More than half of the world’s adult population does not have a bank account. Most of these unbanked adults live in Africa, Asia, Latin America, and the Middle East. People in the unbanked world find travel distances, bureaucratic issues and paperwork associated with opening a bank account to be prohibitive. Banking services have been limited in the developing world because financial institutions struggle to serve customers profitably. Financial exclusion means that these adults cannot borrow for unexpected events such as illnesses, accidents and unemployment; and opportunities for raising entrepreneurial finance are non-existent. Not having a bank account creates problems especially for those who need to transfer money internationally. More than $350 billion was sent through official money remittance channels to developing countries in 2011. The IMF believes that the real figure could be 50% higher as money sent through un-official channels is difficult to quantify. The World Bank estimates that average cost of remittance to an unbanked economy is 9.3% of the amount being sent; this values the unbanked international remittance market at over $30 billion.
The Concept of Mobile money
More than 1 billion people have access to a mobile phone in the developing world. Mobile money services have been gaining popularity because they make life easier for the unbanked. Mobile money allows consumers to use their mobile phones to pay utility bills, send money to family and buy goods and services. The mobile money model enables companies to offer basic financial services to unbanked consumers in a profitable way. There are an estimated 98 million mobile money accounts in the Sub-Sahara African region; twice the number of Facebook users in that region. Mobile money industry relies on a network of agents to facilitate deposits and withdrawals. In June 2013, there were 886,000 mobile money agents in the world; compared to 500,000 western union agents. Most mobile money providers maintain their own network of agents and many of these providers have now started using mini ATM’s.
Mobile Money and International remittance
Despite its localised success, mobile money has not been successful in facilitating international money remittance on a large scale. Even success stories such as M-Pesa have not been successful with international remittances so far. A service that facilitates international money transfer has to comply with a number of regulatory and operational requirements in all jurisdictions involved. Western Union, through partnerships with a number of mobile money providers, launched mobile money transfer services in 9 countries, allowing senders to remit funds to recipient wallets from anywhere in the world. But Western Union’s regulatory compliance comes at an expense that is passed on to the consumer, ultimately reducing the demand for these services. Although cost of compliance is high, lack of transparency is a major reason for high remittance costs worldwide (according to an IMF study). The average cost of sending $200 to the unbanked world is $18. M-Pesa and similar services are closed eco-systems with high transaction fees. The unbanked world is an ideal ground for market disruption by a peer-to-peer de-centralised money remittance technology such as Bitcoin.
Bitcoin: International Remittance and New Opportunities
One of the reasons why there are inefficiencies in international mobile money remittance is that the market is segmented in localised corridors such as US to Mexico and US to Africa. Each corridor has a unique combination of mobile operators and regulatory requirements. Setting up multiple corridors to achieve economies of scale requires significant time and investment, and building up remittance volumes to justify those costs is a challenging task. Bitcoin, with its de-centralised protocol, could bring this large market of unbanked adults together, eliminating the need for money agents and intermediaries between the sender and the receiver. Using a single unified payment network will allow easier access to money and eliminate un-necessary transactions; for example, a migrant worker can pay his/her family’s utility bills and top up mobile phones without routing the money through his/her family.
The adoption of digital currencies and growing internet usage would not only make international remittance cheaper and efficient, but also improve economies of unbanked countries. Bitcoin will encourage online commerce, innovation and entrepreneurship in the unbanked world. For example, one needs a credit card to buy a domain name but getting a Visa or Mastercard in Rwanda is virtually impossible for majority of the residents. With Bitcoin, consumers can spend money online on all sorts of goods and services that are currently not available; Bitcoin would connect a consumer in Kenya to a merchant in the US. Freelancers with Bitcoin wallets can join the world economy and accept payments for services they can render through the Internet. Entrepreneurs will build online / offline services and start accepting payment in Bitcoin without having to open merchant accounts. Entrepreneurs can raise money for new ventures in crowd funding rounds and give away equity in exchange – all done online and facilitated by Bitcoin.
However, consumer education will play a key role in the adoption of Bitcoin in the unbanked world. Many unbanked consumers prefer over-the-counter (OTC) transactions because they struggle to understand new technology. These users find paying an agent to facilitate the transaction easier than downloading wallets and fiddling with technology. The issue could be resolved if everyone had Bitcoin wallets; then the recipient would not have to convert Bitcoins to fiat as he/she could use the coins to buy products and pay bills. Literacy challenges mean that Bitcoin adoption is more likely to start with selected migrant groups. Migrants in the US to Mexico and US to Africa remittance corridors prefer to use cash or similar alternatives as a large percentage of senders and recipients are illiterate. In comparison, the US to India remittance corridor is more likely to adopt Bitcoin because the consumers are more educated and tech savvy. New startups can drive consumer education by tapping into existing networks. Last year Bitcoin startup Kipochi launched an M-Pesa integrated wallet in Africa. Bitcoin’s advantages such as low transaction costs and faster confirmation times are likely to built a network affect that will drive slow but inevitable organic adoption. Digital currencies are likely to present new opportunities, revolutionise money remittance and boost economic development in the unbanked world.