Category: Banks

Remittances have become a lifeline for many people in Sub-Saharan Africa, but the cost of sending money via banks and money transfer operators remains punitively high. On average, it costs 9.3% (of value transferred) to send the equivalent of $200 to the region, the highest remittance rates anywhere on the planet, according to the new World Bank 2019 report. However, the cost drops dramatically by as much as 90% when money is sent through cryptocurrency-based fintech companies like Bitpesa.

Also read: Central Bank Digital Currencies Take Center Stage at IMF Spring Meetings

Banks Most Expensive Cash Transfer Agents

Africans working abroad last year sent $46 billion to support families in their home countries. The money is often used to pay for education, buy food and clothes, start a business, build a house and cover daily living costs. Money sent from overseas is a vital tool of survival for many families in Africa’s often unstable economies.

But too much of the money is being taken in transfer fees by financial companies. According to the World Bank, banks are the most expensive agents for sending money back to Africa at 10.2%, followed by money transfer operators at 7.7% and post offices at 5.5%. This is by far too costly when compared to the Sustainable Development Goals target of cutting financial transfer costs to within 3% of total transaction value by 2030.

Some people have now started to put their hopes in bitcoin-backed fiat remittances as a way of cutting fees and improving efficiency and speed during transfers. When American political science graduate Elizabeth Rossiello founded Bitpesa in 2013, the company initially focused on facilitating bitcoin-supported cash transfers between citizens of the U.K. and Kenya. However, Bitpesa now has operations in eight African countries: the Democratic Republic of the Congo, Ghana, Kenya, Morocco, Nigeria, Senegal, Tanzania and Uganda.

Stephany Zoo, head of marketing at Nairobi-based Bitpesa, told news.Bitcoin.com that the company helps people in Africa send or receive money from around the world at a fraction of the cost charged by traditional agents. Bitpesa also caters to global remittance companies using API services for payments to mobile money operators, as well as bank networks in the African countries in which it has a presence, she stated.

“We process our remittance payments with a blend of traditional and personal insurance such as pooling, as well as using cryptocurrency,” Zoo elaborated. “Our fees are 1 to 3% so it’s significantly lower than those mentioned in the World Bank report. A lot of our clients are money transfer operators that actually move the money and we are the underlying technology or software behind what they do as well as being their foreign exchange provider.”

Informal Cash Transfers

In September, Bitpesa signed a deal with Japanese company SBI Remit allowing people across Africa to make payments for cars, beauty products and electronic gadgets. Africans making overseas purchases deposit their local fiat currencies into Bitpesa’s bank account, after which the payments are sent on the BTC blockchain to SBI Remit, which in turn makes the final payments in Japan.

The entire process can be completed within a matter of hours, at about half of the usual transfer cost. Conventional banking methods take a few days to handle similar transactions, Bitpesa claims. The fiat to crypto deposit and transfer also applies to remittance services, only this time the funds go directly into the account of the person receiving the money. “[This] cuts out all the middlemen, saves on conversion and transfer fees, and can be done in just a few clicks,” Bitpesa says on its website.

The World Bank data does not capture the true value of the amount of money sent to Africa from abroad or from other African countries. Often, remittances flow through informal channels carried by friends, family members or by bus drivers across borders. That’s because sometimes the effort of sending cash through MTOs is just not worth the risk. To do so means revealing your identity by producing a passport, work permit or visa – documents which a number of migrant workers don’t have.

Likewise, some cryptocurrency-based remittances fly beneath the radar, with it being unnoticed that they are serving this purpose. For example, Uganda’s Coinpesa is primarily a crypto exchange and does “not directly engage in the remittance business,” according to chief executive officer Suleiman Murunga. “However, that does not mean that we are not processing trades that originated as a remittance,” he observed. Murunga noted how cryptocurrency-based remittances were hard to track on an exchange, but also highlighted how this characteristic could help lower transfer costs to around 2%, having eliminated the cost of conversion from crypto to fiat.

Transfers Powered by In-House Crypto Tokens

In Nigeria, Sure Remit charges between 0-2% for non-cash remittances. The company claims to host a network of hundreds of merchants throughout the world and uses an in-house token, RMT. Built on the ethereum blockchain, the token can be exchanged for a variety of services, such as to purchase and send vouchers, send airtime, pay bills and buy groceries. Instead of receiving cash, recipients in Nigeria get vouchers that they can use to obtain whatever services or goods they need.

Elsewhere in southern Africa, Wala utilizes its own digital coin called dala to help users send money, buy airtime and data, pay bills and school fees in a number of countries at no cost. Wala sits on top of banks’ existing infrastructure which “helps banks better serve their customers.” The South African company believes that “once people are digitally engaged, the cost of financial services will decrease.”

Now, as the Sub-Saharan African remittance market is expected to grow 4.2% in 2019 and 5.6% in 2020, according to the World Bank, Bitpesa’s Stephany Zoo is optimistic crypto-based remittances business will claim a share of the market, saying: “I think that to improve market share, [crypto money transfer firms] must work with companies that have hybrid infrastructure and are more digitally focused because it is more effective, faster and easier to hold accountable than other traditional routes of remittances.”

What do you think about the cost of remittances in Africa? Let us know in the comments section below.

Images courtesy of Shutterstock, Bitpesa and World Bank.

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