For the past few years Bitcoin has made international headlines for providing an alternative currency for online payments but also for funding dark web drug markets. Roble Musse, co-founder and chief executive officer (CEO) of CoinFling, addresses the practicality of integrating the cryptocurrency into an online remittance platform.
What do you think of Bitcoin? Will CoinFling incorporate Bitcoin in its strategy? These were the questions I faced when I met with investors last year. It was a not so subtle signal that professional money was searching for plays that would benefit from a Bitcoin surge. There has been a lot of speculation that the international remittance market could be disrupted by the introduction of Bitcoin. Here is my real world perspective.
My first experience with Bitcoin came in late 2012 when I was searching for a merchant service provider to allow CoinFling to process credit and debit cards. What was supposed to be a routine procedure turned out to be next to impossible. For three months, every merchant provider I talked to turned us down, after making us provide tonnes of supporting documents of course. It would have been easier for CoinFling to get an account if it was in the business of online porn or gambling, one salesman lamented. It didn’t help that we were still bootstrapping and our balance sheet was a tad weak. I reached out to folks in my network for advice. One of these individuals was a co-founder of a Seattle startup. He threw out random suggestions: “How about Square? How about using Paypal?” “No, no, no! That wouldn’t work!” I exclaimed in frustration. I felt that he didn’t understanding our predicament. But just then, he belted out: “Listen, you’ve got to think outside the box or it’s over.” I’m not sure if it was the words “outside the box” or “it’s over” that gave me a jolt of energy but I decided to look at the problem with a fresh set of eyes the next day after a good night’s rest.
In my subsequent search for non-traditional payment methods I came across Bitcoin. This encounter was not inspired by an idealistic love affair with the cryptocurrency; it was based on sheer practicality. I had a problem and I was hoping Bitcoin was going to solve it. I first reached out to several Bitcoin merchant service providers I found online. While waiting for them to respond, my team and I went through the steps we would take to change the workflow if Bitcoin became an alternative:
Step 1: Customer would have to convert their dollars into Bitcoin.
Step 2: Customer would use their Bitcoins to execute a money transfer with CoinFling.
Step 3: Coinfling will have to exchange the Bitcoins into the local currency where the recipient resides, in our case, Kenya.
Step 4: CoinFling will deliver the remittance to the recipient in the local currency.
Some basic problems arose. First, my initial market was Africa, where most of the remittances are initiated from brick and mortar locations be it a Western Union agent or one of the smaller cash based remitters. It was going to be an effort convincing my customers to charge their card on our apps let alone teaching them about Bitcoin. Secondly, were there any Bitcoin exchanges in Kenya, our first market? What will be the cost of converting from dollars to bitcoins and then to Kenya shillings? Thanks to the recent Frank Dodd rules, money transmitters are now required to show the customer all charges related to their transfer including foreign exchange and the exact amount the recipient is going to pick up in the agreed upon currency. How would we adequately hedge against bitcoin’s volatile exchange rate?
We were fortunate enough to secure a merchant account before we had to answer these questions but I still found myself in the middle of the Bitcoin debate. In my recent visit to Kenya, I was invited to be a panelist at The Afrikoin Conference organised by the Savannah Fund, where Bitcoin was front and centre. I regularly have discussions about Bitcoin with members of the startup community as well.
So where do I stand on Bitcoin, especially as it relates to international remittance? I believe Bitcoin has a long way to go, but here are my thoughts:
1. Bitcoin Utopia – If everyone had a Bitcoin account and you could exchange bitcoins for goods and services anywhere in the world then the money transmitter model as we know it, e.g. Western Union, would become extinct. Money transmitters exist because they have developed intricate channels and partnerships to efficiently (or not so efficiently) deliver small amounts of money between individuals. Bitcoin would erase the need for these intermediaries between the sender and receiver. This is the true magic of Bitcoin, as Marc Andreessen, partner at a16z, put it in his article Why Bitcoin Matters: “Bitcoin gives us, for the first time, a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure.” The Bitcoin exchange could add a layer of checks to satisfy anti-money laundering regulations. As long as there isn’t a full adoption of Bitcoin, there will be an opportunity for service providers to offer solutions for the gaps.
