Yesterday I wrote a blog post regarding Western Union and the lack of focus displayed by their CEO specific to the implications of bitcoin technology to impact their business. It ended up getting quite a bit of traffic and I also received some criticism. Given that this was an opinionated blog post and not a published piece of journalism I was surprised it caused as much of a stir as it did. With that, it made me realize that I should take my blog posts just as seriously as any published article. It also challenged me to take a closer look at the case for bitcoin in the remittances market to assess whether my opinions were in fact valid or if I’d just been drinking the proverbial “bitcoin kool-aid”. Here’s what I’ve learned in the past 24 hours.
For bitcoin’ers the remittances industry has been a target vilified for supposed predatory practices. Granted, the idea of making money off the circumstances of the worldest poorest is something no decent person would want to associate themselves with. That being said, I think it is equally as important to recognize that remittance businesses like Western Union and MoneyGram do actually provide a service that is valued by our fellow inhabitants to the tune of over $440 billion in 2011 (source) according to the World Bank. Transferring value across the world has traditionally been a cumbersome, untimely, and costly process – these companies have provided a necessary service. There are also high costs of doing business for such businesses – compliance alone costs Western Union between 3.5 – 4.5% of their quarterly revenue (source).
The case for bitcoin in terms of remittances is that it can help the poorest migrant workers that are forced to send small amounts of value home on a paycheck-to-paycheck basis. As far as fees go, for large sums of money the Western Unions of the world are actually a pretty good deal. For example, to send $1,000 USD cash to Mexico a migrant worker paying cash at a terminal in Denver, CO would only pay $8 USD with the recipient in Mexico able to receive the cash in minutes… 0.8% is not bad! On the other hand, for the poor migrant worker only earning $200 USD a week and sending half ($100) home to their family just to get by they would also pay $8 USD. At 8% this is starting to get pretty significant. When you start to look at other transfer rates between different nations and values you can get some very high percentages. For example, in 2012 to send money from South Africa to Botswana the average fee was 22.7% (source). You can test these numbers and your own experiments using other amounts and countries HERE with Western Unions price calculator – just keep in mind that if you’re in the US it’ll assume your sending from here. With that – it is undeniable that for individuals sending small amounts of money home the fees are substantial.
The question now is, what is the actual percentage of remittances that are sent in small sums? More specifically – how many migrants are actually sending sums of money as small as $100 at a time? If you are in the United States, you might imagine few people send such small amounts home at a time knowing they will incur such a large fee. It is important to remember that many remittances are sent across the borders of the worlds developing nations where monthly wages may only be $200 per month or less. (Examples from 2010 can be viewed HERE). In such circumstances, saving for the more cost-efficient transfer is not realistic. Unfortunately, this has been an elusive number and the best I can do is make an estimation on available data, here’s what I’ve come up with. (if anyone can find this information please send it my way so I can update).
In 2014 there are an estimated 230 million international migrant workers and 700 million internal migrants. (source). The World Bank expects remittance flows to increase to $700 billion annually by 2016 (source). With $540 of the $700 billion (77%) expected to be to developing nations, it seems a conservative estimation that at least 25% of these remittances would be sent in small sums by poor workers. This would be a sum of $135 billion in 2016. Given the existing average fee of 8.5% and bitcoin’s potential in a liquid market to bring fees to 2% or lower (1% in and 1% out) we’re looking at a potential savings to the world poorest of 6.5%, equivalent to $8.7 billion. When you then consider the possibility of migrant workers being paid in bitcoin, the savings potential increases even further. Furthermore, if you consider the moonshot scenario of people holding bitcoin and not transferring, however unlikely, the fees would go to 0.
In conclusion, I do think bitcoins potential to disrupt remittances is real. My conservative estimation would say that the utilization of bitcoin could directly impact one fifth of the future remittance market, with the potential to disrupt much more. The greater realization is what this savings might mean to the world poorest classes and the exponential impact it may have on their standards of living. Is Western Union pure evil? No. Will they disappear entirely? Probably not. But the reality is that the future of their business may rely on the remittance flows of the wealthy and middle class. If this is the case, I think we all win, especially the worlds most needy.