Update (9th July, 22:15 GMT): with extra information about remittance fees.
One of bitcoin’s promised ‘killer apps,’ and one regularly cited as a use case whose time has come, is overseas remittances – providing cheaper and improved services for foreign workers sending money back to their home country.
Now, several startup platforms in the Philippines are setting up the foundations of the infrastructure needed to allow people to send and receive bitcoin easily.
That bitcoin use has not already become widespread in the remittance industry comes as a surprise to some. Near-instant international payments, low or even free transaction fees, and a potential absence of currency conversion seemingly offer a competitive edge over ‘legacy’ systems like Western Union or MoneyGram, whose fees and processes are regarded by bitcoiners as dated and even exploitative of low-income populations.
Additionally, with bitcoin, there’s no need for either party in a transaction to have a bank account. According to a column in The Economist, that’s something over 80% of African adults lack. Adding all the developing world’s other unbanked individuals, the potential for bitcoin to bring financial services to this ignored market is huge.
Where is bitcoin?
Bitcoin’s lack of success in developing markets so far, however, is not so surprising when you consider the situation of people based in the countries where it could be most useful.
To be truly advantageous, an entire bitcoin economy would need to arise at each end first – that is, users would earn bitcoin, transmit bitcoin to relatives who would then spend bitcoin at the other end.
This chicken-and-egg scenario in which bitcoin co-exists with existing (and more commonly accepted) fiat currencies means that currency conversions must still occur at each end of the transmission, which then requires intermediaries in the form of bitcoin exchanges and the fees they will necessarily levy.
Liquidity and governments
Further complicating the situation are the lack of exchange liquidity (the ease with which bitcoin can be bought or sold) in the emerging markets where remittances are most often used and a lack of competition in the space.
Additionally, bitcoin exchanges may find themselves facing the same regulatory hurdles and costs as the entrenched money-transmission system, who must deal with anti-money laundering rules and unwieldy banking systems in certain countries.
Local governments with their own interests at stake may even throw up their own barriers to unregulated digital currencies and exchanges, no matter how economically advantageous they are to the population.
The good news is that a number of companies have emerged to make serious attempts at solving these problems, setting up unified platforms with exchange functions at both ends and direct deposits into bank accounts. And some of those companies are based in and focusing on the Philippines.
The Southeast Asian country is hardly the poorest in the world, and its ranking of 114th on the 2012 UN Human Development Index is still higher than many Asian and African countries.
Yet, Philippines is a special case: over 12 million, or 10% of the entire population, live and work overseas, sending $23bn back home in 2013 – that’s large enough to form a key sector of the country’s economy.
Most of those workers are in low-paying service jobs, and currently pay up to 10% to money transmitters to send smaller amounts (for example, $100) home.
Update: It has been pointed out that several existing remittance services, such as Xoom and Remitly, offer lower flat fees on larger remittances ($200 or more) which actually make up the bulk of money sent from the US to the Philippines. Western Union and Moneygram have also lowered rates recently. The fees increase as dollar amounts drop and the necessity for prompt transfers increases.
The Philippine bitcoin community has grown fast and its Facebook group now has over 2,000 members from all sectors of the bitcoin economy. Startups like Bitmarket.ph are already trying to find bitcoin-related solutions to local problems in areas such as merchant payment solutions.
The current Philippine government, which is regarded as more business-friendly than previous administrations, does not currently regulate bitcoin and has not announced any intention to do so.
Co-founder of merchant/e-commerce service Bitmarket.ph Miguel Cuneta is a prominent member of the local bitcoin community. In the past month, he and his fellow entrepreneurs have also launched Rebit.ph, a service aimed specifically at remittances.
Rebit.ph aims to solve the conversion problem as efficiently as possible, while highlighting its founders’ status as established members of the business community to build trust in the bitcoin startup.
Bitmarket also operates at least one Skyhook bitcoin ATM and is currently talking to other companies about building a more thorough merchant and payment ecosystem.
This week it announced a new integration using the Coinbase API for US customers, a reduction from %3 to 1% in the transfer fee, and a 0% fee on exchange from BTC to the local national currency, the peso.
Rebit.ph is being marketed with a “grassroots approach” that even allows the remitter to purchase rice and other food directly instead of sending money (or a combination of both) – a service Rebit is calling ‘Satoshi Rice’.
Otherwise, remitters can choose whether to send money to a home address, a bank account, or have the receiver come in person to collect it from Rebit’s office.
“We realized that profiteering on remittances is the problem, and decided to turn this into almost a pure cost recovery model and make revenues in the other channels we provide. Remittance is a big big thing for Filipinos and as Filipinos ourselves, we know first hand how hard these people work and sacrifice to send what little they earn back to their families.”
He describes Rebit and similar services as a “temporary solution”, and maintains a long-term hope that some day recipients will not have to convert bitcoins back into local currency.
Until then, a comparison chart on Rebit’s platform shows just how big the cost difference is between using bitcoin and existing transmission services like Western Union, Moneygram and Xoom.
This integrates with Coins.ph’s exchange and merchant network, and works in a similar fashion to Rebit.ph – sending money either to a selection of bank accounts or other existing payment services.
Hose told CoinDesk about the practical side of the exchange and remittance business, including liquidity issues surrounding currency conversion at the Philippine end and regulation in different jurisdictions.
The advantage of having operated Coins.ph for six months already, he said, is being accustomed to dealing with biases in day-to-day trade by tapping into international liquidity providers and factoring the cost of doing so into Sendmoney’s buy/sell spread.
Bitcoin in the remittance arena
“The beauty of bitcoin is [that it is] an open network, so it promotes more competition, and hence better pricing and efficiency,” Hose said, adding:
“We are still very early in the game, but since many of the costs of running an exchange are fixed, we expect pay-in/pay-out percent fees will decrease as exchanges grow in volume, as well as [to] figure out additional ways to monetize other than transaction fees.”
There are still unknowns surrounding bitcoin remittances and existing regulation in different countries, Hose indicated. With that in mind, Coins.ph follows know-your-customer (KYC) and anti-money laundering (AML) practices despite not being required to under Philippine law.
Once everyone accepts bitcoin, he added, it would cause a “disruption on the scale of what Skype did to long distance calling rates”.
In emerging markets, though, bitcoin already offered a compelling value proposition without even having to reach that scale – the existing banking infrastructure is sufficiently costly to be of no use to a majority of the population, who could never afford the initial deposit required to open an account.
“You only need one or two exchanges per market to bootstrap the bitcoin economy,” Hose concluded.
Rice worker image via Shutterstock