April 25, 2024

Does Bitcoin do weather in the field of international transfers?


Discussion of Bitcoin cash payments usually proceeds in a sensational spirit, if not even leading todelusion. There is quite a large category of Bitcoin fans who attribute incredible potential to this innovative product, but cannot take into account the downside.

This is a group of very capable and talented people,but, unfortunately, they believe too much that Bitcoin will suddenly make regulation unnecessary and will very soon destroy Visa, Wester Union and the “evil banks.” It is very easy to find articles written for such an audience or by the participants themselves, but we will not link to them so as not to become embroiled in outrageously crude and misleading discussions. We, representatives of the &#171;traditional&#187; payment service SaveOnSend, we will offer you a summary of alternative opinions &#8212; from the perspective of payment system practitioners.

A Healthy Look at Bitcoin Money Transfers

We are always happy to find articles on the topic of Bitcoinmoney leaders who do not fall into excessive enthusiasm. Here are a couple of examples (in English): Bitcoin for those who think with their own heads, Fighting Bitcoin fluctuations, or comments from sensible people:

Miguel Kuneta, co-founder of Satoshi Citadel Industries:

The real reason why Bitcoin will blow up.The money transfer market is that anyone can make a transfer to anyone anywhere for $20, for example to the Philippines, receive it within 8 hours even without the participation of a bank, and pay a maximum of 1-4% commission. [At the same time], Bitcoin has difficulty transferring large amounts of money.

Salvador Del Palms, Kraken:

This is a long war. And soon, fiat currencies are not going to retreat at all.

However, even more prudent expertsneglect the fundamental difference between Bitcoin and the features that need to be taken into account to understand its potential in the field of international money transfers. These are the key arguments made by Bitcoin proponents, which are often taken at face value.

1. Most of the users suffer from the conventional money transfer system.

Article &#171;Sudden financial tragedysystems&#187; quite indicative in this regard. What is typical for such articles &#8212; an absolute lack of field research, or even simple user surveys. If you talk to enough people who have low incomes and make international payments, you will soon find out that they have no "tragedy". And, what is even more puzzling, this segment is not as affected by the cost of remittances. Why? Low-income people do not suffer from a lack of infrastructure at all. Most users of our SaveOnSend service have at their disposal a combination of a smartphone and a bank account, which can easily be used as an online money transfer tool. The fact is that they need an intermediary to handle the cash (to be issued to the recipient), and this is why they pay 3, 5 or even 10 times more to send money home. Paradoxical? Yes. Tragedy? Hardly.

Target audience of Bitcoin payments

This is why the main trend is in remittances.&#8212; transition from cash to online money. This trend is not fast, the increase in the share of online money is slow, at 1-2% annually, and this process will last for decades, not a couple of years. But this happens not only in the field of cash payments. The same low rate of innovation is quite common among other types of financial transactions: from cash to plastic cards, from checks to online payments, from a physical payment card to payments from smartphone applications or smart watches. like iWatch.

2. Bitcoin payments are designed to help those in need.

Articles on financial technology basedBitcoin often tries to expose the poor, the unbanked, or women as the main reasons and focus of remittance startups. Instead of directly saying that the main goals of these startups &#8212; to earn money and accumulate market power, we are asked to believe in their supposedly lofty goals. It is not surprising that such articles always lack two critical aspects that would be able to convince this: 1) specific characteristics of the target audience 2) an explanation of how money will be made with the help of this target audience.

Information about both recipients and sendersfunds is misleading. By definition, most senders who send $200 a month to their families in India, China, the Philippines or Mexico are considered to have money. This means that most of them have a bank account and a smartphone. Of course, there is a portion of immigrants who send money illegally, but this portion is small, partly due to stricter rules for residents and increased deportations.

According to the company's analysis of international moneyXoom payments, according to World Bank and 2011-2012 and FDIC, 78% of non-U.S. residents have bank accounts. If the recipient of the money transfer is not serviced by the bank, then this does not create any significant inconvenience or significant difference in the price of the transfer. Considering that Wester Union alone has 500,000 branches worldwide, it is clear that most recipients who are not banked can still easily receive their money. There will always be recipients who live in extremely isolated areas, but reaching them with advanced technology is not cost-effective.

