Bitcoin and mobile messaging have emerged as tools in addressing the global remittance market to lower the cost of transferring funds across national borders.
This past spring, KakaoTalk, based in Seoul, South Korea, a chat app, purchased a 40% stake in Satoshi Citadel Industries (SCI), a Manila, Philippines bitcoin startup as reported by Quartz. KakaoTalk joins Viber and WeChat in addressing the global remittance market, estimated at $500 billion annually.
Transfers Are Complex
A cross-border money transfer requires the parties to agree on a transfer method, calculate exchange rates, collect personal details, synchronize amounts, then confirm when the cash has been sent and received.
Most such transfers are sent by migrant workers who relocate to other countries for better-paying jobs. They send money to family or friends back home who depend on the money for living expenses.
An estimated 230 million people send $500 billion annually in remittances. They mainly use Moneygram, Western Union and RIA, which collectively have 1.1 million retail locations and comprise more than a quarter of the annual remittance market.
Chat Apps Open Up The Market
Smartphones, which have grown in use, have allowed chat apps to play a bigger role in these transactions. Both WeChat and Viber this year partnered with Western Union to enable U.S. users to send money to foreign beneficiaries from within their respective apps.
Such cooperation could help logistical challenges facing remittances, but cost remains an issue. Sending $20 to the Philippines from the U.S. using Viber and Western Union requires a 4% foreign exchange fee and a $4 flat fee. Once the money converts to the Philippine peso, it arrives as $15.15 at its destination, amounting to a $5 loss.
Most Asian migrants, who are construction workers, crewmen and domestic helpers, transfer the equivalent of $200 monthly, which often exceeds 25% of their personal income. The $12 in approximate fees they pay equals a half a day’s wages.
Bitcoin Enters The Fray
Startups have tried to develop bitcoin alternatives. With bitcoin, senders pay for transactions in local currency, then the facilitator converts the cash to bitcoins before sending it. After the bitcoin arrives at its destination, the facilitator converts it into local currency. The company that facilitates this exchange takes a cut, similar to a traditional facilitator. Neither customer necessarily knows bitcoins were involved.
Three new bitcoin players have emerged in the last year: Sentbe, SCI and Payphil, while better-established bitcoin exchanges such as Coinplug and Korbit are entering the field.
With bitcoin, the transfer cost is cut in half: $6 versus $12 for a $200 transfer. Bitcoin-enabled transactions currently comprise 20% of the remittances between South Korea and the Philippines annually, according to some estimates.
Migrant workers tend to be wary of new technologies promising savings. Chat apps such as WeChat, KakaoTalk and Viber are addressing the trust challenge.
But Internet penetration remains a fundamental challenge. In the Philippines and other emerging Asian markets, Internet penetration is often below 40%, limiting the digital reach.
Remittance providers need to have local cash-out partners due to customer dependence on hard currency. These partners bring added costs and security risks. The user cannot buy food at a local market or pay a transit fare to get kids to school using digital currency.
The biggest challenge for the remittance market could be contending with an offline population.
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