2. An alternative to the Visa/MasterCard monopoly – This is an immediate value Bitcoin brings to the money transmitter industry. Bitcoin exchanges quote a processing fee of between 0.5 per cent and one per cent compared to credit or debit cards, which usually start at 1.6 per cent and could go higher depending on the card that is used or the business you are in. This cost is especially painful for money transmitters because it’s charged on both the principal being sent and the fee the transmitter is charging. For example, if you are sending US$100 and the money transmitter fees are US$2.99, at a 1.6 per cent processing fee, the merchant would take about US$1.65. That comes to 55 per cent of the money transmitter fees. Most transmitters offset the credit/debit card fees against the margin they make on foreign exchange. However, any value Bitcoin provides in terms of lower processing fees would be lost if there isn’t a certain degree of stability in its value.
3. Adoption of Bitcoin by immigrants – With all the discussion on how Bitcoin will save immigrants from the costly fees money transmitters charge, there is very little acknowledgement of how manual this process is currently. According to Western Union’s 10k, 95 per cent of their transfers are initiated from their brick and mortar stores. This is not because Western Union has a crappy online service offering, it’s because of the characteristic of some of the remittance markets they operate in. For example, the USA to Mexico corridor is known to be highly manual because a large number of Mexican immigrants might not have access to banking facilities or convenient internet access and so prefer transacting in cash. Compared to the USA to India corridor where the Indian immigrants are typically characterised as highly skilled and educated with access to banking facilities and the internet. Could there be a leap of some of these market segments directly from cash to Bitcoin? This is an open question. In my discussions with customers in the USA to African corridor, I have encountered deep skepticism for transacting online. These customers are usually older and come from countries that have just recently adopted credit card use.
4. Is Bitcoin built for speculators or online commerce? – The recent volatility of Bitcoin’s value does not bode well for its future as an online currency. This level of volatility adds additional risk and cost to online businesses that accept the currency and also confusion for the consumer. The shoes you saw on an online store for one bitcoin have jumped to 10 bitcoins in less than five hours. Talk about inflation. But don’t worry, most online merchants that accept Bitcoin quote their products in dollars and make a conversion when you are ready to pay. Joshua Gans, professor of strategic management at the University of Toronto said in his article Time for a little Bitcoin discussion: “The reason Bitcoin has managed to establish equilibrium, despite volatility, in the payments platform market is because it was designed to be limited in supply.” This very scarcity, I would argue, has attracted the speculators. In addition to the media hysteria over Bitcoin which harkens back to the pre-dot.com bust.
5. Is offering Bitcoin a competitive advantage? – There are recent entrants in the remittance market that are solely focused on offering Bitcoin as a payment method. While I believe they are doing important work in testing the waters and preparing the market for this method of payment; as the demand for Bitcoin increases, companies like Western Union and even CoinFling will add Bitcoin as payment option e.g. Visa, Mastercard, ACH, and Bitcoin. The specialisation and expertise for Bitcoin will be retained by the Bitcoin exchanges. It will be a plug and play situation for money transmitters similar to how we currently connect to credit card merchant services. While money transfer customers are price sensitive, they also value other factors like convenience, trust, and speed just as much. Partnerships will continue to be a competitive advantage as long as we don’t get to a “Bitcoin Utopia” situation.
These are truly interesting times for innovators across the world. The idea that we could be taking the next big leap in the evolution of money is exciting. The debate on what Bitcoin is and its future has brought together skeptics like Nobel Laureate in Economics Robert Shiller, who has compared it to a bubble, and Silicon Valley innovators like Marc Andreessen, who marvel at its design and believe that it’s the next big thing since the internet went mainstream. If there was a way to combine the characteristics of a stable currency like the dollar with the technological breakthrough of Bitcoin we would surely have a winner. Do I hear Dollarbit anyone?
Image courtesy of Shuttershock