A Closer Look at Bitcoin Remittances


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.


Here’s Why Western Union is in Serious Trouble

Like many who follow cryptocurrency closely I’ve had my eye on the ongoing Money2020 conference taking place in Las Vegas, NV. One of the specific interviews that has surfaced and caused a stir is the Erik Schatzker (Bloomberg) interview with Western Union CEO Hikmet Ersek. It can be viewed here.

In this interview, Ersek struggles to describe how bitcoin will impact Western Unions legacy money transfer business. Some excerpts:

ES (Bloomberg): “Is the bricks and mortar network a melting ice-cube?”

HE (Western Union): “It’s not. If you’re a Philippino nurse leaving your country from the Philippines and coming to the US, serving US society in a hospital … Half of your salary is sent back home and you want to give the money to somebody you trust. You trust somebody, you go to a location, it’s a big event.”

ES (Bloomberg): “What about bitcoin?”

HE (Western Union): “Well, I think bitcoin is a good system. I always say – what is bitcoin? Is is a currency or a system? I’ve been asked, would you transfer bitcoin? Bitcoin is not a regulated currency. In the moment that it is regulated, any currency, as we do transfer 122 currencies, we would transfer any currency worldwide. Once it is regulated – it has to be regulated!”

ES (Bloomberg): “But once it’s regulated does it then become a legitimate competitor to what you do at Western Union?”

HE (Western Union): “Definitely not…. …Erik, you want to send me one bitcoin, lets say. I get it in Dirhams, right? What is in the middle is Western Union.”

First it appears clear that english is not Ersek’s primary language (he’s originally from Istanbul) and with that I feel the need to grant some leniency in this regard – clearly describing complex ideas under a camera lens on live television is hard enough. That said, he is the CEO of a multi-billion dollar international company and there are some telling responses that do not bode well for Western Union. Here are some specifics:

  • It is ironic that Ersek specifies “trust” as an important factor in transferring money. He’s 100% correct, it certainly is a key element. That being said, what he fails to appreciate is that crypto currencies are peer-to-peer and require no middleman for international transfer. Trust not required. That said, users will still likely have to trust a 3rd party if they want to transfer into local currency. It is clear that should they do so they would choose to go through an exchange (most charge 0.4% or lower for withdrawals into local currency). This beats the Western Union average of 10.8% by 10.4%. Yikes.
  • Next, Ersek specifies that the only requirement for Western Union to accept bitcoin is that it be regulated. This implies that once it is regulated Western Union will add it to their offerings. To anyone that understands how bitcoin works this response is very confusing. The obvious threat is that of the 122 currencies Western Union currently serves all that is required is the emergence of liquidity (likely in the form of native bitcoin exchanges) for each of those customer bases to disappear seemingly overnight. (I will describe the likely scenario for this below).
  • Finally, when pushed to describe if bitcoin is a competitor, Ersek completely misses the mark in not acknowledging, or possibly even recognizing, that bitcoin is the proverbial comet that is about to disrupt his business. In his example, he describes Western Union as the middle man for transferring Bitcoin to Dirhams. If this is the case, they better hurry up and make some offers to crypto-exchanges.

There are only two things required to dissolve Western Union’s business worldwide. The scenario for each region will require the following:

  1. Liquidity: Currently bitcoin is not truly “international” in the sense that many countries do not have native exchanges. Of the 122 currencies mentioned by Ersek established bitcoin exchanges likely only operate in 10-20 of them. What this means is, unless users are willing to hold bitcoin, there is no way to “cash out” and use that value at home. That said, countless exchanges are in the works and fighting to bring this liquidity to their countries – much faster than many might suspect. Furthermore, the big fish like Coinbase and Circle will continue to expand their reach. Once they do anyone in the world will be able to send value at almost zero cost and cash out in their native currency.
  2. Awareness: Once liquidity has been established the only remaining requirement is for entrepreneurial individuals in these markets to setup a lawn chair across from a brick and mortar money transmitter terminal, cash and cellphone in hand, and undercut the rate. Boom! Instant entrepreneur. In fact, it would be silly for the employees of these terminals to not take the business for themselves, one might imagine they likely would.

As someone that has travelled extensively in the developing world, I can say that it will take little time for individuals in liquid markets to exploit this opportunity. Last October 2013, while traveling in Buenos Aires, Argentina I saw first hand the industriousness of local individuals in acquiring US dollars. On the streets the price for USD was double that of local exchanges. You should expect the other parts of the world to be no different, when there is a margin to be made the gap closes pretty quickly. At 10%, the gap in remittances is significant incentive.

With this understanding, I must admit I was very surprised to hear the CEO of the world remittance leader speaking so casually about bitcoin technology. If his statements truly reflect the awareness and strategy of his company they are in for a world of hurt.

UPDATE: Within minutes of making this post I’ve received some criticism for the title, particularly the inclusion of “serious trouble”. By “serious trouble” I do not mean that the organization is on the verge of collapse or immenently doomed. What I do mean, and stand by, is that evidence would suggest that their leadership is unaware of a technology that has arisen that is in direct competition with them and could likely disrupt the core of their business. If the CEO of Kodak had displayed an equal disregard for digital cameras in 2002 I would have felt the very same way. It is the job of leaders to be aware of the ocean in which they are navigating their ship, in this case the captain seems relatively unaware of the choppy seas.