somebody with money in a vicinity and thus significantly improve effectiveness of victim targeting.

Joking aside, even if we stop worrying about common sense and just go with this story, how would it look as an investment? Spending on localization, wireless data, customer service, etc., all to serve few people in remote areas seem understandable if those were marginal expenditures to piggyback on key metropolitan areas, but not as a targeted investment.

But it was apparently the right message to make, no matter how silly it seemed, because Abra won the award. And what is much more important is that Abra’s idea for “Uber for remittances” is indeed groundbreaking. Enabling consumers to act as ATMs could eventually be a replacement for hawala and catalysis for speeding up a slow shift from off- to on-line method of sending money.

Abra is not looking to modify behavior of end-users. It wisely enables a cash-to-cash method habitual for 90% of remittance transactions. The fact that Bitcoin is somehow involved is also not apparent (check out Abra’s landing page). We also shouldn’t worry that Abra would waste $12 million by targeting remote villages. All remittance startups talk about helping “poor” in remote locations because it makes for a better PR. But as everyone else, Abra is going to target tech-savvy consumers in major metropolitan areas of top global remittance corridors.

As you could tell from this article, Abra is facing a myriad of challenges. Longer-term, there is an obvious question about Abra’s ability to make profit considering that they only charge “human tellers” on each side 0.5% assuming all FX risk. At least for now, bitcoin spreads are higher and hedging is very hard to find, hence, it is quite expensive (mining businesses in developing countries are already looking for the same hedge). In terms of Abra’s competitive offering to consumers, if we add to Abra’s margin each teller’s markup of 1%, the total margin gets to around 3% which is on the high-end for corridors like USA-to-Philippines (check SaveOnSend app for other corridors).

For now, Abra is in an early pilot mode, singing up thousands of “human tellers,” so it might be another year before we start learning facts about its transfer volumes and revenues. The key strategic question is how Abra is going to allocate $12 million among customer acquisition, application development and back-office areas. Learning from mistakes of other remittance startups, growth of customer base shall consume a majority of funding and management time. Not another management position or a bigger office but repeat customers would eventually define whether Abra’s pathfinding leads to a sustainable business model or just an interesting techy experiment.

But the biggest hurdle Abra needs to clear in the first few years is related not to its performance but to regulations. Abra wants to claim that it is just a technology company that doesn’t provide money transfer services per say. That would allow Abra to avoid spending time and effort on compliance and licenses (see another SaveOnSend article on that topic). While it would be a welcome change for governments of USA, Mexico, Philippines, etc. to embrace Abra’s interpretation, this might be unlikely. As Abra well understands, it would have to spend heavily on PR and lobbying in order to preserve its business model. And if Bitcoin community wants to finally act like one and organize for the right cause, getting Abra off the regulatory hook shall top the list.

Rebit.ph

So far, Rebit has raised only $100K. This is a minuscule amount considering that it costs around $50 to acquire a new customer. Rebit’s more fundamental challenge is that its model is not fundamentally different from a typical remittance provider – read this article from its former insider.

Its repeat customer base is in hundreds, but Rebit is also attracting one-off users, in total generating 50-100 daily transactions. Rebit doesn’t charge fees making money on the FX-Bitcoin spread. Read Rebit’s extensive update and Q&A on Reddit.

Question for YOU: which bitcoin money transfer provider do you think has a practical chance to reach 1% market share in ANY global corridor in the next several years? Please describe your brief rationale in the comments section below.

Regulatory aspect of using Bitcoin for money transfer

Besides its business value, compliance with KYC-AML is another existential questions for Bitcoin remittances. Read this article on whether such compliance is even feasible. Faisal Khan does a great job discussing various aspects of Bitcoin’s legality and compliance for sending money internationally in his “The Lure of Remittances for Bitcoin Startups” article. Some providers are hoping that if they are MSB-licensed outside the US, they could have an online website and provide money transfers from the US to their country – see Faisal’s response here. Finally, read his step-by-step instruction on how to make Bitcoin international money transfer compliant.

For Bitcoin regulations in USA, state-by-state, read here.

Overall, we understand why a cross-border remittance provider requires more scrutiny than a company in a lending space like Lending Club or Kabbage. The additional risk of money laundering and terrorism financing might outweigh any potential benefits. At the same time, we are concerned with applying an excessive amount of regulation to this seemingly promising innovation. While many in the bitcoin community believe that bitcoin dominance is around the corner, we have a more cautious view that bitcoin money transfers are going to remain a tiny phenomena for years to come. So when we notice how governments or banking organizations are gearing up regulations and imposing limitations (FinCEN Fines Ripple), we are worried that Bitcoin’s remarkable potential would be validated much later on because of these premature efforts. Like with crimes in a non-bitcoin space, anybody is welcome to raise a concern, but so far there seems to be more fear about what might happen rather than an objective assessment of bitcoin’s present danger (see “Bitcoin Still Confuses Bankers” for a macro view on this vector).

Making Bitcoin money transfer a reality

There is a long-term vision for Bitcoin-based remittances: as the currency itself becomes stable in the next 10 years, there would be another wave of startups to market Bitcoin as a storage of value and investment. While those startups are also likely to burn out, they would pave the wave for a mass adoption of bitcoin. And at that point, we will finally start seeing new breed of “killer” remittance apps that take advantage of FULL Bitcoin, currency & ledger.

In a short-term, a bitcoin-based remittance providers might be better-off starting in lower-volume-higher-margins corridors that we discussed above. Outside of legal realm, there is an intriguing case for Bitcoin-based remittances as the transitional “hawala” replacement. For some top global destinations like China, informal remittance channels might be on par or higher than formal. Why senders prefer a shady route instead of “western union”? Privacy & Taxes. Based on our discussions with residents of Chinese communities around NYC, we learned that a) many of them seem to work without paying taxes, b) they also seem extremely secretive of their earnings, both for safety and reputation reasons, c) they perceive a real risk of a bank or remittance provider sharing their transfer information with authorities and/or crime syndicates in USA and China. Without commenting on legal aspects, a Bitcoin-based remittance provider, super-localized and focused on complete anonymity, might bring such “unbanked” segment into the fold of using online tools. Then, maybe some of such users would be less hesitant to try a licensed remittance provider.

We are eagerly awaiting the day the first bitcoin money transfer provider could be added to SaveOnSend app, assuming it won’t be one of the existing players simply adopting parts of a bitcoin-blockchain technology. To enable such startup, we would overlook its understandably tiny market share and potentially not-the-best pricing. There are only 3 rules:

1. Licensed as a money transmitter n USA’s 10 largest states (CA, FL, TX, NY, IL..)

2. Independently verifiable 100s of happy customers, representative of a typical mass-market international money senders: monthly-quarterly transaction, $0-3K range, sending to China, India, Philippines, or Mexico

3. “Bitcoin-seamless” – customers send USD and receive destination currency, but don’t have to do something extra just because of bitcoin

We are wishing you “best of luck” on this unbelievably difficult journey! If we missed anything, please leave a comment.