In fact, there is no difference, receiving money throughbank account or through an intermediary with cash &#8212; in most cases, the broker's margin is the same for both of these methods (you can check for yourself using our SaveOnSend app).

3.  Bitcoin transfers are instant and therefore &#8212; they are not affected by exchange rate volatility

There may be a misunderstanding in this context&#171;variability&#187; exchange rates. Money transfer services that don't use Bitcoin already use real-time exchange rate tying. For example, in the largest money corridor in the world, the USA &#8212; Mexico, many providers already transfer money in minutes, and the number is growing (table provided below). The reason is that some money transfer services such as Xoom or TransFast can do this for 70-90% of bank transfers, while others &#8212; still not, is related to the bank's risk management and communication network, and, sooner or later, they may speed up their transfers.

Bitcoin Transfer Test: $300, Card-Cash, USA &#8212; Mexico, April 1, 2015

On the other hand, a money transfer using Bitcoin still suffers from exchange rate fluctuations, moreover, twice:

  • since Bitcoin is more unstable than almost any other currency, its internal spread is higher (the table below is for 2015), so this affects every conversion
  • Bitcoin needs to be transferred once again to anothercurrency, sometimes even twice. In order to convert American dollars to Mexican pesos, you need to make one &#171;extra&#187; translation. To transfer &#171;dollar-dollar&#187; From the US to China or the Philippines, where it makes sense to choose the multi-currency option for receiving funds, Bitcoin has to be transferred twice, while with regular money transfer services there is no need to convert currency at all.


By the way, compare volatility as a percentagegraph above, which shows the intermediary’s commission associated with currency fluctuations, and compare with the top transfer services in one of the largest corridors in the world, the USA-China (see below). You may be surprised to find that Western Union typically has ZERO interchange allowance. This is another common misconception among Bitcoin fans&#8230;


4. Bitcoin can radically reduce the cost of remittances

Most potential savings oninternational payments that can be made today, instantly, ONLY if senders stop going to intermediaries who handle cash and spend 3 minutes of their time to link their bank accounts using a smartphone with the transfer services they currently use, for example Western Union or Ria Money Transfer. Not understanding why so many people who send money continue to spend 3, 5, 10 times more when they have both a bank account and a smartphone will likely lead to many future Bitcoin remittance startups being disappointed and their investors.

Most people who doBitcoin remitters seem unaware of how low margins are in 2015. Many continue to repeat the outdated adage of &#171;10% average margin&#187; from traditional transfer companies and that Bitcoin is 250 times cheaper:


Instead of spending 30 seconds inthe SaveOnSend application or read the latest World Bank report. They would immediately discover that the weighted average margin drops to 6% (Western Union worldwide margin ~5.5%, Ria Money Transfer ~4%). So why is the Internet filled with articles about the high costs of international money transfers? Because it happened before, and it’s quite difficult to change the existing mindset in your head, and so radically. As usually happens, high margins have become a field of high competition, and in the last 7 years alone prices have fallen by 30% (according to the World Bank):


For Bitcoin money transfer services more thanThe margin for online transfers is significant, which in the top corridors is 1-2%. For remittances from the US to India, the most advanced money corridor, the margin approaches ZERO (see table below). And other top corridors will also begin to establish similar conditions &#8212; it's only a matter of time.

Comparison of international payments margins for large companies and startups, USA-India, $ 1,500, bank-bank, July 1

It doesn't matter what we talk about &#8212; about simpleusers or on an industrial scale &#8212; If the Bitcoin approach differs only in the way it moves money between countries and how it records transaction information, then for it to be competitive in terms of price, 2 conditions must be satisfied: 1) the cost of performing these specific processes on the company's side must be a significant cost to them, and 2) existing services provide services for such processes very inefficiently. Let's look at the financial statements of public companies that deal with consumer money transfers (euronet, wester union, moneygram, xoom).


