There was a time when cross-border remittance was expected to be bitcoin's killer app.
It was a simple equation: the global remittance market is huge, and the (often poor) people sending money to friends and family across borders pay high transaction fees that could (in theory) be reduced with bitcoin transactions.
And yet, years later, the giants of the remittance market are far from slain, despite the average fees of 7.5%, and the growing crisis of bank "de-risking" – strategically refusing to process transfers to or from regions considered to present a high risk of money laundering, terrorism or other illegal activities.
So, what exactly are the dynamics of the remittance market that keep Western Union, MoneyGram, etc, at the top of the food chain, and what would it take to chip away at their position?
The cost of compliance
The first thing that caused over-optimism in regards to bitcoin's potential was a belief that tiny transaction fees would translate into low-cost remittance processing.
While the low bitcoin transaction fees represent the cost of actually processing a payment, many companies in the bitcoin space have found that the technical costs are often trivial compared to the regulatory ones.
In fact, even established players can struggle with the cost of compliance. In 2013, Western Union took a hit to profit margins as a result of the investment needed to keep up with new and existing regulations, and even its increased focus on digital payments rather than cash transfers has brought mixed results in the years since.
So, for newcomers to the field without such deep pockets, the barriers to starting out can be prohibitive.
Gabriel Abed, CEO of Bitt, an exchange based in Barbados that allows users in the Caribbean to trade bitcoin for US dollars or the local Barbadian dollars, says that its success has been hard won.
He told CoinDesk:
"[This work] is so costly in terms of time, energy, and access to resources. Trying to find the right team members to fill gaps in terms of compliance, AML and other loopholes is unbelievably difficult, and legislation doesn't exist yet to support the work we're doing – the barriers can be huge."
The problem of remittance is also complicated by the fact that the countries most in need of it often lack the kind of ecosystem necessary to help startups transition from idea to launch.
For example, in the US, bitcoin startups benefit not just from access to investors and technical talent, but from the work done by policy groups and the growing number of lawyers specializing in cryptocurrency and distributed ledgers.
But companies wanting to break into emerging markets are often forced to strike out alone, taking on tasks far beyond the remit of marketers and product developers.
BitPesa founder and CEO Elizabeth Rossiello admitted to feeling like her startup is, at times, fighting an uphill battle in Africa.
"Until you have the lawyers, the founders and other relevant people coming here, it's going to just be us. When you have the startup carrying the cost of lobbying there's not a lot you can do ... a brand new company is going to have to really invest in a team to first understand the market, then do all the lobbying."
BitPesa's story is a case in point.
An early darling of bitcoin-based money transfer, they have run into trouble in Kenya where Safaricom – provider of the mPesa mobile money transfer network BitPesa tapped into – blocked their access to the service.
This left BitPesa frozen out of the network the company was first built on, even as they expand into new markets like Nigeria and the Democratic Republic of Congo.
De-risking and its effects
Against this background, the need for a shake-up in cross-border financial services is become more apparent by the day.
In recent years, banks based in Western countries have becoming increasingly aggressive in de-risking, which is throttling access to financial services in many parts of the world.
If a trade corridor is considered lucrative, such as that between the US and China, although the costs of conducting due diligence are high, banks on both sides are willing to maintain the relationships necessary to process transactions.
But for poorer nations with a low volume of transactions and a higher risk of financial crime, maintaining these cross-border banking relationships (CBRs) is increasingly difficult.
In a June 2016 report, a team of researchers from the International Monetary Fund (IMF) spelled out the dangers of the withdrawal of CBRs across the world, noting that smaller nations in Asia, Africa, the Caribbean and the Pacific Islands have been particularly affected.
The Caribbean has been hardest hit since its island nations have small populations that are largely dependent on foreign trade.
Exchanges like Bitt are doing their best to fight against this trend, but resolving the problem requires cooperation from a range of actors from the state level down to individual service providers, and is far more a political problem than a technical challenge.
That said, an IMF report into the withdrawal of CBRs suggests that industry-wide initiatives to lower the cost of compliance will play a key part in reversing the trend.
That's where some of the experiments in streamlining KYC compliance that make use of blockchain tech could be of use.
Yet, counter to the general trend, in certain locations bitcoin transactions do play a role in the remittance process.
Notable among these is the Philippines, a nation from which a large percentage of the population regularly works abroad – some of them in Asian neighbor South Korea, where remittances sent home by Filipinos account for roughly $231m each year.
In fact, bitcoin-powered remittances are now estimated to make up 20% of the remittances sent by Filippino workers in South Korea, often charging transaction fees which are only half of their competitors ($6 on a transfer of $200 rather than $12).
Even so, not all in the Asian remittance market are convinced by the suitability of bitcoin.
Singapore-based startup Toast, which recently received $1.5m in investment to build an app specifically for remittances, decided to pivot away from using bitcoin as the underlying means of transaction, citing concerns over regulation.
And systems in which bitcoin must always be traded for another local currency may continue to run into problems of regulation.
Looking at this on a macro level, the growing diversity in the range of companies that will accept payment in directly in bitcoin benefits the remittance market too, especially when those companies provide products or services to regions otherwise affected by de-risking.
When a Filipino mother can buy groceries for her family directly in bitcoin or with a bitcoin-enabled service, the problem of sending money across borders could become technical rather than political.
But until then, bitcoin will not be able to solve the problem of high remittance fees.
Money snail image via Shutterstock
Disclaimer: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in BitPesa.