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Lower cost of remittances to Africa – Can bitcoin ease the pain?

Over 30 million Africans live in the diaspora. They sent almost $40bn (£26.5bn) home in 2014, a figure that is likely to grow significantly in the coming years.

While north African countries such as Morocco, Algeria and Egypt receive the most, east African countries are particularly dependent on remittances.

The average per migrant is almost $1,200, representing 5% of GDP on a country-by-country average.

Yet the cost of sending this money is high.

The Overseas Development Institute (ODI) reports Africans in the diaspora pay an average of 12.3% to money transmitters to send $200 home, while the cost of sending money between African countries is also high. Each year, the ODI says total fees amount to $1.4bn.

Part of the reason for these high costs could be a lack of competition; Western Union and MoneyGram control 50% or more of the remittance market in most Sub-Saharan African countries. But help may be at hand from an unlikely source: digital currency Bitcoin.

Mt.Gox
The collapse of the Mt.Gox Bitcoin exchange left some investors wary of the cryptocurrency

Coining it

Bitcoin gets a negative press in the western world, especially after the collapse of the Mt.Gox exchange and the cryptocurrency’s fluctuating value.

But a number of companies are betting on Africa as the destination where it could see the biggest uptake and have the most impact.

Elizabeth Rossiello, chief executive of Bitcoin remittance service BitPesa, which allows workers overseas to send money home to Kenya and Ghana for a flat fee of 3% and says it is growing its user base by 60% month-on-month, believes the shortage of payment options in Africa make it a fertile ground in which Bitcoin can grow.

“Credit cards are only available to less than 3% of the population in sub-Saharan Africa. PayPal is blocked in many countries or much more expensive in the few it is operating. Bank transfers and remittance corridors are two to three times the price as elsewhere,” she says.

“So in terms of a need for a cheap, fast, functioning alternative form of payment, yes – Bitcoin does have a greater opportunity in sub-Saharan Africa.”

BitPesa in action
BitPesa in action

Timothy Stranex, co-founder of South African Bitcoin exchange BitX, believes Bitcoin could be the first online payment method available to many people given the low credit card penetration, while he also expects uptake from merchants wishing to accept payments from foreign customers.

“In an increasingly global world, international payments are becoming increasingly important,” he says.

“Bitcoin provides a much easier way for businesses and consumers to participate in the global economy than traditional systems.”

Rick Day, co-founder of Igot, another Bitcoin exchange recently launched in Africa, says Bitcoin is gaining popularity in Africa “slowly but surely”. Since its launch in early 2014, Igot has counted more than 200,000 transactions.

Igot co-founder Rick Day
Igot co-founder Rick Day says he thinks Bitcoin could find supporters in the charity and NGO sector

“As more and more people realise the value of Bitcoin, the speed of its transaction and the low cost, they are more inclined to use it. We expect the Bitcoin industry in Africa to grow in the next six to 12 months as more entrepreneurs enter the market,” he said.

Flexible friend

The other reason why those setting up Bitcoin businesses in Africa are hopeful the digital currency is set to go far is the fact Africans have already shown themselves willing to adopt alternative forms of moving money around.

Mobile money has taken off on the continent, with figures from the Central Bank of Kenya indicating Kenyans alone transferred over $11bn using mobile money services in the fast half of 2014.

Meanwhile Kenyan operator Safaricom – the first operator to provide an effective platform for the technology with its M-Pesa service – estimates up to 43% of Kenya’s GDP now flows through its mobile money channels.

This makes Africa the ideal place for Bitcoin to take off, according to Nikunj Handa, chief executive of Ghanaian Bitcoin remittance service Beam, which also charges 3% for transactions.

“Africans are more used to the concept of digital payments and digital cash than those in other developing continents. With the right integrations with the mobile money vendors and the mobile money software, the acquisition, liquidation and hedging of Bitcoin can be made seamless and easy for the African public to adopt,” he says.

Beam's Nikunj Handa (right) and his co-founder and chief technology officer Falk Benke
Beam’s Nikunj Handa (right) and his co-founder and chief technology officer Falk Benke

BitX’s Timothy Stranex agrees that the success of M-Pesa and services like it show that alternative payment systems can work in Africa.

“It has also shown the role of mobile in next-generation payments. To be successful, alternative forms of payment must truly be cheaper, faster and more convenient than existing methods,” he says.

“They must also leverage mobile. Bitcoin adds to this by also removing the requirement for intermediary service providers.”

Risky business

Bitcoin’s growth in Africa, as elsewhere in the world, is not without its challenges.

Mr Stranex says there is an unclear regulatory landscape and financial institutions are very risk averse when it comes to the digital currency.

There are also low levels of liquidity in local Bitcoin markets, though he feels this will change as more Bitcoin-related start-ups begin operations and more consumers start using the currency.

Another concern is that the volatility of the digital currency’s price could result in a fall in the value of sums sent via Bitcoin. But the remittance companies say this risk is removed by the fact they immediately convert transfers into the currency of the recipient.

Western Union office in Ethiopia
Western Union and MoneyGram are the main players in the remittance field – this is an agent in Addis Ababa in Ethiopia – but the fees to send money can be high

“There is no price risk given that we settle instantly. This is our whole selling point,” says Ms Rossiello.

“Once we are sent Bitcoin, that is instantly changed into local currency and delivered locally. So the price that is shown before the transaction to the customer, is the one the recipient receives.”

Igot is the same, according to Mr Day.

“In Kenya, users can immediately convert from Bitcoin to the M-Pesa system, in which it is held as Kenyan shillings,” he says.

Serial entrepreneur and SiliconCape.com cofounder Vinny Lingham believes the problem is not the price but rather the perception that the price is important when it is not.

“Bitcoin is not a currency, it’s the world’s first openly traceable digital commodity. Any commodity can be used as a currency, most notably gold, which fluctuates daily,” he said.

“The value of Bitcoin does not lie in its use as a currency, but rather in its utility as a decentralised trusted public ledger and the applications that can be built upon it.”

Technology research company Gartner’s David Furlonger says that if Bitcoin can be a catalyst for improving remittance systems this will be a good thing for the entire economy, not just one sector.

But he warns that “Bitcoins aren’t necessarily the panacea to economic development”.

“Clearly the cost of international remittance inhibits enfranchisement of a large part of emerging market populations, and digital currency developments can democratise access to the economy.”

“[But] legislators need to understand the impact of unregulated movements of money and the opacity of remitter/receiver in the bitcoin ecosystem.”

Mr Furlonger points out there are potentially “operational risks concerning data portability, money flows, payment processes, customer and business transparency that are not clearly understood in the digital era, potentially increasing threats to the overall market.”

“Bitcoin is merely one protocol and one digital currency, many others exist.”

Post earlier appeared on the BBC

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