For African migrants, sending money back home comes at a high cost: they spend an average of 12.4 percent on transfer fees. Bitcoin entrepreneurs are now coming up with clever ways of bringing the cost of remittance down, all the way to zero. A risky endeavor or a smart fix?
By Julie Blussé
Shaun Matsheza has gone through the process every month for over five years, ever since he came to the Netherlands. Armed with cash and a customer card, he shows up at Western Union’s bright yellow desk to send money back home to Zimbabwe. The cost to do so is high: on average, about 15 percent of the total money transaction. “And if something suddenly arises, and my family needs 40 euros or so, I have to pay the minimum fee of 17 euros,” says Matsheza, who is a journalist for Radio Netherlands Worldwide. “It can be ridiculous.”
At the other end of the transaction, the process is not very convenient either. After Matsheza sends his mother a secret code, she or a sibling travels about half an hour into town to collect the money at the nearest Western Union agency.
Matsheza and his family are far from alone in acting out this monthly ritual. In fact, millions of people across the world do the same. Their mundane motions fuel the global economy; according to the World Bank, countries in Sub-Saharan Africa will receive 44 billion euros in remittance this year alone, which makes it one of the largest sources of income, far exceeding foreign aid.
Popular money transfer agents like Western Union or MoneyGram, whose services are cheaper than banks, handle a large part of these transactions to African countries. Yet their fees for sending money are outrageously high: an average of 12.4 percent. Like Shaun Matsheza, many migrants are reluctantly loyal customers. “I am always interested in alternatives,” Matsheza says, “but it’s not an easy problem to solve.”
High-tech fix for low-tech communities
Techies believe that Bitcoin might be just what these migrants are looking for. Sending Bitcoin across borders and exchanging to and from the cryptocurrency is practically free of charge, and it doesn’t require the interference of any bank or government.
Now if asking your cousin in the UK to start sending Bitcoins to your smartphone-less aunt in Uganda sounds less than genius, hold on— there’s a few smart entrepreneurs who believe they've found ways to make this high-tech fix work in low-tech communities too.
Pelle Braendgaard is one of them. He is the Danish founder of Kipochi, a free mobile web app for both smart and dumb phones. Kipochi is a Bitcoin wallet that allows users to send and receive Bitcoins via their phone. “Our goal is to make Bitcoin accessible,” Braendgaard explains from his Nairobi office. “With Bitcoin, you normally have to transfer money via these complex addresses, but with Kipochi all you need is a phone number.”
A smooth exchange
Kipochi might make sending and receiving Bitcoins as easy as sending a text, but what are Africans supposed to do with this cryptocurrency stored on their phone anyway? “In the first couple of years I do see the Bitcoin currency mainly as a transfer medium,” Braendgaard says. “You have to transfer your euros to Bitcoin, and then on the other side the recipient has to transfer Bitcoin back to Kenyan shillings for example. The [currency] exchanges are key for this.”
For now, Kipochi users can exchange the Bitcoin in their wallet at online exchanges like Mt. Gox, but Braengaard admits it’s not very convenient. Braendgaard is working with regulators across Africa to create easier ways to exchange money to and from Bitcoin.
One of Kipochi’s plans is to allow shops to function as exchange agents where customers can convert the Bitcoins in their Kipochi wallets to local currency. “That’s where we are planning to make our money,” Braendgaard says. These agents will be required to pay a 1 percent fee to Kipochi over money transactions, a cost the agents can then pass on to their customers. The shops would function much like traditional money transfer agencies, but at much lower rates.
But perhaps most promising is the idea of linking Bitcoin to mobile money like M-PESA. M-PESA has over 18 million users in Kenya already and is becoming more and more accepted as a form of currency for everything from buying groceries to paying salaries. Similar services like EcoCash in Zimbabwe are gaining traction across the continent.
By linking Bitcoin to mobile money, Braendgaard believes that using Bitcoin will become a much less daunting prospect for the less tech-savvy. “One of the great things about Kenya is that because of M-PESA, people already understand digital money,” Braendgaard explains. “Here I just say, ‘Bitcoin is like M-PESA, but international’, and people immediately understand it.”
While Kipochi is not directly linked to M-PESA yet, the company has developed the technology to exchange Bitcoin to M-PESA, and is currently under negotiation with Safaricom, the telcom provider that runs M-PESA, to integrate this function in their app.
Kipochi is not the only company that sees M-PESA as useful medium to make Bitcoin remittance more acceptable: CoinFling, a service similar to Kipochi set up by US-based Somalian Roble Musse has already secured such a deal, but is still in private beta. BitPesa is also in the process of working out a deal, and is preparing for launch.
Another concern for people who are interested in using Bitcoin for remittance is the currency’s extreme volatility. Bitcoin has been in the news for its insane climb as well as its precipitous drops in value. What if Bitcoin plummets in value before you can exchange it?
“It has worried us,” Braendgaard admits. “But I suspect in the beginning most remittances are going to be very short-lived. A Bitcoin transfer normally takes a maximum of ten minutes, so people will be able to exchange fairly quickly.”
In an interview with Bloomberg, BitPesa CEO Elizabeth Rossiello says that BitPesa plans to absorb the risk of the exchange risk for the customer. “The minute you confirm the transaction, the price is locked in,” Rossiello notes.
In many ways, Kipochi and other Bitcoin remittance services are trying to make the use of Bitcoin as acceptable as possible by making exchanging currency to and from the cryptocurrency so seamless that you might not notice its role in the remittance process at all.
Yet in the long run, Braendgaard, who has been working on digital currency since the nineties, hopes that Bitcoin will be accepted as a currency in itself. He believes Bitcoin holds a huge potential to offer access to financial services in developing countries, especially in Sub-Saharan Africa where 76 percent of adults is still unbanked.
Braendgaard argues that cash-based economies cause bureaucracy and red tape that stifle economic development: “If the only payment available is physical cash, you run into all sorts of issues. You can’t prove your income if it’s all in cash for example. So if you want to get a loan, that’s just very hard.”
With Bitcoin, many people who live too far away from traditional banks can open accounts on their cell phones. And because Bitcoin is a decentralized currency, Braendgaard believes “it literally can’t be stopped by governments or strong banking industry,” and won’t be subject to the same bothersome regulations.
That might give Bitcoin an advantage over mobile money like M-PESA, which is run by a telcom operator that incurs fees on its users for sending or withdrawing money.
Matsheza is sure to try Bitcoin remittance as soon as some of the technical hurdles are cleared. “I’m still a bit sceptical. But I’ll give it a shot and try it once or twice, with the minimum amount of money. If it’s convenient, why not?”
For Matsheza, free or cheap money transfers would mean that he could send money home more often, at times that are convenient to him and his family. And money he would save on fees would go a long way in Zimbabwe. “Twenty euros is like a week’s expenditure in food and everything. If I could give them that much extra, it would make a big difference.”
“They could even save a bit of money,” Matsheza imagines. “My mother runs a poultry business, she keeps chickens. If she could put that money aside, it would become less of a hand-to-mouth and more of a growing business.”