It becomes clear that most of their costsrelate to payments for customer receipts and withdrawals, onboarding new customers, channel infrastructure, customer service, risk management, legal compliance, rather than recording transactions or moving funds across national borders. Therefore, these services strive to find less costly ways to collect and transfer money to clients, attract clients, deploy real and online channels, serve clients, manage the risks of releasing funds before they are paid&#8230; These aren't sort of the features where Bitcoin offers a favorable price advantage.

For example, Western Union has HALF of allexpenses in 2014 were “intermediary fees,” which would likely not be affected by differences in whether these payments were made using Bitcoin or fiat currency. Or let's look at the costs associated with scams: a significant role in the money transfer industry (for example, the case of "employees impersonating others" on Xoom, or when people lie about what they haveenoughfunds in their bank account for transfer, ornotsend money, or when hackers take overtheir online accounts). Again, it is not certain that Bitcoin money transfers will be much better at dealing with such client-side scams. Only if you use transfers that are completely within the scope of Bitcoin. In this case, we have potentially a much more secure infrastructure, but very little chance of widespread adoption.

Some online money transfer startups,perhaps they hope to grab a piece of the payment system bubble, get an easy $100-200 million from venture investors, go public (for example, TransferWise has already raised $91 million and WorldRemit &#8212; $140 million), and figure out their advantages in the next several years of purchased time. It is possible that Bitcoin money transfer startups operate on the same principle&#8230; but then it is quite obvious that the point here is to raise easy money, and not to lower costs by introducing Bitcoin innovation.

However, there are still many areas wherethe cost of remittances remains high. For the world's top 10 corridors, each with a volume of $10 billion per year, international payments margins are typically less than 2%. At the bottom of the list we have a large number of $1-5 million corridors within Africa with very low competition, and as a consequence &#8212; high margin. For this simple reason, Western Union accepts electronic payments from less than 20% of countries/territories:


So why are all the famous BitcoinAre money transfer companies similarly operating in the world's largest, most competitive corridors, where margins are already the lowest? If the main goal of their startup is to help the poor, why not work with corridors that are not occupied by large players and in which there is no competition in digital payments at all (a list of the most expensive corridors can be found here)? Why open a head office in the US or UK rather than in Africa, where the margins for international payments are greatest?

Beyond the hypocrisy to find one big enoughcorridor in which it makes sense to build a Bitcoin remittance startup &#8212; it is necessary to conduct thorough research. Let's also not forget the margin trends of the last 5 years in Wester Union and MoneyGram, including the current price war for the US-India corridor. It is obvious that the big players do not hesitate to reduce prices/margins, even losing money, in order to maintain their market share.

Another argument for the possibility of Bitcoinreduce prices for money transfers &#8212; focus on small-value payments, believing that the number of such payments will increase radically (for example, if sending $10 back home is inexpensive, many migrants will send a large number of small payments). But although some increase in small amount payments is expected (this is discussed in an interview with Western Union), we do not see a strong trend. If you come across any research on this topic, please point it out in the comments. But some large players do not impose any commissions on small-volume payments at all, changing the price only depending on the adjustment for currency fluctuations (for example, below is an example of transferring $20 to the Philippines). If the transfer cost is less than $1, then it is difficult to say how a Bitcoin money transfer company can provide a significant price reduction and convince users to switch money transfer companies.


5. Bitcoin money transfers will destroy Western Union

The obsession with destroying Western Union seems to behas become too much of a distraction for many startups, Bitcoin companies and vice versa. It’s one thing to have such an insanely audacious goal, but it’s another thing &#8212; talk about the fact that this could become a reality over the next few years. The situation looks like this: 8 years have passed since the launch of Xoom and Transfast, and their payments are just over 1/10 of Western Union's payment volume, and Remitly, after 4 years, is 1/30 of Xoom's volume. The last money transfer company of note, TransferWise, is growing very quickly and has surpassed Xoom's monthly volume in just 4 years, but its business model operates within bank-to-bank payments, so its profits are likely to remain slim in comparison with Western Union (in this article you can read why Western Union is likely to remain the industry leader):


Choose ANY corridor in the world and reach it1% share will be a much more significant milestone that will make sense to talk about in the Bitcoin community. If this is achieved in the next few years, many skeptics will begin to take Bitcoin money transfers seriously. But instead, the Bitcoin community draws inspiration from sly comparisons between their defunct business and the world leader.

