September 13, 2016
Remittance companies have been long flourishing at the low-developed markets. Over $28,5 billion in personal remittances have been sent and received in the Philippines last year, which make up one-tenth of the country's GDP. In Nigeria, the number is close to $35 billion annually.
Yet, the costs of making international money transfers can go prohibitive as the established industry players mainly control the entire global market. That’s exactly where Bitcoin startups have decided to step in.
The Problem with the Usual Money Transfers
When you need to send funds abroad, the operation usually requires a lot of hassle. You have to decide who pays the fees; calculate the exchange rates (which often fluctuate vastly); synchronize accounts; agree upon the most appropriate transfer method and afterwards confirm that the cash has been sent and received.
Around 230 million people globally send over $500 billion in remittances per year. Primarily this is done through companies like Western Union, Moneygram, and RIA. The three of them are now in control of more than 25% of the global remittance volume.
As smartphones grow in popularity among the unbanked, two popular chat apps Viber and WeChat have decided to get a cut of the market share and started offering money transfers in partnership with Western Union. US users we allowed to send money to non-US beneficiaries through an app.
However, the common problem remains – remittance fees are still too high for the majority of users. For instance, sending $20 from the US to the Philippines via Viber and Western Union will cost you a flat $4 fee, plus 4% foreign exchange fee. As a result, the beneficiary will receive just $15.15 and the exchange rates will be far from great as well.
While this may not seem like a big deal, these small fees can add up quickly. The majority of Asian workers send home around $200 on average per month. That is roughly a quarter of their personal income. Those $12 in fees paid to conduct the transfer is equivalent to their half day's wages.
How Bitcoin Startups Plan to Change This
A number of bitcoin payment providers have been working on creating an alternative to traditional money-transfer options.
Most services operate the following way:
- A sender pays for a transaction in the local currency.
- Cash is converted into bitcoins before further transmission.
- After transmission, the bitcoin is converted to the local currency at the destination country.
- The service provider takes a certain cut during the currency exchange.
By transferring funds using one of these services, the fees would be closer to $6 compared to $12 using the traditional options.
A spring of other related services has started to emerge around bitcoin money transfers. Paxful, for instance, offers you to redeem or purchase bitcoins directly using payment methods ranging from gift cards to Western Union. Afterwards, you can transfer them from your account to another one using services like Igot or Cryptopay.me.
What holds back the bitcoin remittance from going mainstream is the fact that users feel reluctant about adopting a new tech solution and don’t fully trust the new fintech companies. Bitcoin startups will have to do some serious educational work to spread their reach further.
Digital currencies can’t also magically turn into hard cash whenever a person needs to pay for rent or shop for food. Their application is still somewhat limited in the online world too. Most ecommerce service providers do not support payments in cryptocurrencies.
Finding better access to the unbanked, non-digitalized population is the key to steering further growth and disruption within this market segment.
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