At the same time, Western Union has recentlyFor several years it has proven its ability to flexibly adapt to online evolution &#8212; this can be understood by comparing their past activity or profit statistics in the online segment with more recent ones. And overall, this may be the biggest &#171;blind spot&#187; bitcoin startups or money transfer startups. They have a vision (by calling a spade a spade &#8212; they are wishful thinking) that Western Union deals only with cash, and that they have not heard of telephony and are still using telegraph in the 21st century. In reality, things are different, and the current performance of their shares calls into question their imminent disappearance from the market.


6. The only reason that prevents the widespread use of bitcoin is [enter your favorite]

Bitcoin startups, instead of researching the market and finding the real problems of money transfer customers, preferbelievethat one Bitcoin is already enough to disrupt the payments industry. They bet onmiraclenew technology that will attract the user,as soon as he hears about the use of Bitcoin in their service. In their opinion, once a major merchant agrees to accept Bitcoin as payments, or if a Bitcoin money transfer startup cuts all its fees, including currency conversion fees, to zero &#8212; mass application is guaranteed. Even fairly down-to-earth proponents of Bitcoin transfers think comparisons between Bitcoin and Skype or WhatsApp are fair.

It seems that they forgot about two basic principles that ensure the success of any innovation:
1) Has &#171;viral&#187; product orthe service becomes clear in weeks/months, but not in years. WhatsApp and other &#171;viral&#187; giants spread with lightning speed among millions of users, there is no need to double check. Nothing even close to this has happened with ANY Bitcoin app, and the active user base for money transfer apps is typically in the hundreds of users. Yes, maybe one day someone will invent a fundamentally better Bitcoin transfer application than any of those already on the market today, but this certainly has nothing to do with existing startups and their investors.


2) The more satisfied users are with theircurrent choice, and the more work required of them to migrate to a new technology, the more effort must be directed into branding and marketing to facilitate the transition. In addition, it is worth remembering that the multitude of other viable options prevents the transition to new technology not only for ordinary users, but also among necessary business partners. Why would a grocery store start accepting meager cash flow from a new money transfer service if they were already happy with their partnership with Western Union and other well-known brands? In these articles, you can read how this particular problem is described by the founders of Bitcoin money transfer startups BitSpark, and Abra and Rebit.

Thus, even if a Bitcoin startupremittances will raise $100 million in easy money from venture capital firms, or through an IPO and begin providing fiat remittances for free &#8212; in order to win at least 1% of the market share in any of the top money corridors, they will spend years, not months, and this also requires the involvement of a full range of work to attract clients (SEO, PR, advertising, referral programs).

But even if successful &#8212; what will happen,What if another financial crisis like the one in 2001/2008 hits and investments stop being so “easy”? What kind of geniuses should a team consist of that can push through a Bitcoin transfer company, working without margin? To be clear, the same problems get in the way of ANY online money transfer startup &#8212; for example, TransferWise and other similar fintech money transfer startups.

The biggest barrier to mass adoption of the technology may be the dominance of the Bitcoin community by idealists who are stuck in a stupid paradigm &#171;Bitcoin = Internet&#171;, and not skeptical practitioners,who would see Bitcoin as just another innovation. Whether you are launching a new brand of vodka, clothing, cars or money transfers &#8212; a service that can change the market must perfectly provide more or less standard services. Miracle, as you know, does not like to rush.

In the next article, we will analyze specific bitcoin companies that are trying to work in the field of money transfers, and point out the shortcomings of their business models.


: saveonsend.com